Inflation and Financial History Essay

The Ascent of Money

Niall Ferguson's The Ascent of Money, gives an insightful view on the history of money. Ferguson claims that financial history is the background of all history. Ferguson's viewpoints and theories are expressed clearly throughout the documentary. It provides a deeper explanation to the modern-day economy and the structure of financial revolutions.

The Ascent of Money have provided examples in human history that have demonstrated the neccessity of money. A society without money is unsustainable, bartering doesn't enrich economic developments, and hunter-gathers will fight each other for resources instead of trading. A couple centuries before the birth of Christ, Greeks, Romans, and the later Chinese descendants standardized coins as units of account. The amount of silver in the old world was scarce and the New world's expeditions created solutions by discovering rich silver mines; in places like Lima. The abundance of silver in Europe led to a unexpected inflation. Money was worth only what someone else would give in exchange for it. Over time, the financial innovation of credit arose, and sparked a major advancement to economic development.

In episode 1, it states if credit and banks did not exist, the only form of money lending would be to borrow money from loan sharks. Doing so will halt economic development. Christians in Italy were prohibited from lending money with interest called usury because a faithful Christian could not lend to a "brother." In Shakespeare's fictional play Shylock The Merchant of Venice, Shylock was a Jewish loan shark that provided credit but was rejected by other Christians. Then came banking; in which the Medicis were the first family to apply bookkeeping and set up branches under agencys. Their system of banking influenced other people of Europe such as the British and the Dutch. A major financial innovation towards modern banking was England's creation of bank notes and monopolies. Financial innovation from England sparked Industrialization throughout Europe. Industrial investment banks arose along with savings banks later on. The world's economies created central banks ruling the gold standard. The universal gold standard provided exchange rates and a chance of deflation. The Great Depression, which greatly affected the U.S. and Germany have made the nations realize that a central bank is neccessary for a stable economy.

Episode 2 reveals the creation of the bond market. States started issuing bonds at a fixed interest rate. A government bond would be purchased and sold above or below its original value depending on the credibility of their actions. A government's bond market long term rate set the rate for the whole economy. If a government lost a large amount of credibility, it would have to issue bonds with a higher interest rate which would increase the state's cost as well. The bond market developed out of Italy where Italy's city-states sold bonds to their rich residents. Raised money was funded to pay mercenaries, for example; Florence paying the mercenary Giovanni. Selling bonds affected certain major events in history such as the American Civil War which had an unexpected turn by providing cotton for the Confederates at a price before the war. The U.S. forced defaulting nations to pay back debts; which in turn allowed some of them to live on bond yields. During World War I, governments increased their supply of money which created inflation. After the defeat of Germany and its allies, a weak central government and enermous spending led to a drastic drop in the currency rate creating hyperinflation.

Episode 3 explains the financial innovation of the joint-stock limited-liability company. This allowed investors to gather resources while not having to invest their whole fortune. John Law was the first person to create a stock market bubble. In 1602, The East India Company was created and its shares were traded in the years to come. The East India

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