The Ascent of Money
Niall Ferguson’s The Ascent of Money paints a broad, general portrait of the financial strategies and schemes that have emerged since the rise of established trade. He focuses on the global expansion of fiat currencies to demonstrate that “behind each great historical phenomenon there lies a financial secret.” Ferguson traces the lineage of common financial instruments like war bonds, stock offerings, insurance policies, and home mortgages. In doing so, he highlights the occasional abuse that comes with the ability to defer payment and print more paper. Ferguson focuses most of his attention on the western world, specifically Great Britain, France, and the United States by following a tried and true narrative style that goes like this: We all know about stock market bubbles. We can thank John Law and the French government for the first one. Let’s start by taking a field trip back to 18th century Europe to talk about what Law did, before working our way back to the time of Enron, pointing out the similarities along the way.
At times, Ferguson’s grasp of Western history makes the historically illiterate wonder if he’s just showing off by casually referencing nine 18th century dignitaries in just two pages of text; on pages 138-9 (hardback) he manages to toss in at lease one reference to:
- John Law
- Lady Catherine Knowles
- Earl of Banbury
- Victor Amadeus II, Duke of Savoy
- Marquis of Torcy
- Louis XIV
- Duke of Noailles
- Duke of Orleans
- Louis XV
Name dropping aside, Ferguson effectively sheds light on a number of financial dramas that influenced the course of political and military history. While Union victories at Vicksburg and Gettysburg fill up history text books as major turning points in the American Civil War, Ferguson explains that it was Ulysses S. Grant’s capture of New Orleans that turned the financial tide of the war in favor of the Union.
Early in the war, the Confederacy subsidized their war efforts by issuing cotton bonds to stake holders in Europe. These bonds entitled holders to a 7% annual coupon and the right to redeem it at maturity for cotton at the pre-war price. Initially, cotton bonds exploded in value as war time demand for cotton and the South’s ability to restrict the supply of cotton to Europe resulted in cotton prices soaring “from $6.25/lb to $27.25/lb.” In this environment, the price of the cotton bonds continued to rise, “making them an irresistibly attractive investment for key members of the British political elite.”
However, such a scheme hinged on “one overriding condition: that investors should be able to take physical possession of the cotton which underpinned the bonds if the South failed to make its interest payments.” When Grant’s troops seized New Orleans, the ability to move Southern cotton to Europe was all but lost, the value of the bonds plummeted, and the European financial support of the Southern war effort vanished. This was disastrous for the Confederate treasury as their only recourse for paying off their debtors was “to print unbacked paper.” According to Ferguson, by 1864, a confederate ‘greyback’ was worth one cent in gold compared to the union ‘greenback’ which held a value of fifty cents.
Too, the Union would win the war.
Ferguson’s greatest feat comes when he adroitly moves each piece of financial history explored earlier in the book under the umbrella of the emerging financial hybrid between America and China— Chimerica. Chimerica, Ferguson notes, accounts “for just over a tenth 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.” This economic— potentially imperial— construction represents the fusion of western finance and growing eastern economies whereby America outsources labor to China and then buys the finish product. At present, it’s a convenient marriage: America’s managerial quest for cost-efficiency and China’s need to reach full employment presents a pareto improving opportunity for both nations.
Cautiously, Ferguson closes his chapter on Chimerica by raising the question of whether “anything could trigger another breakdown of globalization like the one that happened after 1914?” To this he responds, “the obvious answer is a deterioration of political relations between the United States and China… The scenario may seem implausible,” but Ferguson reminds us of “one important lesson of history… Major wars can arise even when economic globalization is very far advanced and the hegemonic position of an English-speaking empire seems fairly secure.”
He concludes the book on a note of markets-are-perfect-and-comprised-of-rational-agents-capitalism as he suggests, “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.” Strangely, he finds the blemishes in the humans and assumes a single, perfect mirror, free of distortions or odd characteristics that can confuse the beholder. I’m reminded of my last trip to the barber shop when two mirrors across from each other conspired to create the illusion of an ever repeating series of me getting a haircut. While it’s convenient to assume financial markets merely reflect our intent, our intent is often influenced by what we see— a house of mirrors can be rather deceiving.