The Ascent of Money | Niall Ferguson

Summary of: The Ascent of Money: A Financial History of the World
By: Niall Ferguson

Introduction

Dive into the fascinating world of money and finance as Niall Ferguson’s ‘The Ascent of Money: A Financial History of the World’ unravels the story behind the development of the financial system we know today. Explore how the value of money is based on trust, the invention and impact of credit and debit, and the evolution of various financial institutions. Through the book summary, you’ll also gain insights into accessing credit as a path out of poverty, the ups and downs of the stock market, and the consequences of political decisions on the financial world. All of this is presented in a captivating and easily digestible manner, enlightening readers about the crucial aspects of the global financial system.

The Power of Trust in Money

In the 16th century, Spanish conquistadors sought gold and silver to mint coins and increase their wealth. However, the surge in coinage led to the depreciation of its value, revealing that the power and value of money come from societal trust, not physical worth. Money is not valuable because of its intrinsic properties, but rather because people believe in its value. The trust embedded in money also involves central banks ensuring a stable supply of currency while banks protect customers’ assets. In contemporary society, most money is virtual, with paper bills and coins largely worthless without societal trust in their value. The value of money, therefore, derives from the trust placed in it by society.

The Evolution of Credit and Debit

The advent of credit and debit has been pivotal to human progress, standing alongside scientific and technological breakthroughs. Initially, borrowing and lending were prevalent in ancient Mesopotamia, evidenced by inscribed clay tablets. Over time, developments in banking transformed this simple process into the credit system in use today. Banks play a critical role in this system as they create credit, which expands the money supply. For instance, depositing €100 in a bank could result in €270 being created through lending and re-lending. This monetary expansion is significant as the money generated can be employed to fund investments/purchases. The credit and debit system is indispensable to finance since the supply of money would decrease without debtors and creditors.

Development of the Modern Financial System

The modern financial system is made up of various interconnected markets and institutions that were developed over the centuries. It started with the creation of banks in medieval Italy, as merchants needed credit to fund their trade. The bond market was then invented during the constant wars between Italian city states, which led to the sale of government IOUs on the market. In the seventeenth century, joint-stock companies emerged, allowing companies to fund themselves by selling shares of ownership on the stock market. In the eighteenth century, insurance companies used financial market analysis to manage risk. Governments greatly expanded their role in the financial system in the twentieth century. Finally, the real estate market was heavily expanded in the 1920s through government deregulation and incentives for political reasons. These markets and institutions are all interdependent and make up the modern financial system that we know today.

The Truth About Financial Systems

The financial system, which includes banks and access to credit, provides the best route out of poverty. Despite negative stories about greedy bankers, banks allow savers to deposit money which can be loaned to those in need. Access to credit provides people with a chance to make long-term plans and decisions, such as buying property or starting a business. Without access to reliable credit, poor people are forced to borrow from less-reputable sources, where astronomical interest rates and violent punishments for late payments are charged. Microfinance, which lends small amounts to individuals with little or no collateral, can fund expensive items or help start micro-businesses. With access to affordable credit, people in poverty can make a dramatic difference in their lives.

The Power of Efficient Financial Systems

Inefficient financial systems, such as communism or feudalism, restrict the free flow of capital, making financial development challenging. In contrast, the financial system in Western Europe allows for the freest and most efficient flow of capital, making competition fierce and driving profitability and reliability. This system has allowed societies using this model to prosper and dominate over those with inefficient financial systems. The spread of the Western financial model continued through globalization in the twentieth century. Historical examples such as the rise and fall of European Empires and the domination of Western nations over Asian countries illustrate the power of strong financial systems. The Netherlands, despite being smaller, outperformed the Spanish Habsburg Empire economically due to its efficient financial system. In conclusion, societies with a strong financial system will prosper at the expense of those with financial inefficiencies.

The Flawed Financial System

The financial system is a reflection of human nature, which is inherently irrational and unequal. Humans tend to swing between different moods, making us more irrational where money is concerned. Investor confidence is fragile and easily affected, leading to unstable markets. Additionally, people prefer to observe and copy others, contributing to market instability. Financial rewards are not shared equally, and inequality lies at the heart of both the financial system and the human condition. These irrational faults and inequalities in human society are intensified in the financial system.

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