The Ascent of Money/A History of the World

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Posted December 3, 2008

Books

It's Still Making The World 'Go Round

Niall Ferguson’s latest book, “The Ascent of Money: A Financial History of the World,” went to press in May 2008, but it shrewdly anticipates many aspects of the current financial crisis, which has toppled banks, precipitated gigantic government bailouts and upended global markets.

MICHIKO

KAKUTANI

___________

BOOKS

OF THE TIMES

Are we on the brink of a ‘great dying’ in the financial world,” Mr. Ferguson asks, “one of those mass extinctions of species that have occurred periodically, like the end-Cambrian extinction that killed off 90 percent of Earth’s species, or the Cretaceous-Tertiary catastrophe that wiped out the dinosaurs? It is a scenario that many biologists have reason to fear, as man-made climate change wreaks havoc with natural habitats around the globe. But a great dying of financial institutions is also a scenario that we should worry about, as another man-made disaster works its way slowly and painfully through the global financial system.”

____________________

The Ascent of Money

A Financial

History of the World

By Niall Ferguson

442 pages. The Penguin

Press. $29.95.

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In the course of this useful if somewhat lumpy volume, Mr. Ferguson looks at the roots of the current economic meltdown, examining how, in a globalized world that uses increasingly complex financial instruments, defaults on subprime mortgages in American cities like Detroit and Memphis could unleash a fiscal tsunami that spans the planet.

But the book does not focus primarily on speculative manias and financial crises; for that, the reader is better off with two old-school classics, “Manias, Panics and Crashes” by Charles P. Kindleberger and Robert Aliber, and “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay. Instead Mr. Ferguson discusses such cycles of euphoria and panic within a larger historical context: he traces the evolution of credit, debt and the idea of risk management over several centuries, and as he did in an earlier book, “The Cash Nexus,” he examines the potent links between politics and economics.

Mr. Ferguson explains why money went from coinage to paper and the advantages and disadvantages of the gold standard. He argues that aging societies (like those facing a large baby-boom generation entering retirement years) have “a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power.” And he looks at how exotic financial innovations (like collateralized debt obligations) and wide support for adjustable rate and subprime mortgages (endorsed, he says, by proponents of wider home ownership as disparate as Alan Greenspan and President Bush) pushed the snowball of the current financial crisis.

Whereas Mr. Ferguson’s recent books “Empire” (2003) and “Colossus” (2004) were highly polemical histories promoting the virtues of British and American empire, this volume is considerably less ideological and less tendentious. No doubt Mr. Ferguson, who earlier called for the United States to export democracy and capitalism, has been chastened by the continuing war in Iraq and by the growing economic difficulties of the United States.

Noting the high savings rate of Chinese households and Chinese corporations (in sharp contrast to Americans’ penchant for living on credit), he observes that the direction of capital flow is now from East to West.

“In 2007 the United States needed to borrow around $800 billion from the rest of the world; more than $4 billion every working day,” he writes. “China, by contrast, ran a current account surplus of $262 billion, equivalent to more than a quarter of the U.S. deficit. And a remarkably large proportion of that surplus has ended up being lent to the United States. In effect, the People’s Republic China has become banker to the United States of America.”

Although “The Ascent of Money” is pockmarked by digressions (about things like the Black-Scholes model of options pricing) that many lay readers will find arcane and difficult to understand, the book as a whole is animated by Mr. Ferguson’s narrative gifts, among them his ability to discuss complex ideas in user-friendly terms.

He also has a knack for illustrating his larger hypotheses with colorful stories about people like Nathan Rothschild (the subject of one of his earlier books); the Scottish economist and gambler John Law (described as “the man who invented the stock market bubble”); and the Nobel Prize-winning economist Milton Friedman and his so-called Chicago Boys, who helped bring economic reforms to Pinochet’s Chile.

JUSTINE STODDART

Niall Ferguson

________________________

Financial systems

as a driving force

in history.

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It is Mr. Ferguson’s belief that “behind each great historical phenomenon there lies a financial secret,” and much of this volume aims to explicate that argument. He writes, for instance, that the Confederacy’s lack of hard cash, as much as its lack of industrial capacity or manpower, undercut its cause. And he suggests that the Renaissance boom in art and architecture can be traced to Italian bankers’ application of Eastern and Arabic mathematics to finance.

“The Dutch Republic prevailed over the Habsburg Empire,” he argues, “because having the world’s first modern stock market was financially preferable to having the world’s biggest silver mine. The problems of the French monarchy could not be resolved without a revolution because a convicted Scots murderer had wrecked the French financial system by unleashing the first stock market bubble and bust. It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo. It was financial folly, a self-destructive cycle of defaults and devaluations, that turned Argentina from the world’s sixth-richest country in the 1880s into the inflation-ridden basket case of the 1980s.” Mr. Ferguson is fond of making Darwinian comparisons in the book, writing that “financial history is essentially the result of institutional mutation and natural selection,” and noting that “as in the natural world, the evolutionary process has been subject to big disruptions in the form of geopolitical shocks and financial crises.”

Also contributing to “the inherent instability of the financial system,” he says, are the vagaries of human behavior: “our innate inclination to veer from euphoria to despondency” and “our perennial failure to learn from history.”

“Those who put their faith in the ‘wisdom of crowds’ mean no more than that a large group of people is more likely to make a correct assessment than a small group of supposed experts,” he writes. “But that is not saying much. The old joke that ‘Macroeconomists have successfully predicted nine of the last five recessions’ is not so much a joke as a dispiriting truth about the difficulty of economic forecasting. Meanwhile, serious students of human psychology will expect as much madness as wisdom from large groups of people. A case in point must be the near-universal delusion among investors in the first half of 2007 that a major liquidity crisis could not occur.”

Copyright 2008 The New York Times Company. Reprinted from The New York Times, TheArts, of Tuesday, December 2, 2008.

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