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The Ascent of Money, By Niall Ferguson
A mirror on the crisis
Friday 31 October 2008
The extraordinary events in the financial markets during the past few months – and their aftermath as taxpayers pick up some meaty bills – will have reminded us of the fragility of our banking system.
Queues outside Northern Rock as people sought to get their money out? It was not just a case of banks going to the wall or needing to be rescued. One entire country, albeit a small one, defaulted on its debts. It was to most people an unprecedented financial earthquake, something that hadn't happened since the banking failures of the early 1930s. We accept that there seems to be an economic cycle, with its swings from booms to, if not busts, at least periods of much slower growth. But this? Surely what happened was at the outer limits of the conceivable – indeed, for most of us, beyond it.
Well, actually no. This type of financial chaos has occurred again and again throughout history. On any long view, periodic bursts of chaos are normal. It would be astounding if they did not happen. Worse, despite all our efforts to avert them, they will happen again, though perhaps not for a while yet.
The long story of money, credit and banking is the subject of Niall Ferguson's new book, The Ascent of Money. It is written in conjunction with a Channel 4 series but don't let that put you off; Professor Ferguson is not only one of the world's leading historians. He has written a number of books on financial themes and tackles his complex subject with great clarity and wit.
And what a subject it is. Money, such a simple word, is at the very core of our relations. It must rank as one of the great inventions of our species, alongside the division of labour and the wheel.
So we march with money through time. From the Roman denarius, still circulating in Europe in the early Middle Ages, through the development of the loan sharks in northern Italy into the first real bankers; from the rise of Amsterdam as the world's financial capital and the gradual shift of its techniques to London; from the Rothschilds, who did not, as is popularly supposed, make a great coup out of using carrier pigeons to learn the result of the battle of Waterloo before anyone else, but rather from a huge subsequent gamble on the price of government securities; to the first great age of market capitalism during the 19th century; and to the booms and busts of the modern world.
There are a score of fascinating details. One example is how John Law managed to persuade the French to appoint him controller general of finances (sort of governor of the Bank of England and Chancellor of the Exchequer combined) and allow him to engineer the French financial bubble in 1720-21 that did far greater damage to French savings than the South Sea Bubble did to British finances at the same time. He describes how grand families, such as the Grevilles, were ruined by spendthrift heirs, while other new dynasties, notably the Rothschilds, were founded on a mixture of thrift, information and acumen.
Perhaps the most helpful aspect of the book is Ferguson's ability to link the past with the present – particularly helpful right now. For example, he draws a parallel between international investment during the last great burst of globalisation from 1870 to 1914 and the massive international capital flows of the present global era. The difference was that during the 19th century it was mostly a case of the developed world, Britain, France and other European nations, financing infrastructure in developing countries, now it is a still-developing country, China, financing consumption in the US. The author writes of "Chimerica", which he describes as "the wonderful dual country ... which accounts for just over a 10th of the world's land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years".
The 19th-century globalisation ended with the catastrophe of the First World War. It is really scary to realise how unaware people were of the fragility of those times. In 1910, the British journalist Norman Angell published The Great Illusion, in which he argued that war between the great powers had become an economic impossibility because of "the delicate interdependence of international finance".
In spring 1914 an international commission reported on the Balkan Wars of 1912-13. The British member of the commission, Henry Noel Brailsford, wrote: "In Europe the epoch of conquest is over and save in the Balkans perhaps on the fringes of the Austrian and Russian empires, it is as certain as anything in politics that the frontiers of our national states are finally drawn. My own belief is that there will be no more war among the six powers."
To quote those statements is not to suggest that this period of globalisation will end in a similar disaster. It is simply to note we should not take this period of great prosperity, one that has seen the largest improvement in living standards of the greatest proportion of the world's population ever known, for granted. Something of its fragility is now evident. Ferguson argues that the financial bubble, now burst, was in part down to the relationship between China and America. He argues that the Asian savings glut "was the underlying reason why the US mortgage market was so awash with cash that you could get a 100 per cent mortgage with no income, no job and no assets".
That was also the argument made by Ben Bernanke, chairman of the Federal Reserve Board, but that seems to me to be too kind to his predecessor Alan Greenspan. Greenspan drove US interest rates down below inflation in an effort to boost the economy. If money is, so to speak, free, it is unsurprising if bankers lend it and people borrow it unwisely. The sub-prime crisis was made in America, not China.
Ferguson ponders whether the relationship between China and the US might break down into some kind of trade war and that this might trigger the end of this period of globalisation. He draws three disturbing lessons from history. One is that major wars can happen even when globalisation is far advanced. The second is that the longer the world goes without a major conflict, the harder it becomes to imagine there could be war. And third, a crisis that strikes complacent investors does more damage than one that hits battle-scarred ones.
Financial markets are taking a lot of stick at the moment. Is that fair? I like his concluding judgement. It is that markets "are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty."
1694: the Bank of England (left) is founded to act as the government's banker and debt-manager
1797: war with France has drained the gold reserves. The 'Restriction Period' lasts until 1821
First World War: the National Debt rises to £7bn
1929: the Wall Street crash heralds a European bank crisis and the Great Depression
1992: Black Wednesday costs the Treasury £3.4bn 2008: the US sub-prime meltdown triggers global panic and brings UK banking to the edge of collapse
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