08 January 2011

Book Review

The Ascent of Money by Niall Ferguson

Economics and finance, to most people, are incredibly boring subjects.  Indeed, they are dismal sciences to most.  I suspect it has something to do with the nigh-incomprehensible jargon and lack of narrative that these subjects tend to have.  However, these two subjects address the fundamental meaning of the modern business world, of which most people are part.

Given the general unattractiveness of these subjects, it should come as a relief that there are rather painless ways to be introduced to them.  For economics, I recommend Henry Hazlitt’s Economics in One Lesson.  For finance, I recommend Niall Ferguson’s the Ascent of Money.

Ferguson’s work is intriguing and masterful, in that it weaves a fascinating narrative of the modern financial institutions, such as insurance or banking.  More importantly, it connects readers to the rise of these institutions through the people who created them.  Naturally enough, the book is fairly limited in nature, since a comprehensive look at any one aspect of finance would fill several volumes by itself.  Nonetheless, the book serves as both a primer for the novice and a refresher course for the expert.

There are only six chapters to the book, and each looks at a specific aspect of finance.  The first chapter addresses, quite naturally, the whole concept of money.  Money has not always been used by humans, but it has been used long enough to feel like it’s always been around.  Traditionally, gold and silver have been the currencies of choice.  In recent times, though, there has been a switch to fiat money: currency that is not backed by any tangible asset, but rather faith in the currency itself.  Hopefully, it comes as no surprise that fiat currencies are enforced by the governments that create them.

Ferguson then deftly moves on to the bond market.  Government bonds are among the earliest instruments, and have played a major role in world events, most notably the Napoleonic wars.  In addition, since bonds are generally considered a more secure investment, they tend to have lower yields.  As such, they are particularly sensitive to inflation.  As detailed in the book, too many governments have discovered for themselves the hard way just how detrimental inflation can be to their nation.

The discussion of inflation segues naturally to the history of market bubbles.  No primer would be complete without exploring the Holland tulip bubble, which is where chapter three starts.  John Law, a Scotsman, plays an integral role in this matter, and Ferguson does an excellent job of weaving him into the historical narrative.  Of course, investors and policy-makers have ignored this lesson time and again, as seen in the tech bubble of 2000, as well as the recent housing bubble.  The man lesson to take away from this chapter, it seems to me, is that if anyone says that an investment is a sure thing, the best course of action is to nod politely and then run away as fast as you can.

The book next turns to the history of insurance.  Though the idea did not originate in Britain, it certainly took off there, which helps to explain the global dominance of British insurance firms, like Lloyd’s.  Interestingly, the Brits are the most insured people in the world.  In addition, the Brits were among the first to adopt “social insurance.”  This sort of insurance was administered only to the truly needy, at least in the beginning, and recipients of the benefits still faced a rather harsh life.  This was the model for a long time, though it became increasingly liberalized the world over.  Then Milton Friedman’s Chicago school saw an opportunity in Chile to bring radical privatization to the public insurance realm.  Surprisingly, they were able to pull off their audacious scheme, which appears to have enabled Chile to surge ahead of their South American peers economically.

Chapter five addresses the history of real estate ownership.  Initially, most land was either unowned or owned by the select wealthy.  In fact, mass ownership, such as is seen in modern America, did not even occur until after World War II.  During this time, land was not so much viewed as a status symbol as much as an investment.  This mindset helps, in very small part, to explain the recent housing bubble, which Ferguson addresses in this chapter.  Unsurprisingly, bad monetary policy coupled with misguided federal policy helped to create the mess that eventually blew up at the end of 2008 and the beginning 0f 2008.

The final chapter is a rather interesting one.  It is somewhat incoherent, thematically, and addresses a wide variety of inter-related subjects.  In the first place, it peeks at America’s economic relationship with China, and then explores the global currency market, taking a look at George Soros in the process.  It then closes with a reflection on the somewhat short life of the American trader.  This jumping around can be forgiven, for the subjects are quite relevant to today, and well-written besides.

In all, the book is an entertaining and compelling read.  Though it clocks in at 442 pages, 84 of which are notes and acknowledgments, it is a rather fast read.  The book does seem unfocused at points, which is to be expected given the breadth of the subject.  Niall Ferguson has done a masterful job with this book, so go out and give it a read.

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