December 28, 2008
Follow the Money
By MICHAEL HIRSH
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THE ASCENT OF MONEY
A Financial History of the World
By Niall Ferguson
Illustrated. 442 pp. The Penguin Press. $29.95
Niall Ferguson, it is fair to say, is a one-man book factory. In fact, if the American economy cranked out goods as prolifically as Ferguson does histories, we might not be in half the fix we are in right now. But then Ferguson wouldn’t have nearly as much to write about. The onetime enfant terrible of the Oxbridge historical establishment, Ferguson specializes in finding fault with great powers, especially the way they mismanage their empires. Ferguson first came to notice a decade ago with “The Pity of War,” a revisionist tour de force arguing that Britain made a world-historical error by entering World War I (and thereby destroying its empire) when it should have simply waited out the swift German conquest of Europe and remained a superpower, with Europe the better for it. More recently the Scottish-born Ferguson, who now spends half the year teaching at Harvard and the other half at Oxford, has turned his attention to the prodigal young heir to the British imperial crown, the United States. In “The Cash Nexus” (2001) and “Colossus” (2004), he urged Americans to emerge from their self-denial and fulfill their obvious destiny as the next “liberal” empire spreading the light of democracy and Anglo-Saxon legalism across the globe. “The greatest disappointment facing the world in the 21st century,” Ferguson concluded in “The Cash Nexus” (published in the opening months of the Bush presidency), is that “the leaders of the one state with the economic resources to make the world a better place lack the guts to do it.” Ferguson later supported the Iraq war as evidence that Washington had finally gotten up its courage, imperially speaking.
Whatever one thinks of his arguments, it’s impossible to ignore Niall Ferguson. He’s like the brightest kid in the debating club, the one who pulls all-nighters in the library and ferrets out facts no one thought to uncover. And in his latest book, “The Ascent of Money” — humbly subtitled “A Financial History of the World” — Ferguson takes us on an often enlightening and enjoyable spelunking tour through the underside of great events, a lesson in how the most successful great powers have always been underpinned by smart money. “The ascent of money has been essential to the ascent of man,” he writes, making a conscious reference to the BBC production he loved as a boy, Jacob Bronowski’s “Ascent of Man.” (In fact, like Ferguson’s three previous books, “Colossus,” “Empire” and “The War of the World,” “The Ascent of Money” was written as a companion to a TV documentary series.)
“Behind each great historical phenomenon there lies a financial secret,” Ferguson says. He goes into fascinating detail about how “it was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo” by selling bonds and stockpiling gold for the British Army. The richest bankers on the Continent in the 19th century, the Rothschilds became known as die Finanzbonaparten (the Bonapartes of finance). And, as Ferguson argues, they also played a crucial part in the South’s defeat in the Civil War by declining to invest in Confederate cotton-collateralized bonds. Imperial Spain amassed vast amounts of bullion from the New World, but it faded as a power while the British and Dutch empires prospered because they had sophisticated banking systems and Spain did not. Similarly, the French Revolution was made all but inevitable by the machinations of an unscrupulous Scotsman named John Law, whom the deeply indebted French monarchy recklessly placed in charge of public finance. “It was as if one man was simultaneously running all 500 of the top U.S. corporations, the U.S. Treasury and the Federal Reserve System,” Ferguson writes. Law proceeded to single-handedly create the subprime mortgage bubble of his day. When it collapsed, the fallout “fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.” Wilhelmine Germany, meanwhile, came up short in World War I because it “did not have access to the international bond market,” Ferguson writes. Every one of these episodes sounds like a warning shot: Will America be the next great power to fall because of unsound finance?
The question is particularly pressing in the midst of what is widely seen as the worst financial crisis since the Great Depression. And Ferguson’s conclusions are troubling. Only a few years after accusing Washington of “imperial understretch” for failing to flex its muscles — and without any hint of irony — Ferguson now argues that the United States may be succumbing to financial overstretch. Deeply in debt to the rest of the world, it has become part of a “dual country” that he calls “Chimerica.” “In effect, the People’s Republic of China has become banker to the United States of America,” he writes. Until the current global financial crisis, this seemed to be a fairly reliable relationship. American consumers over-bought goods and over-borrowed from China, and the Chinese in turn accumulated huge dollar surpluses that they plowed back into Wall Street investments, thereby supplying profligate Americans with the financing we needed to consume and sustain ourselves as the lone superpower. “For a time it seemed like a marriage made in heaven,” Ferguson writes. “The East Chimericans did the saving. The West Chimericans did the spending.”
Suddenly, however, it’s looking more like a marriage made in hell. According to Ferguson, much of the current crisis stems from this increasingly uneasy symbiosis. It turns out “there was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow.” This cascade of easy money, he argues, “was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000. . . . And Chimerica — or the Asian ‘savings glut,’ as Ben Bernanke called it — was the underlying reason why the U.S. mortgage market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no job or assets.” Going forward, the system seems likely to be increasingly unstable, as Treasury Secretary Henry Paulson suggested recently when he warned that unless fundamental changes are made, “the pressure from global imbalances will simply build up again until it finds another outlet.”
Previous periods of global stability and peace had relied on judicious mechanisms like the Congress of Vienna or the Bretton Woods agreements. Now the international system — and America’s position within it — has come to depend on what looks more like a global Rube Goldberg machine running on hot money. And though Ferguson doesn’t come out and say it, the Chinese may now have the upper hand in this chimerical Chimerica. While so far it’s worked in Beijing’s interest to underwrite America’s rampant consumerism — because we buy so many of their goods — the Chinese also have the option of recycling some of their surplus billions into their own huge population. We, on the other hand, don’t have the option not to borrow from them. Indeed, it’s no secret on Wall Street and in Washington that the real targets of President Bush’s $700 billion bailout plan were the foreign funds, including “sovereign wealth funds,” that keep America’s financial system afloat. Unless these foreign financiers — principally China and Japan — get reassurance that the global financial system can function properly again, America’s long period of growth and power may be coming to a close.
Perhaps, then, the conclusion should be that Americans need to flex our muscles less as an empire and fight a little harder for fiscal sobriety and balance in our foreign policy. To be fair, Ferguson was early in seeing that America’s fiscal problems were serious. In “Colossus,” he warned presciently of America’s increasing reliance on Chinese capital, although he argued then that we should be mainly worried about domestic entitlements like Medicare and Social Security — indicating that he, like the Bush administration, seriously underestimated the ultimate cost of the Iraq war.
As with Ferguson’s three previous documentary efforts, “The Ascent of Money” sometimes feels as if it were laid out like a shooting script. Ferguson will depart from an exegesis on the 17th century or the Great Depression to pop up in post-Katrina New Orleans or Memphis (for a report on bankruptcies), and we surmise it’s to record another on-scener for PBS. The book, whose main text comprises a scant 360 pages (a light effort for Ferguson, especially considering the ambitious subtitle), is also reductionist at times. Is it really fair to say Chimerica is mainly at the root of our current problems? (A lack of oversight and regulation of the subprime mortgage market here at home had a lot to do with it as well.) China’s backwardness between the 1700s and 1970s was largely due to its dearth of financial innovation, he suggests, but other historians have pointed equally to the absence of technological innovation of the kind that arose in Europe’s close-quartered patchwork of states because of repeated wars.
And in the end, as Ferguson himself seems to acknowledge, the scope of the financial crisis that is plaguing the world today calls into question the book’s premise — that the “trajectory” of finance through history, while “jagged and irregular,” is “unquestionably upwards.” Our increasingly sophisticated finance clearly contains self-destructive tendencies, and its very complexity may have become our undoing. Ferguson wonders whether the cruel realities of biological evolution are the model for what is happening now. Contemplating the financial Armageddon that has devastated Wall Street and set back globalization, he asks: “Are we on the brink of a ‘great dying’ in the financial world — one of those mass extinctions of species that have occurred periodically, like the end-Cambrian extinction that killed off 90 percent of Earth’s species, or the Cretaceous-Tertiary catastrophe that wiped out the dinosaurs?” Here we thought we were making all this progress as a species, and suddenly we find our supposed innovations lumped with Tyrannosaurus rex. Doesn’t sound like much of an ascent to me.
Michael Hirsh is Newsweek’s national economics correspondent and the author of “At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World.”
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