A review of Niall Ferguson’s
The Ascent of Money

Penguin, 442 pages, $33.

For anybody who has recalculated his net worth recently and recoiled in horror from the screen and asked the question–“How did we get in this mess anyway?”—, there are some answers to be found in Niall Ferguson’s The Ascent of Money. It is, in fact, the book you wish you’d read a year ago.

Sadly, it was not published until November last year. Still, it records the history through which we are living up to last May. By then, investment bank Bear Stearns had already collapsed. There were nasty rumours about Lehman Brothers and Merrill Lynch, soon to be brutally confirmed. The swankier New York restaurants serving the high-living young Wall Street traders had already begun to feel the pinch. And oil – in May the price of a barrel was well on the way to its July peak of $147 and unlike today when markets fall if $40 oil becomes $39 oil, the stock-market then dipped with each successive rise in the price of crude.

All in all, if money is your subject, Ferguson’s tome is about as up to date as one can get in hard-cover. And if nine months ago feels like a different era, which it could – the Dow was over 12,000 in those halcyon days – well, if it’s true that before recovery begins understanding must blossom, The Ascent of Money should still be at the top of the must-read pile.

For, it’s all happened before sufficiently often that the patterns were there for those who – like Ferguson – took the time to research the whole story. Whether that would have saved many people’s financial bacon is another matter: One of Ferguson’s observations is that people have a large and unfortunate capacity to deny what they don’t want to believe. However, the current bubble and bust has its predecessors and there is a sequence that they followed.

The Scots-born Ferguson, 45, is a celebrity intellectual. Educated at Magdalen College, Oxford, now teaching history and business administration at Harvard, he has the gift of rendering complexity down to such basic elements that non-celebrity, non-intellectual types can get the gist. The Ascent of Money is not his first venture into popularizing knowledge: He has seven other books in publication, including the provocative “The Pity of War,” that argues Europe would have been better served had Great Britain stayed out of The First World War, and allowed Germany a quick win.

In other words, he is not afraid of controversy, and when not marking term papers in Massachusetts, continues to raise the average IQ of various British newspapers with his commentary. His purpose is, as he points out in Ascent, “to educate.”

And so he does.

Ascent is crammed with the financial gossip of the ages. That may seem a trivial reason for applause, as though it matters today that a future British prime minister, William Gladstone, bought Confederate bonds during the American civil war, the 19th century Duke of Buckingham proved spectacularly that one could lose one’s shirt in property, or that Florence’s august financial pioneers the Medici family started off as small-time crooks, before switching to money-changing at street tables – banchieri – hence banking. Or upon reflection, and with Enron in mind, perhaps the Medici career path does have some relevance.

In any case, the sometimes delicious trivia invariably illuminate Ferguson’s description of complex financial dealings, (including how to run a hedge-fund racket,) and support some well-chosen insights.

Here are a few.

First, Ferguson’s conclusion of a review of 3,000 years of financial history that examines ancient Mesopotamian money lenders recording their transactions on clay tablets, the invention of bonds in renaissance Italy, the rise of Holland, Great Britain, and Wall Street, is that for all its evil reputation, money is not bad.

Rather, “money is the root of all progress.” True enough: There aren’t many places in the world today that don’t have money in some form. Of the few there are, only missionaries would choose to settle in them. As Ferguson says, borrowing an aphorism from Jacob Bronowski’s The Ascent of Man, “the ascent of money has been essential to the ascent of man.”

Second, if humanity holds deep prejudices against something that in essence is merely a tool to facilitate transactions between people, it is probably because of what it does to us: “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like.” That is, money may not be evil, but it amplifies our tendency to overreact, and to swing from exuberance when things are well to deep depression when they go wrong. “Booms and busts are products of our emotional volatility.”

The first modern cycle of bubble and bust happened in France, the work – ironically, given the Scottish reputation for thrift – of a Scotsman. How John Law, convicted murderer, compulsive gambler and – it must be admitted – a financier of remarkable if flawed genius got to be the central banker of France, the ruin of the French nobility and arguably the cause of the French revolution, occupies 30 pages. His rise and fall however, was a template for successive bubbles up to and including the Crash of 1929.

It has always been the same, says Ferguson.

First there’s displacement. “Some change in economic circumstance creates new and profitable opportunities for certain companies.”

Next, euphoria. Prices soar.

Mania takes over: Hoping for huge, easy gains, uninformed investors (and swindlers) move in.

Then, distress. Informed investors do the math, and bail out.

Finally, revulsion, or the moment when the little boy says the emperor has no clothes. (Seldom is it a regulator who points out the obvious.) The uninformed investors panic, and prices plummet.

It is dot.com, or, sub-prime. So now, for example, real estate’s overvaluation is clear but only in the rearview mirror. That bubble was driven by low interest rates, interest-only loans, and zero-down mortgages. It was no secret in 2006 that Americans in alarming numbers had used the equity in their homes to the point they had become vulnerable to even small upward movements in interest rates. Anybody who remembers the fluctuations of the last 30 years, never mind the last 300 since John Law issued his first 20-year note, might have suspected the system’s fragility.

So, why didn’t more people jump?

To be fair, it would have been an unusual person who foresaw how U.S. mortgage defaults would undermine the value of asset backed commercial paper around the world. As unlikely, is that reasonable people would have then deduced the consequential credit crunch would in turn ruin established financial giants like Bear Stearns, and cause a British bank to be nationalized.

But, some risks are calculable, and humanity has a capacity to learn: Unlike the aftermath of the Great Depression, banks have not restricted the money supply in the wake of a stock crash, for instance.

What gets us every time however, are not the calculable risks but the incalculable uncertainties and above all, what money does to reason. “When stock prices surge up in sync . . . investors are gripped by a collective euphoria, what the former chairman of the Federal Reserve Alan Greenspan memorably called ‘irrational exuberance.’ Conversely, when investors’ animal spirits flip from greed to fear, the bubble can . . . burst with amazing suddenness.”

Thus, investors rationalize what they want to believe, deny what they know if it conflicts with a peer consensus, and let emotions rule. That the Dow is now (early March 09) in the 6,000s – less than half what it was 12 months before – is a function of emotion for instance, not a realistic assessment of American strength or productive capacity.

Unfortunately, Ascent offers no timetable for recovery. Indeed, in a November post-publication interview with Bill Watson (writing in the National Post,) Ferguson concedes that even he was taken aback at the obliteration of Wall Street investment banks. “We are in a historical chain reaction the end of which is not foreseeable . . . the whole thing gives me insomnia.”

Closing his argument, he gives us all one more incalculable to worry about – war. Behind every major world event, is a financial trigger: Money drives history. “The Dutch republic prevailed over the Hapsburg Empire because having the world’s first modern stock market was financially preferable to having the world’s biggest silver mine.” The French Revolution happened because the French financial system was ruined by the first market bubble and bust. Now, financial globalization has “blurred the distinction between developed and emerging markets, with capitalist America in hock to Communist China – to the satisfaction of neither.

Where are things headed?

Drawing upon his First World War research, Ferguson reminds us the present era of globalization is not the first of its kind, and that globalization is not a guarantee of peace. Under the leadership of the British Empire, the world was actually substantially globalized by the end of the 19th century and many people also thought the complex web of free trade, and the awfulness of modern (19th century) weapons, meant war was an anachronism. Certainly, 99 years separated Waterloo from the opening volleys of August 1914.

However, he writes, “Could anything trigger a breakdown of globalization like the one that happened is 1914? The obvious answer is a deterioration of political relations between the U.S. and China, whether over trade, Taiwan, Tibet or some other as yet subliminal issue . . . One important lesson of history is that major wars can arise even when economic globalization is very far advanced and the hegemonic position of an important English-speaking empire seems fairly secure.”

A second important lesson, notes Ferguson, “is that the longer the world goes without a major conflict. The harder one becomes to imagine (and perhaps, the easier one becomes to start.”)

The rewards of knowing are huge. So, alas, are the costs of financial ignorance. Whether one thinks it speculation or prophecy, Ferguson’s thesis is something upon which to have an opinion.

-

Nigel Hannaford, also of British origin as with Ferguson, is a columnist with the Calgary Herald.