A Financial History of the World

Niall Ferguson has been getting a lot of press recently. Apparently he made a big impression on people in Davos at the recently held conference, and he has followed up on this publicity with a column in the Financial Times, where he is a contributing editor, and a blog on The Huffington Post. The basic idea Ferguson is presenting to the world is that the underlying problem in the financial crisis is too much outstanding debt. He says that rather than add more debt, through government stimulus programs, to the toxic waste that currently exists, policymakers should develop a plan that would actually reduce leverage, i.e. reduce the amount of debt outstanding.

He is highly critical of the “born-again” Keynesians who have taken the writings of Keynes out of context and applied them to a situation that is not appropriate. Hence, to Ferguson, those countries enacting “Keynesian” stimulus plans will be exacerbating the current financial problem and not solving it.

Ferguson's recent book “The Ascent of Money” is not only a very worthwhile read, but it also provides some of the history and background to his policy conclusions. For either reason - or both - I would highly recommend this book to the readers of my blog.

Getting away from the “current events” application of this book, there are several other important lessons in history that Ferguson would like us to consider, making the book not only provocative, but supportive of financial institutions and those that work in the finance field. Seldom today, do you see such a defense raised.

First, Ferguson takes on the work of those utopian writers who consider the ideal world to be one in which there is no money, no finance. He concludes that modern, successful economies have a well developed money system and effective financial institutions that contribute to economic innovation and growth. Those societies that do not have a functional money system and no financial structure are the ones that do not grow and develop; this includes areas or regions (e.g. urban areas and agricultural regions) as well as nations. He contends that before the Industrial Revolution could take place in the West, there first had to be a financial revolution.

Ferguson then presents a discussion of why finance and financiers have such a “bad” reputation and are so easily picked upon when something goes wrong. For one, he argues, “debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter.” Also, “financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability.” And, finally,

“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 book makes three other points. One has to do with the fact that finance is often looked upon as a parasite to the “real” activity that goes on in the world, contributing little to the actual production of goods and services. The second is that financial systems seem to “reflect and magnify” what human beings are really like. That is, money

“amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong…But finance also exaggerates the differences between us, enriching the lucky and the smart, impoverishing the unlucky and not-so-smart.”

A third point deals with the seeming contribution of finance to tremendous amounts of wealth and to skewed income distribution, which has raised suspicions that finance is a parasite to “real” economic activity and contributes to the violent swings that take place within the economy - the assumption being that “real” economic activity would be more stable and less volatile without finance around.

There is one other key element to Ferguson’s world view. Ferguson does not believe in economic determinism; that is, he does not think that all decisions are made using rational economic reasoning. He believes that politicians and political events, especially wars, shape the institutions and policies, the rules and regulations, of modern economic life. In pure economic theory these inputs are treated as “exogenous” shocks, events that occur outside of our economic models but that significantly affect the future path of the economy.

What are these exogenous shocks? Well, how about a taxcut for the wealthy? How about a war on terrorism? How about a policy of keeping “real” short-term interest rates negative for over a year and a half? How about “domestic political conflicts” that arise relating to religion or other factors that can divide a nation -- say, cultural wars that relate to abortion, stem-cell research, and same-sex marriage? Ferguson contends that there is nothing in economics that can specifically account for these types of events and yet they play a major role in determining the evolution of an economy.

The body of the book is about the subtitle: A Financial History of the World. This may be a bit of a stretch, but he does cover a lot of history. There is a chapter on the history and evolution of the bond, a chapter on the rise of the joint-stock, limited-liability company and stock markets, a chapter on insurance and insurance companies and a chapter on the development of the idea of home ownership and whether or not home ownership should be a universal dream.

And then there is a chapter that moves us up to April 2008, when the book was being finished. The focus of this chapter is on “Chimerica”, the co-evolution of China and America in this current age of globalization. This chapter is worth reading even though a lot has happened since the author wrote the book. Of course, this leads into a discussion of all the debt that America has recently put on the books, and how this debt has been financed by nations that are just emerging into the modern financial system, dominated by China.

The rest of the story remains to be written -- and Ferguson, I’m sure, will contribute to its writing. Read this book. Read Ferguson’s earlier book “Cash Nexus: Money and Power in the Modern World, 1700-2000.” I believe that his ideas are going to be much discussed, and rightfully so. Having consumed these two books, as well as his several others, will give you a leg up on those discussions.

Comments

[drone:]

He's a smart guy with a handle on events, a very good speaker trying to sell a book. But his view is no more cogent than any other.

Feb 14 04:19 PM

[drone:]

I usually listen to Ferguson on "Conversations with History" with Harry Kreisler, when I can't get to sleep. As soon as Ferguson starts to speak, I'm gone and that's it for the night.

Feb 14 04:28 PM

[drone:]

He's pumping out books left and right. How many books in the last few years? Calm down all you yuppies. Stop reading his books and he will go away.

Feb 14 04:35 PM

[markettaker:]

Let's talk about what we can do with this mess. I think something needs to be done with peoples awareness rather than there whinning.

This article should say it all: Read it, then rate me or comment.

www.gotoguy.com/2009/0.../

Feb 14 05:23 PM

[Erez Attiya:]

You can obviously cut the entire book by typing one sentence: "The defendant/s________ (fill the one or few you think are guilty in all this crisis and apathy reaction) found guilty!"
On the other hand, if you don't think there is one or few guilty persons, believe me, no book will help you find them or figure out who are they, so cut it right here.

Feb 14 05:40 PM

[otbricki:]

None of these are empires that failed due to financial over extension.

Babylon was conquered by Alexander the Great.
Egypt fell mostly because of a great famine caused by the Nile failing to flood for several years.
Greece never really had an Empire
Rome lasted for 1000 years in the west until Germanic tribes sacked Rome and broke the aqueducts in 357. The eastern half of the Roman Empire lasted until 1450 (total 2000 years) or so when it was conquered by the Ottomans. Rome went through several economic crises and survived them all just fine.
The Tartars are an ethnic group originating in Mongolia. Never had an Empire.
The Caliphate was destroyed by the Mongol Empire when they conquered Baghdad.
France lost their empire when Napoleon was defeated at Waterloo.
Austria-Hungary was destroyed by WWI. It was highly divided by ethnic tensions during it's short existence. Would have fallen apart anyway because it was ungovernable.
The Western half of the British Empire i.e. the US and Canada is still going strong.
Soviet still has an empire, they just had a setback and are now look like they are on a comeback. The same people are still in power i.e. ex-KGB

Empires don't fall because they get overextended economically. Economics goes in cycles anyway. Look at the US - Civil Wars, several big depressions, etc. No problem. It takes an outside force to destroy an empire.

On Feb 14 02:09 PM Jim Hawthorne wrote:

> otbriki; tell me you're joking! Empires that fell due to over-extension?
>
> Babylonian, Egyptian, Greek, Roman, Tartar, Caliphate/Moor, Austro-Hungarian,
> German, French, British, Soviet...
>
> Yea! You were joking?............. Right???
>
> On Feb 14 01:08 PM otbricki wrote:

Feb 14 06:44 PM

[otbricki:]

Spain's empire lasted well into the 19th century. The Thirty Years War was a setback, but it retained its colonies and recovered afterwards. It was really the French invasion by Napoleon that doomed the Spanish empire.

On Feb 14 01:47 PM john s. gordon wrote:

> spain looted their new world possessions in the 16th century &
> hauled as much of the loot as they could back to europe.
>
> however money goes to where it has the most value, which at that
> time meant to the spanish netherlands which enjoyed economic boom
> conditions in spite of chafing under the spanish yoke.
>
> i have been rereading the biography of samuel insull whose overleveraged
> holding company house of cards collapsed in the 1930 depression,
> leading to PUHCA legislation in the FDR era, 1935. it is perhaps
> significant that PUHCA was abolished in 2005 during the regime of
> the great deregulator, Geo.dubya.

Feb 14 09:44 PM

[Alex Ikonnikov:]

To You're Kidding: too bad not too many people share your belief.. otherwise.. if we did.. we wouldn't be here!

Feb 15 03:10 AM

[brushes9:]

Does Ferguson call for anyone going to jail...no. Ferguson is coffee table economics for upper Boston families who want to feel informed, but not dirty. Frankly, he is your mum's dinner guest, young, good looking and completely uncontroversial.

Is seeking alpha attempting to broaden its bovine base with this book review?

Feb 15 12:22 PM

[jksisco:]

One day perhaps, governments will learn to set aside a reserve account for exogenous emergencies, stick to balanced budgets and let private investment fund those projects outside of governments Constitutional limits... maybe someday.

Feb 15 01:21 PM

[sheople:]

Mr. Niall Ferguson should stay out of the way of our inept leaders, they're on a mission.

Feb 15 04:04 PM

[USC-Col 200...:]

I would have to disagree. I believe the reason why we're having difficulties with inflation somewhat or the purchasing power of our income is due to the substantial debt that our country's has overtaken. We have all these liabilites and not enough cash or methods of paying them off, especially when considering tax cuts. During this current stimulus the tax cuts are taken into account already. I think the gross total reported to the media takes into the account the value subtracted by the tax cuts. However the government is printign money basically to cover the debt of the government. I believe debt reduction makes US dollars more valuable. With regards to individuals, substantial debt has crippled the economic landscape. Everyone is overextended, and everyone's financial record is reduced somewhat becuase of the enormous debt they hold. It's detracting from the ability to purhcase a home whether America likes it or not. As well as banks can't readily guarantee interst income as its done in past time, because so many people are heavily indebted. I think it was a good idea to put every American in homes in accordance with the free credit given to American throughout the 90's. The greed or the propensity to give to much unsecured debt is what I'm believeing is hurting the economy, because now no one knows how to budget as well and relying on HELOC's and credit cards as financial income, which is hazardous to your credit record, your mortgage, and your lifestyle. That is dangerous. Debt reduction would eventually get everyone in shape, so banks can trust consumer once more, and those SIV and MBS have more weight or value when needed to be sold.


On Feb 14 02:54 AM Tradememe wrote:

> His ideas about debt reduction and too much stimulus are all valid
> in theory but not in practice. When everyday you hear news about
> job losses, it is difficult for the government not to do anything.
> Instead of arguing against stimulus plans, perhaps, it would be better
> to discuss about their relative effectiveness.

Feb 15 09:20 PM

[Moon Kil Woong:]

Napoleon had to sell off his portion of North America in the Louisiana Purchase to finance his expansion and then ran himself dry anyway.

You can't really mean what you said that England didn't overextend its empire to unmanageability by defending your position with the argument that the Western Half of the UK is doing fine. The US is not the UK? That's like saying the Roman Empire didn't die because the EU is here. And what about the Eastern half of the UK? Would that be UK India that sold East India Tea to the US before the Stamp Act.

Feb 15 10:04 PM

[mr freddo:]

Thank you for the interesting book review. Although it is popular to hate bankers these days for good reason, it is important to remember the positve role that finace plays in a prosperous society. But we learned in the depression that finance must be regulated to be successful. When we repealed glass steagall, we unfortunately forgot that lesson. Greed is a powerful force with a short term perspective.

Feb 15 10:04 PM

[Moon Kil Woong:]

And the Boston Tea party.

Feb 15 10:04 PM

[Jim Hawthorne:]

otbriki! You have an extremely narrow, pedantic, and self-serving viewpoint of history!

Every single one of these empires fell due to over extension! Now, this is interwoven with "financial over extension' whether the empire in question was slave, feudal, mercantile, &etc. based! Unless you live in an isolated island universe, where every event must of necessity have but a single, solitary cause; or believe that only some mysterious universally agreed upon major cause is of any importance, then there is NO form of over extension worth talking about that does not find itself intricately related to financial over extension!

You strike me as a word-game freak and a poor excuse for a sophist!

Empires fall because out of the blue comes a force or an agent that magically appeared to vanquish it??? For some quaint reason it suddenly lacked the financial resources to repel it??? You have the ignorant audacity to infer that Rome survived a few economic crises and yet, with oodles of cash on hand failed to man the barricades with the barbarians at the gates??? The Tartar Empire suddenly ceases to exist by your fiat? (Their long-suffering, slaughtered neighbors might object to your dismissal of the Tartar Empire being non-impressive!)

You play with facts as if you have an exclusive right to them!

Expand beyond Google and do a little serious reading! You think you know a lot of 'what's' but you are shamefully ignorant of the 'why's'!

On Feb 14 06:44 PM otbricki wrote:

> None of these are empires that failed due to financial over extension.
>
>
> Babylon was conquered by Alexander the Great.
> Egypt fell mostly because of a great famine caused by the Nile failing
> to flood for several years.
> Greece never really had an Empire
> Rome lasted for 1000 years in the west until Germanic tribes sacked
> Rome and broke the aqueducts in 357. The eastern half of the Roman
> Empire lasted until 1450 (total 2000 years) or so when it was conquered
> by the Ottomans. Rome went through several economic crises and survived
> them all just fine.
> The Tartars are an ethnic group originating in Mongolia. Never had
> an Empire.
> The Caliphate was destroyed by the Mongol Empire when they conquered
> Baghdad.
> France lost their empire when Napoleon was defeated at Waterloo.
>
> Austria-Hungary was destroyed by WWI. It was highly divided by ethnic
> tensions during it's short existence. Would have fallen apart anyway
> because it was ungovernable.
> The Western half of the British Empire i.e. the US and Canada is
> still going strong.
> Soviet still has an empire, they just had a setback and are now look
> like they are on a comeback. The same people are still in power i.e.
> ex-KGB
>
> Empires don't fall because they get overextended economically. Economics
> goes in cycles anyway. Look at the US - Civil Wars, several big depressions,
> etc. No problem. It takes an outside force to destroy an empire.
>
>
> On Feb 14 02:09 PM Jim Hawthorne wrote:

Feb 15 10:18 PM

[srw:]

"The basic idea Ferguson is presenting to the world is that the underlying problem in the financial crisis is too much outstanding debt."

My (humble) basic idea is that the problem is called corruption. Corruption is not only about bribes, but when you lie, you're in a power position, and you deceive others who have your trust.

Feb 15 10:28 PM

[mac.barron:]

Just lobbing a Molotov here, but what do the alphas have to say about the Government issuing a statute cutting ALL interest rates on consumer mortgages and debt in half and freezing them at those rates for the next five years?

I'm certainly NOT saying that I think it is a good idea or the "right" thing to do; I am just curious to see if any debate follows.

Feb 16 12:05 AM

[growser7:]

It has been argued that the western Roman empire fell precisely because of a financial collapse caused by spendthrift emperors. I think it was in Johnson's "Modern Times" that it was pointed out that the last time the world saw hyperinflation to the degree seen in Weimar Germany was in 3rd century Rome. In Gibbon's Decline and Fall, there is a pathetic description of a bankrupt Rome that couldn't repair its city walls, rebuild aqueducts or drain the malarial swamps around the city. As for the barbarian forces, they were probaly not as large as the ones faced by Marius in the Republic. As an example, the Vandals probably never numbered more than 50,000; they prevailed because Rome was too broke (financially and morally) to defend itself. Interestingly, the city of Rome was destroyed by Romans, not barbarians; the citizens were too broke to quarry and instead stripped their public buildings for stone. The Barbarian emperors actually posted guards to protect the city they had conquered, but to no avail.

One theory holds that the "Dark Ages" were not so much the result of the "barbarization" of Europe but rather the collapse of the ancient world's captial structure. A vigorous civilization, when conquered, often conquers the conqueror---not so with western Rome. The Renaissance occured when enough capital had been concentrated by the Italian merchant class to fund the artists and thinkers of the day.

Too bad it took 1,000 years to get the capital structure back.

Feb 16 12:49 AM

[ZDB:]

"My (humble) basic idea is that the problem is called corruption. Corruption is not only about bribes, but when you lie, you're in a power position, and you deceive others who have your trust."

This is why light needs to be used and not government money. We don't need the government to go out and act as a crusader we need the government to keep our roads and bridges up. With the problems on Wall street the answer is not calling for more rules but for the rules to be followed. We shouldn't be asking for the business men to go to jail for making profits, we should be asking for transparency. And we shouldn't be handing out money from the treasury that we don't have, FDIC should be reinforced and let the banks fail. Let the companies who depend on short term financing to make payroll fail, let the vultures come in and do what they do. We need the weak companies to die, we need the strong to be able to compete with the global markets not propping up these failed companies that can't turn a profit.

As for the regulation on pay, put the salaries and bonuses of CEO and board members into the hands of the owners of the company, the shareholders.

Feb 16 01:02 AM