The Ascent of Money: A Financial History of the World: 10th Anniversary Edition

by Niall Ferguson

Money is not metal. It is trust inscribed.

To understand the power of these three innovations, first-year MBA students at Harvard Business School play a simplified money game. It begins with a notional central bank paying the professor $100 on behalf of the government, for which he has done some not very lucrative consulting. The professor takes the banknotes to a bank notionally operated by one of his students and deposits them there, receiving a deposit slip. Assuming, for the sake of simplicity, that this bank operates a 10 per cent reserve ratio (that is, it wishes to maintain the ratio of its reserves to its total liabilities at 10 per cent), it deposits $10 with the central bank and lends the other $90 to one of its clients.

This allows him to introduce two of the core definitions of modern monetary theory: M0 (also known as the monetary base or high-powered money), which is equal to the total liabilities of the central bank, that is, cash plus the reserves of private sector banks on deposit at the central bank; and M1 (also known as narrow money), which is equal to cash in circulation plus demand or ‘sight’ deposits. By the time money has been deposited at two different

student banks, M0 is equal to $100 but M1 is equal to $271 ($100 + $90 + $81), neatly illustrating, albeit in a highly simplified way, how modern fractional reserve banking allows the creation of credit and hence of money.

quality. Some measures of M1 included travellers’ cheques in the total. M2 adds savings accounts, money market deposit accounts and certificates of deposit. M3 is broader still, including eurodollar deposits held in offshore markets, and repurchase agreements between banks and other financial intermediaries.

First, a large part of the money we put aside for our old age ends up being invested in the bond market.

In 1913, according to recent estimates, Argentina was one of the ten richest countries in the world. Outside the English-speaking world, per capita gross domestic product was higher in only Switzerland, Belgium, the Netherlands and Denmark. Between 1870 and 1913, Argentina’s economy had grown faster than those of both the United States and Germany. There was almost as much foreign capital invested there as in Canada. It is no coincidence that there were once two Harrods stores in the world: one in Knightsbridge, in London, the other on the Avenida Florida, in the heart of Buenos Aires.

For two days in June crowds in Argentina’s second largest city, Rosario, ran amok in an eruption of rioting and looting that left at least fourteen people dead. As in the Weimar Republic, however, the principal losers of Argentina’s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the principal beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes.

The certificates issued were not quite share certificates in the modern sense, but more like receipts; the key document in law was the VOC stock ledger, where all stockholders’ names were entered at the time of purchase.

Total non-insured damages arising from hurricanes in 2005 are likely to end up costing the federal government at least $109 billion in post-disaster assistance and $8 billion in tax relief, nearly three times the estimated insurance losses.6 According to Naomi Klein, this is symptomatic of a dysfunctional ‘Disaster Capitalism Complex’, which generates private profits for some, but leaves taxpayers to foot the true costs of catastrophe.7 In the face of such ruinous bills, what is the right way to proceed? When insurance fails, is the only alternative, in effect, to nationalize all natural disasters – creating a huge open-ended liability for governments?

Utility. In 1738 the Swiss mathematician Daniel Bernoulli proposed that ‘The value of an item must not be based on its price, but rather on the utility that it yields’, and that the ‘utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed’ – in other words $100 is worth more to someone on the median income than to a hedge fund manager.

The key, as he saw it, was not just to reduce inflation. It was also essential to foster that link between property rights and political rights which had been at the heart of the successful North American experiment with capitalist democracy.

In the late 1960s, US public sector deficits were negligible by today’s standards, but large enough to prompt complaints from France that Washington was exploiting its reserve currency status in order to collect seigniorage from America’s foreign creditors by printing dollars, much as medieval monarchs had exploited their monopoly on minting to debase the currency.

Today the average American earns more than $34,000 a year. Despite the wealth of people like Wu Yajun and Yin Mingshan, the average Chinese lives on less than $2,000. Why would the latter want, in effect, to lend money to the former, who is twenty-two times richer? The answer is that, until recently, the best way for China to employ its vast population was through exporting manufactures to the insatiably spendthrift US consumer.

Krugman who in 1998 had predicted that ‘the growth of the Internet [would] slow drastically’ because ‘most people have nothing to say to each other’ and that ‘by 2005 or so, it [would] become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.’54

Blockchains vary in three different respects: the nature of the consensus algorithm, which synchronizes the process of block addition; the number of transactions per block and fees, if any; and the way miners are rewarded for providing the computational hardware and electricity to run the blockchain. Bitcoin is unusual because its creator designed its supply to be limited.

Satoshi’s goal was not to create a new money but rather to create the ultimate safe asset, capable of protecting wealth from confiscation in jurisdictions with poor investor protection as well as from the near-universal scourge of currency depreciation.

Bitcoin is portable, liquid, anonymous and scarce.