Book review: The Ascent of Money

Tait Simpson reviews Naill Ferguson's financial history of the world
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As world financial markets were shaken to their very core in the Fall of 2008, The Financial Times, usually read mostly by financial professionals, found itself selling far more copies than usual. After years of diligently investing our money mostly in stocks, an increasing number of people wanted answers to two simple questions: how could this happen and where did all my savings go?

Enter British historian, now Professor at Harvard University, Niall Ferguson, with a highly readable history of how the world of modern finance evolved over 3000 years from a pursuit for the ultra wealthy to a system touching and impacting everyone's life. The themes of the recent backlash against financiers; greed, corruption, and irrational behaviour, are all featured prominently through the centuries of financial bubbles and subsequent crashes.

Ferguson devotes his early chapters to explaining the rise of three crucial pillars to finance; stocks or equities, bonds, and insurance. In all three, flaws exist that allow for the usefulness of these financial tools to be ruthlessly manipulated before far too often failing. Bonds allowed empires to be built, financing wars, conquests, and the building of great national infrastructure projects. Britain's wealthy Rothschild family, and their subsequent investment bank Rothschilds, developed their wealth through the buying of bonds during the European wars of the early 1800s, often using their wealth and connections to manipulate markets to grow their profits.

Insurance, founded in Scotland in the 1740s, allows citizens to cover themselves in the events of the natural world: fire, accidents, and finally death. The trading of stocks traces its roots to the 1600s. As investors saw the possible high returns in stocks being enjoyed by their fellow citizens, a succession of financial bubbles over 400 years can be easily traced. In early markets, The Mississippi Company trading in France in the late 1600s rose by a factor of 20 before crashing down to nothing while the South Sea Company trading in Britain a century later, rose nearly 10X before finding a similar fate. Investors in Enron and Lehman Brothers can draw some comfort that companies have been collapsing nearly overnight since joint-stock, limited liability companies were created in the 1600s. In fact, even in good times, 10 percent companies fail each year. In financial shocks, which Ferguson calculates actually occur to some degree nearly every year somewhere in the world, the number is far higher. Regardless of circumstances, ''Time and again, share prices have soared to unsustainable heights only to crash downwards again.'' As in the current crash, all former downturns have seen the small investors taken advantage of by ''unscrupulous insiders who have sought to profit at the expense of naive neophytes.''

What little comfort investors can draw from financial history is that at least some of their savings are probably left after the recent downturn of approximately 50 percent. Citizens and investors in the Confederate (Southern United States) States in the 1860s, Germany in 1920s, Argentina in 1980s, all saw their entire savings wiped out by hyperinflation regardless of what they had invested in. If you have half your savings remaining, you are looking pretty good compared to centuries of investors who have been left with nothing.

Where financial markets exist, Ferguson concludes they are far from efficient, susceptible to all forms of human bias and overreaction. Still, in looking at weak developing countries and dovetailing on the microfinance efforts of Noble Prize winner Mohammed Unis to provide lending to those with no credit, he argues forcefully that "poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence." Banks in other words, are a necessary evil that allow the basics of commerce to take place.

Ferguson's chapters flows easily from one set of ideas to the next, providing a neat synopsis of the major ideas of financial innovation. Students of finance who have covered the ideas will find his more recent overviews frustratingly shallow, but Ferguson's strength lies not summarizing the ideas of others but in his ability to explain how each one links into the next. In summarising finance in the last 30 years, he deftly hops from the free market doctrine of Milton Friedman, to Peruvian economist Hernando de Soto's pursuit of property rights for the poor, to George Soros's theories on the irrationality of investors, to algorithmic trading, and finally into the mountain of debt in every aspect of American life that is being funded by China (Chimerica in his words).

In the end, Ferguson warns against the current propping up of companies by the governments. Financial history is replete with financial crashes and failed companies. In every case, new companies arise, and new markets develop. And always, investors are ready to take a chance on a new bond or stock issue that promises to capitalise on whatever the new economy promises to deliver.

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