The Ascent of Money Book Summary - The Ascent of Money Book explained in key points

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The Ascent of Money summary

Name: The Ascent of Money
Rating: 4.4 (118 reviews)
Author: Niall Ferguson

Niall Ferguson

A Financial History of the World

4.4 (118 ratings)

21 mins

Table of Contents

The Ascent of Money
summarized in 11 key ideas

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Key idea 1 of 11

The financial system is evolutionary in nature.

Charles Darwin discovered that life evolved through a process known as natural selection. Life forms most suited to their environments prospered, whilst those less successful died out.

In most environments there are only enough resources to support a limited amount of life. The fight for these resources is vicious, as failure will often result in extinction.

The life forms which were most prosperous were able to spread their genes through reproduction and thus multiply in number, eventually taking the place of the declining species.

The process is continuous; species are always dying out and being replaced by new species. Usually these changes are localized to small environments, but sometimes events happen that cause extinctions on a large scale.

For example, 64 million years ago a meteor wiped out almost all life on earth, including most dinosaurs. In situations like this, new species will grow in the spaces left by the extinct ones, just as mammals took the place of dinosaurs after the meteor disaster.

The financial system evolves in a similar way, through market selection: the financial equivalent of natural selection. The financial world is constantly changing through new techniques and innovations in the same way the natural world constantly evolves. The firms that adapt to these new situations grow and prosper and are imitated by others. This is the financial equivalent of gene reproduction.

On the other hand, firms that cling to outdated practices and fail to produce sufficient returns are doomed to extinction.

Some events, like the financial collapses of 1929 and 2008, lead to a mass extinction of financial firms and practices. In situations like this, space is created for new types of financial firms and practices to spring up.

The financial system is evolutionary in nature.

The value of money comes from the trust we as societies place in it, not from its intrinsic worth.

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 system of credit and debit funds the financial system through the creation of money.

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 financial system is a combination of interconnected financial markets and institutions developed over centuries.

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.

Finance, in particular access to credit, is the most effective way of providing a route out of poverty.

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.

Societies with a strong financial system will prosper at the expense of those that are financially inefficient.

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.

The financial system mirrors human nature and is therefore deeply irrational and unequal.

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 tends to develop bubbles, all of which eventually burst.

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 and hyperinflation are often caused by the political mismanagement of a currency.

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.

Both private insurance and the welfare state are imperfect systems for minimizing financial risk and uncertainty.

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.

The deregulation of the real estate market shows how political decisions can have dramatic financial repercussions.

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.

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What is The Ascent of Money about?

The Ascent of Money is an explanation of how different historical events led to the development of the current financial system.

It aims to show how, despite its proneness to crises and inequality, the financial system and money itself are drivers of human history and progress.

Who should read The Ascent of Money?

Anyone who wants to understand the workings of the financial system
People who want to understand why financial crises happen
Anyone who wants to know why money is so powerful

About the Author

Niall Ferguson is one of Britain’s most renowned historians. He has worked for numerous institutions in Britain and the USA, with a focus primarily on international and economic history.

In addition to his academic career, he is also known as a commentator and writer for numerous newspapers and magazines. He has written and presented various television documentary series, including a television adaptation of the Ascent of Money.

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