Niall Ferguson on the Ascent of Money 'We Need New Banks'
In a SPIEGEL interview, Harvard historian Niall Ferguson discusses the turbulent history of money, the inevitability of financial crises and the fatal influence mathematicians have on the monetary system.
SPIEGEL: Professor Ferguson, can you show us the contents of your wallet?
Ferguson: If you like, sure. Have a look. I have about a hundred dollars on me.
SPIEGEL: Why do people consider such green-printed pieces of paper to be so valuable?
Ferguson: These pieces of paper are also promissory notes. Four thousand years ago in ancient Babylon, clay tablets fulfilled this role. Nowadays we use banknotes. They are only worth what other people are willing to give you in exchange for them. Money is about trust, no matter what form it takes, be it clay, gold, paper, or a computer monitor with a liquid crystal display.
SPIEGEL: The dollar has lost about 86 percent of its purchasing power in the last half-century. Why doesn't depreciation of this scale shatter confidence in paper money?
Ferguson: It's simple: Because paper money is so easy to use. It gives people an exchangeable commodity and a mathematical unit that is standardized and generally accepted. That's something we're willing to accept a certain amount of inflation for. It's the price we pay for having a system of paper money.
SPIEGEL: The purely paper-based system is not all that old. The dollar was pegged to gold until 1971. Aren't precious metals a far better form of payment?
Ferguson: It does indeed appear attractive to have gold in your portfolio these days, and gold does have a special allure. I recently saw the death mask of Agamemnon in Athens. Although it was made in the 16th century before Christ, it's lost none of its splendor. Nevertheless, I don't think gold will ever have a monetary role again. For example, think how impractical it would have been if you'd had to pay for your flight to Boston using gold. How much was it?
SPIEGEL: Just under 400 euros.
Ferguson: At current prices, that's the equivalent of almost half an ounce of gold, that is, about 15 grams. Now just imagine you had to pay for a single apple.
SPIEGEL: And yet there was a close relationship between money and precious metals for centuries -- millenia even. Why was the link broken?
Ferguson: Because it proved to be an extremely inflexible system. If the overall volume of money depends on the availability of precious metals, it can't simply be increased. So a shortage of gold or silver can limit economic growth. The link to gold brings with it a danger of deflation, in other words a constant drop in prices which would hobble the economy. The gold standard was one of the causes of the deflation Germany suffered in the early 1930s, for example.
SPIEGEL: You mean that the demise of the Weimar Republic was caused in part by financial factors?
Ferguson: Germany's financial history played a significant part in Adolf Hitler's rise to power. At the beginning of the 20th century Germany had the world's best education system, a democratic tradition of sorts, and universal suffrage. Why then did fascism spread in Germany? To a large extent because of the series of financial traumas the country had suffered in quick succession: The hyperinflation of 1922-23 and the deflation that accompanied the global financial crisis of 1929.
SPIEGEL: Then what role, if any, does money play in our history?
Ferguson: The ascent of Man is coupled with an increase in the importance of money. Barter -- the direct exchange of one commodity for another -- was not particularly efficient. The shortcomings began to appear with the division of labor, when some people became farmers, some craftsmen, and others traders. Money helped them do business with one another. I believe that money is the source -- or rather the midwife -- of nearly every advance throughout history.
SPIEGEL: That's an interesting theory. Can you prove it?
Ferguson: The glory of Florence, the boom in architecture and in the art market during the Renaissance, for instance, was based on the fact that the Medicis were bankers and had made their fortune exchanging money. Without the Medicis, Botticelli might not have got the opportunity to paint some of his most famous paintings. Or take the French Revolution. This was at least indirectly a consequence of the financial straits the monarchy had got into because of "Sun King" Louis XIV's military campaigns. Napoleon's defeat at Waterloo in 1815 is another example. The battle was partly a clash between two financial systems. The French financed their military conflicts through plunder, while the British used the bond market and took out loans. This helped Britain develop into a superpower.
- Part 1: 'We Need New Banks'
- Part 2: 'The Ascent Is Never Entirely Straight'
- Part 3: 'It's Not About More Regulation, but About Better Regulation'