Niall Ferguson gives us an important and readable history of the financial institutions that have shaped the world.
In his introduction, Ferguson shares some startling statistics: horrendously high percentages of Americans have demonstrated gross ignorance of how their credit cards work and a majority fail to understand the foundational concept of compound interest. A disturbingly large minority of respondents in Britain could not determine whether a £30 discount were better than 10% off £250, nor could they appreciate the impact of an inflation rate higher than their savings account’s interest rate.
We cannot afford such ignorance:
Despite our deeply rooted prejudices [against financiers], money is the root of most progress. …Financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evolution of credit and debt was as important as any technological innovation in the rise of civilisation…
…Behind every great historical phenomenon, there lies a financial secret…
Ferguson, in a brief, but compelling narrative, demonstrates the financial forces behind the lasting influence of the Roman empire, the Crusades, the fall of the Aztecs, the European Renaissance, the fall of the Spanish empire, and so on.
The core of his book traces the history of coinage, bonds, stocks, insurance, the politically driven push for home ownership, and finally the growing tension in America’s financial system and the concurrent rise of China.
Ferguson, a historian, himself identifies three key lessons from his study:
- Poverty is more a product of non-existent or inefficient financial systems than of financial magnates’ supposed greed.
- “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like.”
- Accurate financial predictions are impossible due to the complexity of the system’s “non-linear relationships”.
One of Ferguson’s salient points is that the success of any monetary system—be it specie, banknotes, electronic, stocks, bonds, or conch shells and colored beads—is fundamentally based on faith in the system; and that disruptions of that faith manifest in financial crises.
Ferguson points out that a relatively small disruption—the defaults of some ‘sub-prime’ mortgagors in the United States—precipitated a crisis of confidence that shuttered several major American banks and corporations and innumerable smaller institutions, prompted an out-of-the-history-books run on the bank in England, and bankrupted the nation of Iceland.
If we would avoid the collapse of our civilisation, we must learn the lessons of our financial history. Ferguson has given us an excellent primer. Reserve a place on your bookshelf for this one.