The Ascent Of Money

The Ascent Of Money by Niall Ferguson is an introduction to modern finance and the rise of money lending, presenting a favorable view of their effects upon the world.

…financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today.

…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. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channeled from the idle rich to the industrious poor.

…approximately $1 of every $14 paid to employees in the United States now goes to people working in finance. Finance is even more important in Britain, where it accounted for 9.4% of GDP in 2006.

The book gives an interesting history of some of the world’s most famous bankers and the power they accumulated, particularly the Medicis and Rothchilds, who brought value by facilitating trade and commerce while reducing transaction prices. It also described the role of European bankers during the American Civil War.

Though others had tried before them, the Medici were the first bankers to make the transition from financial success to hereditary status and power  They achieved this by learning a crucial lesson: in finance small is seldom beautiful. By making their bank bigger and more diversified than any previous financial institution, they found a way of spreading their risk.

One of the biggest financial innovations was fractional reserve banking, pioneered by the Swedes. Other European countries improved finance while the Spaniards, still obsessed with silver and gold in their American colonies, kept defaulting time and time again, not understanding that the true nature of money lay in debt and not mineral reserves. One of the more interesting parts of the book was its description of the bond market and its powerful stranglehold on world governments.

…the bond market is powerful partly because it passes a daily judgement on the credibility of every government’s fiscal and monetary policies. But its real power lies in its ability to punish a government with higher borrowing costs. Even an upward move of half a percentage point can hurt a government that is running a deficit, adding higher debt service to its already high expenditures.

…countries that defaulted on their debts risk economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention.

While the book paints a rosy view of finance, it also highlights cases where the abuse of it through hook and crook caused problems for entire economies, particularly through price inflation. A recent example of that was Goldman Sachs’ commodity manipulation that caused the price of common foodstuffs to rise. On the other hand, ignoring finance and having inflexible monetary policy can turn recessions into depressions. He suggests that Helicopter Ben Bernanke actually did the right thing in showering Wall Street with money to prevent a depression. He also thinks Alan Greenspan is a great man for admitting he shouldn’t have kept interest rates so low.

Economies that combined all these institutional innovations—banks, bond markets, stock markets, insurance and property-owning democracy—performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources then, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, and then in the guise of globalization.

You’ll also read about:

• The abysmal effects of Britain’s weflare system on their economy
• Argentina’s failed destiny to become an economic superpower due to bad economic decisions and poor leadership
• How the “risk free” LTCM fund imploded and almost took the world economy with it

My problem with the book is that his explanations were too light. He glossed over tough concepts like sovereign bonds and other financial instruments without providing much in the way of examples, unlike a writer such as Matt Taibbi who explains the most complex concept in a way that laymen can understand. I felt like I had to read this book in front of Google so that I could look up things he mentioned only in passing.

The book also seemed hurried with its historical research, especially towards the end when it become a jumbled mess. Overall it’s an okay book but I don’t recommend it for the neophyte.

…it’s not owning property that gives you security; it just gives your creditors security. Real security comes from having a steady income.

Read More: “The Ascent Of Money” on Amazon