The Ascent of Money: A Financial History of the World is a book published in 2008 that was written by Niall Ferguson. An informative, curious book, The Ascent of Money cleverly argues that money is the driving force of human civilization and innovation, making it a worthwhile read for everyone, seeing the massive importance of money.
The book begins with Ferguson discussing the massive wealth inequalities in the world: while CEOs and hedge fund managers could make millions to billions annually, much of humanity is struggling to merely survive. He also writes of the Great Recession, as it devastated many powerful companies. Ferguson claims that although economics is unfair, it is still hugely beneficial: “To adapt a phrase from Jacob Bronowski … the ascent of money has been essential to the ascent of man … The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit. Perhaps, too, it will be a financial crisis that signals the twilight of American global primacy. Behind each great historical phenomenon there lies a financial secret” (4). Ferguson then gives some statistics regarding finance: “In 2006 the measured economic output of the entire world was around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 per cent larger. The total value of domestic and international bonds was $67.9 trillion, 40 per cent larger … Every day $3.1 trillion changed hands on global stock markets.” (5). More and more people are entering the field of finance because of the high salaries, and Ferguson remarks that every financial boom eventually ends, seeing how sellers will eventually outnumber buyers, and pure, unadulterated avarice turns into childish cowardice. To be specific, the Great Recession occurred due to the housing bubble, in which people were encouraged to take loans, and those loans were sold to unknowing investors who believed them to be valuable assets. In his own words, “The proximate cause of the economic contraction of 2008-9 was financial: to be precise, a spasm in the credit system precipitated by mounting defaults on a species of debt known euphemistically as subprime mortgages. So intricate had our global financial system become, that relatively poor families …. Had been able to buy or remortgage their homes with often complex loans that … were then bundled together with other, similar loans, repackaged as collateralized debt obligations (CDOs) and sold by banks in New York and London to … German regional banks and Norwegian municipal authorities, who thereby became the effective mortgage lenders. These CDOs had been so sliced and diced that it was possible to claim that a tier of the interest payments from the original borrowers was as dependable a stream of income as the interest on a ten-year US Treasury bond, and therefore worthy of a coveted triple-A rating. This took financial alchemy to a new level of sophistication, apparently turning lead into gold.” (9-10). Ferguson states that as some mortgages grew older, their initially sweet periods of low interest eventually ended, leaving people with high-interest ones, making their value go down. The entire structure of the housing bubble, which was founded on sand, quickly collapsed, sending the world into an economic crisis. Ferguson states that although his explanation was a bit of an oversimplification, that doesn’t take away from the fact that there are many nuances that can be explored for a long time. He speaks of the dangers of being financially illiterate, seeing that a large number of people don’t pay their debts on their credit cards every month despite knowing of the potentially high interest rates: “According to one 2007 survey, four in ten American credit card holders do not pay the full amount due every month on the card they use most often … Nearly a third (29 per cent) said they had no idea what the interest rate on their card was. Another 30 per cent claimed that it was below 10 per cent, when in reality the overwhelming majority of card companies charge substantially in excess of 10 per cent. More than half of the respondents said they had learned ‘not too much’ or ‘nothing at all’ about financial issues at school. A 2008 survey revealed that two thirds of Americans did not understand how compound interest worked.” (13). Of course, this isn’t a problem merely for America: a vast amount of individuals around the world may struggle with financial literacy. Ferguson states that if economic crises are to be avoided, then everyone, from bankers to regular people, needs to know basic economic terms and concepts. Ferguson alleges that a fantastic way to learn more about economics is to see its history. He then provides the layout for the book: “The first chapter of this book traces the rise of money and credit; the second the bond market; the third the stock market. Chapter 4 tells the story of insurance; Chapter 5 the real estate market; and Chapter 6 the rise, fall and rise of international finance.” (14). Ferguson alleges that poverty in many areas isn’t due to exploitation, but the utter absence of financial institutions that would otherwise prove beneficial. He then states that as the present progresses into the future, certain economic principles and strategies will prevail over others, akin to natural selection in the real world.
Ferguson states that every country in the world relies on money to exist, even Communist ones (ex. North Korea). The potentially peacekeeping effects of money are clearly seen when civilizations using them are compared to groups of hunter-gatherers: the latter don’t rely on money, and they subsequently get what they want by raids and violence, not bargaining and negotiation. He discusses the Incan Empire and Potosí, a mountain of silver that was connected with many deaths, seeing how European settlers forced natives of the area and African Americans to mine for valuable minerals in horrible conditions, causing many to perish due to accidents, injuries, and poisoning. A city grew near it: at its height, it had between 160,000-200,000 people. The earliest coins known today go back as far as 600 BC and were Lydian in nature, seeing that they were made of an alloy made of gold and silver. The earliest coins were inherently valuable due to the minerals used to create them: “By Roman times, coins were produced in three different metals: the aureus (gold), the denarius (silver) and the sestertius (bronze), ranked in that order according to the relative scarcity of the metals in question … It was not until 221 BC that a standardized bronze coin was introduced to China by the ‘first Emperor’, Qin Shihuangdi. In each case, coins made of precious metal were associated with powerful sovereigns who monopolized the minting of money partly to exploit it as a source of revenue.” (25). Money became vital in Europe and the Middle East, though the abundance of silver from areas like Potosí backfired on the Europeans, seeing how so much was brought in that the quantity increased exponentially, causing inflation. That is, “During the so-called ‘price revolution’, which affected all of Europe from the 1540s until the 1640s, the cost of food - which had shown no sustained upward trend for three hundred years - rose markedly. In England … the cost of living increased by a factor of seven in the same period” (27). Overall, money has no intrinsic value: it’s only valuable insofar as the value others allot to it. As Ferguson put it, “What the Spaniards had failed to understand is that the value of precious metal is not absolute. Money is worth only what someone else is willing to give you for it. An increase in its supply will not make a society richer, though it may enrich the government that monopolizes the production of money. Other things being equal, monetary expansion will merely make prices higher.” (27). Going back even before valuable coins, the earliest financial transactions were conducted in Mesopotamia around five millennia ago on clay tablets. Ferguson states that money has obviously evolved in its form, from clay tablets to valuable coins to paper to potentially online holdings, seeing how most of the money today is actually present virtually, not in a physical manner. Therefore, “Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap. And now, it seems, in this electronic age nothing can serve as money too.” (31). Of course, if you look at the word associated with money, “credit,” it is closely related in its form to “credo,” or “I believe” in Latin. Modern finance can be stated to have begun in Europe, seeing how an Italian named Fibonacci created the Fibonacci sequence (a number is composed of the prior two put together - 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.) and published the Liber Abaci, or “The Book of Calculation” in 1202. The book explained fractions and decimals and how they’re relevant to financial transactions. Ferguson proceeds by discussing the financial aptness of Jewish people, and of the anti-Semitism that followed their monetary success, exacerbated by the fact that Christians viewed lending money with interest (usury) as a grave sin, seeing that doing so would cause a person to be excommunicated. Ferguson discusses loan sharks: they frequently operate in poor areas to offer a quick fix for those needing money, though those who would accept the temporary aid would be making a Faustian bargain, seeing that they’re basically entrapping themselves in debt. The creation of organizations to be powerful enough to make substantive profits while not behaving like loan sharks is seen in how banks came into existence: the Medici was a very wealthy family that influenced the world with their lending, seeing how some of them became popes and royalty. The Medici, as expected, kept track of financial transactions with documents for the sake of organization. They eventually became so powerful that they basically ran the country thanks to their financial acumen and the size and influence of the bank they established. Three major innovations occurred in quick succession: standardized currency became more popular (especially in financial accounts), the creation of fractional reserve banking (seeing how investors wouldn’t frequently ask to withdraw their money), and the birth of the Bank of England in 1694 (it helped manage the finances for the wars of the government and was also involved in joint-stock operations and even gained a monopoly on banknotes). Ferguson then provides an excellent summary of the money supply: “Some measures of M1 included travellers’ cheques in the total. M2 adds savings accounts, money market deposit accounts and certificates of deposit. M3 is broader still, including eurodollar deposits held in offshore markets, and repurchase agreements between banks and other financial intermediaries … The important point to grasp is that with the spread throughout the Western world of a) cashless intra-bank and inter-bank transactions b) fractional reserve banking and c) central bank monopolies no note issue, the very nature of money evolved in a profoundly important way … Now money represented the sum total of specific liabilities (deposits and reserves) incurred by banks. Credit was, quite simply, the total of banks’ assets (loans). Some of this money might indeed still consist of precious metal, though a rising proportion of that would be held in the central bank’s vault. But most of it would be made up of those banknotes and token coins recognized as legal tender along with the invisible money that existed only in deposit account statements.” (52). Thus, banks had to make clear their credibility and reliability to their lenders, seeing that bank runs are to be dreaded and avoided as much as possible.
When it came to the world turning to banking, Spain initially did poorly, seeing how it included a massive amount of silver, making it unwilling to change its ways: this is seen best in how it defaulted at least fourteen times between 1557 and 1696. However, it eventually caught on, and London quickly arose as a city and became known as private in nature and specialized in certain professions. Soon the laws prohibiting usury were overturned, giving banks only more incentive to make profits and to hold people’s money. Europe then saw an economic crisis: “The question that remained unresolved for a further forty years was what the relationship ought to be between the Bank’s reserves and its banknote circulation … [the] 1844 Bank Charter Act divided the Bank in two: a banking department, which would carry on the Bank’s own commercial business, and an issue department, endowed with £14 million of securities and an unspecified amount of coin and bullion which would fluctuate according to the balance of trade between Britain and the rest of the world. The so-called fiduciary note issue was not to exceed the sum of the securities and the gold. Repeated crises (in 1847, 1857 and 1866) made it clear that this was an excessively rigid straitjacket, however; in each case the Act had to be temporarily suspended to avoid a complete collapse of liquidity. It was only after the last of these crises, which saw the spectacular run that wrecked the bank of Overend Gurney, that the editor of The Economist, Walter Bagehot, reformulated the Bank’s proper role in a crisis as the ‘lender of last resort’, to lend freely, albeit at a penalty rate, to combat liquidity crises.” (55-6). As time went on, more and more countries created their national banks, from the United States to Japan to the Swiss. In America, banks relied on the gold standard until the Great Depression, seeing how people frequently hoarded gold to wait for better times to sell it for a greater profit. When it comes to debt, many countries allow people to declare bankruptcy to spare themselves. Ferguson notes that “The principal driver of bankruptcy turns out to be not entrepreneurship but indebtedness. In 2007 US consumer debt hit a record of $2.5 trillion. Back in 1959, consumer debt was equivalent to 16 per cent of disposable personal income. Now it is 24 per cent.” (62). A major reason for the increase in debt is globalization, seeing how economies are changing greatly with rapidly changing times. Ferguson proceeds to discuss the history of bonds, but not before describing their purpose: to help governments get the necessary revenue to conduct certain activities. He writes, “The total value of internationally traded bonds today is around $18 trillion. The value of bonds traded domestically … is a staggering $50 trillion. All of us … are affected by the bond market in two important ways. First, a large part of the money we put aside for our old age ends up being invested in the bond market. Secondly, because of its huge size, and because big governments are regarded as the most reliable of borrowers, it is the bond market that sets long-term interest rates for the economy as a whole.” (68). The origin of bonds lay in how money was needed by governments to wage wars against each other. The concept of the bond continuously survived due to how many citizens were willing to purchase them, as well as the existence of an oligarchy that managed the finances. Nathan Mayer Rothschild was the founder of the biggest bank in the world of the nineteenth century, and was obscenely rich. He made his money due to his determination to defeat his opponents, and invested in the British (who were fighting Napoleon at the time), seeing how he wanted Napoleon to be defeated. When he learned that Napoleon was crushed at the Battle of Waterloo, he was significantly disappointed, as he expected the war to be a long one: he avoided losing money by buying many bonds and selling them a year later - by that time they were forty percent more expensive. Thus, he made tremendous profits and became even richer. Rothschild was intensely criticized for his war profiteering, seeing how he financed many of the sides of wars that were fought and could have technically prevented massive bloodshed if he stood against armed conflict. It should be noted that while he did determine the outcomes of quite a few wars (the most prominent being the Napoleonic Wars, of course), after amassing his fortune, he stopped favoring armed conflict, seeing how he had much to lose. For instance, Rothschild didn't support the South in the Civil War, as it wasn’t a good investment. Although the South tried to make money by issuing bonds and restricting the cotton supply, military defeats caused their financial plans to be greatly hindered, to their detriment. The South, to deal with the problem, started printing money to support itself, causing much inflation: “the Confederate government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars’ worth in all. Both sides in the Civil War had to print money, it is true. But by the end of the war the Union’s ‘greenback’ dollars were still worth about 50 cents in gold, whereas the Confederacy’s ‘greybacks’ were worth just one cent, despite a vain attempt at currency reform in 1864 … inflation exploded. Prices in the South rose by around 4,000 per cent during the Civil War. By contrast, prices in the North rose by just 60 per cent. Even before the surrender of the principal Confederate armies in April 1865, the economy of the South was collapsing, with hyperinflation as the sure harbinger of defeat. The Rothschilds had been right. Those who had invested in Confederate bonds ended up losing everything, since the victorious North pledged not to honor the debts of the South.” (97-8).
In Europe, a class of people known as the rentiers arose: they made money by simply owning property and charging rent for their use. They were very rich, causing many to be incensed due to the disproportionate inequalities they perpetuated. The death of the class of rentiers occurred during WWI, seeing the massive inflation that occurred then. Ferguson provides a list of what is needed for hyperinflation to occur: shortages of goods, “short-term government borrowing from the central bank,” which causes an increase in the money supply, leading to the public to become cautious of inflation, directly leading to a rise in the price of goods (101). That is, inflation could be a self-perpetuating loop once it is significantly powerful. Overall, when it came to Europe during WWI (1914-18): “the volume of banknotes in circulation” rose by 1,040 per cent in Germany, 708 per cent in Britain, 386 in France, 1,116 for Bulgaria, and 961 for Romania. When it came to the cost-of-living index, those living in Berlin in 1918 faced one that was 2.3 times larger than the one before the war, while in London the number was 2.1. However, while basically all the European powers faced massive inflation due to WWI, one of the main reasons Germany fell into economic ruin was due to the Versailles Treaty, which demanded that Germany pay more money than was possible (Germany was supposed to pay 132 billion gold marks, more than thrice its national income). Furthermore, not enough taxes were levied and large spendings by the government exacerbated the financial deficit. Furthermore, many Germans were unrepentant of the role their country played in WWI, causing the German currency to completely fall apart: “By the end of 1923 there were approximately 4.97 times 1020 marks in circulation. Twenty-billion mark notes were in everyday use. The annual inflation rate reached a peak of 182 billion per cent. Prices were on average 1.26 trillion times higher than they had been in 1913 … Industrial production dropped to half its 1913 level. Unemployment soared to, at its peak, a quarter of trade union members, with another quarter working short time.” (105-6). Thus, the economic ruin of Germany caused the class of rentiers to suffer financially. Ferguson then discusses Argentina - its name literally means “the land of silver.” While Argentina did well prior to the twentieth century, it fell into disaster due to inflation, economic mismanagement (the oligarchs who controlled most of the land believed that they could make profits by selling food to other areas, which backfired during the Great Depression), instability, military coups, and internal conflict (not one group of Argentina desired a stable inflation rate and money supply). In the words of Ferguson, “What made Argentina’s inflation so unmanageable was not war, but the constellation of social forces: the oligarchs, the caudillos, the producers’ interest groups and the trade unions-not forgetting the impoverished underclass or descamizados (literally the shirtless). To put it simply, there was no significant group with an interest in price stability. Owners of capital were attracted to deficits and devaluation; sellers of labour grew accustomed to a wage-price spiral. The gradual shift from financing government deficits domestically to financing them externally meant that bondholding was outsourced. It is against this background that the failure of successive plans for Argentine currency stabilization must be understood.” (112). It should also be noted that the main losers of Argentina’s financial crises were not the working class, but those depended on fixed income, such as civil servants, academics, and pensioners, seeing how Argentina’s debt skyrocketed. “By 1983 the country’s external debt, which was denominated in US dollars, stood at $46 billion, equivalent to around 40 per cent of national output. To matter what happened to the Argentine currency, this dollar-denominated debt stayed the same. Indeed, it tended to grow as desperate governments borrowed yet more dollars. By 1989 the country’s external debt was over $65 billion. Over the next decade it would continue to grow until it reached $155 billion” (114). To deal with this massive issue, Argentina decided to default, which was a rough process: “After two bailouts in January ($15 billion) and May ($8 billion), the IMF [International Money Fund] declined to throw a third lifeline. On 23 December 2001, at the end of a year in which per capita GDP had declined by an agonizing 12 per cent, the government announced a moratorium on the entirety of its foreign debt, including bonds worth $81 billion: in nominal terms the biggest debt default in history.” (115-6). The concept of bonds is not guaranteed to be constantly strong, as seen in Argentina’s example, but it is still prominent and powerful: “In 2007 a survey of pension funds in eleven major economies revealed that bonds accounted for more than a quarter of their assets, substantially lower than in past decades, but still a substantial share. With each passing year, the proportion of the population living off the income from such funds goes up, as the share of retirees increases.” (117-8).
The concept of stocks is directly tied to that of the company, seeing that those who invest in a company do so using stocks, and thereby invest not only money, but their emotions and focus. The stock market, of course, goes through booms and busts, causing economists like John Maynard Keynes to categorize it as animalistic and bipolar, seeing how he deemed it dependent on “animal spirits.” There are five stages of a stock market: (1) displacement (“Some change in economic circumstances creates new and profitable opportunities for certain companies”), (2) euphoria (people overtrade - “rising expected profits lead to rapid growth in share prices”), (3) mania (this is one step above euphoria when it comes to attracting people, seen in how even prudent and beginner investors are likely to join), (4) distress (people start to panic upon coming back to reality and start selling their shares while there are still people to take them), and (5) revulsion (“As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether”) (122-3). Stock markets are characterized by asymmetric information, as those intimately involved with the stock market know more information than those outside of it. There are also cross-border capital flows: money can move from country to country with little impediment. Then there’s easy credit creation: value can be generated by the stock market. The main difference between stocks and bonds is that bonds are much more reliable: if the government promises to pay the holder of the bond the money back with a little interest they’re very likely to do so. However, when it comes to companies, they can go bankrupt or suffer economically: “a share is a portion of the capital of a profit-making corporation. If the company succeeds in its undertakings, there will not only be dividends, but also a significant probability of capital appreciation … The returns on stocks are less predictable and more volatile than the returns on bonds and bills. There is a significantly higher probability that the average corporation will go bankrupt and cease to exist than that the average sovereign state will disappear. In the event of a corporate bankruptcy, the holders of bonds and other forms of debt will be satisfied first; the equity holders may end up with nothing. For these reasons, economists see the superior returns on stocks as capturing an ‘equity risk premium’ - though clearly in some cases this has been a risk well worth taking.” (126-7). A man known as John Law was a key force that drove the French Revolution, seeing how he made it impossible for the aristocracy to reform its finances due to his policies. He was also a murderer: he killed someone in a duel and escaped to Amsterdam, which was then a great place to become an investor, seen in how Dutch ships that left would be funded by groups of investors. Many companies at the time (ex. The Dutch East India Company) were the origins of the concept of stocks, seeing how they made it clear that buying their shares means also having a piece of the say when it comes to the company’s actions. Of course, even in the beginning investing in a company was risky: they promised to give the holder of the stock money only if they are making a profit. Furthermore, in the early days traveling by sea was quite risky, as many ships didn't survive the journey. The Dutch East India Company was able to take over areas like the East Indies, and it was the government, acting ruthlessly in its dealings: British East India Company officials were vulnerable to execution and indigenous peoples (ex. the Bandanese) were sometimes slaughtered. The massive power companies like the Dutch East India Company possessed gave them a monopoly over a variety of goods, and they only focused more on maritime trade over time. “In the 1620s, fifty VOC [Dutch East India Company] ships had returned from Asia laden with goods; by the 1690s the number was 156. Between 1700 and 1750 the tonnage of Dutch shipping sailing back around the Cape doubled. As late as 1760 it was still roughly three times the amount of British shipping.” (136-7). Those who had invested in the Dutch East India Company made massive profits, seeing how at its peak shareholders were given eight times the value of the stocks they owned. It’s also noteworthy to mention that the Dutch East India Company didn't see a bubble and crush, as its ascent was gradual but consistent, not rapid and frenetic. When it came to France before the French Revolution, the government was struggling with massive public debt under the reign of Louis XIV, and the government was about to go bankrupt for the third time in the century. John Law wanted to make a public bank based on the Dutch ones in France. In an attempt to make it successful, he was given authority for twenty-five years over the Company of the West, a company that originated in 1717 that had power over the commerce of Louisiana, a territory that still belonged to France before the Louisiana Purchase. To keep the Company of the West afloat, he sold shares for it and gave shareholders privileges (ex. giving them the first pick of new shares).
John Law was later made the Controller General of Finances, granting him even greater power, making it realistic to say that he was the sole controller of the economy. John Law, despite holding a vital position, was in his private life a gambler, which is quite amusing. The Company of the West eventually deteriorated due to massive inflation due to his policies of printing large quantities of money: “By May 1720 the total money supply (banknotes and shares held by the public, since the latter could be turned into cash at will) was roughly four times larger in livre terms than the gold and silver coinage France had previously used.” (150). Law also ordered that it would be illegal for a civilian to have more than 500 livres of metallic coins, giving the authorities the jurisdiction to search the houses of people to ensure compliance. Law’s policies, expectedly, were unpredictable and prone to change: “One day gold and silver could be freely exported; the next day not. One day notes were being printed as fast as the printing presses could operate; the next Law was aiming to cap the banknote supply at 1.2 million livres. One day there was a floor price of 9,000 livres for Mississippi shares; the next day not. When this floor was removed on 22 February the shares predictably slumped. By the end of the month they were down to 7,825 livres. On 5 March, apparently under pressure from the Regent, Law performed another U-turn, reinstituting the 9,000 livre floor and reopening the bureau to buy them at this price … It seemed inevitable that before long all the shares would be unloaded on the Company, unleashing a further flood of banknotes and a surge in inflation.” (152). In an attempt to stop the Company of the West from falling apart, Law tried to decrease the price of the shares from 9,000 to 5,000 livres. “He also devalued the banknotes, having revoked the previous order guaranteeing that this would not happen. This was when the limits of royal absolutism, the foundation of Law’s System, suddenly became apparent. Violent public outcry forced the government to revoke these measures just six days after their announcement, but the damage to confidence in the System was, by this time, irrevocable. After an initial lull, the share price slid from 9,005 livres (16 May) to 4,200 (31 May). Angry crowds gathered outside the Bank, which had difficulty meeting the demand for notes … Law was roundly denounced at an extraordinary meeting of the Parlement. The Regent retreated, revoking the 21 May decree. Lee offered his resignation, but was dismissed outright on 29 May. He was placed under house arrest; his enemies wanted to see him in the Bastille … (An investigative commission quickly found evidence that Law’s issues of banknotes had breached the authorized limit, so grounds existed for a prosecution.)” (152-3). He was eventually reinstated to power as the Intendant General of Commerce, but it only prolonged the inevitability of an economic downturn, seeing how he soon fled the country to save his life from angry mobs, but not before writing to the Duke of Orleans that while he had made huge mistakes, he was an understandable person who was prone to error, and that he didn't make his mistakes out of dishonesty or greed (of course, this wasn’t true, seeing how he was both a murderer and a con artist who exploited the economic system for his personal gain). Not long after he left, the Mississippi Bubble (which was centered around the Mississippi Company) burst, causing much mayhem in Europe and making Law even more detested, as the bursting of the Mississippi Bubble definitively demonstrated how the Company of the West traded nothing of value, a clear contrast to how the Dutch East India Company actually moved goods (ex. spices) from area to area. Although Law successfully fled with his life, he was financially ruined. The Bubble Law was later passed to prevent incidents like the Mississippi Bubble from occurring, seeing how it made it clear that companies can’t do things (ex. acting as dictators in other areas) that aren’t included in their respective charters.
One cannot talk about the stock market without mentioning the Great Depression, one of the worst economic crises in history. One of the main factors when it comes to differentiating the Great Depression from other financial downturns is that very few expected it, as the market seems to be booming without a limit, making the impact of the crisis all the worse when it did happen. Overall, when it comes to lessons that can be learned in the Great Depression, one of the main ones is “that inept or inflexible monetary policy in the wake of a sharp decline in asset prices can turn a correction into a recession and a recession into a depression. According to Friedman and Schwartz, the Fed should have aggressively sought to inject liquidity into the banking system from 1929 onwards, using open market operations on a large scale, and expanding rather than contracting lending through the discount window. They also suggest that less attention should have been paid to gold outflows.” (164-5). Decades after WWII there was “Black Monday,” an event that occurred on 19 October 1987 that saw the Dow dropping by 23 per cent. “From peak to trough, the fall was of nearly one third, a loss in the value of American stocks of close to a trillion dollars” (166). Although Black Monday was obviously disastrous, what was remarkable was that no recession followed it, giving credence to the belief that sometimes the most remarkable events are the absence of certain ones (ex. a large decrease in violence between countries following WWII due to the threat of the atomic bomb). An excellent example of the fickleness of stocks can be seen in Enron, a notable and influential gas company that collapsed due to its dishonesty and fraud: it manipulated the market and used fake numbers to make itself seem valuable. Enron’s collapse was rapid when it began occurring: “Investors had been assured that Enron’s stock price would soon hit $100. When (for ‘personal reasons’) Skilling unexpectedly announced his resignation on 14 August 2001, however, the price tumbled to below $40 … On 16 October Enron reported a $618 million third-quarter loss and a $1.2 billion reduction in shareholder equity. Eight days later, with a Securities and Exchange Commission inquiry pending, Fastow stepped down as CEO … When Enron filed for bankruptcy on 2 December, it was revealed that the audited balance sheet had understated the company’s long-term debt by $25 billion: it was in fact not $13 billion but $38 billion. By now, distress had turned to revulsion; and panic was hard on its heels. By the end of 2001 Enron shares were worth just 30 cents.” (174). Ferguson notes the following lessons when it comes to stock: “Invented almost exactly four hundred years ago, the joint-stock, limited-liability company is indeed a miraculous institution, as is the stock market where its ownership can be bought and sold … there have been crooked companies, just as there have been irrational markets … the two go hand in hand … A crucial role, however, is nearly always played by central bankers, who are supposed to be the cowboys in control of the herd … without the loose money policy of the Federal Reserve in the 1990s, Ken Lay and Jeff Skilling would have struggled to crank up the price of Enron stock to $90. By contrast, the Great Depression offers a searing lesson in the dangers of excessively restrictive monetary policy during a stock market crash … the history of the Dutch East India Company, the original joint-stock company, shows that, with sound money … stock market bubbles and busts can be avoided.” (175). Regardless, so long as humans are the ones running the economy, financial cycles will occur, making it vital for investors to practice prudence and consistency.
Ferguson proceeds to write about insurance. While it can be effective, sometimes a severely terrible incident can make it fail, one of the prime instances being Hurricane Katrina, which involved $41 billion in insurance. The concept of insurance existed for a long time, seeing that for most of human history people weren’t expected to live very long due to factors like war, disease, accidents, and natural disasters. Insurance is closely tied to the probability of negative events occurring, life expectancy, potential certainty (ex. Jacob Bernoulli’s Law of Large Numbers, which states the importance of samples), normal distribution (including standard deviations and probability itself), utility (ex. $50 is worth far more to a person struggling with finances than a millionaire), and inferences (states that the utility of something is the probability of it occurring times the profit/payoff generated if it does occur). Some of the first groups to begin the concept of insurance were religious organizations, seeing how they wanted to provide the families of deceased clergymen with a stable source of income enough to last them for a while after their deaths (this was known as the Scottish Ministers’ Widows’ Fund). A fantastic definition of insurance was provided by Alfred Manes, who was an expert at insurance: it is “An economic institution resting on the principle of mutuality, established for the purpose of supplying a fund, the need for which arises from a chance occurrence whose probability can be estimated.” (196). Insurance eventually expanded to include potentially everyone, paving the way for welfare states and organizations that focus on service and aid for those who need it. State insurance arose when a large number of people began to desire it to be so (economies of scale). This is excellently encapsulated in Japan: after WWII, millions were dead and homeless, and most of its merchant fleet was at the bottom of the ocean. To save itself from continuous ruin, Japan encouraged insurance and followed the examples of other countries, including Britain and the United States. Britain and America’s reliance on welfare, Ferguson alleged, caused slower growth, making people desire reform that was found in Milton Friedman’s belief that the Federal Reserve was mainly to blame for the Great Depression and that inflation did indeed occur due to an over-abundance and printing of money. When Friedman went to Chile, he gave advice to Pinochet, a military dictator who was responsible for the murders of thousands (estimated to be above two thousand) people and the horrific tortures of more than 30,000. This caused Friedman to be scorned (he remarked that he wasn’t criticized for giving advice to China). Later, José Piñera, a student from Harvard and who was born in Chile, went back to Chile to overhaul the welfare state by giving people an incentive to work for themselves: “Between 1979 and 1981, as minister of labour (and later minister of mining), Piñera created a radically new pension system for Chile, offering every worker the chance to opt out of the state pension system. Instead of paying a payroll tax, they would put an equivalent amount (10 per cent of their wages) into an individual Personal Retirement Account, to be managed by private and competing companies known as Administradora de Fondos de Pensiones (AFPs). On reaching retirement age, a participant would withdraw his money and use it to buy an annuity; or, if he preferred, he could keep working and contributing. In addition to a pension, the scheme also included a disability and life insurance premium … In the words of Hernán Büchi (who helped Piñera draft the social security legislation and went on to implement the reform of health care), ‘Social programmes have to include some incentive for individual effort and for people gradually to be responsible for their own destiny. There is nothing more pathetic than social programmes that encourage social parasitism.’” (216-7). When Piñera’s suggestion was passed, a large number of people switched to the private system of retirement planning: by 1990 more than 70 per cent of workers had switched. After seventeen years as dictator, Pinochet resigned from absolute power (he decided to leave the office of president, but remained the head of the armed forces), causing democracy to come back in, to the benefit of Chileans (seeing how they’re no longer liable to being arrested, tortured, and executed without trial). Overall, Friedman’s advice seemed to be successful: “The growth rate in the fifteen years before Friedman’s visit was 0.17 per cent. In the fifteen years that followed, it was 3.28 per cent, nearly twenty times higher. The poverty rate has declined dramatically to just 15 per cent, compared with 40 per cent in the rest of Latin America. Santiago today is the shining city of the Andes, easily the continent’s most prosperous and attractive city.” (219). Ferguson states that disasters like Hurricane Katrina definitely support the notion that American welfare is ineffective, seeing the massive amount of aging Americans and the skyrocketing cost of private health care. America’s private health care system is an utter disaster, seeing how it is run for only profit: 47 million Americans don’t have a private insurance policy, which is exacerbated by the aforementioned population of Baby Boomers, seeing how it is very difficult to deal with a generation as large as them. As Ferguson put it, “The average worker plans to work until age 65. But it turns out that he or she actually ends up retiring at 62; indeed, around four in ten American workers end up leaving the workforce earlier than they planned. This has grave implications for the federal budget, since those who make these miscalculations are likely to end up a charge on taxpayers in one way or another. Today the average retiree receives Social Security, Medicare and Medicaid benefits totalling $21,000 a year. Multiply this by the current 36 million elderly and you see why these programmes already consume such a large proportion of federal tax revenues. And that proportion is bound to rise, not only because the number of retirees is going up but also because the costs of benefits like Medicare are out of control, rising at double the rate of inflation.” (221-2).
Ferguson states that the only country with a problem regarding aging more severe than the United States is Japan, seeing the vast amount of old people and the low birth rate. When it comes to the current age, potentially catastrophes could be especially dangerous, seeing climate change and the potential that terrorists would use nuclear bombs to kill people (al Qaeda leaders have actually bragged that they want to kill millions of Americans, including many children). Ferguson ends the section discussing insurance that it is a good idea to have it, seeing that the future is difficult to predict and anything can happen. Ferguson proceeds to discuss property: the game of Monopoly was created to show how landlords and the rich could exploit people by charging high prices of rent and the like, only for it to become a popular game played for leisure. For much of human history, only aristocrats owned houses. When democratic policies were put into place, that drastically changed, seeing that more and more people owned property (and could subsequently vote, seeing how in some areas holding property was a requirement for the right to vote). Although more people owned their houses, a large number of people in all areas were left out, seeing the potentially restrictive economic costs and a lack of financial aid (especially in poor areas that were also affected by segregation and violence). For instance, in Britain the government led by Margaret Thatcher passed the Mortgage Interest Relief At Source (MIRAS) that led to a “leap in the share of owner-occupiers from 54 per cent in 1981 to 67 per cent ten years later. The stock of owner-occupied properties has soured from just over 11 million in 1980 to more than 17 million today.” (253-4). The benevolent attempt of certain officials to allow more people to own property included the weakness of high-interest rates, seeing that banks would sometimes only lend money to those who are financially inexperienced if they receive a higher return, directly leading to a large contribution to the boom and bust cycle in the property market. There was then the Savings and Loan scandal: when the Reagan administration deregulated the Savings and Loan associations, people began to use the money of those who had saved in the organizations to do whatever they wished, while others went so far as to blatantly steal it. When the scandal was finally revealed, those responsible were sentenced to years of prison and were given fines of millions of dollars. When it comes to property, three massively important concepts are depreciation, liquidity, and volatility: (1) depreciation involves property mostly becoming less valuable the more time goes on due to wear and tear, (2) when it comes to liquidity, houses are harder to be given a monetary approximation due to their size, and (3) property prices frequently fluctuate to the detriment of many. To support the third point, “In Britain between 1989 and 1995, for example, the average house price fell by 18 per cent or in real, inflation-adjusted terms by more than a third (37 per cent). In London the real decline was closer to 47 per cent. In Japan between 1990 and 2000, property prices fell by over 60 per cent.” (264). Subprime mortgages are given to those who may be struggling with finances or have dubious credit histories. When it came to them, “a high proportion were adjustable-rate mortgages (ARMS) - in other words, the interest rate could vary according to changes in short-term lending rates. Many were also interest-only mortgages, without amortization (repayment of principal), even when the principal represented 100 per cent of the assessed value of the mortgaged property. And most had introductory ‘teaser’ periods, whereby the initial interest payments - usually for the first two years - were kept artificially low, back-loading the cost of the loan. All of these devices were intended to allow an immediate reduction in the debt-servicing costs of the borrower. But the small print of subprime contracts implied major gains for the lender. One particularly egregious subprime loan in Detroit carried an interest rate of 9.75 per cent for the first two years, but after that a margin of 9.125 percentage points over the benchmark short-term rate at which banks lend each other money: conventionally the London interbank offered rate (Libor). Even before the subprime crisis struck, that already stood above 5 per cent, implying a huge upward leap in interest payments in the third year of the loan.” (265-6). When it came to the subprime crisis, the people of Detroit frequently experienced many advertisements that offered seemingly cheap houses. While a huge amount of economically disadvantaged colored people were able to have their own houses, things quickly turned sour once the initial period of grace was over. As Ferguson described, “As soon as the teaser rates expired and the mortgages reset at new and much higher interest rates, hundreds of Detroit households swiftly fell behind with their mortgage payments. As early as March 2007, about one in three subprime mortgages in the 48235 ZIP code were more than sixty days in arrears, effectively on the verge of foreclosure. The effect was to burst the real estate bubble, causing house prices to start falling for the first time since the early 1990s. As soon as this began to happen, those who had taken out 100 per cent mortgages found their homes worth less than their debts. The further house prices fell, the more homeowners found themselves with negative equity” (271).
Ferguson continues, “What I was witnessing was just the beginning of a flood of foreclosures. In March 2007 the Center for Responsible Lending predicted that the number of foreclosures could reach 2.4 million. This may turn out to have been an underestimate. At the time of writing (May 2008), around 1.8 million mortgages are in default, but an estimated 9 million American households, or the occupants of one in every ten single-family homes, have already fallen into negative equity … According to Crédit Suisse, the total number of foreclosures on all types of mortgages could end up being 6.5 million over the next five years. That could put 8.4 per cent of all American homeowners, or 12.7 per cent of those with mortgages, out of their homes.” (272). Ferguson believes that the main culprit of this crisis is the over-pricing of certain items which makes the subprime rates unreasonable, seeing how even some of the best (triple-A) securities were found to be worth little. Thus, this demonstrates that houses are risky investments, seeing how prices can increase as well as go down with the tide of the financial cycle. Although the world’s poor own a total amount of real estate that sums up to $9.3 trillion, their lives are still poor in quality due to the fact that they struggle to get by, much less think about property rights. Fortunately, loans were made to certain people who were suffering from poverty, including women. “The founder of the microfinance movement, the Nobel prize winner Muhammad Yunus, came to understand the potential of making small loans to women when studying rural poverty in his native Bangladesh. His mutually owned Grameen (‘Village’) Bank, founded in the village of Jobra in 1983, has made microloans to nearly seven and a half million borrowers, nearly all of them women who have no collateral. Virtually all the borrowers take out their loans as members of a five-member group (koota), which meets on a weekly basis and informally shares responsibility for loan repayments. Since its inception, Grameen Bank has made microloans worth more than $3 billion, initially financing its operations with money from aid agencies, but now attracting sufficient deposits (nearly $650 billion by January 2007) to be entirely self-reliant and, indeed, profitable … Loans start at around $200 for three months. Most women use the money to buy livestock for their farms, or … fund their own micro-business, selling anything from tortillas to Tupperware.” (280-1). Astoundingly, small loans made a massive difference in most of the women who accepted them, as it afforded them enough resources to do things they wouldn’t have had the time to do otherwise. Ferguson states that although microloans can be effective in certain situations, it’s still far from a definitive solution, seeing how approximately two-fifths of the people of the world are outside “the financial system, without access to bank accounts, much less credit … Nor should we forget that some people in the microfinance business are in it to make money, not to end poverty. It comes as something of a shock to discover that some microfinance firms are charging interest rates as high as 80 or even 125 per cent a year on their loans - rates worthy of loan sharks. The justification is that this is the only way to make money, given the cost of administering so many tiny loans.” (282). Ferguson states that when it comes to housing, people should practice foresight and caution, seeing how it is foolish to put oneself in financial jeopardy to buy a house, considering that the house is one of the first properties to go when bankruptcy is declared and foreclosures occur.
Ferguson then discusses globalization and international finance. He begins by talking about China’s relationship with America: “By 1820 per capita income in the United States was roughly twice that of China; by 1870, nearly five times higher; by 1913 nearly ten times; by 1950 nearly twenty-two times. The average annual growth rate of per capita GDP in the United States was 1.57 per cent between 1920 and 1950. The equivalent figure for China was -0.24 per cent. In 1973 the average Chinese income was at best one-twentieth of the average American. Calculated in terms of international dollars at market exchange rates, the differential was even wider. As recently as 2006, the ratio of US to Chinese per capita income by this measure was still 22.9 to 1.” (286). What caused America to advance and China to stagnate was how America had colonial holdings in the Caribbeans that focused on sugar production, how it was organized when it came to utilizing resources, and an influx of ideas due to imperialism. Another reason as to why China was underwhelming in a financial sense when compared to the United States is that it isolated itself for centuries, setting itself back technologically and intellectually, and only learned of modern financial institutions when foreigners entered, directly resulting in advantageous financial policies being rejected in the name of patriotism and tradition. Globalization has changed everything in the world, not just economics, as international movements of people, ideas, and knowledge led to drastic changes, including new technologies (ex. the internet) that facilitate said globalization even further. Aside from colonization, globalization occurred due to many financial investments being made abroad, the creation of technology like the telegraph, and the standardization of procedures when it came to financing (ex. Europe’s central banks almost unanimously agreed to follow the gold standard by 1908). Ferguson writes of historical events and their relation with economics, including the Opium Wars of China (China lost them terribly due to not being organized, it having incompetent officials, and inadequate technology), WWI (which surprisingly saw many of the world’s biggest stock markets closing for up to five months: the Vienna market was the first to be temporarily shut down - “By 30 July all the continental European exchanges had shut their doors. The next day London and New York felt compelled to follow suit. Although a belated settlement day went ahead smoothly on 18 November, the London Stock Exchange did not reopen until 4 January 1915. Nothing like this had happened since its foundation in 1773. The New York market reopened for limited trading (bonds for cash only) on 28 November, but wholly unrestricted trading did not resume until 1 April 1915.”), and the hyperinflation of Germany (301). When it came to the closing of the stock market, it had a colossal impact due to how people actually believed that WWI was going to be a short war (a popular saying went that the soldiers will be back home by Christmas). When WWI was over, severe inflation in Europe, but especially in Germany, caused further mayhem, setting the stage for WWII and the rise of fascism. When WWII ended, a capitalistic system known as the Bretton Woods was formed to attempt to prevent the rise of Communism. This plan stated that a country can choose two of the following three options: (1) “full freedom of cross-border capital movements,” (2) “a fixed exchange rate,” and (3) “an independent monetary policy oriented towards domestic objectives.” (307). Ferguson remarks that Western countries chose the last two options, while Third World countries had much trouble growing financially due to a lack of investors and the obvious presence of economic hit men who could negatively impact a country for the sake of profit. Ferguson details, “no reforms, no money. Their preferred mechanism was the structural adjustment programme. And the policies the debtor countries had to adopt became known as the Washington Consensus, a wish-list of ten economic policies that would have gladdened the heart of a British imperial administrator a hundred years before. Number one was to impose fiscal discipline to reduce or eliminate deficits. The tax base was to be broadened and tax rates lowered. The market was to set interest and exchange rates. Trade was to be liberalized and so, crucially, were capital flows.” (309-10). Those who were against this kind of behavior viewed the World Bank and IMF as servants of imperialism, seen in how developed countries were acting in a predatory manner towards poorer areas, including keeping murderous dictators who were against Communism in power and supporting oligarchs who exploited commoners. Anti-globalization resulted from this, as those who viewed America and other areas negatively wanted them to keep to themselves and to leave them alone. Economic globalization also had a fair amount of backstabbing, as leaders whom America didn't like were sometimes assassinated. A prime example of an economic hit man is George Soros, who utilized speculation to make billions in profits by betting on certain currencies and running hedge funds, seeing how he acknowledged that sometimes stocks weren’t as valuable as they actually portrayed to be: people’s biases and ignorance can exacerbate or underexaggerate the value of an item. “The success of the Quantum Fund was staggering. If someone had invested $100,000 with Soros when he established his second fund (Double Eagle, the earlier name of Quantum) in 1969 and had reinvested all the dividends, he would have been worth $130 million by 1994, an average annual growth rate of 35 per cent. The essential differences between the old and the new economic hit men were twofold: first, the cold, calculating absence of loyalty to any particular country - the dollar and the pound could both be shorted with impunity; second, the sheer scale of the money the new men had to play with.” (320).
Ferguson then discusses the collaboration of Fisher Black (of Goldman Sachs) and Myron Scholes (of Stanford): they produced groundbreaking equations (known as quants) that relied on reason and logic, not emotion and bias. While their equations seemed to be reliable in the short-run, human fallibility and irrationality quickly disrupted it. Other predictions given by the equations failed in their accuracy, seen in how humans are emotional beings that are greatly illogical: “A desperate Russian government was driven to default on its debts (including rouble-denominated domestic bonds), fuelling the fires of volatility throughout the world’s financial markets … the Russian default had a contagious effect on other emerging markets, and indeed some developed markets too. Credit spreads blew out. Stock markets plunged. Equity volatility hit 29 per cent. At peak it reached 45 per cent, which implied that the indices would move 3 per cent each day for the next five years. Now, that just wasn’t supposed to happen, not according to the Long-Term risk models. The quants had said that Long-Term was unlikely to lose more than $45 million in a single day. On Friday 21 August 1998, it lost $550 million - 15 per cent of its entire capital … Suddenly all the different markets where Long-Term had exposure were moving in sync, nullifying the protection offered by diversification. In quant-speak, the correlations had gone to one. By the end of the month, Long-Term was down 44 per cent: a total loss of over $1.8 billion.” (327). Overall, to reiterate, the reason Long-Term did relatively poorly in the long-term and why Soros succeeded is that people are illogical: “Short term, it was still dear old Planet Earth, inhabited by emotional human beings, capable of flipping suddenly from greed to fear. When losses began to mount, many participants simply withdrew from the market, leaving LTCM with a largely illiquid portfolio of assets that couldn’t be sold at any price. Moreover, this was an ever more integrated Planet Earth, in which a default in Russia could cause volatility to spike all over the world.” (329). Another reason why the pure logic of Long-Term didn't succeed was the data entered into it: it didn't stretch back long enough, so it was insufficient in quantity. Ferguson writes of the increasing popularity of hedge funds due to their massive profits, and reveals that a huge amount of money can be made by utilizing deception and greed. He then discusses China, stating that it keeps its goods cheap by buying billions of dollars in the world market, causing the strategy to be named Bretton Woods II: “In 2006 Chinese holdings of dollars almost certainly passed the trillion dollar mark.” (335). Ferguson deems as “Chimerica” the economic combination of China and America. In his own words, it “accounts for just over a tenth of the world’s land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years. For a time it seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation. Thanks to Chimerica, global real interest rates - the cost of borrowing, after inflation - sank by more than a third below their average over the past fifteen years … But there was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000 … And Chimerica - or the Asian ‘savings glut’, as Ben Bernanke called it - was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 per cent mortgage with no income, no job or assets.” (336-7). Ferguson ends his discussion of globalization by writing of important lessons, including that wars can occur even when an economy is advanced due to things like nationalism, that the longer the world takes peace for granted, the potentially more willing nations will be to declare war, and that investors that take stability for granted are impacted especially negatively by shocks in the financial cycle.
Ferguson writes in his afterword of “the descent of money.” He writes that today’s society is largely paved by four millennia of economic development, and provides a great overview of his book: “Money - the crystallized relationship between debtor and creditor - begat banks, clearing houses for ever larger aggregations of borrowing and lending. From the thirteenth century onwards, government bonds introduced the securitization of streams of interest payments; while bond markets revealed the benefits of regulated public markets for trading and pricing securities. From the seventeenth century, equity in corporations could be bought and sold in similar ways. From the eighteenth century, insurance funds and then pension funds exploited economies of scale and the laws of averages to provide financial protection against calculable risk. From the nineteenth, futures and options offered more specialized and sophisticated instruments: the first derivatives. And, from the twentieth, households were encouraged, for political reasons, to increase leverage and skew their portfolios in favour of real estate.” (343). Ferguson states that economies that adopted with changing times and had institutions such as banks, bond and stock markets, insurance, property, and democracy did much better in the long-run that those which refrained from doing so, seeing how democracies and republics are more efficient than aristocratic and totalitarian ones, seeing how they give the common worker an incentive to do well. He admits once more that financial crises have occurred many times and are likely to occur in the future: “One recent study of the available data for gross domestic product and consumption since 1870 has identified 148 crises in which a country experienced a cumulative decline in GDP of at least 10 per cent and eighty-seven crises in which consumption suffered a fall of comparable magnitude, implying a probability of financial disaster of around 3.6 per cent per year. Even today, despite the unprecedented sophistication of our institutions and instruments, Planet Finance turns out to be as vulnerable as ever to crises.” (344). Ferguson states that the future is extremely uncertain, and that people may be overconfident when it comes to it due to their erroneous belief that the past and the present is what’s really needed to predict the future. Ferguson writes of certain biases, including the availability bias (people ignore choices that aren’t obvious or accessible in the current situation), hindsight bias (makes people believe that they knew all along something would happen only after it occurred), the problem of induction (not enough evidence is used to reach a certain conclusion), conjunction fallacies (people overestimate the probability that likely events are going to occur while underestimating the chance that unlikely events could happen), confirmation bias (people look only at evidence that supports their prejudices and biases while ignoring those that point to the contrary), contamination effects (when irrelevant information impacts someone’s decision), the affect heuristic (biases that prevent people from thinking clearly of the costs and benefits of a behavior), scope neglect (people are unwilling to make necessary changes to adapt), overconfidence in calibration (when people believe that a desired result is likely to happen), and bystander apathy (when people are less likely to do what needs to be done when in a nameless crowd). Of course, the previous biases clearly demonstrate that humans are flawed, which is quite fitting, seeing how all human behavior can be explained with evolution. Indeed, the concept of Darwinian natural selection has been frequently compared to markets, seeing how, supposedly, only the best and biggest companies survive. Indeed, many companies go “extinct” every year, even the best. Ferguson then gives more similarities between evolution and economics: when firms create new ones, they pass on their knowledge and money (their “genes”), innovation is similar to spontaneous mutation, competition for resources is a key staple of companies, under-performance for companies is rewarded with bankruptcy (extinction in the world of biology), the rise of variety due to creativity and constant adaptation (like how new species come into existence), and the possibility of extinction (bankruptcy). Ferguson details that evolution, though similar to economics, still has key differences: it isn’t progressive, seeing that sometimes the smallest and weakest animals are those that survive. Furthermore, companies can’t actually sexually reproduce, and their extinction doesn’t count as the actual obliteration of a species. Ferguson states that the Great Recession is like an extinction event for the world of economics, seeing how US investment banks have been severely damaged by it. “The US investment banks, once Wall Street’s dominant players, have disappeared: either bankrupt (as in the case of Lehman Brothers), taken over by commercial banks (Bear Stearns and Merrill Lynch) or forced to transform themselves into commercial banks in order to survive (Goldman Sachs and Morgan Stanley). Bond insurance companies, meanwhile, also seem destined to disappear. In other financial sectors the story is of population decline rather than outright extinction.” (358-9). Some of the financial sectors that Ferguson predicts to be weakened include hedge funds. Ferguson states that companies deemed too big to fail could and should be let go, seeing how they may be unmanageable and inefficient in the long-run. Furthermore, he states that governments need to come to terms with how much they are willing to step in to help companies during economic crises for the sake of posterity. He then asks questions about the potential future of the world, including the relationship between China and America, the fate of US government bonds, the future of property-holding in the world, and the Federal Reserve’s power over the printing press. He states that although the Great Recession is awful, it is only one part of a history of continuous economic improvement: “There have been great reverses, contractions and dyings, to be sure. But not even the worst has set us permanently back. Though the line of financial history has a saw-tooth quality, its trajectory is unquestionably upwards.” (363). He writes once again of globalization and of the importance of technology, as more and more people are learning new techniques and becoming open-minded. He ends his book with the following sentences: “The historical reality … is that states and financial markets have always existed in a symbiotic relationship. Indeed, without the exigencies of public finance, much of the financial innovation that produced central banks, the bond market and the stock market would never have occurred. I remain more than ever convinced that, until we fully understand the origin of financial species, we shall never understand the fundamental truth about money … financial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty.” (363).
Personal thoughts:
The Ascent of Money: A Financial History of the World by Niall Ferguson is a detailed, interesting, and worthwhile book, seeing how it discusses a subject that affects all humans. I greatly appreciate Ferguson’s use of statistics, historical examples, and his own experiences, as they make the book more engaging and realistic to read and analyze, seeing how the study of concepts as large as that of finance can be hard to comprehend, much less grasp, at times. I also like how he compared and contrasted evolution to financial markets, seeing that there are key distinctions and similarities to draw between them. Of course, humanity’s behavior that influences the world of finance (ex. prudence, jealousy, fear, panic, suspicion, foresight) can be easily explained from an evolutionary lens, which is a worthwhile connection. Although the text may be somewhat dry to read in some instances, it’s still far from boring, seeing Ferguson’s analysis and claims that are supported by evidence. I highly recommend The Ascent of Money to anyone interested in economics, history, human nature, the relationships between financial sectors and governments, and change and continuities over time.
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