For reasons impossible to ascertain, the Financial Times published a review of Niall Ferguson's history of modern finance, The Cash Nexus: Money and Power in the Modern World, 1700-2000, but without naming the volume (in the online version of the article, at least), on Dec. 27, 2005, almost five years after the book's publication.  --  Perhaps it was lost in a drawer.  --  Stephen Fidler's review asserts that virtually all financial transactions can be reduced to loans, bets, or trades: "understand these building blocks and you understand, at root, what financial markets are about." ...

Business Life

By Stephen Fidler

Financial Times (UK)
December 27, 2005 (subscribers only)

[Review of The Cash Nexus: Money and Power in the Modern World, 1700-2000 by Niall Ferguson (Basic Books, February 2002; hardcover, March 2001; in the U.K., hardcover, Allen Lane, February 2001; paperback, Penguin. April 2002)]

Loans, bets, and trades. These three words, more or less, encapsulate all transactions in the world's financial markets. Raw computing power in the past 20 years has pushed modern finance to levels of sophistication that make it hard for laymen to grasp. But understand these building blocks and you understand, at root, what financial markets are about.

Academics like to use posher words for these three ideas. Loans are a mechanism for allowing an intertemporal transfer of value, a procedure first recorded in written loan contracts in Mesopotamia, present-day Iraq, about 3,000 years ago.

Bets are contingent claims in which one side pays the other depending on the outcome of a future event. They also seem to have emerged in Mesopotamia but were developed in 17th-century Holland, where a market developed in options on shares. Insurance and all types of risk hedging are, in essence, bets.

Trades, which allow the transfers of financial claims, are the key to financial markets. True negotiability was evident in China in the 11th century in the development of paper money, an experiment that lasted 400 years and that failed only as financial markets were developing in Europe.

This academic but beautifully produced and revealing book casts light on where, when and why these concepts first emerged and how they developed.

Consider interest, for example, an extraordinary and hardly self-evident innovation, mistrusted throughout history. According to Aristotle: "The most hated sort [of wealth] and with the greatest reason is usury."

Its development in the ancient Middle East is associated with a loss of self-sufficiency by individuals as labor specialization occurred with the emergence of crafts. The need for exchange that resulted spurred not only credit but the first recorded writing.

The book does not argue that concepts developed in one place necessarily influenced the subsequent development of similar financial instruments. But it roams around the world from China -- where pawnshops, noted in the seventh century, were almost the only private financial institutions before the 19th century -- to Italy, where the beginnings of modern state finance emerged, and beyond to the U.S. and Africa.

The raising of money from the citizens of the Italian cities of Venice, Florence, and Genoa -- mainly through irredeemable forced loans -- allowed governments to convert private wealth into military power and thereby expand their territory. These governments were raising money at rates of 5 to 7 per cent a year, while the European monarchies were compelled to borrow at much higher rates.

The importance of developments in the Netherlands in the 17th century is deservedly emphaszsed. One chapter shows how the foundation of the first joint stock company in 1602, the Dutch East India Company, developed out of earlier methods of financing single voyages. It also explains how this spawned the development of a secondary market in corporate securities -- the first modern stock exchange.

These innovations found their way across the English Channel with William III, Prince of Orange, who assumed the English throne in 1688. Accompanying him was a group of brokers, dealers, and speculators who then adapted and improved the Dutch innovations to finance Britain's growing empire.

In doing so, they created the City of London.

The authors have also uncovered some fascinating historical footnotes, including a financial instrument that has been paying interest since it was issued in the 17th century: the oldest live security in the modern capital markets.

That perpetual security was a bond issued by one of Holland's many water boards, responsible for a 33.5km stretch of dyke. It has paid interest in Carolus guilders, Flemish pounds, guilders, and now, since one of the authors presented the coupons to a successor company, in euros.

The book also describes how speculators moved in to benefit from anomalies that emerged in the market for annuities in the 1830s -- which the British government used to finance itself. In return for an up-front sum, the government would pay an annual amount until the person specified in the contract died.

At age 90, life expectancy was so short that about two-thirds of an annuity's purchase price was repaid every year.

As a result, speculators scoured the countryside looking for hearty 90-year-olds, who found themselves suddenly the subject of unusual and unexpected attention and often the best medical care. In 1834, the government ended the anomaly, putting an upper age limit of 80 on annuities.

I must, however, quibble with the eminent historian Niall Ferguson. He claims to have found the first eurobonds, issued by Russia more than 140 years before the 1963 bonds by Autostrade, the Italian motorway concern, that usually claim that distinction.

But Ferguson has his definitions wrong: the eurobond was innovative because it was issued by a foreign borrower in a currency other than the currency of the country in which it is issued. Ferguson's Russian bonds, raised by Rothschilds, were sterling-denominated foreign bonds issued in London.