by das monde
Tue Sep 1st, 2009 at 05:50:28 AM EST
This is a review of Niall Ferguson's book
The Ascent of Money: A Financial History of the World.
The same story is put into televised series. The author is a contentious historian, known also for two volumes The House of Rothschild, and for the touch apologetic Empire study. Recently he got involved in a debate with Krugman and others over Obama's economic policies.
I find the historical part of the book very good (not like The Economist). At some point Ferguson laments large financial ignorance of the public - but there is not much supply of coherent lay explanations or open educative information either. Ferguson's book gives a relatively transparent history of money and quite a lot of accessible explanations, filling quite a few "self-evident" gaps. On the other hand, a number of jumps in financial terminology or arguable "common sense" are still present. On balance, the book looks very useful for these times.
In Credit We Trust
One striking realization from the first chapters is that money (in this world) is not defined by the widely presumed functions of exchange mediation or wealth storage. This is well demonstrated by the story of Spanish conquest in South America. After the band of Francisco Pizarro routed the Inca army of Atahuallpa, the Spanish were grabbing tons of gold and silver beyond their original fancy. They even found a mountain of silver ore, Cerro Rico, and crippled generations of local Indians for extraction of that silver. But the abundance of precious metals did not make Spain supremely rich or powerful. Contrarily, Spain suffered the first big inflation, and the Spanish crown even went into deep debt. In contrast, the Dutch and British colonial empires expanded thanks to basic financial innovations (joint stock markets, exchange and clearance banking, central banking, fractional reserve system).
The defining property of money is credit assertion. Right from the Babylon times, transferable notes of credit claims were issued - and that is what money is to this day (most of the time). Collecting money means collecting credit claims. The fundamental unit of value appears to be a credit claim or expectation. The significance of precious metals (and real estate) in financial transactions is that usually these are accepted as most reliable collateral, merely.
Even if modern dollar bills are promised to be nothing more but "legal tender", all paper and electronic money originates (more or less exclusively) as credit in this world. Just recently, a lot of new money originated from the infamous subprime loans and the boom of leveraged credit. It became once more clear that waves of credit expansion do not have to be objectively related to the state of material productive relations and needs of economic exchange. We are facing an exceptionally big mismatch between financial fancy and the real world.
Even when we talk of governments "printing money", the actual mechanism is that a government borrows money from its Central Bank in exchange for treasury bills and bonds. It takes two to tango: the government prints its promissory paper that bankers and investors would value; the Central Bank delivers the banknotes. The money is covered by new ongoing credit bonds.
There is definite logic in the "money as credit" definition. It appeals to a certain will of cooperation, trust and common expectation of future between a creditor and a borrower. Such a relation is absent in nature. But there are caveats. For one thing, the powers and potential reputation of creditors and borrowers differ markedly. A debt default is a big shame, while the business of vulture funds ripping developing countries for excesses of their earlier dictators is not questioned. A lot can be sacrificed in the ongoing crisis, but not interests of big creditors. Secondly, the level of trustworthiness of a borrower or a project is determined by the will of creditors, and this is not a democratic process. Even if a majority of us were proud creditors or investors, the size of fellow fish differs markedly. Seldom are the questions asked, how powerful are the biggest bankers, what they do with "hard earned" wealth, or who owns those mountains of public debt.
Do Bankers Rule The World?
Ferguson's history also shows that the banking or lending business is a double-edged sword. At different times, you should be prepared both for high society looks and duties, and for rough power and shrewd politics to collect your credit. Failure risks are big, but a few winners could gain enormous power. The first banking practices in the medieval Europe were quick failures, mainly because only ethnic minorities were doing it. But then the Medici raised their fortunes and got significant control of Italian city states.
Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers; a small-time clan notable more for low violence than for high finance [pg 43]
By the time Pius II became pope in 1458, Giovanni's son Cosimo de' Medici effectively was the Florentine state. As the Pope himself put in: "Political questions are settled in his house. The man he chooses holds office... He it is who decides peace and war and controls of laws... He is King in everything but name." [pg 44-45]
In the post-Napolean Europe, the Rothschilds dominated bond markets of many European governments, from England to Prussia, from Russia, Austria to Belgium. They were in power to determine which ministers to appoint, or which wars were to be fought.
The liberal historian Jules Michelet noted in his journal in 1842: "M. Rothschild knows Europe prince by prince, the bourse courtier by courtier. He has all their accounts in his head, that of courtiers and that of the kings; he talks with them even without consulting his books" [pg 91]
Ferguson even mentions the story of Nathan Rothschild earning the first huge wealth from speculation on the outcome of the Waterloo battle. Ferguson dismisses it by asserting that decisiveness of Waterloo "nearly ruined" the Rothschilds, but they successfully gambled their "superflous" wealth on British government bonds that recovered by more than 40% by late 1817.
How influential and self-serving are the financial elites now? How much are public officials beholden to them? How much those exclusive bailouts were necessary? Did the financial sector become a big rentier of all economic activity?
The crisis now
Ferguson illustrates (rather speculatively perhaps) how the first financial bubbles, policy failures or creditor fancies influenced the French Revolution, the American Civil War and other important events. Ferguson also dives into emergence of the current crisis - he even claimed that the book was an attempt to provide context for this crisis. His emphasis is on the triggering collapse of subprime mortgages and on Chinamerica - the so-far cooperative relation of Chinese "savings glut" and American consumption. His insights and journalistic skills are worth attention. But however smart were our anticipations, or however skillful is the writing, the debate about this crisis is far from over. Too often very important and obvious questions are ignored. Why was it long decades of Freddie Mac and Fannie Mae activities the main culprit of the suprime bubble, not the swift rise of "Countrywide" and investors' surge for CDOs and other debt derivatives? How much of the supra-material growth of Planet Finance was ever to be sustainable? When would largest consumer or state debt problems ever be solved? Ferguson even mentions George Soros' historical superbubble theory. If this crisis did not happen because producing companies became inadequate in technological innovation or product design, it is perhaps then the modern monetary system is more a problem than a necessary "engine" of economic growth.
The credit games really got out of hand. Financial services are valued disproportionally more than human labor or nature goods. But implicit promises to every investor were bogus. Say, the latest pension policies probably constitute the largest sham or folly ever - at least in the number of effectively duped people. To solve the crisis globally or locally, some political or "textbook" economic tabus may need to be broken, as many financial mechanisms and effects (including hyperinflation, deflation, or sustainability of public policies) are still obscure enough.