Jaipur Diaries 3: Niall Ferguson on The Ascent of Money (Part 1)

I’ve always thought of Niall Ferguson as an economist and, like many others, have stereotyped him as one: an intense looking Harvard professor wearing thick-rimmed spectacles always talking about numbers, policies, currencies, growth rates, cartels, oligarchies, fiscal deficits, stimulus packages…you get the drift.

But I was wrong on both counts. Firstly, Niall is not an economist; he is a historian who specialises in financial as well as the history of colonialism. Secondly, he is extremely good-looking and one of the wittiest speakers I’ve ever heard. He is the author of 13 books including the much-acclaimed Pity of War, Empire and The War of the World. But at the Jaipur Literature Festival, Niall spoke about his latest work The Ascent of Money: A Financial History of the World. Read on.

While introducing his book, Niall said that a few issues which he examines, among others things, the globalisation of the current financial system. Niall said that the international financial system is a part of “everyone’s lives”. “It’s a story of where this thing came from: Planet Finance; this giant, extraordinarily complex system which will affect your life, that will give and take our money, whether you like it or not!” quipped Niall. But who we blame, asks moderator Omair Ahmad. “Not me!” replies Niall, amidst peals of laughter from the audience. According to Niall, it’s easy to come up with simplistic explanations for a crisis of this magnitude. “For a time, there was a fashion to blame Greenspan, former chairman of the Federal Reserve. Then, we decided to blame Goldman Sachs and its rebranding as a giant vampire squid was one of the remarkable phenomena of the past year. In some ways, it resembles those Russian trials of the late 19^th century when the jury would refuse to convict a murderer because, as the Russian Tsar said, we are all guilty” added the Harvard professor. “In some ways, we all are complicit – at least in the Western world – because the financial crisis couldn't have happened if it hadn’t been for the reckless behaviour of millions and millions of house loans that run up debts in excess of anything you’ve ever seen!” Niall exclaimed.

“Countries like Britain, Ireland, the United States, Spain and Iceland achieved unprecedented levels of indebtedness – and in a relatively short timeframe. So, I think before anyone says ‘it’s all the fault of Greenspan or Lloyd Blankfein (Goldman Sachs CEO) or some ruthless investment banker, I think one has to step back and realise that, the financial system is a highly complex one and involves decisions by millions of individual actions” explained Niall.  He adds that he went to Michigan in the United States to study the subprime mortgage crisis and found the process “fascinating”. “It’s absolutely fascinating to get inside the process whereby, a relatively low-income American family takes on an amount of debt that everybody knows is unsustainable” said Ferguson. In his assessment, “ignorance” was the cause of the subprime crisis. 

“Ignorance of financial history and elementary things like interest rates.  We (need to) educate people who really matter in this stuff. And our courses on economics and finance, at close suspection, turn out to be really bad” lamented the Harvard professor. Niall added people who worked on Wall Street and were closely involved in the financial system knew “very little” about financial history. “That’s why they find it so hard to imagine that a great depression might happen to them.”

“Most people who are operating based on their personal experience did not know much about financial crises before the early 1980’s. And they had no idea that, in 2007, they were close to as big a crisis as 1929”. And that, Niall said, was the main reason for him to write The Ascent of Money.

Omair went on to suggest that money is a way of educating people as it attaches a value to something (in this case, a stock) and helps a prospective buyer judge the stock based on the value. So isn’t the financial market screwed up in educating us, in a manner of speaking enquired Omair.

“I would put it slightly differently. It’s the process (of buying and selling) which is educational. The money is a relationship between buyer and seller, between a creditor and a debtor.  The earliest money, which dates back to 4500 years in the form of clay tablets – the size of credit cards – states that X promises to pay Y, the bearer, a specified amount on a certain commodity on a certain date. He (X) crystalises that relationship that transcends time and space because you can settle the debt hundreds of miles away from where you are. So, the money really is just a relationship between the debtor and creditor. Even today, the money that you carry around with you or that you imagine is in your bank – it’s not there!” gasped Niall. “That’s called fractional reserve banking – a 17^th century Swedish invention – which means that when you deposit money in the bank, they take that money and lend it to somebody else. Don’t be fooled; if we wanted all the money at once, banking systems around the world would crash; that’s something that investors at the British bank, Northern Rock discovered not so long ago” Niall quipped.

According to Niall, prices are just signals which “express value”. “But these prices, in a free market, are only arrived at by our collective expectations of what something is worth right now and what it’ll be worth in future” Niall went on to explain that as human beings, our collective mood-swings help determine the value of a commodity in future. “Human psychology, which is very volatile, is magnified when we act collectively and financial markets reflect them; they reflect that there’s been this extraordinary switch from greed to fear. The same people who worked in investment banks and hedge funds in late 2006 and early 2007, bet with me that there will never be another recession in the United States.  So, the relationships which money crystalises are as volatile as the ones we forge in our emotional lives” added Niall.

Veering the discussion towards an Indian context, Omair remarked that since India’s political and economic cisterns remain fragile; we may not be able to afford these mood-swings. What does Niall makes of this? The Harvard professor replied “India’s experience over the last twenty years has been fascinating because unlike many Commonwealth countries, India’s economic miracles – and I think we can call it an economic miracle – have been based not on trade or on foreign direct investment or on globalisation. India’s growth has been primarily a result of a significant increase in savings and investment within India itself. Also, a growth of demand for domestic goods in India; that means India is much less exposed to crises of globalisation than China is where trade has played a much larger role in generating growth.  India has run a modest current account deficit while China has the enormous and ever-growing surplus. In some ways, India hasn’t attempted to grow as fast as China; it’s a little bit like the story of the tortoise and the hare”.

Niall added that China’s reform process started in 1978 which is why it’s economy is now three-and-a-half times larger than India and, by 2021, that figure will go up to four-and-a-half. In essence, India isn’t running as fast as it should be.

This is part 1 of what is a really long recording. Due to time constraints (and long hours of transcribing), part 2 will go up either tonight or tomorrow. Do comment on what you thought of this post. Hope you enjoyed reading this and the other Jaipur diaries as well.