The Ascent of Money - part 1

I just finished reading Niall Ferguson's The Ascent of Money. This book is a financial history of the world and is fantastic on many levels. The subject matter is highly relevant to today's malaise. It will take a few posts to highlight some of the juicy bits. The scope of this book is stunning, interleaving the rise of various financial innovations and their relationship to geopolitics.

The first noteworthy passage I found was in the introduction:

...poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks.

In light of the widespread fraud and moral hazard of the current era, this is a profound insight. With reflection, it holds up. Finance and credit do perform a vital role in society, but it can, and has, gotten off track.

The Government Bond Market

Following the history of the bond market, which grew out of transferable bonds in Italy, it was surprising to find that bonds financed war more than public works. War bonds issued by city-states, then nation-states, have been used mostly to initiate or defend against aggression. Ferguson covers the rise of the Rothschilds and the incredible fortune made buying and selling British bonds during the Napoleonic wars.

He covers the American Civil War from the perspective of the Union and Confederate bond market. As the value of Confederate bonds fell, their ability to finance the war crumbled.

There is also a nice piece on the German hyperinflation after World War I:

Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country's political economy.

The Germans apparently miscalculated the French response to their money printing and after the French invaded to force collections, the political situation got out of hand. We can see evidence of Ferguson's assertion by looking at the political situation in Argentina over the last couple of decades and Zimbabwae today. Hyperinflation flourishes in the midst of political breakdown.