NIALL FERGUSON Author of THE WAR OF THE WORLD THE ASCENT OF MONEY A FINANCIAL HISTORY of THE WORLD U.S. $29.95 Canada $33.00 Bread, cash, dosh, dough, loot: Call it what you like, it matters. To Christians, love of it is the root of all evil. To generals, it's the sinews of war. To revolu­ tionaries, it's the chains of labor. But in The Ascent of Money, Niall Ferguson shows that finance is in fact the foundation of human progress. What's more, he reveals financial history as the essential backstory behind all history. The evolution of credit and debt was as impor­ tant as any technological innovation in the rise of civilization, from ancient Babylon to the silver mines of Bolivia. Banks provided the material basis for the splendors of the Italian Renaissance while the bond market was the decisive factor in conflicts from the Seven Years' War to the American Civil War. With the clarity and verve for which he is known, Ferguson explains why the origins of the French Revolution lie in a stock market bubble caused by a convicted Scots murderer. He shows how financial failure turned Argentina from the world's sixth richest country into an inflation- ridden basket case—and how a financial revolution is propelling the world's most populous country from poverty to power in a single generation. Yet the most important lesson of the financial history is that sooner or later every bubble bursts —sooner or later the bearish sellers outnumber the bullish buyers, sooner or later greed flips into fear. And that's why, whether you're scraping by or rolling in it, there's never been a better time to understand the ascent of money. 1108 Niall Ferguson is one of Britain's most renowned historians. He is Laurence A. Tisch Professor of History at Harvard University, a Senior Research Fellow of Jesus College, Oxford University, and a Senior Fellow of the Hoover Institution, Stanford University. The bestselling author of Paper and Iron, The House of Rothschild, The Pity of War, The Cash Nexus, Empire, Colossus and The War of the World, he also writes regularly for newspapers and magazines all over the world. He has written and presented four highly successful television documentary series for Channel 4: Empire, American Colossus, The War of the World and, most recently, The Ascent of Money. He, his wife and three children divide their time between the United Kingdom and the United States. Jacket painting: Lais Corinthiaca, 1526 (oil on limewood), by Hans Holbein the Younger, Offentliche Kunstsammlung, Basel, Switzerland/The Bridgeman Art Library The A MEMBER OF PENGUIN GROUP (USA) INC. Penguin 375 Hudson Street, New York, N.Y. 10014 Press www.penguin.com | Printed in U.S.A. Praise for THE WAR OF THE WORLD Twentieth-Century Conflict and the Descent of the West "A heartbreaking, serious and thoughtful survey of human evil that is utterly fascinating and dramatic ... superb narrative history." —Simon Sebag Montefiore, The New York Times Book Review "Wielding at once the encyclopedic knowledge of an accomplished scholar and the engaging prose of a master storyteller, Ferguson commendably brings fresh insights to a history by now familiar.... A tour de force." —San Francisco Chronicle "A fascinating read, thanks to Ferguson's gifts as a writer of clear, energetic narrative history." —James F. Hodge, Jr., The Washington Post Praise for EMPIRE: How Britain Made the Modern World "Ferguson ... is a wonderfully fluent writer, weaving telling details and vivid anecdotes seamlessly into his narrative.. Sure to be a chilling assertion to both those in Washington eager to deny imperial ambitions and those in the Arab world suspicious of America's motives." —Michiko Kakutani, The New York Times 'Fluently written, engaging, beautifully designed and spectacularly illustrated ... Empire is a model of how to do popular history." —The Economist "An entertaining, engaging romp through four centuries of British imperialism." —Los Angeles Times ISBN 978-1-59420-192-9 The Ascent of Money ALSO BY NIALL FERGUSON Paper and Iron The House of Rothschild The Pity of War The Cash Nexus Empire Colossus The War of the World NIALL FERGUSON The Ascent of Money A Financial History of the World The Penguin Press New York 2008 THE PENGUIN PRESS Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R oRL, England Penguin Ireland, 25 St. Stephen's Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R oRL, England First published in 2008 by The Penguin Press, a member of Penguin Group (USA) Inc. 123456789 10 Copyright © Niall Ferguson, 2008 All rights reserved ISBN 978-1-59420-192-9 Printed in the United States of America Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book. The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate in or encourage electronic piracy of copyrightable materials. Your support of the author's rights is appreciated. Contents Introduction i 1 Dreams of Avarice 17 2 Of Human Bondage 65 3 Blowing Bubbles 119 4 The Return of Risk 176 5 Safe as Houses 230 6 From Empire to Chimerica 283 Afterword: The Descent of Money 341 Acknowledgements 359 Notes 363 List of Illustrations 399 Index 403 v Introduction Bread, cash, dosh, dough, loot, lucre, moolah, readies, the where­ withal: call it what you like, money matters. To Christians, the love of it is the root of all evil. To generals, it is the sinews of war; to revolutionaries, the shackles of labour. But what exactly is money? Is it a mountain of silver, as the Spanish conquistadors thought? Or will mere clay tablets and printed paper suffice? How did we come to live in a world where most money is invisible, little more than numbers on a computer screen? Where did money come from? And where did it all go? Last year (2007) the income of the average American (just under $34,000) went up by at most 5 per cent.1 But the cost of living rose by 4.1 per cent. So in real terms Mr Average actually became just 0.9 per cent better off. Allowing for inflation, the income of the median household in the United States has in fact scarcely changed since 1990, increasing by just 7 per cent in eighteen years.2 Now compare Mr Average's situation with that of Lloyd Blankfein, chief executive officer at Goldman Sachs, the investment bank. In 2007 he received $68.5 million in salary, bonus and stock awards, an increase of 25 per cent on the previous year, and roughly two thousand times more than Joe Public earned. That same year, Goldman Sachs's net revenues of $46 billion exceeded the entire gross domestic product (GDP) 1 THE ASCENT OF MONEY of more than a hundred countries, including Croatia, Serbia and Slovenia; Bolivia, Ecuador and Guatemala; Angola, Syria and Tunisia. The bank's total assets for the first time passed the $i trillion mark.3 Yet Lloyd Blankfein is far from being the financial world's highest earner. The veteran hedge fund manager George Soros made $2.9 billion. Ken Griffin of Citadel, like the founders of two other leading hedge funds, took home more than $2 billion. Meanwhile nearly a billion people around the world struggle to get by on just $1 a day.4 Angry that the world is so unfair? Infuriated by fat-cat cap­ italists and billion-bonus bankers? Baffled by the yawning chasm between the Haves, the Have-nots - and the Have-yachts? You are not alone. Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the 'real' economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust. Despite our deeply rooted prejudices against 'filthy lucre', how­ ever, money is the root of most progress.