The Ascent of Money: A Financial History of the World by Niall Ferguson (2008)

Like Empire and Colossus before it, this is the book of a Channel 4 TV series. And like them, it is a thematic not a chronological history. Thus:

  • Chapter 1 – A quick skate through the history of money and credit, starting with Babylonian clay tablets, quickly on to the rise of the Medici bankers in Florence
  • Chapter 2 – The bond market
  • Chapter 3 – The stock market
  • Chapter 4 – Insurance
  • Chapter 5 – The real estate market
  • Chapter 6 – The rise and fall and rise again of international finance

In his introduction Ferguson says the world is more truly globalised than ever before and that money in all its aspects rules everyone’s lives, which makes it all the more worrying that polls and surveys in the western world show an astonishing ignorance of even the basics of economics. Therefore he was toiled on the TV series and book to try and make economics more comprehensible and to ‘break down that dangerous barrier which has arisen between financial knowledge and other kinds of knowledge’.

For this reader, at least, he fails. By page 150 I was confused and by page 200 had more or less given up trying to understand the economic mechanisms he’s referring to. I can read the words he uses to explain the massive financial bubble caused by the renegade Scotsman John Law in France in the 1720s. But I didn’t understand exactly why the repeated issue of shares at higher and higher prices in his phantom Mississippi company were doomed to collapse. I could understand that the executives of Enron lied and cheated about their accounts – but I didn’t understand why the financial authorities and auditors who are paid to regulate these things, gave them prizes for so many years.

I didn’t grasp some of the real basics: I don’t understand why the loans a bank has made are counted as part of its assets when common sense suggests that loans are the riskiest parts of its business and so should be part of their liabilities. I found Ferguson’s account of the Wall Street Crash as confusing as every other account of it I’ve ever read, not least because the stock market had been sliding for some time, amid a confusion of other economic indicators, and it actually rallied a bit after the ‘crash’. (Wikipedia article on the Wall Street Crash.) In fact one of the most salient features of the Great Depression of the 1930s which followed is that economists are still arguing about what caused it.

Of course historians are still arguing, and will argue forever, about almost everything that’s happened, from what caused the Great War to the rise of the Nazis. They – historians – fondly imagine they provide a useful function by shedding light on the past and providing some kind of guidance for the future – whereas anyone who’s read a lot of history knows that their ceaseless disagreements provide a kind of high-class entertainment, as informative and pointless as football fans arguing whether Alex Ferguson or Jose Mourinho is the greater manager. Ie their role is purely ornamental: nobody ever learned anything from history, especially the politicians, the populations and – as detailed here in alarming detail – the financiers who enthusiastically repeat it.

With economists, however, it’s a bit more important, as economists actually run things – banks, big corporations, finance ministries and governments. If we were inclined to take the world seriously, it would be desperately worrying that economists disagree so fundamentally about so much, and use a jargon which is so impenetrable to the rest of us and which, on closer examination, bears so little relationship to reality.

If the aim of the book was to make me more economically literate, it failed because it failed to explain even the basic concepts which economics is built on. Many terms are briskly defined as the narrative speeds on its way, but too briskly for this reader – and the text then moves on to use the building blocks I haven’t properly graspe, to build up more ever more complex sentences and statements. Since I don’t understand the individual elements of the sentences, the complete statements just sound like gibberish.

For example, he briskly defines some of the (numerous) definitions of ‘money supply:

M0 (also known as the monetary base or high-powered money), which is equal to the total liabilities of the central bank, that is, cash plus the reserves of private sector banks on deposit at the central bank; and M1 (also known as narrow money), which is equal to cash in circulation plus demand or ‘sight’ deposits. (p.51)

before going on to apply these definitions in different situations. It seems obvious to me that these are ideas that you should probably spend a week of a degree course getting to know and explore and trying out in different scenarios until you are absolutely confident you have mastered every theoretical and practical implication, before you begin applying them in further theory. That time and opportunity to explore the basics of economics is not on offer here.

Similarly, Ferguson devotes seven or so pages to the Great Depression of the 1930s. I read them twice so I know that an impressive amount of banks went bankrupt and I have some of the dates clearer in my mind, but I couldn’t explain to you why it happened and I have no idea why all the clever economists alive at the time and who presumably noticed it was going on, seem to have been powerless to fix it.

Imagine you have a group of people called airplane engineers and they design and build airplanes over the course of the years and suddenly, within a few months, every airplane in the world crashes out of the sky, killing all their passengers. And the engineers have no idea why it happened. And 80 years later – they are still arguing about why it happened. Would you get in a plane?

Suppose the entire class of European politicians, planners, economists and bankers persuaded Greece it would be a good idea to join the Euro. And a few years later the kind of financial crisis which everyone knows comes around every ten years or so, comes around, and it turns out Greece can no longer pay its debtors. But as a result of being in the Euro it cannot now devalue its currency to make its debts easier to pay and its European partners won’t let it default ie abandon repayment altogether – with the result that the combined efforts of some of the cleverest, best-paid politicians and economists in the modern world have turned Greece into a slave state with record unemployment, record bankruptcies and record suicides.

Would you trust these people? These economists and financial advisers and politicians? To guide your country?

If economists struggle to this day to understand why the Great Depression happened, then why am I even bothering trying to grasp the terminology and theories of an intellectual discipline which cannot explain the most important event in its territory and offers such consistently dreadful advice to the people who run countries?

Ferguson says that, out of the fogs of squabbling economists, there do emerge two vital lessons about the Great Depression:

That inept or inflexible monetary policy in the wake of a sharp decline in asset prices can turn a correction into a recession and a recession into a depression. (p.164)

and that:

the benefits of a stable exchange rate are not so great as to exceed the costs of domestic deflation. (p.165)

I think what makes these sentences incomprehensible to me is that I don’t understand the basic building blocks, the individual ideas, from which they’re made. What is ‘monetary policy’? Obviously it’s policy to do with money, but what exactly? What is an ‘inept’ monetary policy? (What would be a ‘good’ monetary policy?) What, in this context, are ‘assets’? What is a ‘correction’? What is a ‘recession’? What is a ‘depression’ and how are they different from each other?

The second sentence is a masterpiece of magic and obfuscation. I needed an extra paragraph or two to remind me what the benefits of a stable exchange rate are, and also a bit of help grasping what deflation is and what domestic deflation is: and then a bit of help putting that all together so I really grasp it. But that help wasn’t to hand.

So reading this book involved rereading a lot of  history I knew already (the Medicis and early banking blah blah blah, Lloyds of London and the birth of insurance blah blah blah, Rothschilds build biggest bank in Europe blah blah blah) but the book completely failed to explain ‘economics’ to me. It failed to explain how the Medicis got so powerful, or why the Rothschilds or Lloyds got so big. They appear to have introduced new banking techniques and had diverse activities, as also did the five Rothschild brothers, each running a bank in a major European capital. Yes. And?

Maybe I’m particularly stupid. Maybe I have the wrong type of brain. But throughout the book, as it hurried through the history of banking and insurance and bond markets and stock markets and property markets, it felt as if I was watching an American football match where quite a lot is obviously taking place, and the crowd around me are jumping up and down and shouting but, because nobody has explained to me even the basic rules, I have absolutely no idea what’s going on, what’s important and not important, when something special happens or why.

The last two chapters – about the housing market and recent economic crashes – read, like a lot of Ferguson’s previous book, Colossus – more like extended magazine articles than history. After some stuff about the decline of the landed aristocracy in England during the nineteenth century, the real core of the long real estate chapter (53 pages) is an extended description of the Savings and Loans scandal of the 1990s and the sub-prime mortgage scandal which helped prompt the recession of 2007 (or is it 2008?) The conclusion of this section appears to say that real estate ie property, isn’t always a reliable investment. Hmm.

Similarly, I have just finished the final chapter about high finance, which opens with an interesting account of the financial collapse surrounding the Great War, but only really takes fire as it approaches the present day and describes the hedge fund boom of the 1990s and 2000s. He then does a quick couple of pages on the way the USA and China have in recent decades become tied in a complex symbiotic financial relationship, with the Chinese government funding the American deficit and Chinese factories supplying consumption-mad America with its consumer goods. Again, this had historical elements but felt less like ‘history’ than an interesting extended article from the Economist or Financial Times. After all the interesting detail, the conclusion of this essay is that a financial crisis can come out of the blue when you least expect it. Hmm. Not a blinding insight, maybe.

These chapters, like similar ones in Colossus – which purports to be a history of the US but is really about the (then recent) US invasion of Iraq – tend to suggest that Ferguson is less a historian in the traditional sense than an impassioned commentator on current political and financial affairs who takes an unusually historical point of view, or uses an unusually large number of historical examples to shed light on  his analyses of the contemporary world.

Confidence sapping

If I came away with one over-riding impression, it is that economic theory has always struggled to catch up with the actual behaviour of incalculably greedy and clever men who are always devising financial structures and models way ahead of the theorists, politicians and regulators, and which almost always come to grief.

If there is one compelling conclusion from the book, it is that economists don’t know what they’re talking about. Again and again Ferguson introduces another tale of greed and folly with words to the effect of, ‘Until 19XX the conventional wisdom was that YY’, before going on to show, again and again and again, how received opinion among economists was overthrown by what actually happens in the world. ‘Bucking the trend’, ‘hardly anyone expected’, ‘nobody could have predicted…’ – by telling so many tales of financial disaster at such length Ferguson, presumably unintentionally, rubbishes the pretensions of his own subject.

Take pages 321 to 330, which describe the pioneering investment theory of a company called Long-Term Capital Management, set up in 1994 by Myron Scholes, an academic, and Fisher Black from Goldman Sachs who were  soon joined by another economist from Harvard Business School, Robert Merton. They devised an impressive mathematical formula for the optimum management of ‘option contracts’ (which, like so many of these concepts, I struggled to understand). They teamed up with a Federal Reserve vice-chairman, a Harvard professor and superstar traders from various firms, along with investment bank backing to set up the company, and started making a lot of money.

The best thing about this story is that after just three years, in 1997 Scholes and Merton were awarded the Nobel Prize for Economics. The Nobel Prize! In September the next year their firm went bankrupt, only surviving because of a $3.6 billion bailout by Wall Street banks, frightened of the knock-on effect its collapse would have on the other major financial houses of America. Truly a Nobel Prize-winning achievement.

The net effect of this book is to undermine your faith that anybody really understands what is going on in the world of money, and to make that world seem a much more anarchic and dangerous place than you already feared.

Related links

Bibliography

1995 Paper and Iron: Hamburg Business and German Politics in the Era of Inflation, 1897–1927
1998 The Pity of War
1998 The World’s Banker: The History of the House of Rothschild
1999 Virtual History: Alternatives and Counterfactuals
2001 The Cash Nexus: Money and Power in the Modern World, 1700–2000
2003 Empire: How Britain Made the Modern World
2004 Colossus: The Rise and Fall of the American Empire
2005 1914
2006 The War of the World: History’s Age of Hatred
2008 The Ascent of Money: A Financial History of the World
2010 High Financier: The Lives and Times of Siegmund Warburg
2011 Civilization: The West and the Rest
2013 The Great Degeneration
2015 Kissinger: 1923–1968: The Idealist

Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: