The cash of civilisations

01.11.08 Publication:

Review by Bill Emmott

The Ascent of Money: A Financial History of the World
By Niall Ferguson
Allen Lane £25, 464 pages
FT Bookshop price: £20

If, in accordance with the mood of the moment, you are wont to think that financiers are all parasites, con-men or just plain greedy, you will find plenty to support that view in Niall Ferguson’s new book. For the tales he tells of boom and bust, of triumph and disaster, of bubbles that inflate, creating spectacular riches that then vanish when pins come along to pop them, are the very essence of financial history. But there is a lot more to such history, and to this book, than that. So you will be disappointed if what you crave is a condemnation of finance and all its works. For Ferguson argues that like it or not – and mostly we should like it – finance is vital to human progress and always has been.

No one writing such a history would be able to resist retelling the story of the South Sea Bubble, or the contemporaneous and much larger Mississippi scheme dreamt up by a convicted Scottish murderer, John Law, which in the early 18th century created a speculative mania in Paris whose collapse can justifiably be said to have laid the foundations for the French revolution in 1789. Nor indeed the stories of the Great Crash of 1929, the many demises of Argentina, or the fall of Enron in 2001.

Ferguson, who is a Scottish-born professor of history at Harvard as well as a contributing editor to the Financial Times, tells those familiar tales as well as most, and sometimes better. And so he should, for he has made financial history his speciality, with earlier well-regarded books such as The Cash Nexus (2001) and The House of Rothschild (1998), in which some of these tales have already appeared – notably his fine debunking of the myth that Nathan Rothschild made a fortune from Wellington’s victory at Waterloo, when in fact it almost ruined him. (Rothschild had financed Wellington’s campaign against Napoleon on the assumption that the war would be long. Waterloo cut it very short. He rescued himself by placing a huge bet in the bond market.)

The merit of The Ascent of Money, however, does not arise from such episodes of financial derring-do. It arises from Ferguson’s unusual ability to show how finance in the broadest sense has evolved in support of, and sometimes as a consequence of, other economic, social and political developments during the past millennium.

Lending has existed ever since money and trade began; government bonds were invented in the 13th century as a way, in effect, to raise revenue from the public without imposing too many taxes (although when governments defaulted, they amounted to much the same thing); from the 17th century onwards joint-stock companies enabled investors to band together to take risks, especially overseas ones.

The first insurance funds were created by Scottish clergymen in the 18th century and soon caught on as a way to protect against calculable risk. The first of today’s most notorious instrument, the derivative, appeared in the form of futures and options during the 19th century. And home mortgages, often with the benefit of tax breaks and other official encouragement, really began to take off only in the second half of the 20th century, whether sub-prime or not.

In fact, insurance and mortgages are two words that make this book, perhaps surprisingly, a more satisfying read than the many other works about financial manias and crashes. Explaining how insurance funds were invented to cope with the burdens of widowhood on the Church of Scotland enables Ferguson to show how such efforts to deal with risk led to the creation of the welfare state. And by explaining how home mortgages have become both a political tool and a culturally popular blend of saving and speculation, he can also show how today’s financial collapse arose not merely from fraud or misbehaviour but from a cocktail of origins in politics, macro-economic policy, financial regulation, social attitudes – and of course greed.

Throughout this long process of the creation and destruction of ideas, instruments, companies and even countries, finance has been inseparable from the rest of capitalism and society. It is not, as its detractors like to claim, some separate, wild or parasitic activity; there is no such thing as the “finance capitalism” whose end many critics are currently predicting. Capitalism would not exist without finance, but then nor would government, given its borrowing requirements, its panoply of treasury bonds and bills, its tax subsidies for home ownership, for investment by small companies or for whatever is the political flavour of the hour.

Finance is, as Ferguson says in his admirable concluding sentence, “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.” Indeed not: and, he might have added, it is the way in which our ideas and enthusiasms can be made to take tangible form, but also the way in which our emotions, both optimistic and pessimistic, rational and irrational, can sometimes get the better of us.

This book is timely – but that timeliness also carries a cost. Like Ferguson’s previous work The War of the World (2006), The Ascent of Money feels somewhat rushed, especially for a work by a scholar. The whirlwind of ideas and gimmicky images that greet the reader could often have benefited from more rigorous thought. It is hard, for example, to see what a multi-page musing on the similarity between financial evolution and biological evolution really contributes; nor, indeed, a comparison between government bonds and James Bond. His idea that somehow China and America might now be thought of as one economy, “Chimerica” is as meaningless in our diverse, inter-connected world as was the similar idea in the 1980s that Japan and America were really united together economically, known as “Nichibei” by the two countries’ Japanese abbreviations.

That said, this book’s timing could still prove salutary for – along with its accompanying television series – it should encourage a more sanguine, historically informed view of the current turmoil than at present seems to prevail. The Ascent of Money would be well worth reading for that reason alone. Money may at present be descending, but it will ascend again, as it always has in the past.