ALLEN LANE £25 (400pp) £22.50 (free p&p) from 0870 079 8897

The Ascent of Money, By Niall Ferguson

A mirror on the crisis

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."

Tough times

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

Arts and Entertainment
War veteran and father of Peter and Laust Thoger Jensen played by Lars Mikkelson

TVBBC hopes latest Danish import will spell success

Arts and Entertainment
Carey Mulligan in Far From The Madding Crowd
FilmCarey Mulligan’s Bathsheba would fit in better in The Hunger Games
Arts and Entertainment
Pandas-on-heat: Mary Ramsden's contribution is intended to evoke the compound the beasts smear around their habitat
Iart'm Here But You've Gone exhibition has invited artists to produce perfumes
Arts and Entertainment
U2's Songs of Innocence album sleeve

tvU2’s latest record has been accused of promoting sex between men

Arts and Entertainment
Alison Steadman in Inside No.9
tvReview: Alison Steadman stars in Inside No.9's brilliant series finale Spoiler alert
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
    'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

    'Queer saint' who bankrolled artworld giants

    British culture owes a huge debt to Peter Watson, says Michael Prodger
    Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

    Pushkin Prizes brings countries together

    Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
    14 best kids' hoodies

    14 best kids' hoodies

    Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk