BOOK OF THE DAY: Michael Caseyreviews The Ascent of Money: a financial history of the world By Niall Ferguson Allen Lane 397pp; £25
NIALL FERGUSON has written a fascinating, accessible, and important book that lives up to its rather grandiose title. It traces the development of money and finance from prehistoric times right up to the present financial turmoil. It goes from cowrie shells to mortgage-backed securities, and everything in between.
Ancient civilisations had to develop money to facilitate economic development; barter was very inefficient. The later obsession with gold and silver, especially by Spain, is an adventure story of exploration and plunder.
The development of credit began in northern Italy where Fibonacci introduced decimalisation and calculations of interest. The first bankers sat on their banci negotiating with ship-owners. The bankers were mainly Jewish because usury was still outlawed by the church - hence the plot of Shakespeare's Merchant of Venice. The notion of charging interest gradually became accepted, given the risks involved, eg ships could sink.
Banking was hardly a sedate profession; five of the Medici family were sentenced to death for capital crimes!
In the 13th century bonds appeared. Governments could borrow money by issuing bonds to investors. The author probably goes a little far by suggesting that England won at Waterloo because the English war had been financed by bonds, whereas Napoleon had to raise taxes.
The 17th century witnessed the birth of the company, equities, and the stock market. Almost immediately there were bubbles, the most extraordinary one being caused by an escaped Scottish murderer, John Law, who from a powerful position in France boosted Mississippi Company shares to the skies. Interestingly, one of the few people who saw through Law's scam was Richard Cantillon, an Irishman in Paris.
Next came the development of insurance and pension funds, though there had been a form of maritime insurance known as 'bottomry' because it insured ships' bottoms! Financial derivatives were developed in the 19th century - at first to safeguard agricultural prices for farmers. This opened the way for more sophisticated instruments, and leveraged finance.
He then deals with the democratisation of property mortgages that gave rise to "civil racketeering" by the executives in the savings and loans financial firms (America's building societies).
The subprime crisis is excellently treated, though its gravity is underestimated.
The author concludes that, despite all of the crises, the western model of finance has fostered economic growth. This may be a little overstated. Many economists would regard money and credit as the oil which lubricates economic activity but not the engine or even the fuel.
Crises tend to recur because each new generation of financiers do not study history. Possibly, but greed and poor corporate governance may be more important explanations.
The author is inclined to glamorise financial derivatives. Many would see these as bells and whistles and not essential to the simple core function of intermediation, ie gathering deposits from savers and lending money to investors. Many would regard the growth of financial services as excessive in most western countries - and possibly a little parasitic.
Areas not covered include the development of monetary theory, the questionable performance of the last chairman of the Fed, the attempt by the IMF to create a single world currency, EMU, offshore banking, and the future of electronic money. But you can't have everything; this is an exceptional book.
Michael Casey is a member of the executive board of the IMF