I read this book more than 5 years ago and recently decided to revisit my Kindle highlights from it.
In those 5 years, Niall has updated the book and released a 10th anniversary edition which has a chapter on bitcoin and cryptocurrencies. (it seems he caught the bug, from his son! :)
I might buy the new edition and reread it cover-to-cover. As you can tell from my highlights below – which I’ve already pruned – the book contains a wealth of historical information and balanced perspectives.
It’s clear he gets bitcoin and why it’s important today, and in his recent podcast interview with Laura Shin, he goes deeper on the topic.
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BOOK HIGHLIGHTS FROM NIALL FERGUSON’S THE ASCENT OF MONEY (the first edition)
And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.
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. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit.
In 2006 the measured economic output of the entire world was around $47 trillion. The total market capitalization of the world’s stock markets was $51 trillion, 10 per cent larger. The total value of domestic and international bonds was $68 trillion, 50 per cent larger. The amount of derivatives outstanding was $473 trillion, more than ten times larger. Planet Finance is beginning to dwarf Planet Earth.
In 1947 the total value added by the financial sector to US gross domestic product was 2.3 per cent; by 2005 its contribution had risen to 7.7 per cent of GDP.
According to one 2007 survey, four in ten American credit card holders do not pay the full amount due every month on the card they use most often
Booms and busts are products, at root, of our emotional volatility.
As Marx later sought to demonstrate in Capital, money was commoditized labour, the surplus generated by honest toil, appropriated and then ‘reified’ in order to satisfy the capitalist class’s insatiable lust for accumulation.
Five hundred years ago, the most sophisticated society in South America, the Inca Empire, was also moneyless. The Incas appreciated the aesthetic qualities of rare metals. Gold was the ‘sweat of the sun’, silver the ‘tears of the moon’. Labour was the unit of value in the Inca Empire, just as it was later supposed to be in a Communist society.
The Incas could not understand the insatiable lust for gold and silver that seemed to grip Europeans. ‘Even if all the snow in the Andes turned to gold, still they would not be satisfied,’ complained Manco Capac. The Incas could not appreciate that, for Pizarro and his men, silver was more than shiny, decorative metal. It could be made into money: a unit of account, a store of value – portable power.
…coins made of precious metal were associated with powerful sovereigns who monopolized the minting of money partly to exploit it as a source of revenue. The Roman system of coinage outlived the Roman Empire itself. Prices were still being quoted in terms of silver denarii in the time of Charlemagne, king of the Franks from 768 to 814.
The Crusades, like the conquests that followed, were as much about overcoming Europe’s monetary shortage as about converting heathens to Christianity.
The Spanish ‘piece of eight’, which was based on the German thaler (hence, later, the ‘dollar’), became the world’s first truly global currency, financing not only the protracted wars Spain fought in Europe, but also the rapidly expanding trade of Europe with Asia.
Within Spain, the abundance of silver also acted as a ‘resource curse’, like the abundant oil of Arabia, Nigeria, Persia, Russia and Venezuela in our own time, removing the incentives for more productive economic activity,
Cursed with an abundance of precious metal, mighty Spain failed to develop a sophisticated banking system, relying instead on the merchants of Antwerp for short-term cash advances against future silver deliveries. The idea that money was really about credit, not metal, never quite caught on in Madrid.
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.
…when human beings first began to produce written records of their activities they did so not to write history, poetry or philosophy, but to do business.
What the conquistadors failed to understand is that money is a matter of belief, even faith: belief in the person paying us; belief in the person issuing the money he uses or the institution that honours his cheques or transfers. Money is not metal. It is trust inscribed.
Jews, too, were not supposed to lend at interest. But there was a convenient get-out clause in the Old Testament book of Deuteronomy: ‘Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.
Shakespeare’s play quite accurately illustrates three important points about early modern money-lending: the power of lenders to charge extortionate interest rates when credit markets are in their infancy; the importance of law courts in resolving financial disputes without recourse to violence; but above all the vulnerability of minority creditors to a backlash by hostile debtors who belong to the ethnic majority.
The fundamental difficulty with being a loan shark is that the business is too small-scale and risky to allow low interest rates.
The simple answer is that the Medici were foreign exchange dealers: members of the Arte de Cambio (the Moneychangers’ Guild). They came to be known as bankers (banchieri) because, like the Jews of Venice, they did their business literally seated at benches behind tables in the street.
Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than for high finance. Between 1343 and 1360 no fewer than five Medici were sentenced to death for capital crimes.
By the time Pius II became pope in 1458, Giovanni’s son Cosimo de’ Medici effectively was the Florentine state. As the Pope himself put it: ‘Political questions are settled at his house. The man he chooses holds office . . . He it is who decides peace and war and controls the laws .
The Italian banking system became the model for those North European nations that would achieve the greatest commercial success in the coming centuries, notably the Dutch and the English, but also the Swedes.
In the words of Adam Smith, ‘The judicious operation of banking, by substituting paper in the room of a great part of . . . gold and silver . . . provides . . . a sort of waggon-way through the air.
The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy. They cannot have both. A currency peg can mean higher volatility in short-term interest rates, as the central bank seeks to keep the price of its money steady in terms of the peg. It can mean deflation, if the supply of the peg is constrained (as the supply of gold was relative to the demand for it in the 1870s and 1880s).
The ability to walk away from unsustainable debts and start all over again is one of the distinctive quirks of American capitalism. There were no debtors’ prisons in the United States in the early 1800s, at a time when English debtors could end up languishing in jail for years.
Many of America’s most successful businessmen failed in their early endeavours, including the ketchup king John Henry Heinz, the circus supremo Phineas Barnum and the automobile magnate Henry Ford.
Bankruptcy may have been designed to help entrepreneurs and their businesses, but nowadays 98 per cent of filings are classified as non-business. The principal driver of bankruptcy turns out to be not entrepreneurship but indebtedness.
The inescapable reality seems to be that breaking the link between money creation and a metallic anchor has led to an unprecedented monetary expansion – and with it a credit boom the like of which the world has never seen. Measuring liquidity as the ratio of broad money to output over the past hundred years, it is very clear that the trend since the 1970s has been for that ratio to rise – in the case of broad money in the major developed economies from around 70 per cent before the closing of the gold window to more than 100 per cent by 2005. In the eurozone, the increase has been especially steep, from just over 60 per cent as recently as 1990 to just under 90 per cent today. At the same time, the capital adequacy of banks in the developed world has been slowly but steadily declining. In Europe bank capital is now equivalent to less than 10 per cent of assets, compared with around 25 per cent at the beginning of the twentieth century.
Is it any wonder, then, that money has ceased to hold its value in the way that it did in the era of the gold standard?
First, a large part of the money we put aside for our old age ends up being invested in the bond market. Secondly, because of its huge size, and because big governments are regarded as the most reliable of borrowers, it is the bond market that sets long-term interest rates for the economy as a whole.
From a politician’s point of view, the bond market is powerful partly because it passes a daily judgement on the credibility of every government’s fiscal and monetary policies. But its real power lies in its ability to punish a government with higher borrowing costs.
Whereas towns, with their oligarchical forms of rule and locally held debts, had incentives not to default, the same was not true of absolute rulers. As we saw in Chapter 1, the Spanish crown became a serial defaulter in the late sixteenth and seventeenth centuries, wholly or partially suspending payments to creditors in 1557, 1560, 1575, 1596, 1607, 1627, 1647, 1652 and 1662.11 Part of the reason for Spain’s financial difficulties was the extreme costliness of trying and failing to bring to heel the rebellious provinces of the northern Netherlands, whose revolt against Spanish rule was a watershed in financial as well as political history.
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.
it was as much a lack of hard cash as a lack of industrial capacity or manpower that undercut what was, in military terms, an impressive effort by the Southern states. At the beginning of the war, in the absence of a pre-existing system of central taxation, the fledgling Confederate Treasury had paid for its army by selling bonds to its own citizens, in the form of two large loans for $15 million and $100 million.
In reality, however, the Rothschilds opted not to back the South. Why? Perhaps it was because they felt a genuine distaste for the institution of slavery. But of at least equal importance was a sense that the Confederacy was not a good credit risk (after all, the Confederate president Jefferson Davis had openly advocated the repudiation of state debts when he was a US senator). That mistrust seemed to be widely shared in Europe. When the Confederacy tried to sell conventional bonds in European markets, investors showed little enthusiasm.
With its domestic bond market exhausted and only two paltry foreign loans, the Confederate government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars’ worth in all. Both sides in the Civil War had to print money, it is true. But by the end of the war the Union’s ‘greenback’ dollars were still worth about 50 cents in gold, whereas the Confederacy’s ‘greybacks’ were worth just one cent
Prices in the South rose by around 4,000 per cent during the Civil War. By contrast, prices in the North rose by just 60 per cent.
The Rothschilds had been right. Those who had invested in Confederate bonds ended up losing everything, since the victorious North pledged not to honour the debts of the South.
Partly it was because Latin American republics were among the first to discover that it was relatively painless to default when a substantial proportion of bondholders were foreign. It was no mere accident that the first great Latin American debt crisis happened as early as 1826-9, when Peru, Colombia, Chile, Mexico, Guatemala and Argentina all defaulted on loans issued in London just a few years before.
‘Inflation’, wrote Milton Friedman in a famous definition, ‘is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.
Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon…
Much sooner, and to a much greater extent than in Britain, the German and Austrian authorities had to turn to their central banks for short-term funding. The growth of the volume of Treasury bills in the central bank’s hands was a harbinger of inflation because, unlike the sale of bonds to the public, exchanging these bills for banknotes increased the money supply.
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.
Gross vividly recalls the time when US inflation was surging into double digits, peaking at just under 15 per cent in April 1980. As he puts it, ‘that was very bond-unfriendly, and it produced . . . perhaps the worst bond bear market not just in memory but in history.
In 1913, according to recent estimates, Argentina was one of the ten richest countries in the world. Outside the English-speaking world, per capita gross domestic product was higher in only Switzerland, Belgium, the Netherlands and Denmark. Between 1870 and 1913, Argentina’s economy had grown faster than those of both the United States and Germany.
So miserably did it fare in the 1960s and 1970s, for example, that its per capita GDP was the same in 1988 as it had been in 1959. By 1998 it had sunk to 34 per cent of the US level, compared with 72 per cent in 1913.
What went wrong? One possible answer is inflation, which was in double digits between 1945 and 1952, between 1956 and 1968 and between 1970 and 1974; and in treble (or quadruple) digits between 1975 and 1990, peaking at an annual rate of 5,000 per cent in 1989. […] Another answer is debt default: Argentina let down foreign creditors in 1982, 1989, 2002 and 2004.
As so often in inflationary crises, war played a part: internally against supposed subversives, externally against Britain over the Falkland Islands.
As in the Weimar Republic, however, the principal losers of Argentina’s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the principal beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes.
So successful did Argentina’s default prove (economic growth has since surged while bond spreads are back in the 300-500 basis point range) that many economists were left to ponder why any sovereign debtor ever honours its commitments to foreign bondholders.
Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia.
…some of the structural drivers of inflation have also weakened. Trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social constituency with an interest in positive real returns on bonds has grown.
In such a greying society, there is a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power.
After the advent of banking and the birth of the bond market, the next step in the story of the ascent of money was therefore the rise of the joint-stock, limited-liability corporation:
In theory, the managers of joint-stock companies are supposed to be disciplined by vigilant shareholders, who attend annual meetings, and seek to exert influence directly or indirectly through non-executive directors. In practice, the primary discipline on companies is exerted by stock markets
Nothing illustrates more clearly how hard human beings find it to learn from history than the repetitive history of stock market bubbles.
No stock market has out-performed the American over the long run. One estimate of long-term real stock market returns showed an average return for the US market of 4.73 per cent per year between the 1920s and the 1990s. Sweden came next (3.71), followed by Switzerland (3.03),
in most countries for which long-run data are available, stocks have out-performed bonds – by a factor of roughly five over the twentieth century.
The joint-stock company and the stock market were thus born within just a few years of each other. No sooner had the first publicly owned corporation come into existence with the first-ever initial public offering of shares, than a secondary market sprang up to allow these shares to be bought and sold.
Nor was it coincidental that this same period saw the foundation (in 1609) of the Amsterdam Exchange Bank, since a stock market cannot readily function without an effective monetary system. Once Dutch bankers started to accept VOC shares as collateral for loans, the link between the stock market and the supply of credit began to be forged.
According to Law, confidence alone was the basis for public credit; with confidence, banknotes would serve just as well as coins. ‘I have discovered the secret of the philosopher’s stone, he told a friend, ‘it is to make gold out of paper.
what Law was attempting could be described as reflation. The French economy had been in recession in 1716 and Law’s expansion of the money supply with banknotes clearly did provide a much-needed stimulus. At the same time, he was (not unreasonably) trying to convert a badly managed and burdensome public debt into the equity of an enormous, privatized tax-gathering and monopoly trading company.
At their peak in September 1720, prices in Paris were roughly double what they had been two years before, with most of the increase coming in the previous eleven months. This was a reflection of the extraordinary increase in note circulation Law had caused. In the space of little more than a year he had more than doubled the volume of paper currency.
Not surprisingly, some people began to anticipate a depreciation of the banknotes, and began to revert to payment in gold and silver.
Law’s bubble and bust fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations. The French monarchy’s fiscal crisis went unresolved and for the remainder of the reigns of Louis XV and his successor Louis XVI the crown essentially lived from hand to mouth,
…the fact remains that the United States, which was the epicentre of the crisis, was in many respects in fine economic fettle when the Depression struck. There was no shortage of productivity-enhancing technological innovation in the inter-war period by companies like DuPont (nylon), Procter & Gamble (soap powder), Revlon (cosmetics), RCA (radio) and IBM (accounting machines).
First, too little was done to counteract the credit contraction caused by banking failures. This problem had already surfaced several months before the stock market crash, when commercial banks with deposits of more than $80 million suspended payments.
Fifthly, when rumours that the new Roosevelt administration would devalue the dollar led to a renewed domestic and foreign flight from dollars into gold, the Fed once again raised the discount rate, setting the scene for the nationwide bank holiday proclaimed by Roosevelt on 6 March 1933, two days after his inauguration – a holiday from which 2,000 banks never returned.
…this remains the most important: that inept or inflexible monetary policy in the wake of a sharp decline in asset prices can turn a correction into a recession and a recession into a depression. According to Friedman and Schwartz, the Fed should have aggressively sought to inject liquidity into the banking system from 1929 onwards, using open market operations on a large scale, and expanding rather than contracting lending through the discount window.
More recently, it has been argued that the inter-war gold standard itself was the problem, in that it transmitted crises (like the 1931 European bank and currency crises) around the world. A second lesson of history would therefore seem to be that the benefits of a stable exchange rate are not so great as to exceed the costs of domestic deflation.
Hyman Minsky put it well when he observed: ‘The most significant economic event of the era since World War II is something that has not happened: there has not been a deep and long-lasting depression
Partly, it was because Greenspan felt it was not for the Fed to worry about asset price inflation, only consumer price inflation; and this, he believed, was being reduced by a major improvement in productivity due precisely to the tech boom.
Traders had begun to speak of the ‘Greenspan put’ because having him at the Fed was like having a ‘put’ option on the stock market
In short, it was not merchants but mathematicians who were the true progenitors of modern insurance.
A soldier’s odds of being killed at Waterloo were roughly 1 in 4. But if he was insured, he had the consolation of knowing, even as he expired on the field of battle, that his wife and children would not be thrown out onto the streets
What no one anticipated back in the 1740s was that by constantly increasing the number of people paying premiums, insurance companies and their close relatives the pension funds would rise to become some of the biggest investors in the world – the so-called institutional investors who today dominate global financial markets. When, after the Second World War, insurance companies were allowed to start investing in the stock market, they quickly snapped up huge chunks of the British economy, owning around a third of major UK companies by the mid 1950s.24 Today Scottish Widows alone has over £100 billion under management.
as the inventors of modern insurance, the British remain the world’s most insured people, paying more than 12 per cent of GDP on premiums, roughly a third more than Americans
However, the world’s first welfare superpower, the country that took the principle furthest and with the greatest success, was not Britain but Japan.
In Japan egalitarianism was a prized goal of policy, while a culture of social conformism encouraged compliance with the rules. English individualism, by contrast, inclined people cynically to game the system. In Japan, firms and families continued to play substantial supporting roles in the welfare system. Employers offered supplementary benefits and were reluctant to fire workers. As recently as the 1990s, two thirds of Japanese older than 64 lived with their children.
Yes, America had a welfare state. No, it didn’t work. The Reagan and Clinton administrations had implemented what seemed like radical welfare reforms, reducing unemployment benefits and the periods for which they could be claimed. But no amount of reform could insulate the system from the ageing of the American population and the spiralling cost of private health care.
According to the Bank for International Settlements, the total notional amounts outstanding of OTC derivative contracts – arranged on an ad hoc basis between two parties – reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.
Since 1959, the total mortgage debt outstanding in the US has risen seventy-five fold.
But the origins of the Anglo-American model of the highly geared home-owning family lie as much in the realm of government policy as in the realm of culture. If the old class system based on elite property ownership was distinctively British, the property-owning democracy was made in America.
Suppose you had put $100,000 into the US property market back in the first quarter of 1987. According to either the Office of Federal Housing Enterprise Oversight index or the Case-Shiller national home price index, you would have roughly trebled your money by the first quarter of 2007, to between $275,000 and $299,000. But if you had put the same money into the S&P 500 (the benchmark US stock market index), and had continued to reinvest the dividend income in that index, you would have ended up with $772,000 to play with, more than double what you would have made on bricks and mortar. In the UK the differential is similar.
There are, however, three other considerations to bear in mind when trying to compare housing with other forms of capital asset. The first is depreciation. Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since the Second World War have been far less volatile than stock markets
Subprime lending hit Detroit like an avalanche of Monopoly money. The city was bombarded with radio, television, direct-mail advertisements and armies of agents and brokers, all offering what sounded like attractive deals. In 2006 alone, subprime lenders injected more than a billion dollars into twenty-two Detroit ZIP codes. In the 48235 ZIP code, which includes the 5100 block of West Outer Drive, subprime mortgages accounted for more than half of all loans made between 2002 and 2006.
What scarcely anyone had anticipated was that defaults on subprime mortgages by low-income households in cities like Detroit and Memphis could unleash so much financial havoc: one bank (Northern Rock) nationalized; another (Bear Stearns) sold off cheaply to a competitor in a deal underwritten by the Fed; numerous hedge funds wound up; ‘write-downs’ by banks amounting to at least $318 billion; total anticipated losses in excess of one trillion dollars.
The great revelation of the microfinance movement in countries like Bolivia is that women are actually a better credit risk than men, with or without a house as security for their loans.
Of course, it would be a mistake to assume that microfinance is the holy grail solution to the problem of global poverty, any more than is Hernando de Soto’s property rights prescription. Roughly two fifths of the world’s population is effectively outside the financial system, without access to bank accounts, much less credit.
Yet there remains a credible hypothesis that China’s problems were as much financial as they were resource-based. For one thing, the unitary character of the Empire precluded that fiscal competition which proved such a driver of financial innovation in Renaissance Europe and subsequently. For another, the ease with which the Empire could finance its deficits by printing money discouraged the emergence of European-style capital markets. […] In short, the Middle Kingdom had far fewer incentives to develop commercial bills, bonds and equities.
Perhaps the most remarkable feature of the crisis of 1914 was the closure of the world’s major stock markets for periods of up to five months.
The near-universal adoption of the gold standard had once been seen as a comfort to investors. In the crisis of 1914, however, it tended to exacerbate the liquidity crisis.
in the emergency of war, a number of countries, beginning with Russia, simply suspended the gold convertibility of their currencies. In both Britain and the United States formal convertibility was maintained, but it could have been suspended if that had been thought necessary.
The decision of the Nixon administration to sever the final link with the gold standard (by ending gold convertibility of the dollar) sounded the death knell for Bretton Woods in 1971.
With currencies floating again and offshore markets like the Eurobond market flourishing, the 1970s saw a revival of non-governmental capital export. In particular, there was a rush by Western banks to recycle the rapidly growing surpluses of the oil-exporting countries. The region where the bankers chose to lend the Middle Eastern petrodollars was an old favourite. Between 1975 and 1982, Latin America quadrupled its borrowings from foreigners from $75 billion to more than $315 billion.
Stiglitz’s biggest complaint against the IMF is that it responded the wrong way to the Asian financial crisis of 1997, lending a total of $95 billion to countries in difficulty, but attaching Washington Consensus-style conditions (higher interest rates, smaller government deficits) that actually served to worsen the crisis.
Like the rise of China, the even more rapid rise of the hedge funds has been one of the biggest changes the global economy has witnessed since the Second World War.
In 1990, according to Hedge Fund Research, there were just over 600 hedge funds managing some $39 billion in assets. By 2000 there were 3,873 funds with $490 billion in assets.
To ensure that those exports were irresistibly cheap, China had to fight the tendency for the Chinese currency to strengthen against the dollar by buying literally billions of dollars on world markets – part of a system of Asian currency pegs that some commentators dubbed Bretton Woods II. In 2006 Chinese holdings of dollars almost certainly passed the trillion dollar mark.
And Chimerica – or the Asian ‘savings glut’, as Ben Bernanke called it – was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 per cent mortgage with no income, no job or assets.
By the end of 2007 sovereign wealth funds had around $2.6 trillion under management, more than all the world’s hedge funds…
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. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.
As we have seen, all financial institutions are at the mercy of our innate inclination to veer from euphoria to despondency; our recurrent inability to protect ourselves against ‘tail risk’; our perennial failure to learn from history.
Around one in ten US companies disappears each year.
Of the world’s 100 largest companies in 1912, 29 were bankrupt by 1995, 48 had disappeared, and only 19 were still in the top 100.