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A review of The Ascent of Money, by Niall Ferguson
By Jillian McLaughlin
Subprime mortgage crisis, solvency, liquidity, Henry Paulson, Chris Cox, capital gains, preferred stock. The current economic crisis exposed a level of financial illiteracy never fully realized by many in the younger generation. Credit meant our parents paid later. Mortgages, what? And when I first heard the names of Fannie Mae and Freddie Mac, I thought a restaurant chain was going bankrupt (you know, the kind with watered-down coffee and key-lime pie you can buy by the slice). However, with Paris Hilton and Lindsay Lohan ceding the national spotlight to fat, white business executives, the college students of the United States have to similarly re-order their priorities. Understanding finance has never been more important than now, amid one of the biggest economic debacles in the history of the world.
Enter Niall Ferguson, a Harvard professor of financial history, and his timely new book, The Ascent of Money. Banishing financial ignorance is his goal, and understanding the origins of money, banks, bonds, stocks, property, and the globalization of finance is the way for him to explain current complexities. After finishing Ferguson’s comprehensive and entertaining narrative, financial jargon becomes familiar. He explains Enron, the Scottish criminal and financial crook that indirectly precipitated the French Revolution, Italian politics, Scottish loan sharks, and unsavory Texan property developers. And you find out that Fannie Mae and Freddie Mac are nicknames for the longer and decidedly more official- sounding Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively.
To begin Ascent, Ferguson introduces the idea of money and its current form. “We are happy with money we cannot even see,” he writes. “Today’s money can be moved from our employer to our bank account, to our favorite retail outlets without ever physically materializing” (29). The seeming invisibility of money amid complicated financial transactions can make already confusing operations seem utterly incomprehensible. But as Ferguson points out, money at its root is a simple idea. He writes, “The intangible character of most money today is perhaps the best evidence of its true nature.” From clay slabs to gold to paper, money has undergone more physical transformations than Michael Jackson, but the core remains. Money is “trust inscribed” (30). No matter its form, money stands for a certain value and its validity arises from people’s willingness to recognize it as such. Many people think that paper money had value because it was backed by the gold standard; each bill stood for a specific gold amount held in the national treasury. In fact, to say that the dollar derived its value from gold is to confuse the origins of money–money is about the value humans place on it. Value is placed on gold because people hold gold to be valuable. Nothing is intrinsic in finance.
From money’s humble clay-tablet beginnings, various financial instruments arose. The institution that made most others possible is the bank. Initially, at least in the European context, Jews operated many of the banks because they were not allowed to practice other professions. In the Christian faith at the time, usury (lending money at interest) was a sin. Even arguing that it wasn’t a sin was a sin. In the Torah, lending money is also a sin, but a very helpful clause was written in–Jews could lend money to strangers (i.e. Gentiles). Thus, modern banking. The Medici in Florence ended up modifying the bank by skirting around usury laws and instead took a proportion of profit from any ventures in which they invested. Soon, banks proliferated and grew more powerful in their ability to help finance political ventures and, significantly, war.
From banks, Ferguson takes up bonds. Bonds are issued usually by governments to investors who buy them at a certain value with the promise that they will receive interest set at a certain rate. The fun begins when inflation happens and bonds lose their value. Financial instruments are not usually interesting in and of themselves, but in terms of how they interact within the larger social and political milieu.
From stocks to insurance, Ascent traverses social welfare in Japan, boom-and-bust stock markets, and, most relevantly for us, property, traditionally considered one of the safest vehicles for investment. Currently, there are 9,000 foreclosures every day in the U.S. Much of the problem lies in subprime loans. Ferguson focuses his analysis on the lending market in Detroit. Many lenders offered loans with minimal down payments and interest rates that were extremely low for the first two years of the mortgage. Then interest rates spiked, leaving many people with unaffordable mortgages. As people defaulted on mortgages they could not afford, the supply of houses for sale increased, causing prices to plummet. Soon, many people found themselves with mortgages worth more than their houses.
This analysis of the current economic woes is undergirded by an understanding of bonds, which Ferguson explained earlier. Bundles of mortgages were bound together and sold to banks, mutual funds, and other firms as secure bonds that would yield a set amount of interest. Because property is traditionally secure and people tend to make their mortgage payments, the cluster of subprime mortgages looked like it would yield a regular amount of interest. And that’s how the cookie crumbled, so to speak. The predatory lenders did not feel the need to offer more affordable rates because they made money from selling the mortgage to others; these lenders needed neither the capital to withstand buyers’ defaults nor the long-term focus because they did not hold these toxic mortgages.
By the last page, this ignorant college student gained a firm grasp on our current economic debacle, as well as a background in the financial successes and failures of the past. Ferguson deftly weaves narrative, analysis, and quirky facts into a decidedly readable book. If I cannot put down a book on the origins of financial instruments, clearly the book is exceptional. Some of his normative prescriptions reside on the conservative end of the spectrum, but Ferguson is too good an academic to imbibe Ascent with unqualified free market dogma. Instead, he gives a balanced approach which favors deregulation but also acknowledges the success of more progressive financial institutions and areas where regulation should still exist.
For anybody who wants the opaque world of finance illuminated, purchase The Ascent of Money.
Click here to buy the book at Amazon.com
Jillian McLaughlin is an editor and regular contributor to The Kosmopolitan. She writes the blog, “Stuff K Students Like” and writes for the Current Affairs section. She is currently a Junior at Kalamazoo College majoring in political science.
