Niall Ferguson has done more than anyone to popularize financial history. Long before Northern Rock sought liquidity support from the Bank of England in September 2007, thereby alerting even the most disinterested observers to the impending collapse of the subprime mortgage market, Ferguson was telling anyone who would listen that to ignore the history of financial innovation was to court trouble. The success of his BBC4 series, The ascent of money: the financial history of the world, confirms that, given sufficient societal anomie, a prophet may indeed find honour in his own country. Without denying him that accomplishment, one might nevertheless enquire how far the companion volume by the same name makes a significant contribution either to historical scholarship or to the scarce supply of accessible textbooks on this subject.
Ferguson's main thesis, which he expounds in the introduction and the first five of the six chapters and the ‘afterword’, is that the history of financial innovation can be likened to that of Darwinian evolution. As underlying material conditions change, new ecological or financial environments disrupt the old equilibrium by favouring different adaptations. Spontaneous mutations that hitherto had been harmful suddenly confer a survival advantage or at least achieve neutrality. This produces a staggering array of new organisms or financial products; over time, those that survive do so because they maintain either an absolute competitive advantage or, as is more often the case, a high degree of suitability to a particular niche. Ferguson's ominous warnings about prospects for speciation and even mass extinction leave little to the imagination.
None of this is particularly original, as the occasional nods to Veblen and Schumpeter acknowledge. Yet Ferguson updates the science, by taking on board Stephen Jay Gould's ‘punctuated equilibrium’, and develops the extended metaphor with relish. The problem is that this is interpretation not explanation; whether you love Ferguson's analogy or hate it, his rhetorical strategy leaves no room for reasonable disagreement. The historical examples he offers – Spanish conquistadors, Medici banking, John Law's Mississippi Scheme, N. M. Rothschild's Prussian Loan, Hurricane Katrina – are just set-pieces chosen to illustrate the central insight. Much like Smith's pin factory, Marx's labour markets, Darwin's moths, or Freud's Moses, the facts of the business are not actually the point.
Most readers (especially student readers), however, are unlikely to realize this, which is where the defects of Ferguson's historical accounts become serious. On subjects about which Ferguson is an authority, nineteenth-century European bond markets, for instance, his explanation is excellent. But his narrative of the role of cotton in the American Civil War is less reliable and that of Latin American debt default almost incoherent. The least historically accurate chapter, on equities, is sadly also the most important to the overall argument. After an engaging and revealing account of the origins of the Dutch stock market, Ferguson's exploration of John Law's scheme is simply mistaken, or, at best, oversimplified. Ferguson downplays the original debt conversion scheme, whereby holders of government debt (the billets d'état mentioned in passing) could convert them into shares in the company. For most investors, participation in the conversion scheme was a ‘flight to quality’. Law's acquisition of the mint, his obtainment of a royal charter for his bank and control of direct and indirect taxes, and his access to the Regent undermined the value of alternative investments. For those interested in the details, Larry Neal's account in the Rise of financial capitalism is far more persuasive. That Law manipulated the Regent and the market is undeniable; but in characterizing the Mississippi Scheme as a stock bubble, Ferguson's story all but ignores the essential ingredient.
While people did lose money in John Law's scheme, there exists no reliable evidence for widespread economic hardship in its wake. There is even limited evidence to the contrary. The collapse did, indeed, turn the French off stock markets and made them suspicious of banks. But to suggest, as Ferguson does, that John Law single-handedly retarded the sort of financial reforms in eighteenth-century France that might have averted the French Revolution is to overstate his case vastly. His conclusion to chapter 3 will bewilder students and specialist readers alike.
An otherwise admirable account of the history of insurance in chapter 4 is marred by a thinly disguised attempt to apologize for disastrous neo-liberal policies in Chile. Nor can a naïve reader be expected to understand why Ken Griffin's Citadel Investment Group becomes, for Ferguson, paradigmatic of hedge funds, especially in a discussion which otherwise pitches them as an extension of CTAs (commodity trading advisers), whose activities still today remain limited to exchange-based trading. Similar objections might be made to the discussion of housing markets and the subprime industry in chapter 5. The discussion, rife with moralizing, lionizes relationship banking and microfinance, without acknowledging the difficulties single women, unmarried couples, and religious minorities had obtaining mortgages in the Anglophone world even two decades ago. There are two sides to this story. Ferguson tells the one that suits his narrative arc.
But the real difficulty is the sixth chapter on ‘Chimerica’. On one level, Ferguson simply echoes what Jeremy Siegel has been saying for years. Standards of living in the western world have been, and will continued to be, supported by the savings glut in the developing world, particularly East Asia. This is more relevant than it was two years ago because of the wave of public borrowing necessary to finance the last round of banking bail-outs. Yet what Ferguson has to say about them again comes by analogy. His discussion of the collapse of Long-Term Capital Management, while not inaccurate, suggests that the credit derivatives meltdown was simply a malfunction in the Black-Scholes model, but writ large. This is all very amusing as cocktail chatter, but it will not help students understand the current financial crisis, much less the unprecedented contagion to the real economy. And what is true of his discussion of LTCM and subprime is also true of the book as a whole.
