Lexington, KY - The year 2009 will be remembered for the global financial crisis. Regardless of other events in the news - wars, nuclear threats and the inauguration of a new U.S. president - all things money have remained front and center in the public's attention.
The Ascent of Money: A Financial History of the World was written as the current crisis was deepening. While author Niall Ferguson doesn't dwell on the current economic downturn, he shows how the continuing financial meltdown of 2009 fits into the bigger historic picture.
In delineating humanity's historic relationship to money, Ferguson seems to borrow a page from George Santayana. The Spanish philosopher is perhaps best known for the aphorism, "Those who cannot remember the past are condemned to repeat it."
Certainly, this cleverly written book can be read from this perspective. But far from condemning finance, Ferguson, one of Britain's most renowned historians, shows that finance is the foundation of human progress. Understanding the history of finance should provide insight into our current global crisis - if we're willing to pay attention.
In the introduction, the author says one purpose of his book is to educate. He cites a 2008 survey that revealed that two thirds of Americans did not understand compound interest. Nearly a third of Americans said they had no idea what the interest rate on their credit card was. Over 59 percent did not know the difference between a company pension, Social Security and a 401(k) plan. Ferguson clearly accomplishes the educational objective; moreover in today's economy he provides an element of urgent fear.
The development of money, and consequently banking, is central to human progress, Ferguson says. Money represents "trust inscribed," whether on paper or metal. Trust is a necessary component of civilization.
Money is also a barometer for our feelings about the larger world. The financial system "magnifies what we human beings are like Ö," Ferguson writes. Money, he suggests, is a mirror, and "it is not the fault of the mirror if it reflects our blemishes as clearly as our beauty."
While Ferguson shows finesse in explaining the concepts of money, his book takes on real life in his storytelling about the characters responsible for the rise and fall of money through history. There is no doubt that the author is a talented, insightful scholar. His tales of money, from 1,000 B.C. Babylon to the 14th century Italian Medici family to the threat of a young Corsican commander named Napoleon Bonaparte, make for a fascinating read.
These stories also relate money's long history of bubbles, panics and crashes. For example, Ferguson details the career of Scottish financial con man, gambler and financier John Law, who created one of history's greatest stock market bubbles. From 1719-20, Law took control of French national debt and sold shares in the company that controlled French Louisiana.
The shares rose in price while investors borrowed against them, creating inflation. The new term "millionaire" was coined. Panic set in, and the system collapsed. The results set back France's financial development, putting the French off paper money and stock markets for generations.
Following that time, all bubbles proceed through five stages: 1) displacement, as change creates new, profitable opportunities; 2) euphoria, where rising profits lead to rapid growth in share prices; 3) mania, when the prospect of easy gains brings first-time investors and swindlers; 4) distress, as insiders see profits declining; and 5) revulsion, as everyone stampedes for the exits, causing the bubble to burst altogether.
From current history, Ferguson writes about Milton Friedman, who saw money supply as the key to the economy and George Soros, the hedge fund philosopher and proponent of market reflexivity. He also chronicles the shadow world of derivatives, credit-default swaps and the subprime mortgage debt that are currently showing their effects. Of particular interest is the section titled "Chimerica," which describes the relationship between the world's fastest growing economy, China, and the United States.
In a poignant afterword, Ferguson summarizes that the ascent of money "has not been, and can never be, a smooth one." Even with the sophistication of contemporary financial institutions and instruments, finance remains vulnerable. Among the reasons is what he terms "the hard-wired fallibility of human beings."
Still, the author is convinced that understanding our financial selves is the most important factor in creating change. Financial markets, he repeats, are "like the mirror of mankind, revealing every hour of every working day the way we value ourselves."