More story than history
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The evolution of money from its rudimentary stage to its latest avatar as a virtual entity
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C. T. Kurien
THE ASCENT OF MONEY — A Financial History of the World: Niall Ferguson; Allen Lane, an imprint of Penguin Books, 11, Community Centre, Panchsheel Enclave, New Delhi-110017. Rs. 595.
Though money is the most commonly handled artefact in daily life, there is a certain mystique about it that still appears to be baffling. Niall Ferguson will not solve that problem, but a glimpse into the ascent of money from its rudimentary stage to its latest avatar as a virtual entity may contribute to a better understanding.
Ascent
That ascent can be summarised in the author’s own words. “Today’s financial world is the result of four millennia of economic evolution. Money — the crystallised relationship between debtor and creditor — begat banks, clearing houses for ever larger aggregations of borrowing and lending. From the 13th century onwards, government bonds introduced the securitisation of the streams of interest payments; while bond markets revealed the benefits of regulated public markets for trading and pricing of securities. From the 17th century, equity in corporations could be bought and sold in similar ways. From the 18th century, insurance funds and then pension funds exploited economies of scale and the laws of averages to protect against calculable risk. From the 19th, futures and options offered more specialised and sophisticated instruments: the first derivatives. And from the 20th, households were encouraged, for political reasons, to increase leverage and skew their portfolios in favour of real estate.”
I shall not go deeper into any of these aspects, but restrict myself to a few comments. If it is not evident from the summary given above, it may be pointed out that Ferguson’s account is not a “financial history of the world”, but is confined to the West. It is, of course, quite common to think of the world as consisting of the West and a few other bits thrown in. China appears towards the end of Ferguson’s narrative, as the communist lender to capitalist America. Second, the ascent of money is more story than history. It tends to be centred on personalities — their adventures and even philandering in some cases. Personalities are, no doubt, important in history, and the narratives add spice to what otherwise could have turned out to be rather dry. But there is a loss of balance in Ferguson’s account.
Loss of balance
The loss of balance is prominent in other aspects too. Consider a very significant statistical statement in the Introduction: “In 2006 the measured economic output of the entire world was around $ 47 trillion. The total market capitalisation of the world’s stock markets was $ 51 trillion, 10 per cent larger. The total value of domestic and international bonds was $ 68 trillion, 50 per cent larger. The amount of derivatives outstanding was $ 473 trillion, more than ten times larger. Planet Finance is beginning to dwarf Planet Earth.” I went through the book eagerly expecting to see how the manifestation of money in the form of derivatives is being dealt with because it is the latest and in quantity mind boggling. But his interest appears to be in telling the story of the early part of monetary evolution, bonds of governments and shares of corporations with derivatives treated rather casually.
And, though the disjunction between Planet Finance (the realm of finance) and Planet Earth (the “real” economy) is one of the crucial aspects of contemporary globalisation, Ferguson misses the opportunity to deal with it although his Afterword touches on it briefly.
But there are many things that one learns from his work. First and foremost is that money is all about debt or credit, or as has been quoted already, it is “the crystallized relationship between debtor and creditor.” The worth of money, then, is not the value of the (precious) metal it contains, as was believed not in the distant past, or even the precious metal that backs currencies — the principle on which the gold standard functioned less than a century ago and a notion that was formally given up only in 1971 when the U.S. dollar detached itself from gold.
Trust
Second and following from the first, since money is a matter of relationships, its stability rests on trust, more readily destroyed than created. It is this fiduciary aspect of money that lies beneath the currencies with the “I promise to pay the bearer the sum of …” printed on them. To a large extent, the volatility of many financial markets and the threat to financial institutions like banks can also be traced to this aspect of trust.
Third, unlike natural evolution which is generally considered to be steered by chance, the evolution of money and finance has taken place in the context of some form of “intelligent design”— regulatory bodies usually representing the common good. In fact, in modern times, it will not be possible for financial markets to function with some semblance of order without that kind of external direction and regulation. This is important because it declares that the money market, the core market in the contemporary world, functions very much guided, if not controlled, by visible hands. That much even the Greenspans of this world who constantly preach the gospel of “free markets” will concede. They don’t see, or refuse to admit, that if the core market is, or has to be regulated, then all markets come under some form of regulation. Whether all regulations promote the common good or not is a different issue. Ferguson points out that regulatory bodies get easily penetrated by those with interests of their own (what finance does is to concentrate power in the hands of a few) who can then free many other markets from overt public regulation arguing that markets work best when they are “free”.
Lastly, and to quote Ferguson again, “[F]inancial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty.”
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