Sunday, July 12, 2009

From Shylock to Soros - The Ascent of Money

The demand (and glamour) of economists is counter cyclical. When times are bad, economists seem to be coming out of the woodwork. Economists who were well-known only in some academic cliques suddenly become subject of water cooler conversations. The extraordinary economic environment we are living in these last two years has been like manna from heaven for the dismal science. In my continuing search for good books on the macro-economic story of the times, I have crossed paths with some pretty strong characters this year - Paul Krugman, George Soros. Love them or hate them kind of guys, though remarkably close in terms of their prescriptions for solving the economic malaise of the present. Niall Ferguson is a similarly strong personality, and his views on the solutions are markedly different from Krugman or Soros.

[Interesting aside: Are you looking for a thoughtful discussion between stalwarts on The Crisis and How to Deal with It? Read this one between Krugman, Soros and Ferguson, with the other superstar of the times Nouriel Roubini thrown in. Informed, opinionated, fun.]

Ferguson is, by all accounts, an academic of considerable stature. With The War of the World and Empire, he has created quite a reputation for himself as a thinker of note on matters of economic and financial history, and on empire states. The Ascent of Money, published earlier this year, has quickly reached must-read status amongst the financial community. I am always somewhat wary of such books, and start with a somewhat suspicious bent of mind. I am glad to say The Ascent of Money deserves its early fame.

The Ascent of Money is a history of the financial world. It is split into six chapters, one each explaining the history of banking, bond markets, stock markets, insurance, real estate markets and the globalization of capital markets. The chapters are extremely well researched, informative, and compellingly written. His story starts in earnest with Jews in sixteenth century Venice, providing commercial credit sitting on their benches, their banci. They gain their inglorious reputation with the bard's depiction of Shylock in The Merchant of Venice. And that this just the beginning. Of an oft besmirched reputation; of a powerful group of professionals working with money and trust; of a tightening link between political and economic histories; and of Ferguson's tale.

Among the most interesting parts of The Ascent of Money are the pieces where Ferguson goes behind the scenes of familiar political history and unravels the financial story that led (at least in part) to the outcomes that we read in history books today. Like the role of the bond market in the South's fall in the civil war, or the roots of Germany's hyperinflation in the days leading up to the second world war. And he has some memorable quotes to help us along on the ride - "Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon." Which reminds me - How is Zimbabwe doing recently? Maybe the topic of a later post.

I am a banker who is also an active (if amateur) investor in the stock markets. So it was a bit surprising to me that the two chapters of the book I found least compelling were the ones on the history of banking, and of stock markets. The two most powerful chapters were certainly the ones on the bond market and on the real estate market ('the home owning democracy', as Ferguson calls it). Worth the price of the book just for those two chapters. And again, there are some memorable one-liners to help the story along - like this one from a Savings & Loan regulator of old - "the best way to rob a bank is to own one." Take that, Uncle Sam.

Ferguson is known for his stance that history is an inexorable march towards the present. His belief is that things could have gone many different ways, and some personalities just happened to intervene in a particular way, which led us to this today rather than something entirely different. The Ascent of Money takes a similar line. It doesn't feel like something that is moving in the one direction of time's arrow.

One little nit - The six chapters do a great job of explaining the story of the six financial institutions. But they do it in silos. It's as if the evolution of the stock markets had nothing to do with the existence of bond markets, or of insurance, or anything else. I am guessing it was a necessary simplification to show us the threads by themselves. But at some level, I guess I would have liked to see the interweaving pattern as well.

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