The Ascent of Money by Niall Ferguson

 


Imagine you are running a world superpower, but you are a bit strapped for cash. Your enemies all seem to be well funded, and you can’t keep up with them. Who do you turn to?

 If you are France in the early years of the Eighteenth Century, you turn to John Law. John Law ought to be a lot better known than he is. He was a petty Scottish nobleman who lost his original small fortune during a life of wandering, gambling and trading, not to mention a conviction for murder following a duel. He was however well connected and somehow contrived to get in charge of the French financial system in the early years of the Eighteenth Century.

France at this time was facing severe financial problems following the wars of Louis XIV. The War of Spanish Succession had been very expensive for all the participants but France in particular had spent vast sums of money on it and was struggling in its aftermath. Debts were huge. Payments on the debts had led to an outflow of gold and silver which meant that there weren’t enough coins in circulation to keep trade running. Nowadays we would call it a recession.

But John Law seemed to have the solution. His quick mathematical brain coupled with his perennial lack of cash led to a fascination with the Dutch stock market, at that time the most advanced in the world. He was not slow to see the possibilities of applying what he had learnt in Amsterdam elsewhere. After getting nowhere in some smaller countries, he set his sights on the most powerful country in Europe.

He came up with a cunning plan to pay off France’s huge debts while at the same time developing France’s colonies and its home economy. He had been impressed by Dutch financial institutions and could see how things like banks, stock markets and limited liability companies could be applied to France with good effect. In this, he was almost certainly correct.

But he was still more ambitious. He thought he could improve on them. His ‘system’ was based on a central bank that issued paper money. This had never yet been used in France, but Law correctly saw that the basis of a monetary system wasn’t the value of a particular kind of metal but simply people’s faith in it.

So far so good. But there was another angle. Law proposed to create a monopoly on the trade of France’s overseas possessions, and then set up a company to exploit that trade. He had seen how successful the Dutch East India Company had been, and how there was a buoyant market in shares in that company. Selling shares in the French version would clear the French crown’s debts. He settled on the extensive territory of Louisiana – roughly the middle third of what is now the United States – and the Mississipi Company was born. The new company would stimulate the development of the colony leading to new revenue streams. Trade would be facilitated by paper money issued with the guaranteed backing of the monarch. Investors got a safe haven for their savings. Everyone was a winner! In its straightened financial position the government seized on this plan that seemed so modern and which solved so many of their problems, and Law got not far short of Carte Blanche to try out his system.

You sort of know what is coming next don’t you. The shares were enormously popular. Not only did they pay a dividend, which had an implied state backing, but the value of the shares themselves rose. Who could resist the lure of a steady income earned while your capital increased in value. They were so popular that Law had no trouble getting people to buy a second tranche of the shares – nobody it seems realised that by increasing the number of shares the value of each individual share ought logically to be reduced. In fact, the share price increased, making the purchasers still happier. Law proceeded to issue more shares generating ready money for himself and the crown. The public started trading the much desired shares much as they did their other rather weightier assets. Voltaire, safely viewing the whole thing from the distance in Switzerland, concluded that everyone in Paris had gone mad.

What Law had created was a stock market bubble. Bubbles in stock prices, house prices and commodities have been a familiar feature of the last couple of centuries, but this one really was unique. Law was in control of not only the Mississippi company, but also of the supply of money and of taxation. He also had the ear of a despotic government. No salesman in history can have had quite so much going in his favour to maintain the market the way he wanted.

But even so, he was unprepared for the hugely overvalued price that the shares were now trading at. Human nature being what it is, hardly anyone looked objectively at the actual enterprise to make a judgment on what the returns were likely to be. Everyone was simply following the crowd. The share price was soon so high that only a huge dividend could justify it. And there was very little happening in the colony that could pay out anything like the expectations that had been generated, although some unfortunate Germans were persuaded to migrate to some undeveloped swamps in Louisina where most of them died.

The only option was to pay the dividend by effectively printing money. Luckily Law had been put in charge of the Bank of France enabling him to cover it up what he was doing by complex trades transferring the stocks to the French national debt, and back again. Inevitably, this led to inflation. Inflation of course, affects everybody but is particularly hard on the poor who didn’t have the means to participate in the scheme. Things were turning ugly.

Law tried every trick in the book to maintain confidence in his system. He personally underwrote one share issue. He gave guarantees that shares would be purchased back at a particular price. And he continually modified the legislation to suit whatever was going on at the time. The whole process took nearly five years, from the foundation of the bank in 1715 through to its final collapse in May 1720. The shares peaked in value in late 1719, and Law managed to avoid out and out collapse for several months after that.

But once panic set in the whole edifice disintegrated. Law’s final throw of the dice was an attempt to fix the price of the shares. This pleased no-one. Quite the opposite, angry crowds rampaged through the streets forcing the government to repeal the price control. After this the final collapse set in leaving many many ruined victims. Law himself was one of the victims barely getting out of France with his life. The financial development of the French state was another victim. For generations in France financial institutions were regarded with cynicism and mistrust. Hardly surprising given that Law’s activities had not only ruined himself and his backers, but affected everybody else as well. This may well have played a part in the French government’s difficulties raising finance which in turn may have been one of the causes of the French Revolution.

The whole story is made interesting by the characters of John Law himself. Despite being a convicted murderer and hardened gambler, seems a remarkably dewy-eyed and gullible individual. From what he says and from his actions, it seems quite clear that far from being a cynical and deliberate fraud he genuinely believed his scheme was going to work. It is sometimes tempting to look back on the past with condescension, and to assume that with the benefit of hindsight we know better. But there were plenty of people around at the time who had the foresight to see that Law’s ideas were not only flawed but would be dangerous if they were put into practice. One Italian prince Law approached turned him down on the grounds of not having enough cash to be ruined. And there were plenty of nay-sayers in France itself who could see the flaws in both Law’s plans and his character. But despite this, the regime embraced Law with enthusiasm and supported him until very nearly the end. The moral is that when you are in a difficult position it is hard to avoid the temptations of an apparently easy solution. Deep down, we all know that there is no such thing as a free lunch. But when you are hungry the free lunch is hard to resist.

This is the book of the television series. As a television series it was pretty good, financial history doesn’t really lend itself to the television treatment but Ferguson talks well and his enthusiasm for his subject is infectious. But the story he is telling is so long and involved that it works much better as a book where you can take it at your own pace. In fact the book rather resembles his earlier book The Cash Nexus, but is a much better read. Where the Cash Nexus, interesting as it is, drifts around from one subject to another and never really comes to any particular point, the Ascent of Money is a good solid narrative taking us from the early origins of money and following its development through the centuries. On the way we get some fascinating individual stories like the one about the ambitious but unlucky John Law. One chapter even manages to make insurance interesting. Yes, insurance. The narrative continues right up to the middle of the present financial crisis.

I read the paperback which has been revised extensively from the hardback – that is how quickly things are changing at the moment. It is a good read and very topical, but I imagine that the next edition will need even more rewriting.

The Ascent of Money: A Financial History of the World by Niall Ferguson pp464 Allen Lane

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