THE ASCENT OF MONEY
A Financial History of the World
By Niall Ferguson
Illustrated. 442 pp. The Penguin Press. $29.95
Follow the Money
By MICHAEL HIRSH
Published: December 25, 2008 / http://www.nytimes.com/2008/12/28/books/review/Hirsh-t.html?pagewanted=all&_r=0
Niall Ferguson, it is fair to say, is a one-man book
factory. In fact, if the American economy cranked out goods as prolifically as
Ferguson does histories, we might not be in half the fix we are in right now.
But then Ferguson wouldn’t have nearly as much to write about. The onetime
enfant terrible of the Oxbridge historical establishment, Ferguson specializes
in finding fault with great powers, especially the way they mismanage their empires.
Ferguson first came to notice a decade ago with “The Pity of War,” a
revisionist tour de force arguing that Britain made a world-historical error by
entering World War I (and thereby destroying its empire) when it should have
simply waited out the swift German conquest of Europe and remained a
superpower, with Europe the better for it. More recently the Scottish-born
Ferguson, who now spends half the year teaching at Harvard and the other half
at Oxford, has turned his attention to the prodigal young heir to the British
imperial crown, the United States. In “The Cash Nexus” (2001) and “Colossus”
(2004), he urged Americans to emerge from their self-denial and fulfill their
obvious destiny as the next “liberal” empire spreading the light of democracy and
Anglo-Saxon legalism across the globe. “The greatest disappointment facing the
world in the 21st century,” Ferguson concluded in “The Cash Nexus” (published
in the opening months of the Bush presidency), is that “the leaders of the one
state with the economic resources to make the world a better place lack the
guts to do it.” Ferguson later supported the Iraq war as evidence that
Washington had finally gotten up its courage, imperially speaking.
Whatever one thinks of his arguments, it’s impossible to
ignore Niall Ferguson. He’s like the brightest kid in the debating club, the
one who pulls all-nighters in the library and ferrets out facts no one thought
to uncover. And in his latest book, “The Ascent of Money” — humbly subtitled “A
Financial History of the World” — Ferguson takes us on an often enlightening
and enjoyable spelunking tour through the underside of great events, a lesson
in how the most successful great powers have always been underpinned by smart
money. “The ascent of money has been essential to the ascent of man,” he
writes, making a conscious reference to the BBC production he loved as a boy,
Jacob Bronowski’s “Ascent of Man.” (In fact, like Ferguson’s three previous
books, “Colossus,” “Empire” and “The War of the World,” “The Ascent of Money”
was written as a companion to a TV documentary series.)
“Behind each great historical phenomenon there lies a
financial secret,” Ferguson says. He goes into fascinating detail about how “it
was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon
at Waterloo” by selling bonds and stockpiling gold for the British Army. The
richest bankers on the Continent in the 19th century, the Rothschilds became
known as die Finanzbonaparten (the Bonapartes of finance). And, as Ferguson
argues, they also played a crucial part in the South’s defeat in the Civil War
by declining to invest in Confederate cotton-collateralized bonds. Imperial
Spain amassed vast amounts of bullion from the New World, but it faded as a
power while the British and Dutch empires prospered because they had
sophisticated banking systems and Spain did not. Similarly, the French
Revolution was made all but inevitable by the machinations of an unscrupulous
Scotsman named John Law, whom the deeply indebted French monarchy recklessly
placed in charge of public finance. “It was as if one man was simultaneously
running all 500 of the top U.S. corporations, the U.S. Treasury and the Federal
Reserve System,” Ferguson writes. Law proceeded to single-handedly create the
subprime mortgage bubble of his day. When it collapsed, the fallout “fatally
set back France’s financial development, putting Frenchmen off paper money and
stock markets for generations.” Wilhelmine Germany, meanwhile, came up short in
World War I because it “did not have access to the international bond market,”
Ferguson writes. Every one of these episodes sounds like a warning shot: Will
America be the next great power to fall because of unsound finance?
The question is particularly pressing in the midst of what
is widely seen as the worst financial crisis since the Great Depression. And
Ferguson’s conclusions are troubling. Only a few years after accusing
Washington of “imperial understretch” for failing to flex its muscles — and
without any hint of irony — Ferguson now argues that the United States may be
succumbing to financial overstretch. Deeply in debt to the rest of the world,
it has become part of a “dual country” that he calls “Chimerica.” “In effect,
the People’s Republic of China has become banker to the United States of
America,” he writes. Until the current global financial crisis, this seemed to
be a fairly reliable relationship. American consumers over-bought goods and
over-borrowed from China, and the Chinese in turn accumulated huge dollar
surpluses that they plowed back into Wall Street investments, thereby supplying
profligate Americans with the financing we needed to consume and sustain
ourselves as the lone superpower. “For a time it seemed like a marriage made in
heaven,” Ferguson writes. “The East Chimericans did the saving. The West
Chimericans did the spending.”
Suddenly, however, it’s looking more like a marriage made in
hell. According to Ferguson, much of the current crisis stems from this
increasingly uneasy symbiosis. It turns out “there was a catch. The more China
was willing to lend to the United States, the more Americans were willing to
borrow.” This cascade of easy money, he argues, “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
U.S. mortgage market was so awash with cash in 2006 that you could get a 100
percent mortgage with no income, no job or assets.” Going forward, the system
seems likely to be increasingly unstable, as Treasury Secretary Henry Paulson
suggested recently when he warned that unless fundamental changes are made,
“the pressure from global imbalances will simply build up again until it finds
another outlet.”
Previous periods of global stability and peace had relied on
judicious mechanisms like the Congress of Vienna or the Bretton Woods
agreements. Now the international system — and America’s position within it —
has come to depend on what looks more like a global Rube Goldberg machine
running on hot money. And though Ferguson doesn’t come out and say it, the
Chinese may now have the upper hand in this chimerical Chimerica. While so far
it’s worked in Beijing’s interest to underwrite America’s rampant consumerism
— because we buy so many of their goods — the Chinese also have the option of
recycling some of their surplus billions into their own huge population. We, on
the other hand, don’t have the option not to borrow from them. Indeed, it’s no
secret on Wall Street and in Washington that the real targets of President
Bush’s $700 billion bailout plan were the foreign funds, including “sovereign
wealth funds,” that keep America’s financial system afloat. Unless these
foreign financiers — principally China and Japan — get reassurance that the
global financial system can function properly again, America’s long period of
growth and power may be coming to a close.
Perhaps, then, the conclusion should be that Americans need
to flex our muscles less as an empire and fight a little harder for fiscal
sobriety and balance in our foreign policy. To be fair, Ferguson was early in
seeing that America’s fiscal problems were serious. In “Colossus,” he warned
presciently of America’s increasing reliance on Chinese capital, although he
argued then that we should be mainly worried about domestic entitlements like
Medicare and Social Security — indicating that he, like the Bush administration,
seriously underestimated the ultimate cost of the Iraq war.
As with Ferguson’s three previous documentary efforts, “The
Ascent of Money” sometimes feels as if it were laid out like a shooting script.
Ferguson will depart from an exegesis on the 17th century or the Great
Depression to pop up in post-Katrina New Orleans or Memphis (for a report on
bankruptcies), and we surmise it’s to record another on-scener for PBS. The
book, whose main text comprises a scant 360 pages (a light effort for Ferguson,
especially considering the ambitious subtitle), is also reductionist at times.
Is it really fair to say Chimerica is mainly at the root of our current
problems? (A lack of oversight and regulation of the subprime mortgage market
here at home had a lot to do with it as well.) China’s backwardness between the
1700s and 1970s was largely due to its dearth of financial innovation, he
suggests, but other historians have pointed equally to the absence of
technological innovation of the kind that arose in Europe’s close-quartered
patchwork of states because of repeated wars.
And in the end, as Ferguson himself seems to acknowledge,
the scope of the financial crisis that is plaguing the world today calls into
question the book’s premise — that the “trajectory” of finance through history,
while “jagged and irregular,” is “unquestionably upwards.” Our increasingly
sophisticated finance clearly contains self-destructive tendencies, and its
very complexity may have become our undoing. Ferguson wonders whether the cruel
realities of biological evolution are the model for what is happening now.
Contemplating the financial Armageddon that has devastated Wall Street and set
back globalization, he asks: “Are we on the brink of a ‘great dying’ in the
financial world — one of those mass extinctions of species that have occurred
periodically, like the end-Cambrian extinction that killed off 90 percent of
Earth’s species, or the Cretaceous-Tertiary catastrophe that wiped out the
dinosaurs?” Here we thought we were making all this progress as a species, and
suddenly we find our supposed innovations lumped with Tyrannosaurus rex.
Doesn’t sound like much of an ascent to me.
Michael Hirsh is Newsweek’s national economics correspondent
and the author of “At War With Ourselves: Why America Is Squandering Its Chance
to Build a Better World.”
The ascent of money
A financial history of the world
One way to make sense of the present financial chaos is to
look back at the past
Oct 9th 2008 |From the print edition / http://www.economist.com/node/12376642
THE typical career of a Wall Street banker lasts about a
quarter of a century, enough to span just one big financial crisis. As Niall
Ferguson explains in his new book, “The Ascent of Money”, which will be
published next month, today's senior financiers would have started out in 1983,
fully ten years after oil and gold prices first began the surge that had ruined
the previous generation of money men. That, he concludes, is a “powerful
justification for the study of financial history.”
Mr Ferguson is right. The world needs a book that puts
today's crisis into context. It is too late now to warn investors about
expensive houses and financiers about cheap credit. But perhaps the past can
help make sense of the wreckage of banks, brokers and hedge funds that litters
the markets. Looking back may help suggest what to do next. And when the crisis
is over and it is time for the great reckoning, the lessons of history should
inform the arguments about what must change.
This rushed, uneven book, by a British-born Harvard
University professor who made his name a decade ago with a history of the
Rothschild banking dynasty, will contribute less than expected to that debate.
It has strengths, including a tidy account of the run-up in housing markets and
of the symbiotic rivalry between America and China. But in the earlier
chapters—the history, oddly enough, where you would expect Mr Ferguson's
ambitions for his subject to quicken his judgments—the words rarely come to
life, either as a source of ideas or as narrative.
Perhaps the book was bound to be flawed, given the pace with
which today's crisis has torn through the markets. As the debacle has unfolded,
from a housing crisis, to a credit bust, a bank run and what now looks
ominously like a global recession, each episode has posed different questions.
Finishing his manuscript in May this year, Mr Ferguson must have been dizzy
with the unravelling of certainties. And yet, he is at his strongest in his reading
of the news. His story of what is happening today shows prescience, even if it
is necessarily incomplete.
It may be that Mr Ferguson was too distracted by the present
to pay enough attention to the past. Claiming to be “A Financial History of the
World”, the book dutifully dabbles in societies, such as the Inca, who did not
see gold and silver as money, and in the pre-Christian Mesopotamian clay
tablets that served as credit notes for commodities. He traces the
transformation of banchieri, named for the benches where money was changed,
into the families that dominated the political and cultural life of Renaissance
Italy and from there into modern bankers. He explains how the bond market had
its origins in the state's need for money to finance war. He describes how
manias have repeatedly engulfed greedy investors over the
centuries—concentrating on John Law, whose schemes ruined 18th-century France.
And he rehearses the story of financial risk from its origins in Enlightenment
Scotland.
Yet the reader is left wondering quite who the book is aimed
at. The finance specialist will not find enough here to begin to compete with
the work of Charles Kindleberger, an economic historian. And the reader who
wants to know how finance is interwoven with general history would do better to
turn to Jeffry Frieden's excellent 2006 work, “Global Capitalism”.
Mr Ferguson may seem to be speaking to a general audience,
given that he has taken his title from “The Ascent of Man”, Jacob Bronowksi's
book and television series of a quarter-century ago which analysed the
contribution of science to civilisation. Yet these readers will be baffled by
passages that breezily toss around ideas like “sterilisation”—the issue of
bonds by a government to mop up the inflation-inducing money it prints to buy
foreign currency. And they may be put off by Mr Ferguson's attempt to be jolly.
After two and half pages on the mathematics of bond yields, for example, comes
this quip: “So how did this ‘Mr Bond' become so much more powerful than the Mr
Bond created by Ian Fleming? Why, indeed, do both kinds of bond have a licence
to kill?”
Of far greater interest is Mr Ferguson's general theory,
which does not emerge until the end of the book. He thinks that finance evolves
through natural selection. Although the professor cautions against the sort of
Darwinism that sees evolution as progress, he believes that new sorts of
finance are constantly coming into being as the environment changes. The
sequence of creation, selection and destruction is what has generated many of
the financial techniques that modern economies depend on.
This leads Mr Ferguson to make two timely points. One is to
remember that evolution depends on extinction as well as creation. You have to
allow ill-adapted techniques to fail if you are going to get something new. As
the world rushes around rescuing every bank in sight, it is a reminder that the
guarantor-state will later have to administer painful medicine.
The other is to observe the wonder of what financial
evolution has created. Just now it is only natural to think of the
“roller-coaster ride of ups and downs, bubbles and busts, manias and panics,
shocks and crashes.” But Mr Ferguson sees something else too: “From ancient
Mesopotamia to present-day China…the ascent of money has been one of the
driving forces behind human progress: a complex process of innovation,
intermediation and integration that has been as vital as the advance of science
or the spread of law in mankind's escape from the drudgery of subsistence
agriculture and the misery of the Malthusian trap.” Amid this financial bust,
cleave to that.
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