Interest in finance?
When I read sentences like “Equity volatility hit 29 per cent,” or texts that seem to associate to the words “security”, “collateral”, or “leverage” some entirely different meanings than I do, I shut down. I stop reading. In the world of modern finance, I am illiterate.
And for a long time I felt entirely comfortable with that. I feel happy not having to worry about how I might I have been slightly richer if only I had invested in this or that slightly better stock. But then the world-wide financial crisis happened, and I resolved to improve my financial literacy. Not to become a stockbroker: to improve my understanding of the world I live in. After all, being able to read (books) exposes me to the world with all its worries, too, yet I wouldn’t want to be illiterate.
That’s why I started reading Niall Ferguson’s The Ascent of Money: A Financial History of the World. In the words of the editor, on the back cover:
With the world in the grip of the biggest financial crisis since the Great Depression, there’s never been a better time to understand the ascent — and descent — of money.
Early financial innovations
There is a lot of interesting and instructive financial history. The Medici family helped spur the Renaissance and overcome the Catholic Church’s prohibition against usury, simply by becoming good and successful banchieri: meticulous bookkeeping, embracing foreign currencies, diversification of the business. The Spanish conquistadores who swamped Europe with silver from Potosí’s Cerro Rico learned the hard way what inflation is. Shakespeare’s Merchant of Venice illustrates perfectly the inherent imbalance between debtor and creditor: like it or not, any creditor who wants to stay in business is forced to be harsh and unforgiving. Demanding a pound of flesh as collateral, as Shylock did, is certainly harsh, but otherwise how could he ascertain repayment of his loan? The Dutch Vereenigde Oostindische Compagnie achieved unparallelled success in the trade of Asian spices through a new business formula: the joint-stock company — which naturally gave rise to the world’s first stock markets, and the first stock exchange in 1608 in Amsterdam.
Early financial innovations such as banks and joint-stock companies with tradeable shares enabled people to achieve successes which they — arguably — otherwise wouldn’t have.1 Access to a good banking system means that it is easier to invest in the future. Joint-stock companies can achieve grander results than others, because they can reach a critical size that may be necessary for success. Perhaps that’s why I loved the first half of the book.
It gets more complex
Subsequent innovations are no less intriguing, and some are accompanied with fantastic stories. That of Nathan Rothschild, for example, who in the months leading up to Waterloo was charged by the British government with providing Wellington with heaps of much-needed gold coins. When Wellington defeated Napoleon much faster than expected, Rothschild was sitting on a mountain of cash that wasn’t needed anymore. Then he made an unprecedented gamble: he bought vast quantities of British government bonds. For over a year, the bond prices kept rising, and at their peak price, Rothschild sold — and became extraordinarily rich.
Or that of the eighteenth-century Scots Robert Wallace and Alexander Webster, who created the Scottish Ministers’ Widows’ Fund, the world’s first insurance fund: smart application of statistics made them highly successful. Or the birth in the 1870s of the first hedge fund, the Chicago Produce Exchange, which allowed farmers to hedge themselves against future low crop prices.
These types of financial transactions clearly deliver value to the parties involved in them. But what of the rest of society? For example, did Argentina, in their recent default crisis, have a point in calling the “holdout” creditors “vultures”? Or were those hedge funds merely present-day Shylocks — beneficiaries of a well-oiled financial system, forced to be cruel by the very nature of the service they offer? They definitely followed the logic of the system: do crises like these illustrate that the system is crooked?
The second half of the book was increasingly thick on the very terms that always bogged me down: derivatives, hedge funds, collateralized debt obligations, etcetera. And at the same time I found the text increasingly less instructive and increasingly poor in perspective-taking. I expected to learn how economies fare, how people fare, as a result of modern finance; not just what the two sides of any financial deal make out of it, or which bubbles took which people by surprise.
This kind of outsider’s perspective, or moral evaluation, is lacking from the book; Ferguson merely reports events. He ends with an evolutionary perspective on finance — the “best”, “most evolved” financial systems have always survived — but to me that stinks. Evolution happens whenever there is change and non-random survival: this is true in finance as in biology. But in finance, it is us, moral beings, who drive the change: thus we can, and should, evaluate and judge the systems we create. And it seems clear to me that Ferguson judges our neo-liberal world much more approvingly than I do.