To many, finance and economics are like a foreign language, each with their own complicated lexicon of words that can seem indecipherable. Opportunity cost, capital gains, amortization, P/E ratio, inflation, deflation, stagflation…the list goes on and on. While the most effective way of learning would be to crack open a 101 textbook and start digging in, this clinical approach to gaining economic enlightenment can be “less than thrilling” for those who are not trying to attain a degree. So how can we make money an topic that is interesting and exciting?
One of the best ways to accomplish this would be to find literature that would not only enhance one’s conceptualization of finance, but would also entertain, while at the same time provide some of the encouragement necessary to continue investing confidently. One of the best possible starting points would have to be The Ascent of Money by Niall Ferguson, a book I consider to be one of the most interesting and accessible work that I have read up to this point concerning the principles of economics and finance.
In The Ascent of Money, Ferguson basically recounts the entire history of finance, in a surprisingly interesting way. From the origins of trade, to the intricacies of insurance and risk management, through the beginnings of stock markets, all the way to the complexity of high finance, this book moves with an unexpected pace and is filled with remarkable stories and characters that one would not expect to be related to financial history.
Case in point…..the Medici family in Italy should not be known just as the benefactors of famous artists, but rather as successful foreign exchange traders, who developed the foundations of the modern banking system as we know it, all while dominating the political landscape and dodging frequent assassination attempts.
In another example, Ferguson goes into great detail about how a gambling Scotsman, John Law, manipulated a French economy in the midst of a recession by introducing the country to a paper currency, leading to an inflationary stock market bubble. Just like every other bubble in history, this one burst, creating a climate of political and social unrest, which developed into the primary catalyst for the French Revolution itself.
Not to be outdone, he asserts that the Confederate Army did not lose the Civil War due to a lack of industrial capacity or manpower, but rather because of a drop in American cotton demand throughout Europe. This lack of demand precipitated a drop in the yields of the bonds tied to the cotton trade that the Confederacy sold, increasing risk and reducing adequate new investment, consequently leading to a plummet in the debt financing necessary to compete with the North.
Using real historical examples is the way that Ferguson describes complex processes, such as bond issuance, debt products and credit derivatives. He does so in a way that breaks down financial ideas to their most basic origins, and methodically develops them into their more complex final products, making it quite simple to follow and understand these seemingly complicated ideas. This book cannot be recommended enough.