Economist and financial historian Liaquat Ahamed — author of Lords of Finance, his Pulitzer Prize-winning account of the central bankers behind the Great Depression, and the new book 1873 — joined Tyler Cowen on Conversations with Tyler for a wide-ranging discussion of financial crises, monetary standards, and the political fallout of deflation. The audio, video, and transcript are available on the episode page.

The conversation opens with a puzzle at the center of Ahamed's two books — why some financial crises reshape history while others do not — before moving through Gladstone's startlingly self-interested bet on Egyptian bonds, Bismarck's role in destroying bimetallism and deflating the world economy for two decades, and whether a global silver or symmetallic standard could have worked. Further topics include Britain's fateful decision to re-peg the pound to gold in 1926, Hjalmar Schacht's transformation from the economist who stabilized Weimar's currency into an opportunist collaborator with the Nazi regime, Montagu Norman's spiritualist beliefs, and why the 1920s produced such a creative cultural moment. For readers new to the period, the 1873 crisis ushered in roughly two decades of falling world prices, and the argument running through 1873 is that the era's most lasting damage was political rather than economic.

The episode also draws lessons from the IMF on Ireland's housing bubble and Pakistan's two dozen bailouts, examines what went wrong in the eurozone crisis, and considers Britain's baffling modern stagnation. It closes with Ahamed's own restless career — from the World Bank to a failed Iraq film to Ismaili Islam's uniquely progress-oriented leadership structure — and what he wants to write next. For the full versions of those exchanges, the complete transcript is on the episode page.

When do financial crises really matter?

Cowen opened by asking how Ahamed's work fits together. Lords of Finance, he said, convinced him that financial crises really matter, while the new book 1873 "almost convinced me that financial crises don't really matter, because the world just keeps on growing." What, he asked, makes the difference for when, historically speaking, crises will really matter?

Ahamed drew a sharp distinction between the two episodes. "I think the first book, Lords of Finance, was about the financial crisis that really plunged the world into a Great Depression," he said. "The second, 1873, is about a crisis that didn't actually plunge the world into a terrible great depression, but what it did was cause a sequence of effects throughout the world which damaged the political economy of the world for the next 20 years. A better title would have been The First Great Deflation."

Deflation without catastrophe

Cowen pressed on the economics: "We're supposed to believe that deflation is bad, nominal wages are sticky. This was a pretty slow deflation, but by one measure, the major world economies are growing 2.5 percent over the next 20 years from 1873 onwards. How did we adjust so well to this?"

"Because prices were flexible. Nominal wages went down," Ahamed replied. "I think the distributional consequences and the political impact of those distributional consequences were much more damaging than the pure economic consequences."

That distinction — aggregate growth on one side, distribution and its political fallout on the other — is the lens the episode applies to why 1873 and the interwar collapse left such different legacies.

Politics after 1873

Cowen then asked whether politics went crazy after 1873 — as it did in many countries, most of all in Europe, in the 1920s and a bit afterwards — or whether it simply continued along its 19th-century path.

Ahamed said it did not go crazy, but it was not a happy time politically either. "It's populism in the United States, the resurgence of protectionism in Europe, the retreat from liberal ideas, the revival of imperialism by Britain when it invaded Egypt," he said. "Those were not happy things that happened."

The Egypt reference ties back to the Gladstone bond story from earlier in the conversation, another point where the episode's financial and imperial threads meet.

Ismaili Islam and progress-oriented leadership

The conversation closed on a more personal note. Noting that Ahamed is listed as non-practicing, Cowen asked why Ismaili Muslims seem, on average, so much more pro-progress than other parts of the Muslim world.

Ahamed attributed it to the community's leadership. "We Ismailis believe in the leadership of a man, the Aga Khan," he said. "We believe he's the direct descendant of the Prophet Muhammad, and he sets the agenda for the whole community." Many people in the old days believed the Aga Khan was divine or had divine spirit, he noted — a view few hold today — but he remains invested with so much moral authority thatif he says, move to Africa, big chunks of the community will do that. He has charted an incredibly enlightened direction for the community." The community itself is not very large: "There are maybe two or three million Ismailis in the world."

Asked by Cowen whether it is precisely that the Imam is "nonhidden" that makes him a useful source of ongoing change, Ahamed answered: "Yes. That was the whole rationale for Shiism."

Cowen's verdict on the episode: "Interesting and substantive throughout, recommended."

This article is based on the post "My excellent Conversation with Liaquat Ahamed," which appeared first on Marginal REVOLUTION.