Niall Ferguson's The Ascent of Money appeared at an awkward moment in 2008. The subprime-mortgage problem was clear enough, but the damage that it would cause to the financial system lay months in the future. As, necessarily, did the US Government's response to the crisis. Interestingly, the response would follow the course outlined in the third chapter of Mr Ferguson's book, which uses speculative bubbles as a window on the growth of equity trading — what most people think of as the stock market. This makes reading the book a rather trying read at times, as one scrambles to place the time-frame of Mr Ferguson's observations. Although far from the critical history of money and finance that one could wish for, The Ascent of Money is too useful a book not to update, and I hope that a more permanent edition will be forthcoming. (Most people, lamentably, will encounter this material in the form of a television series — the surest way of learning nothing ever invented.)
Mr Ferguson's outline is straightforward, proceeding from growth of banking, through the development of public debt (bonds), equities (shares), insurance (including modern "derivatives"), and the securitization of housing (mortgage bundling), to the global economy. The subtopics within each of the six chapters, however, is more colorful than readily intelligible. If the book has a fault, it is the author's inclination to dazzle. Mr Ferguson is very good at dazzling, moving from one interestingly-rendered topic to another. But he does not seem to be correspondingly interested in presenting the overall structure of the financial world — or, failing that, giving an idea of what a financial system would look like, if the global economy were at all systematic.
In the final chapter, for example, Mr Ferguson covers the imperial foundations of Jardine & Matheson, the famous Hong Kong firm; the disastrous impact upon the West's financial markets of the outbreak of World War I; the so-called Washington Consensus; George Soros; and Long Term Capital Management, and symbiotic relationship that has arisen between China and the United States. There is certainly a thread here, but it is not really strong enough to bind these disparate matters. The first two topics are completely historical, whereas the four that follow are ongoing, matters of public policy. The Unequal Treaties period of Chinese history throws a lot of light on the modern economic scene, but it cannot really be mined for suggestions about how to regulate today's dangerously unitary marketplace. (Mr Ferguson is particularly lucid about what went wrong at LTCM: the quants' calculations of risks in different market sectors too readily assumed that those sectors were truly discrete, when in fact they were no more "watertight" than those famous compartments in the hull of the Titanic.) The shift in scope, as the chapter reaches the present time, is so radical that it obliterates the relevance of the earlier material, interesting as it is.
The strategy of treating each chapter as a pocket history of its subject, beginning at the beginning and ending with the state of play in 2008, produces an inevitable incoherence, as of course the recent speculative bubbles (tech and housing), the regulatory miscalculations that made the subprime mortgage meltdown possible, and the proliferation of such instruments as credit default swaps are all substantial ingredients in the soup that we've landed in. They would be easier to apprehend if treated together. Instead, each is the concluding subtopic of the third, fourth, and fifth chapters respectively.
If Mr Ferguson likes to dazzle, that may be because he is dazzled himself. He appears to believe that the odd malefactor (Enron, Danny Faulkner) ought not to challenge the proposition that we have been blessed with the best of all possible markets.
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. And yet throughout financial history there have been crooked companies, just as there have been irrational markets. Indeed the two go hand in hand — for it is when the bulls are stampeding most enthusiastically that people are most likely to get taken for the proverbial ride. A crucial role, however, is nearly always played by central bankers, who are supposed to be the cowboys in control of the herd. Clearly, without his Banque Royale, Law could never have achieved what he did. Equally clearly, 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. Avoiding a repeat of the Great Depression is sometimes seen as an end that justifies any means. Yet the history of the Dutch East India Company, the original joint-stock compary, shows that, with sound money of the sort provided by the Amsterdam Exchange Bank, stock market bubbles an be avoided.
This is almost objectionably placid. Nowhere does Mr Ferguson discuss the management structures of the modern corporation; nor does he press the connection, latent in his conclusion, that Amsterdam's central bankers and the directorate of the VOC were more like partners than even Goldman Sachs and the Federal Reserve Bank are today. The Ascent of Money, while not boosterishly optimistic, sticks to the well-known stories and the uncontroversial developments. But it is a welcome introduction to an important field. If investors knew as much about the history of finance as they know about prices in global markets, "sound money" would be more than the name of a conservative fiscal policy.
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