The Ascent of Money: A Financial History of the World

Niall Ferguson follows the money to tell the human story behind the evolution of finance, from its origins in ancient Mesopotamia to the latest upheavals on what he calls Planet Finance.

Bread, cash, dosh, dough, loot, lucre, moolah, readies, the wherewithal: Call it what you like, it matters. To Christians, love of it is the root of all evil. To generals, it's the sinews of war. To revolutionaries, it's the chains of labor. But in The Ascent of Money, Niall Ferguson shows that finance is in fact the foundation of human progress. What's more, he reveals financial history as the essential backstory behind all history.

Through Ferguson's expert lens familiar historical landmarks appear in a new and sharper financial focus. Suddenly, the civilization of the Renaissance looks very different: a boom in the market for art and architecture made possible when Italian bankers adopted Arabic mathematics. The rise of the Dutch republic is reinterpreted as the triumph of the world's first modern bond market over insolvent Habsburg absolutism. And the origins of the French Revolution are traced back to a stock market bubble caused by a convicted Scot murderer.

With the clarity and verve for which he is known, Ferguson elucidates key financial institutions and concepts by showing where they came from. What is money? What do banks do? What's the difference between a stock and a bond? Why buy insurance or real estate? And what exactly does a hedge fund do?

This is history for the present. Ferguson travels to post-Katrina New Orleans to ask why the free market can't provide adequate protection against catastrophe. He delves into the origins of the subprime mortgage crisis.

Perhaps most important, The Ascent of Money documents how a new financial revolution is propelling the world's biggest countries, India and China, from poverty to wealth in the space of a single generation — an economic transformation unprecedented in human history.

Yet the central lesson of the financial history is that sooner or later every bubble bursts — sooner or later the bearish sellers outnumber the bullish buyers, sooner or later greed flips into fear. And that's why, whether you're scraping by or rolling in it, there's never been a better time to understand the ascent of money.

Big money is intoxicating. During the great bubble of the late 1990s, I escorted one of the newly really rich to be interviewed at CNN, where I headed the financial network. "I just made $400 Million TODAY," he boomed, taking the stairs two at a time. The air around him seemed charged with electric good fortune.

Several years later, I saw him again. He was several billion dollars... Washington Post Book Review (read the entire Washington Post review) less wealthy. He seemed kind, more thoughtful, a touch fragile. (There are none of us so weak we cannot bear our friends' misfortunes, as the acerbic French epigrammist has it.) The Really Rich man had become merely rich, and his pain seemed palpable. What would it be like, I wondered, to wake up thinking: I just lost $400 million yesterday?

The curses and the blessings, the seductions and the traps of money give Niall Ferguson the most redolent of subjects for "The Ascent of Money," his excellent, just-in-time guide to the history of finance and financial crises. A lively writer (author of "Empire" and "The War of the World"), a professor of history at Harvard and a master of anecdote and aphorism, Ferguson says he took Jacob Bronowski's hymn to human invention, "The Ascent of Man," as a model. Just as Bronowski's 1973 BBC documentaries traced the beneficial impact of science and art, Ferguson shows how promises and paper have lifted humans from subsistence farmers in Babylon to Masters of the Universe on Wall Street.

Among his core arguments is that "poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence." Money, he contends, is essential to human progress; it is "trust inscribed" on paper or metal, and without that trust we would all be poorer.

But now, right now in the dark autumn of 2008, comes the shadow of mistrust. It may fall over us at different times and places ... somewhere between the relentlessly down-pointing red arrows on CNBC and the increasingly bitter 401(k) jokes of late-night comedians ... between the latest Congressional testimony from used-to-be financial wizards and the lineup of bailout candidates winging to Washington, hands out. But who among us has not felt the chill?

The financial system, Ferguson writes, "magnifies what we human beings are like ... our tendency to overreact" to booms and busts, enriching the "lucky and the smart, impoverishing the unlucky and not-so-smart." In this way, money is a mirror, and "it is not the fault of the mirror," he notes, "if it reflects our blemishes as clearly as our beauty."

The pleasure of reading Ferguson's treatment comes partly from the clarity of his explanations of financial concepts but mostly from his pen portraits of the extravagantly gifted and flawed characters who have led money's long rise. He shows us how far we have come since Mesopotamian moneylenders developed rudimentary accounting around 1,000 B.C. and the Medici created elements of modern banking in 14th- and 15th-century Florence. But he also weaves a long series of manias, panics and crashes into his tale. The Medici family's surviving papers, he notes, bear scorch marks from the vengeful reformist Savonarola, who set up a Bonfire of the Vanities to destroy sinful goods and sent the Medici packing in one of the periodic reversals of fortune to hit financial leaders over the centuries.

Ferguson sketches the rollicking career of John Law: Scottish con man, killer, genius, lover and creator, in 1719-20, of one of history's great stock market bubbles. Law effectively took control of the French national debt, substituted paper currency for gold and sold shares in the company that controlled French Louisiana. As the shares rose in price and investors borrowed against them, the volume of paper money doubled in a year, breeding inflation, speculation and the new term "millionaire" before Law's system collapsed. From that day on, Ferguson writes, all bubbles have followed five stages:

1) Displacement, as economic change brings a chance for extraordinary profits; 2) Euphoria, as investors take advantage of the opportunity, 3) Mania, as novices, crowds and swindlers rush in; 4) Distress, as insiders see their prospects for profit declining because of the mania and start selling; and 5) Revulsion, as all stampede for the exits.

Ferguson provides a more flattering portrayal of Nathan Rothschild, patriarch of the banking family and mastermind of empires. Nineteenth-century states needed to issue bonds to finance wars; Rothschild was at the ready. When Wellington defeated Napoleon at Waterloo, Rothschild made huge and risky bets on British bonds and secured his family's dominance of the London market for half a century. When the Rothschilds turned down a plea to back the confederacy's bonds, the fate of the Southern rebellion darkened irreversibly. "Money is the god of our time," declared the German poet Heinrich Heine in 1841, "and Rothschild is his prophet."

From recent times, Ferguson gives deft summaries of the lives of Hernando de Soto, the Peruvian champion of property rights for the poor; Milton Friedman, the apostle of monetarism, who saw the supply of money as the key to the economy; and George Soros, the hedge fund philosopher and financier of liberal causes. I found myself understanding Soros' theory of reflexivity for the first time. (Market prices, Ferguson explains, are "reflections of the ignorance and biases, often irrational, of millions of investors ... (which) affect market outcomes, which in turn change investors' biases, which again affect market outcomes" — in short, reflexivity.)

Judging from the text, Ferguson finished writing "The Ascent of Money" in mid-2008, after the sub-prime mortgage crisis had hit but before September's credit freeze and the subsequent plunge in stock prices. As I turned his pages about the soaring trade in complex derivatives, I wanted to cry out to Wall Street: Don't go down that road, the bridge is out!

The shadow world of derivatives, credit-default swaps, the sales of U.S. bonds to China — all seem to bring brilliant results, until they get too big. Indeed, "Too Big to Fail" is the catchphrase of this autumn. But the follow-up question is: How do we know that whatever institution is wearing that label doesn't harbor a hidden cesspool of putrid assets? When should we withdraw our "inscribed trust?"

In a provocative afterword, Ferguson wrestles with "creative destruction," the benefits of allowing companies to fail and investments to sour. He doesn't come to a definite conclusion, but he notes that viewing the financial world from an evolutionary perspective argues for weeding out what the political scientist Joseph Schumpeter called "the hopelessly unadapted" — and quickly. "The experience of Japan in the 1990s," Ferguson comments, "stands as a warning to legislators and regulators that an entire banking sector can become a kind of economic dead hand if institutions are propped up despite underperformance, and bad debts are not written off."

Ferguson is making the rounds with his new book, saying last week on MSNBC that the United States should follow up the G-20 Economic Summit with a "G-2" meeting with just the Chinese. The professor also winningly confesses that even he is confused about the thrust of Treasury Secretary Henry Paulson's $700 billion rescue fund. Ferguson has, nonetheless, written an admirably illuminating book that will take its place beside such modern classics as John Train's "The Money Masters," Peter L. Bernstein's "Against the Gods," and Adam Smith's "Supermoney."

Fear, greed and folly — according to a Wall Street maxim, you always have them in the market. If only you knew in which order they come, then you could make some money. But past results, as investment companies sternly warn, are no guarantee of future returns, not in 2008. Money descends, too.

Shelby Coffey III is a senior fellow and trustee at the Newseum and former editor of the Los Angeles Times.

Reviewed by Shelby Coffey III, Washington Post Book World (Copyright 2006 Washington Post Book World Service/Washington Post Writers Group)
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"[A] lighthearted but thoughtful stroll through financial history." Library Journal

"There is an ease to [Ferguson's] prose that leaves this complicated subject interesting to and approachable by any general reader." Booklist

"[T]he book as a whole is animated by Mr. Ferguson's narrative gifts, among them his ability to discuss complex ideas in user-friendly terms." Michiko Kakutani, New York Times

"Ferguson has produced a timely book that is indispensable...he masterfully covers his broad canvas in a way that remains lucid and accessible." Boston Globe

"Before regulators throw block trades, bond swaps, bridge financing, butterfly spreads and Black-Scholes out with the bathwater, they should find time to read Niall Ferguson's The Ascent of Money." Wall Street Journal

Ferguson tells the human story behind the evolution of money, from its origins in ancient Mesopotamia to the latest Wall Street upheavals. The author shows that finance is, in fact, the foundation of human progress.

Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University, William Ziegler Professor of Business Administration at Harvard Business School, a Senior Research Fellow of Jesus College, Oxford, and a Senior Fellow of the Hoover Institution, Stanford. The bestselling author of Paper and Iron, The House of Rothschild, The Pity of War, The Cash Nexus, Empire, Colossus, and The War of the World, he is also a contributing editor of the Financial Times. Since 2003 he has written and presented three highly successful television documentary series for British television: Empire, American Colossus, and, most recently, The War of the World. The Ascent of Money is a PBS coproduction scheduled to be broadcast in 2009. He and his family divide their time between the United Kingdom and the United States.