Crash Course

The Ascent of Money by Niall Ferguson

What’s in a metaphor? At the end of his new book, The Ascent of Money, Niall Ferguson adds a slightly defensive comment about his choice of title. He notes that some of his friends have accused him of sounding bullishly optimistic, at a time when the credibility of our monetary institutions is dropping like a stone. He could say, of course, that bubbles and hot-air balloons also ascend. But instead he sticks to his guns. The title was chosen, he explains, as a tribute to Jacob Bronowski’s The Ascent of Man; Bronowski’s story was about the progress of the human mind in making sense of the world, and Ferguson’s story – about the development of money, banks, and financial institutions – is also a history of progress.

The changes he describes have contributed hugely to the unlocking of human potential, and are essential to the world in which we live.

At the same time, though, he observes that Bronowski’s title was a response to Darwin’s The Descent of Man, and adds that his own book could have been called The Descent of Money, because it also tells an evolutionary story. Just as complex organisms have evolved out of simple ones, with various false starts and dead ends along the way, so too the elementary banking methods of Italian Renaissance merchants have evolved, over the centuries, into the complex practices of credit swaps, derivatives and collateral debt obligations.

New institutions have arisen, sometimes gobbling up the previous ones, and from time to time there have been mass extinctions – roughly 10,000 US banks, for example, in the four years after 1929. Of the 1912 list of the world’s top 100 companies, 77 had gone bust, or been taken over, by the end of the century. In the world of finance and business, the “survival of the fittest” is more than just a slogan. “Evolution”, Ferguson concludes, “certainly offers a better model for understanding financial change than any other we have.”

This seems, at first sight, a crude position – and a surprising one for Ferguson, of all people, to take. It may suggest a view of the financial realm as a world of its own, following its own scientific laws of development. In one of his earlier books, The Cash Nexus, Ferguson did in fact challenge the whole notion of economic determinism, powerfully demonstrating the primacy of politics (and of that special form of politics, war). In this book, too, he pays special attention to all the ways in which financial systems can fail to follow the iron laws of the theorists, because they depend, in the end, on the decisions of less-than-totally-rational human beings.

So, Ferguson is not, after all, the financial equivalent of a social Darwinist; economic and financial history does not follow scientific laws; the metaphor of evolution is just a metaphor. The biggest difference between his story and Darwin’s is the one he emphasises most strongly of all: financial “evolution” happens mainly because of intelligent design – the designers being not only financiers themselves, but also governments and legislators. Again and again, it is the interaction between those two groups that lies at the heart of the story he tells.

This book is the accompaniment to a six-part TV series. Each programme, and thus each chapter, covers a different topic: the rise of banking; the emergence of bonds; the role of home ownership in the modern financial system; and so on. The range of subject-matters is wide – from Mesopotamian merchants to Goldman Sachs, from medieval Pisa to modern Detroit, from China to Peru – and every page has the Ferguson hallmarks of trenchant argument, telling detail and lucid explanation.

(Not every detail is correct, though. The Indonesian “factories” of the Dutch East India Company were nothing like factories in the modern sense; Pascal did not write a book called Ars cogitandi; Breslau was not Prussian before the 1740s; and the innovatory Swedish bank founded in 1656 was not the Royal Bank, but the one set up by a brilliant Jew from Riga, Johan Palmstruch, which was incidentally also the first European bank to issue paper notes. But these are minor.)

One chapter is about bubbles and crashes, concentrating in particular on the exploits of John Law, the megalomanic Scottish financier who took over the entire French financial system (banking, tax-collection and corporate investment) in the early 18th century. Another chapter, about housing, explains the background to the “subprime mortgage” scandal which lies behind the current credit crunch: here Ferguson’s analysis is more illuminating than all the dozens of newspaper articles I have read on the subject.

What clearly emerges from these and the other stories in this book is that financial structures are always shaped by a framework of law – and that the nature of the law is dictated, at least in part, by political pressures. It was the politics of the New Deal that set up the federal-backed guarantor-institutions Fannie Mae and Freddie Mac; it was excessive regulation that nearly destroyed the Savings and Loan associations in the late 1970s (their interest rates on deposits were limited by law), and excessive deregulation that enabled them to destroy themselves in the 1980s; it was the underlying guarantees of Fannie and Freddie that made “securitised” mortgages seem such a secure investment; and it was further legislation in 2003 that accelerated the selling of mortgages to people who could not possibly repay them.

No less important is the underlying legal set-up, which makes it so easy for ordinary Americans to declare themselves bankrupt (roughly one in ten adult Americans per decade will do this), and which also ensures, in many states, that someone who defaults on a mortgage cannot have any of his other assets or his future wages seized or earmarked to pay for it. Looking at some of the things that have gone so spectacularly wrong in financial history, and at some of the perverse incentives that still remain in place, one is almost tempted to say that politicians and legislators are the problem.

But of course there have been vital solutions that could never have happened without them, such as the establishment of reserve banks, or the basic laws that make possible the issuing and trading of shares and bonds. Perhaps there are some radical libertarians out there who sincerely believe that a much better financial system would emerge if the legal framework were dismantled to within an inch of its life; but Niall Ferguson is not one of them. Nor would many readers hold such an opinion by the time they reached the end of this highly stimulating book.

For the “evolutionary” story here is a much more complex one than any simple history of competitive behaviour between free-floating financial agents.

It involves politics as well as money; ideas about justice and fairness, as well as emotions of fear and greed; and the consequences, both perverse and intended, of laws, as well as the results of hard work and ingenuity, and luck.

Appalling mistakes have been made; but so long as human beings are still able to learn from their mistakes, some sort of ascent will continue.

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