The Ascent of Money


Written by Scottish historian Niall Ferguson, the book is subtitled “A Financial History of the World”. There is also a long documentary of the same name that the author produced for PBS and the BBC that you can watch. The book is an good read for anyone interested in how and why the major components of our financial system such as banks, credit, debt, equity etc got started.

1) Credit and Banks

Without credit, only those with capital could participate in commerce as merchants typically require an initial investment to buy goods in order to then sell them and earn a profit. However in Italy, the Church had banned the practice of Usury; charging your brother interest was forbidden and this had this removed the incentive to give loans to aspiring entreprenuers.

To get around this, Venice allowed Jews (whom they did not consider brothers) to give out loans to Christians. This historical fact accounts for why a large number of banking institutions were founded by the Jewish minorities. However, loan giving was problematic for a small minority owned bank. Powerful borrowers would default on their loans and turn the local populace against the minority.

To counter this, the Medici family in Florence diversified into several markets and grew larger. Although, the way in which they made money was not new, they applied it on a scale that has never been seen. This allowed them to spread the risk of default and they prospered becoming rulers in Florence.

2) Bonds

Bonds were made necessary by the appetite of nations for war. They allowed the financing of wars and the victors forced the losers to pay back the bonds through reparations. Because the loser could not pay back debts to its own bondholders, it was hard to borrow if you were a likely losers and Ferguson cites the role of bonds in deciding outcomes in famous battles such as the American Civil war.

3) Equity

The establishment of colonies required a large initial investment. This enabled colonisers to hire soldiers, establish forts and other defences. Then over a longer period, they could get income from the colonies. This led to the formation of equities where shareholders pooled resources to come up with working capital. Since shareholders sometimes needed the money that they has invested, they were allowed to trade their holding to other investors leading to the establishment of the equity markets.

4) Insurance

You may wonder why a whole chapter is devoted to insurance. Is it really that large of a sector? The answer is that the modern welfare state that accounts for a large portion in a  developed country’s budget had its origins in insurance.

Primitive insurance was little more sophisticated than gambling; it was bets placed on whether ships would make it safely back on harbour. Several mathematical discoveries such as probability made true insurance possible. The first was a scheme to provide pension for the widows and orphans of Scottish clergy.

5) Housing

Housing and mortage are a huge part of the the financial sector. But it wasn’t always this way. For a very long time, only the elites and aristocrats owned houses while the vast majority owned rents. As democracy took hold, Governments have tried to democratise home ownership through policies such as subsidies loans, interest deduction etc with varying degrees of success.


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