The Ascent of Money: A Financial History of the World

“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.” 

Ferguson argues throughout the book that financial innovations represent progress. While we tend to think of science and technology or the law as underpinning civilization, financial systems are just as important. 

“Behind each great historical phenomenon there lies a financial secret, and this book sets out to illuminate the most important of these.” 

History is often seen in terms of the actions of influential people, competing ideas, and underlying social movements, but Ferguson give examples of how finance has had a great impact on historical events, from the French Revolution to the American Civil War to homeownership in the Great Depression. 

“As we are learning from a growing volume of research in the field of behavioral finance, money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility. But finance also exaggerates the differences between us, enriching the lucky and the smart, impoverishing the unlucky and not-so-smart.”

Human behavior is irrational, and this is reflected in the financial markets. Research has also shown the behavior is subject to certain biases regarding money that tend to exaggerate our actions in both good times and bad. 

“The Incas could not understand the insatiable lust for gold and silver that seemed to grip Europeans.” 

This illustrates the fact that virtually any object can be used for money. The concept of money is based on trust, not any particular subject. Thus, clay tablets were used in Mesopotamia, gold and silver in early modern Europe, and paper in modern societies. 

“What the Spaniards had failed to understand is that the value of precious metal is not absolute. Money is worth only what some­ one 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.” 

Ferguson’s point here is that the supply of money influences its worth. in general, when the supply is low, it’s worth more; when the supply is great, it’s worth less. Money in itself does not have an intrinsic, fixed value, but rather a relative one. 

“The ability to walk away from unsustainable debts and start all over again is one of the distinctive quirks of American capitalism.” 

Bankruptcy laws in the United States are designed to encourage a certain amount of risk by allowing entrepreneurs to test out risky ideas in the marketplace. Rather than punish failures, the policy rewards them in a way by giving one the chance to start over. This fosters innovation, as success is rarely found the first time around. A good example of this is the case of Henry Ford, who founded the Ford Motor Company only after early failure and bankruptcy.

“The bond market began by facilitating government borrowing. In a crisis, however, it can end up dictating government policy.” 

Bonds require governments to make choices about how to allocate their resources. Interest rates on bonds increase or decrease the amount of debt a government holds, and when the debt becomes high, the government must decide on the best course of action, such as raising taxes or cutting spending. 

“The Rothschilds had decided the outcome of the Napoleonic Wars by putting their financial weight behind Britain. Now they would help decide the outcome of the American Civil War–by choosing to sit on the sidelines.” 

This represents one of Ferguson’s main themes–that financial developments are behind great events in history. The Rothschilds helped the British government prepare to fund the Battle of Waterloo by purchasing gold for it. On the other hand, they declined to help the government of the Confederacy by not buying its bonds. 

“As we have seen, the danger that rising inflation poses is that it erodes the purchasing power of both the capital sum invested and the interest payments due. And that is why, at the first whiff of higher inflation, bond prices tend to fall.” 

Bonds have a fixed interest rate, so when the inflation is too high, their real value decreases. This will cause the prices of traded bonds to fall. Governments thus work to keep inflation low, which has been the case since the period of high inflation in the 1970s.

“The real point, however, is that stock markets are mirrors of the human psyche. Like homo sapiens, they can become depressed. They can even suffer complete breakdowns. Yet hope–or is it amnesia?–always seems able to triumph over such bad experiences.” 

This reflects one of Ferguson’s main themes. Just as humans have a wide range of behaviors, so do financial markets. Markets reflect the wild swings and irrationality that humans exhibit. 

“Nothing illustrates more clearly how hard human beings find it to learn from history than the repetitive history of stock market bubbles.” 

One of Ferguson’s reasons for writing this book was to educate people in financial history, in order to better understand our own situation today. People have a short memory when it comes to previous financial crises. If they had greater knowledge of history, they might be able to deal better with bubbles, and remember that bubbles always burst. 

“The losses to France, however, were more than just financial. Law’s bubble and bust fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.” 

This illustrates Ferguson’s theme that financial development is behind great events in history. As noted above, the result of this bubble in France was that necessary reforms were never properly made in the 18th century, and the fiscal problems of the French monarchy were part of what led to revolution. 

“In perhaps the most important work of American economic history ever published, Milton Friedman and Anna Schwartz argued that it was the Federal Reserve System that bore the primary responsibility for turning the crisis of 1929 into a Great Depression.”

Because financial crises are as inevitable as they are unpredictable, governments need to have methods for dealing with them properly when they occur. Ferguson writes that central banks are supposed to help mitigate crises in the stock markets, but the example the Great Depression provides is that they can deepen them as well. This underscores the importance of monetary policy. 

“In short, it was not merchants but mathematicians who were the true progenitors of modern insurance. Yet it took clergymen to turn theory into practice.” 

This reflects the influence of mathematics on financial development. Ferguson prefaces the story of insurance with six key breakthroughs, mostly in the field of mathematics, that needed to occur for the creation of insurance as we know it: probability, life expectancy, certainty, normal distribution, utility, and inference. 

“‘Safe as houses’: the phrase tells you all you need to know about why people all over the world yearn to own their own homes. But that phrase means something more precise in the world of finance. It means that there is nothing safer than lending money to people with property. Why? Because if they default on the loan, you can repossess the house. Even if they run away, the house can’t.” 

This quotation highlights Ferguson’s belief that people put too much stock in investing in their homes. Doing so has been touted as the best way for the average person to use investments as way of guarding against the risks of the future, but there is no guarantee that property values will continuously rise. One needs an external income to retain ownership of his or her home, as Ferguson shows in the extreme case of the Duke of Buckingham. On the contrary, creditors find this investment to be safe because a house can be repossessed.

“What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the Commissioner of the California Department of Savings and Loans: ‘The best way to rob a bank is to own one.’ Some S&Ls bet their depositors’ money on highly dubious projects. Many simply stole it, as if deregulation meant that the law no longer applied to them.” 

This encapsulates the savings-and-loans crisis that occurred in the 1980s in the United States. What had been a safe industry turned dangerous when regulations were dismantled, providing an incentive for some to game the system. The key point was that all risk was removed from individuals, as the S&Ls were fully insured by the government, which ended up paying for all the losses created. 

“The process was called securitization and it was an innovation that fundamentally transformed Wall Street, blowing the dust off a previously sleepy bond market and ushering in a new era in which anonymous transactions would count for more than personal relationships.” 

This reflects the rise of securities based on mortgages that began in the 1980s and grew in importance in the early 2000s. Mortgages were effectively turned into bonds in this process that were backed by the US government. They grew from a market of $200 million in the 1980s to $4 trillion by 2007.

“It was also the last vestiges of the business model depicted in It’s a Wonderful Life. Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream–because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist.” 

This follows from the previous quotation, emphasizing the anonymity that became an integral part of securitization. Once mortgages were bundled and sold as securities, they become part of investments around the world. When the subprime mortgage crisis hit the United States in 2007, this turned a local problem into a worldwide one. 

“Microfinance, however, suggests that creditworthiness may in fact be a female trait.” 

One of the results of microfinance research and experience is that women repay their loans better than men. This is true whether or not they have property (a home) to provide collateral on the loan. As a result, woman in developing countries have been able to get small loans to start or expand a business, creating new opportunities for themselves and providing for their families. 

“Meriwether himself, born in 1947, ruefully observed: ‘If I had lived through the Depression, I would have been in a better position to understand events.’ To put it bluntly, the Nobel prize winners had known plenty of mathematics, but not enough history.” 

John Meriwether was one of the founders of Long-Term Capital Management, which went from boom to bust in the 1990s. This illustrates Ferguson’s theme that crises often happen or are made worse when a new generation has little or no memory of the prior crisis. It also underscores his purpose for writing the book: to educate people about financial history, so they can make better decisions today. 

“But these boom years were also mystery years, when markets soared at a time of rising short-term interest rates, glaring trade imbalances and soaring political risk, particularly in the economically crucial, oil-exporting regions of the world. The key to this seeming paradox lay in China.” 

Ferguson uses this to highlight the importance of China in the financial system of the early 21st century. Despite some negative economic indicators, the role China has played has maintained a boom by virtue of its relationship with America, something he refers to as a separate entity called “Chimerica.” It’s a delicate relationship, in some ways, and holds the key to how the world economy will develop throughout the rest of the century. 

“Economies that combined all these institutional innovations—banks, bond markets, stock markets, insurance and property-owning democracy–performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning.” 

This quotation highlights one of Ferguson’s main points that financial development is as important as technological or other development in civilization. A full array of financial institutions and instruments in the system leads to an economy–and thus a nation–coming out ahead. 

“Even today, despite the unprecedented sophistication of our institutions and instruments, Planet Finance remains as vulnerable as ever to crises. It seems that, for all our ingenuity, we are doomed to be ‘fooled by randomness’ and surprised by ‘black swans.’” 

As Ferguson notes, bubbles in the market will always burst at some point, creating crises. And because the uncertainty of the future is greater than our ability to calculate risk, this will remain the case despite our advances in financial institutions, technology, mathematics, or any other area.