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That Clinking Clanking Sound

Antoin E Murphy


The Ascent of Money: A Financial History of the World, by Niall Ferguson, Allen Lane, 442 pp, £25, ISBN: 978-1846141065

Niall Ferguson is an erudite historian who has written a classic biography on the Rothschild family and so has the credentials to write a major work on money. Money, finance and the financial crises that we have experienced in recent times are worthy topics for further historical exploration. Ferguson’s area of study is one that has not been overworked by the academic community. It is striking to note how few articles have been devoted to analysing the anatomies of financial crises in economic journals dominated by a multiplicity of articles on arcane and peripheral issues. This will of course change, albeit a little late for those looking for information on why markets rise and crash. The situation is somewhat similar with respect to books on the subject. When the most recent financial crisis started to develop in the summer of 2007 the search for books dealing with previous financial crises produced meagre pickings. Charles Kindleberger’s important book Manias, Panics and Crashes (1978) was dusted off shelves. Many media commentators rushed to read John Kenneth Galbraith’s The Great Crash (1971), a stylishly written work which unfortunately does not contain a great deal of substance. Keynes’s The General Theory of Employment, Interest and Money (1936) was consulted again and chapter 12 on “The State of Long Term Expectations” quoted extensively. Milton Friedman and Anna Schwartz’s A Monetary History of the United States 1867-1960 (1963) was also reread by certain cognoscenti, most notably Ben Bernanke, the chairman of the Federal Reserve System. After that the cupboard containing books dealing with recent financial crises was quite bare, leaving some writers searching for inspiration to reach back to that highly successful but massively inaccurate nineteenth century potboiler Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.

The reason for the shortage of books on financial crises could be that in recent years many economic writers lost interest in such matters because first, some of them believed that the keys to controlling crises had been discovered through Friedman and Schwartz’s work on the causes of the Great Depression and therefore there was no real need to worry; second, other economists, those belonging to the new classical macroeconomics approach, did not believe in the possibility of financial bubbles. The latter group, fully paid up subscribers to the theory of rational expectations, are of the view that homo economicus is rational, ergo financial bubbles cannot arise. Having contented themselves with writing about methods of controlling inflation and policies to increase output on the supply side of the economy they have had nothing to say on our most recent crisis. Keynes, whom they believed they had academically buried by their research, had to be resurrected to provide economists with some policy initiatives to combat what increasingly appeared to be the arrival of the second Great Depression.

Against this background I had high expectations that Ferguson’s work might fill part of the gap in our knowledge of money and financial crises. It is not just a book but also the text for a successful Channel Four television series, narrated by Ferguson himself. And therein lies the problem, since the finished work reads more like a television script rather than a printed book. There is an imbalance as the author uses material that is eminently suitable for engaging the minds of a television audience but which appears a little thin when presented to a readership expecting detailed historical scholarship.

Perhaps I can best illustrate the problem by concentrating on the chapter dealing with financial bubbles, with its sound bite heading “Blowing Bubbles”. Ferguson concentrates on John Law’s Mississippi System, which in turn spawned the South Sea Bubble. The system arose in France when John Law, a more than colourful Scotsman, persuaded the regent, Philippe duc d’Orléans, to create a bank in 1716.

The objective of the General Bank was to substitute paper money for gold and silver coins. Law believed that by increasing the paper money supply it would be feasible to drive economic activity upwards. The title of his book, Money and Trade, published in 1705, said it all. Law believed that money had a real role to play in the economy and that it was a causa causans of trade. Law’s General Bank, later to become the Royal Bank, was the first part of his overall strategy aimed at addressing France’s monetary crisis as reflected in the shortage of gold and silver coinage. However, Law was sufficiently astute to recognise that France had a further problem, a financial crisis, marked by a highly imbalanced superstructure of public sector debt that had been accumulated by a spendthrift and bellicose Louis XIV.

On his death Louis had left France bankrupt, with international bankers either refusing to lend to the French crown or alternatively charging extortionate interest rates on each new loan. Law set out to address this financial crisis by offering the holders of debt shares in a newly created company, the Company of the West, which would later be popularly referred to as the Mississippi Company. The shares were backed the assets of the company, most notably its monopoly trading concessions to French Louisiana, a vast territory constituting around half of the United States today (excluding Alaska).

Law hoped that by building up the company’s trading concessions in French Louisiana he would generate a stream of revenue to pay dividends on the company’s shares. The issue of the shares was initially successful and their price rose from an effective 170 French livres in 1717 to over 10,000 livres in early January 1720. Paris was the centre of the world’s first stock market boom and such was Law’s success that he was appointed the equivalent of prime minister in early January 1720. This was quite an achievement for a man with the reputation of a dandy, gambler and murderer (he had killed another dandy in a duel in London’s Bloomsbury Square in 1694). Unfortunately, Law pushed the system too far and used the banks’ issues of paper money to monetise the shares. The system collapsed from May 1720 onwards and Law was lucky enough to escape from France with his life.

Ferguson, a fellow Scotsman, is obviously fascinated by Law’s story and devotes a considerable part of his chapter on bubbles to it. He quotes many times from my own work, John Law Economic Theorist and Policy-Maker (Oxford University Press, 1997). However, in his search for a good television script he has gone for the easy story, stereotyping Law as a financial charlatan. In so doing so he has adopted the position of most Scottish historians and of famous Scottish economists such as David Hume and Adam Smith.

Ferguson contends that Law’s System had “to create a bubble or it would fail”. He refers to the “con at the heart of Law’s confidence” and calls him a “con artist”. In other words he does not wish to treat him as a serious theorist and policy-maker. To do so would be bad television. Here I disagree with him and believe that if he had read Money and Trade (1705) and John Law’s Essay on a Land Bank (written in 1704 and published in 1994) he would have found that Law was an inspired monetary theorist with a vision hundreds of years ahead of his time. Law was able to visualise, and to implement temporarily, an economic system based on paper money and bank credit long before the last vestiges of the gold standard were finally removed in 1971. He was centuries in advance of the so called Scottish “enlightened” economists, David Hume and Adam Smith, in visualising the type of financial system that mankind needed to adopt. He was very much someone who understood money. By dint of changing a simple preposition he produced a great definition, writing that money is the value by which goods are exchanged and not the value for which goods are exchanged. By replacing “for” with “by” he was able to show that money did not have to be intrinsically valuable. By this analysis Law was able to show that gold and silver were very limited forms of money and that emphasis on them retarded the monetary progress of humanity. It is a great pity that Ferguson did not understand this and fell into the Scottish trap of regarding Law as a type of financial charlatan. If he does not accept my word for Law’s brilliance and feels that I am suffering from that dreaded biographer’s disease, Lues Boswelliana, then he might possibly look at the judgement of Joseph Schumpeter, the greatest analyst of the history of economic thought, who wrote that Law “is in a class by himself” and that he “worked out the economics of his projects with a brilliance and, yes, profundity, which places him in the front rank of monetary theorists of all time” (Schumpeter, History of Economic Analysis, 1954).

Niall Ferguson is a serious historian who has managed to popularise a difficult subject, namely money, and produce a television series and book for a mass audience. This is no easy feat. He is to be congratulated, but he needs to avoid the characteristic defect of popularisers, that of rushing to facile judgements. He had a great opportunity to show that his fellow countryman John Law was at the vanguard of the Ascent of Money. He did not take this opportunity and instead relegated him to the ranks of confidence trickster. This is a disservice by a great Scottish historian to an even greater Scottish economist.

Antoin E Murphy is an associate professor of economics in Trinity College Dublin. His most recent book, The Genesis of Macroeconomics: New Ideas from Sir William Petty to Henry Thornton, was published by Oxford University Press in December 2008.