The Ascent of Money - Niall Ferguson

The Financial History of the World

The Ascent of MoneyThe overarching theme of Niall Ferguson's 'Financial History' was Darwin's insight; the natural selection of synergies of specialisation & scale ...

Evolutionary Economics -

Evolutionary Economics explains the unleashing of a process of technological & institutional innovation involving the generating & testing of a diversity of ideas which discover & accumulate more survival value for the costs incurred than competing alternatives.
The evidence suggests that it could be adaptive efficiency that defines economic efficiency?

This was not analogy this was ontology.   

 1 - Dreams of Avarice  

From Shylock's pound of flesh to the loan sharks of Glasgow, from the 'promises to pay' on Babylonian clay tablets to the Medici banking system. Professor Ferguson explains the origins of credit and debt and why credit networks were indispensable to any civilization.

 2 - Human Bondage  

How did finance become the realm of the masters of the universe? Through the rise of the bond market in Renaissance Italy. With the advent of bonds, war finance was transformed and spread to north-west Europe and across the Atlantic. It was the bond market that made the Rothschilds the richest and most powerful family of the 19th century.

 3 - Blowing Bubbles  

Why did stock markets produce bubbles & busts? Professor Ferguson goes back to the origins of the joint stock company in Amsterdam and Paris. He draws telling parallels between the Great Recession and the 18th century Mississippi Bubble of Scottish financier John Law and the 2001 Enron bankruptcy. He shows why humans had herd instincts & Minsky moments when it came to investment, and why no one accurately predicted when the bulls might stampede.

 4 - Risky Business    

Life was a risky business – which was why people took out insurance. But faced with an unexpected disaster, the state had to step in. Professor Ferguson traveled to post-Katrina New Orleans to ask why the free market couldn't provide some of the adequate protection against catastrophe. His quest for an answer took him to the origins of modern insurance in the early 19th century and to the birth of the welfare state in post-war Japan.

 5 - Safe As Houses  

It sounded so simple: give state-owned assets to the people. After all, what better foundation for a property-owning democracy than a campaign of privatisation encompassing housing? Economic theory said that markets couldn't function without mortgages, because it was only by borrowing against assets that entrepreneurs got their businesses off the ground. But what if mortgages were bundled together and sold off to the highest bidder?

 6 - Chimerica 

Niall Ferguson investigated the globalisation of the Western economy and the uncertain balance between the important component countries of China and the US. In examining the last time globalisation took hold – before World War One, there was a notable reversal, namely that money was pouring into the English-speaking economies from the developing world, rather than out.

 Shorter Version 

1 - From Bullion to Bubbles  

Spain mined so much silver from South America (the Incan Empire) that silver started to lose value ... 'Money wasn’t metal — it was trust inscribed'. Fibonacci’s 'Liber Abaci' paved the way for Europe to convert from Roman numerals to Arabic numerals, especially because of business calculations & bookkeeping. The idea of interest came about in Venice from Jewish bankers. The Medici’s were able to by-pass laws against usury interest by charging commission on converting different currencies. War bonds became popular in Florence and other Italian cities. Dutch merchants became rich by purchasing spices in the East Indies and trading them in Europe.

2 - Bonds of War  

John Law rose among the ranks of French financiers and ran the biggest Ponzi scheme in France. The shares of the Mississippi Company plummeted after faith was lost in the Louisiana colonies. Financial troubles caused France to struggle for years, and then revolution began in 1789. Nathan Rothschild became successful in the bond market of England. He then was enlisted by the British government to get gold and silver to the Duke of Wellington in preparation for war. The war eventually ended quickly, and the price of gold fell. American Confederates developed cotton bonds to sell in England to fund their efforts in the Civil War. Once New Orleans fell to the Union, the value of Confederate cotton bonds declined. England stopped investing in the cotton bonds, and the Confederate’s economy became doomed. The British were shipping opium from India to China, which was against Chinese law. When the Chinese confiscated and destroyed the opium, the British Navy was sent to Hong Kong. The Navy crushed Chinese forces and took over Hong Kong, establishing businesses and railroads.

3 - Risky Business                

Hurricane Katrina destroyed New Orleans and exposed problems with home insurance. Two Scottish clergymen invented life insurance for Scottish widows in the 1700s. The world’s first welfare superpower was Japan, primarily to make people more suitable and healthy for being soldiers in war. After Pinochet became Chile’s leader, Chile reformed their pension program in order to allow workers to invest in private pension funds. Ken Griffin and George Soros messed with hedge funds and derivatives.

 4 - Planet Finance         

Fannie Mae was set up to reform home owner mortgages in the 1930s among other New Deal reforms. Racial segregation in neighbourhoods also meant that people of colour had to pay higher interest rates. Empire Loans and Savings ran a real estate investment scam that eventually got too big and blew up. In 1989, Argentina suffered a financial crisis due to hyperinflation. Microfinance loans proved to be a success among Bolivia’s female population. The relationship between China and America, called 'Chimerica', was a prosperous relationship where China lent America large sums of money which eventually got out of control. Too many sub-prime loans were made where the borrowers could not pay back the interest.  

 

Economies that combined all these institutional innovations ... banks, bond markets, stock markets, insurance and property owning democracies ... performed better over the long run than those that did not, because financial intermediation generally permitted a more efficient allocation of scarce resources than hierarchical catholic scholasticism, feudalism or central planning. The financial ecosystem evolved in the West was better suited for governance and for human civilization. Thus the Western financial model tended to spread around the world, first as imperialism, then as globalization, and has been vital for all sorts of progress achieved around the world — from the advance of science, the spread of law, mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap – agricultural, scientific & industrial revolutions.

The history of money was an evolution financial institutions and was thus inevitably complex. This made the adoption of the ‘evolved’ financial system first by the West and them by the Rest a logical and inevitable choice that was the better for the world than all the alternative tried so far.

Elaborate evolutionary metaphors described the history of financial institutions in a Darwinian light. But Darwin's insight described ontology not analogy.

This interpretation described financial history as the result of institutional mutation and natural selection. Random ‘drift’ (innovations / mutations that just happen and survived by natural selection, but) and ‘flow’ (innovations / mutations that were 'caused' by the 2nd law and survived as American practices and then adopted by Chinese banks).

There was also a ‘co-evolution’, of different financial species and cultural social species, which adapted together.

Natural selection (markets) was the driver. Financial organisms were in competition with one another for resources. At certain times and in certain places, certain species increased in population frequency and became dominant. But innovations by competitor species, or the emergence of altogether new species, prevented any permanent hierarchy or monoculture from emerging. Broadly speaking, the law of the survival of the fittest applied in the environment full of complexity, change, conflict & scarcity. Institutions with a ‘selfish gene’ that was good at self-replication and self-perpetuation tended to proliferate and endure. Economic growth from social synergies of specialisation and scale.

Key themes -

a. survived institutions were the ‘fitter’ than the alternatives in the local environment because they survived

b. ‘selfishness’ of institutions/genes are rewarding for the species/humanity in the long run because of social synergies. Underpinned by evolved moral sentiments.

This was not analogy but ontology.

Evolutionary Economics explains the unleashing of a process of technological & institutional innovation involving the generating & testing of a diversity of ideas which discover & accumulate more survival value for the costs incurred than competing alternatives.
The evidence suggests that it could be adaptive efficiency that defines economic efficiency?

From cowry shells to credit default swaps, the worst sort of money except for the alternatives that have been tried from time to time.

 

john p birchall

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