I was really hoping I could recommend The Ascent of Money by Niall Ferguson as a kind of catch-all Beginners book, in the spirit of my Beginners articles. Its subtitle is “A Financial History of the World,” after all. But I have to say it fell short of my expectations, although it would still make a nice gift. And although it has 360 pages, the spacing is wide and the margins are big, so you could buy it in the morning, read it in the afternoon, and still wrap it up in time for Christmas.
The book proceeds through a series of historical lessons, one for each major asset class – money (meaning primarily bank credit), bonds, stocks, insurance, real estate, and “international finance.” And there is certainly a lot of fascinating history to learn in there. For example, although I spent seven years dealing exclusively with insurance companies, and I knew about the usage of insurance in early Renaissance Italy, I had never read the story of the Scottish Widows’ Fund, the first true insurance fund designed to be self-financing in perpetuity. Nor did I know how Nathan Rothschild made a fortune betting that UK government bonds would rise in the years after Waterloo (because the government’s need for borrowing would decline). And the book does touch on many of the historical parallels you have probably been reading about during the past few months, from the Great Depression to the S&L crisis to Japan’s lost decade and the emerging markets crisis of 1997-98. Ferguson is also an excellent writer, and even your friends and relatives who are less excited by topics such as bond yields and the money supply will probably find most of it enjoyable going.
But the problem is that the book is just too short. Niall Ferguson made his reputation writing some very big books about considerably smaller topics. Reading this smallish book about an enormous topic, I got the feeling that he wasn’t allowing himself enough pages to deal with each topic in the depth he would have liked. This has two consequences. First, even though he is clearly writing for the general reader, there are places where he doesn’t take enough care to define his terms, and where he is bound to lose large parts of his audience. For example, describing the capital structure of what would become the Mississippi Company, which mixed new shareholder’s capital, billets d’etat issued by Louis XIV, and perpetual bonds, he lost me. So if you really want to understand the shift of European governments from confiscatory taxation to borrowing, you’ll need to look elsewhere.
Second, The Ascent of Money necessarily treats in just a few pages topics on which entire books – and quite long ones, sometimes – have been written, and if you’ve read those books, you’ll find the summaries here pale by comparison. For example, Ferguson makes Enron (on which see The Smartest Guys in the Room) into an emblematic bubble company (“the Mississippi Company all over again”), the bubble this time inflated by cheap money, courtesy of the Federal Reserve. I think calling Enron a bubble company is a only part of the story, since much of what it did – dating back to the early 1990s – was accounting fraud that needed no bubble to exist (although the bubble certainly magnified the scale of the take); Pets.com would be more of a pure bubble company. Similarly, Ferguson’s account of Long-Term Capital Management emphasizes the quantitative arbitrage premise of the fund; but the big bet that killed LTCM was not arbitrage by any means, but a one-sided bet against volatility – a bet that was informed by quantitative analysis (volatility was high, so LTCM thought it would go down) but was ultimately a gambler’s bet, as described in When Genius Failed.
As for the current crisis, Ferguson had the fortune or misfortune of finalizing the book in May, and so missed out on the events of the last few months. At the time he was writing, it still seemed like the crisis would only hasten the day when China would overtake the U.S. as the world’s largest economy (“at the time of writing Asia seems scarcely affected by the credit crunch in the U.S.”). Which, of course, only shows how unpredictable the events of the last four months have been, that China is now facing its most serious labor unrest of the last ten years. Hey, I didn’t see it coming, either. As a historian, the narrative he wants to tell is one of a shift in the balance of economic power from the U.S. to China. Of course, it still may happen – we just won’t know for a couple of decades, at least.
The Baseline Scenario 