Quick Summary: In The Ascent of Money, Niall Ferguson tells the human story behind the financial system’s step-by-step evolution (2009). He explains the building blocks that created money as we know it, beginning with ancient Mesopotamia and ending with the ongoing struggles that people face with money today.
According to Ferguson, credit and debt were as important to the rise of civilization as any other technological innovation. Many of the financial crises that people are experiencing today are the result of history repeating itself, and only by understanding our own financial history will we be able to truly avoid them.
You do not have to read the entire book if you don’t have time. This book summary provides an overview of everything you can learn from it.
Let’s get started without further ado.
The Root of Progress
Around a billion people worldwide struggle to make ends meet on one dollar per day, and people are outraged that capitalists profit from this inequity. There is a hostile attitude toward anything and everyone involved in lending money. Whether people like it or not, money is the driving force behind the majority of human progress. Technological advancement has improved civilization, and the evolution of credit and debt is one of these significant steps forward. Corporate finance was and continues to be the foundation of many empires.
People who live in the safest countries in the world are also the most insured. The globalization of finance has blurred the distinctions between developed and emerging markets, such as communist China becoming the banker of capitalist America. People are always trading and creating new financial life forms.
Despite the aftermath of 9/11, global finance experienced sustained financial expansion from late 2001 to mid-2007. Financial innovations have resulted in fundamental efficacy improvements in the global capital market. Risk was thus allocated to those who could bear it. In 2007, the Western world was hit by a financial crisis that brought back memories of previous financial difficulties. Recessions will occur because history repeats itself. In 2007, the value of all asset-backed securities plummeted, and people were in trouble as banks took over securities.
Many banks suffered massive losses, and even the most well-known American and European banks were forced to rebuild their reserves with the assistance of Western central banks as well as Asian and Middle Eastern sovereign wealth funds. This was for both short-term assistance in rebuilding reserves and long-term capital base rebuilding.
Many European and Asian economies are heavily reliant on the United States, whose output accounts for more than a quarter of total global output. The Federal Reserve, which attempted to alleviate the credit crunch by cutting interest rates, put pressure on the dollar’s external value.
The flaw in the financial system is that it reflects and magnifies what we humans are like. Money, according to behavioral finance, increases our proclivity to overeat and is volatile, shifting from luxury to deep depression when things go wrong. Financial crises are notoriously difficult to forecast.
Where It All Began
Communists, anarchists, extreme reactionaries, religious fundamentalists, and hippies have all fantasized about a moneyless world. Famous philosophers Friedrich Engels and Karl Marx believed that money was a tool of capitalist exploitation. However, no communist state has discovered a practical way to eliminate money.
The discovery of the Potos silver mountain in Bolivia in 1545 altered the world’s economic history. Europeans had an insatiable desire for gold and silver, and both precious metals eventually became units of account, or portable power.
Money eliminates trading inefficiencies because it is a medium of exchange that allows for valuation and calculation. Money enabled economic transactions to be carried out over long periods of time and across large geographical distances. Money must be readily available, affordable, long-lasting, fungible, portable, and dependable; otherwise, it is inefficient.
The first true global currency was created by the Spanish, and it was known as a piece of eight, a silver coin that rapidly expanded European trade with Asia. However, because they dug up so much silver to pay for wars, the metal’s value fell. From the 1540s to the 1640s, Europe experienced a price revolution. This had a significant impact on the cost of food and living. Spaniards failed to recognize that the value of precious metals is not absolute, and that the value of money is determined by people.
The purchasing power of the dollar has declined over the last fifty years, and we are content with paper and electronic money. However, money is becoming virtual, and virtual money is gradually taking over the money supply.
The Italian banking system served as a model for those who achieved the most commercial success after the 1300s, primarily northern European nations such as the Dutch, English, and Swedes. These three countries sparked the next decisive wave of financial innovation, with the emergence of modern central banks.
While the Italians were improving their system, the Spanish were falling behind due to an abundance of precious metal. It took them a long time to develop a sophisticated banking system; they eventually realized that money was about credit, not metal.
The financial revolution preceded the industrial revolution, and banks played a significant role in European industrialization. Financial innovation saw the proliferation of a diverse range of banks in Europe and North America. The difference between financial and natural evolution is that humans, not the divine, regulate.
Credit and debt are essential components of economic development. Credit and debt, like mining, manufacturing, and mobile telephony, generate national wealth.
The Innovation of the Bond
The invention of the bond was one of the most revolutionary advances in the history of money. Governments and large corporations could borrow money from individuals and institutions other than banks by issuing bonds. The Japanese government’s ten-year bond is an example of this.
Today, the total value of internationally traded bonds is around $18 trillion. Domestically traded bonds are worth $50 trillion. The bond market has two effects on people: first, our savings are mostly invested in it, and second, it sets long-term interest rates.
In the 1500s, Italy’s city-states were in crisis due to constant warfare. Expenditures were exceeding tax revenues, and they were mired in debt. The Italians contributed to the bond market’s rise during this crisis.
War provided an opportunity for financial innovation in the 1800s. The Battle of Waterloo in 1815 marked the end of a nearly two-decade conflict between Britain and France. It was a battle of rival financial systems, with Britain relying on debt and France relying on plunder.
By the end of the American Civil War in 1865, both the North and South had been forced to print money to cover the costs of the war. It came to $1.7 billion in total. Forgery was rampant, which hampered progress. Confederate notes were especially simple to forge.
Debt defaults and currency depreciation became all too common because the social class most likely to invest in bonds was poor. The bond market was powerful, and as debt piled up in the 1900s, countries faced economic sanctions, military intervention, and foreign control over their own finances.
Monetary theory cannot explain how and why inflation affects different countries. Inflation is a monetary phenomenon, whereas hyperinflation is a political phenomenon because it cannot occur without a breakdown in a country’s political economy. Inflation reduces purchasing power, allowing bond prices to fall. However, technological innovation and the relocation of manufacturing to low-wage economies in Asia has caused inflation to fall as the items we buy have become less expensive.
Companies and Stocks
Companies are one of the most fundamental institutions of the modern world, as they enable modern capitalism’s grand schemes to be realized. They allow thousands of people to pool their resources and collaborate on long-term projects.
Companies are legally protected in the event that their ventures fail, allowing wealth to be preserved. Companies rely on the stock market to transform the global economy, where myriad slices of companies are bought and sold every day. This indicates how much money the company is expected to make in the future. The stock market has a mind of its own.
Not all financial disasters have obvious causes, such as the October 1929 Wall Street crash. Historians believe the Great Depression was precipitated by Germany’s post-World War I reparations and an increase in American protectionism. The Great Depression has been explained by two generations of economists. Inflexible monetary policy after a sharp decline in asset prices can turn a correction into a recession, and a recession into a depression. The Great Depression could have been avoided if liquidity had been injected into the banking system.
Another historical lesson is that the benefits of a stable exchange rate do not outweigh the costs of domestic deflation. The stock exchange and the joint-stock, limited-liability company are miraculous institutions in which ownership can be bought and sold. Irrational markets have existed alongside corrupt corporations, and central bankers play critical roles in the economy. Human expectations are unpredictable, so financial markets will never be smooth.
Our most basic financial impulse is to save for the future because the world is dangerous and unpredictable. Some people are in the wrong place at the wrong time, and climate change, the rise of terrorism, and other factors make this unpredictability even more pronounced. People must deal with the risks of life. Risk management is a long battle, and there is no such thing as true security because the future is unpredictable and will always catch us off guard.
Hazardous events such as hurricanes, plagues, famines, and wars will always occur. Disasters can be both private and public affairs. People become ill, age and die, or are even born in an unsafe environment. Before modern agricultural societies, everyone was at risk of dying young due to disease, malnutrition, or war. People began to systematically record and calculate weather, agriculture, and mortality probabilities in the eighteenth and nineteenth centuries. Saving money was understood and practiced by that time.
Primitive societies would stockpile food to ensure survival during difficult times. Saving for unforeseeable adversity is a fundamental principle of insurance, whether against old age, sickness, accidents, or death. Damage control is ensured by knowing how much to save and what to do with it.
Insurance was available even in medieval times. Rather than merchants, mathematicians are the forefathers of modern insurance. However, it was clergymen who put theory into practice. Insurance was available even in medieval times.
Rather than merchants, mathematicians are the forefathers of modern insurance. However, it was clergymen who put theory into practice. The Scottish Ministers’ Widows’ Fund made financial history in the 1740s. When the number of people paying premiums was constantly increasing at the time, insurance companies became some of the world’s largest investors and dominated global financial markets.
People took out insurance because of the rise and fall of the welfare state. The welfare state was first implemented in Germany, and the British followed suit later. When private insurers were afraid to tread, the government stepped in. It also eliminated the need for costly promotional campaigns and produced more stable statistical experience averages.
Longer life is bad for the welfare state, and politicians must persuade voters to reform it, despite the fact that it is good for individuals. The world’s population is aging, but the world is becoming more dangerous. People can simply continue to save for a rainy day, but this is far from a safe option.
The Game of Real Estate
Because the real estate market is unique and popular, property is the English-speaking world’s favorite economic game. For most of history, home ownership was the exclusive privilege of the aristocratic elite, as estates were passed down through generations with honorific titles and political privileges.
The issue with property is that it is only a security to the person who lends you money, regardless of how much you own. Many nineteenth-century investors were drawn to mortgages because they appeared to be a risk-free investment. Income is the borrower’s sole security against property loss. No matter how many acres you owned, a regular job became more important in the modern world than an inherited title. The Anglo-American model of home ownership arose from both government policy and culture.
The old class system of elite property ownership originated in Britain, while property-owning democracy originated in America. Except for farmers prior to the 1930s, mortgages were the exception rather than the rule. People who borrowed money to buy houses in the 1920s found themselves in debt. The Roosevelt administration then pioneered the concept of a property-owning democracy, dramatically increasing Americans’ ability to own homes.
During the Great Depression, owning a home served as a deterrent to the possibility of communist revolution, as governments stepped in when the market failed. Depositors had been traumatized by previous bank failures, so President Franklin D. Roosevelt instituted federal deposit insurance.
The Federal Housing Administration encouraged large, long, and fully amortized low-interest loans by providing federally backed insurance for mortgage lenders. As it established a national system of official inspection and valuation, this reinvented the mortgage market and laid the groundwork for a national secondary market.
Following WWII, property ownership and mortgage debt skyrocketed as the US government effectively encouraged lenders and borrowers to collaborate. However, due to racial bias, not everyone in America could afford to own property.
Savings and loans were the bedrock of America’s property-owning democracy. The government both protected and regulated them. Up to $40,000 was insured at the time, but they could only lend to home buyers within fifty miles of the office. Savings and loans, or S&Ls, could invest in anything, including commercial real estate, stocks, junk bonds, and credit cards, rather than just long-term mortgages.
Homeowners tend to become much more individualistic and materialistic. However, ownership alone is insufficient to resurrect dead capital, and people often forget that property does not provide security, as true security comes from a consistent income.
The Biggest Threats
Financial crises were more likely to happen on the periphery of the world economy, in emerging markets. Yet the biggest threats to the global financial system have come from the core, especially in 2002, two years after Silicon Valley peaked in 2000, when the US stock market fell by almost half.
By 2007, a new financial storm had blown up in the credit market. Millions of Americans discovered they could not pay on billions of dollars’ worth of subprime mortgages.
We are living through the end of an era that stretches back for more than a century and has seen an amazing shift in the global balance of financial power. The Chinese economy has exploded with growth in the past thirty years, which implies a historical change.
Overseas investment is hard to trust. Until recently, non-Western countries were highly unreliable in terms of legal systems and accounting rules. The solution to this problem was to impose European rule in the first era of globalization, a brutally simple option. The first era of financial globalization took at least a generation to achieve, yet it was quickly destroyed by World War I, and the damage took more than two generations to repair.
Distressed governments that issue more currency will not lead their citizens or investors to suddenly think it is more valuable. The solution is not to increase supply and expect demand. Our experience as humans suggests otherwise.
The Chinese-American resolution of the 2008 American crisis has failed to happen, partly because the Chinese forays into US stocks produced less than wonderful results. There is serious political tension at the very heart of this alliance.
Major wars can arise even when economic globalization is advanced. The longer the world goes without a major conflict, the harder one becomes to imagine. When a crisis does strike complacent investors, it causes more disruption than a disaster affecting battle-scarred ones.
The Ascent of Money Review
Niall Ferguson explains complex economic and financial concepts in a way that non-experts can understand. Photographs illustrate his points and show historical figures throughout each chapter and at the end of the book. Ferguson was assisted in his research by scholars and librarians, as well as financial experts who agreed to be interviewed. His former colleagues in the History Department at Harvard also double-checked his research.
This book goes back to their history and the root from which they originated. A really great book that explains everything with historical examples and makes it easier for the common man to understand the world of finance. This book is great to re-read the more you learn about the real world of finance.
About The Author
Niall Ferguson has written 15 books. He worked on The Ascent of Money: A Financial History of the World, a six-part PBS television series that won an International Emmy for best documentary in 2009. He is now a senior fellow at Stanford University’s Hoover Institution. Ferguson has received the Benjamin Franklin Award for Public Service, among other honors.
The Ascent of Money Quotes
“The ascent of money has been essential to the ascent of man.”
“there really is no such thing as ‘the future’, singular. There are only multiple, unforeseeable futures, which will never lose their capacity to take us by surprise.”
“perennial truths of financial history. Sooner or later every bubble bursts. Sooner or later the bearish sellers outnumber the bullish buyers. Sooner or later greed turns to fear.”
“Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account, which facilitates valuation and calculation; and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances. To perform all these functions optimally, money has to be available, affordable, durable, fungible, portable and reliable.”
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