The Ascent of Money summary

When the Spanish conquistadors swept through Central and South America in the sixteenth century, they were largely motivated by the quest for gold and silver. They thought that the more precious metal they could acquire, the more coins they could mint, and therefore the more money they would have. What happened though was that the increased supply of coinage actually led to its depreciation in value, regardless of what rare metal it was made of.

The conquistadors failed to realize that the power and value of money comes not from its physical worth but from what people are willing to give you for it. An overabundance of money will always lead to inflation.

The invention of credit and debit was one of the most important developments in human history. It stands alongside technological and scientific advancements as a driving force in human progress.

The earliest forms of borrowing and lending are found in ancient Mesopotamia. As payment for deposits, lenders were given clay tablets inscribed with how much they were owed, similar to IOU (“I owe you”) notes.

The modern financial system was largely developed in Western Europe and North America.

In medieval Italy, increased trade with the Arab world brought with it financial rewards and better systems of accountancy. This led to the creation of the first banks, because merchants needed access to credit in order to fund their trade.

We are often told stories about ‘greedy bankers’: financial vampires who prey on the poor and unfortunate. They supposedly exploit the weaknesses and lack of financial knowledge in others to suck wealth from the bottom of society and hoard it at the top.

Yet the financial system is in fact the best way for nations, communities and individuals to escape poverty and prosper with a sound financial basis.

In inefficient financial systems, such as the communist command economy or medieval feudalism, capital is unable to flow freely. Bureaucrats control financial resources inefficiently to fulfill political targets, or they hoard wealth to enforce social hierarchy. The situation is static, with little incentive for financial development.

The financial system that developed in Western Europe allows the freest and most efficient flow of capital when compared to other existing systems. Competition is fierce; financial institutions need to be profitable and reliable, otherwise they will be swept aside by better ones.

No financial system is perfect. This is because the people who control it and invest in it are human beings, and humans are irrational by nature.

Humans tend to swing between different moods, from optimism and euphoria to pessimism and despair. Where money is concerned, it tends to magnify these mood swings, making us even more irrational.

The stock market is like a balloon. When confidence is high, the prices of stocks and shares rises and the market inflates. When confidence is low, investors take their money out of the market and it deflates.

Sometimes the market will inflate at such a sharp rate that prices become unsustainable. Like an overfilled balloon, the pressure bursts the market, making prices fall dramatically. This is known as a stock market bubble.

Inflation means the weakening of the value of money. A small amount of inflation is to be expected in any economy as more money is always being created, but excessive inflation, or hyperinflation, can be very dangerous.

It is particularly perilous for those holding government bonds and savings in a particular currency, because these forms of wealth become less and less valuable.

Modern private insurance was invented in eighteenth-century Scotland by two hard-drinking Protestant ministers who wanted to provide financial aid to the families of deceased vicars. They used advancements in social and statistical analysis to create the first insurance scheme in which a member’s premiums were pooled and invested to provide returns. These returns could then be given to members in need.

This new system of private insurance provided financial help to the unfortunate and partially mitigated the element of financial risk in life. It proved to be very popular, and systems of insurance spread rapidly in the nineteenth century.

Throughout history, political aims and financial reality have clashed dramatically. This is perhaps best demonstrated by the developments in the real estate market in the twentieth century.

Governments, especially those in the English-speaking world, have pursued policies to increase the percentage of home owners. The rationale behind this lies in the belief that property owners are more self-reliant and secure than people who rent their homes.