The Ascent of Money: A Financial History of the World, Niall Ferguson, Penguin Press (2008).

 

This is a 20,000-foot history of the global financial system (money, banks, corporations, insurance companies, hedge funds, etc.), with some diverting extras such as the origins of the Andes and of the game of Monopoly. Complex details and situations are conveyed in terms the average reader should be able to understand. I found the book interesting and eminently readable.

 

 But do not expect a comprehensive explanation of the current turmoil in global financial markets, complete with a game plan for getting things back on track.  Mr. Ferguson may have some ideas about what needs to be done, as many of us do, but offering solutions is not the point of the book.

 

Financial systems have come a long way since the clay tablets that served as a form of money in ancient Babylon.  The author portrays the development of these systems as playing a key and generally constructive role in the progress of the human race – meeting individual needs, undertaking ever larger-scale and more sophisticated activities, and determining the winners in inter-group competitions (peaceful or otherwise).  If anything, I would say Ferguson overstates the case, seeing innovations in finance as driving progress in other areas when it could be the other way around.

 

As is also explained, financial systems are complex, interactive, and dependent on confidence that things will work as expected. Many things can go wrong, e.g., the government may create too much money (or too little, which is also bad), lenders may find themselves unable to pay due to circumstances beyond their control, investors may realize that the values of their holdings are overstated and rush for the exits, etc.  Once a loss of confidence occurs, the situation can easily spiral out of control. 

 

There have been periodic financial crises in the past.  “Like an Andean horizon, the history of finance is not a smooth upward curve, but a series of jagged, irregular peaks and valleys.” With the best will in the world, there is every reason to expect new crises in the future.

 

Do not look to “experts” to find the best economic path, for they are often wrong.  As the debacle at Long Term Capital Management in the 1980s illustrates, even the brightest financial minds can miscalculate.

 

Do not rely on “the wisdom of crowds” to get things right, because “serious students of human psychology will expect as much madness as wisdom from large groups of people.”  

 

The best hope may be to study the history of finance, which identifies ideas and/or patterns that have spelled trouble in the past and serves as a reminder of the degree of volatility to be expected.  Such an exercise is no panacea, however, because the next crisis may involve a new twist or develop along different fault lines.

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