Understand Economics By Reading History

BR readers must read Niall Ferguson’s “The Ascent of Money: A Financial History” (2008).

This historian, I say again – historian, nails the current economic crisis when he is writing back in 2007. Calling it blow by blow and laying out the options so accurately validates his credentials.

Ferguson’s book is a tour de force on the modern history of economics.

He describes how the financial revolution preceded the Industrial Revolution. He makes the case for money as the root of most progress. (I try to project that in the future in my writing about a Munificent Destiny based, in part, on growing capital).

He shows the influence of culture. And individuals innovate. New ideas make a difference. Economics evolve.

Yet, it always comes back to capital and the essentially human influences – fear and greed rage – that shape the economy.

Socialism and special interest statism transform personal theft into public theft.

Ferguson shows how China and the U.S. are like England and the U.K. in the 19th Century.

Likewise, he shows how catastrophes are overcome.

And, that this current crisis isn’t unique as the politicians are bleating. It’s a bubble. The U.S. – and other countries – have gone through other bubbles.

This bubble doesn’t compare to a real catastrophe. Like what happened in the South when the capital value of the money went to zero in 1865. It took 90 years and 3 generations to come back.

Great book. Easy reading. No math skills needed other than recognizing which numbers are bigger than others – when the author lays out what happens and why.

Super perspective on the current crisis. How President Bush screwed things up with his bailout actions. And how President Obama’s actions so far are precisely the wrong things to do. Likely, soon to be followed by more wrong – and detrimental – actions.

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14 responses to “Understand Economics By Reading History”

  1. Anonymous Avatar

    Sounds like you need to read “Trust: The Social Virtues and the Creation of Prosperity” by Francis Fukuyama.

  2. Anonymous Avatar

    Yo Bowden,
    I’ll have to put this on my list. I’m still muddling through Paul Krugman’s “The Return of Depression Economics.”
    A few points (without having read the book). Reviews of it are mixed. Some readers found it as you did — a lively romp through the history of money. Others thought that well-credentially Ferguson penned this as a low-mid-brow effort making him the “James Michener” of economic history.
    Knowing how much you enjoy religion, I thought I’d throw in this review from the U.K.’s Guardian:

    “Ferguson is by temperament and breeding a financial Stoic, to whom all financial phenomena, however repellent or terrifying, have been designed by the Comptroller of the Universe for the prosperity of the whole. It is a hard philosophy for these times.”

    Pretty flinty stuff. Meanwhile, I must quibble with some of your statements.

    I.E. “Like what happened in the South when the capital value of the money went to zero in 1865. It took 90 years and 3 generations to come back.”

    Not sure this is right. Confederate dollars went out at Appomattox in 1865, right? After that day in 1865, the South was forced to use the U.S. dollar again.I doubt that there was a different value for the greenback inthe North as in the South. The dollar had the same value in all states.

    Secondly, rgarding rhe Obama-bashing, I just want to point out that George W. Bush had his stimulus package, too. He gave away money and drove up deficit spwending, too. Ib fact, he undid Bill Clinton’s fiscal conservatism.

    Bush’s TARP financial bailout ended up boosting the Wall STreet pals of Treas Sect. Paulson from Goldman Sachs. Much of the money went to bank holding companies and not directly to big banks which were loath to make loans, contradicting what TARP was supposed to. And some firms, such as Merrill which faltered and had to be bought out by Bank of Smerica in a government-brokered arrangement, stiull managed to give scores of managers millions in bonuses for failure. Yuo somehow don’t make note of this.

    WHile you may be correct that the extent of this recession might be exaggerated is probably a routine bubble (see recent McKinsey Quarterly), you are unfair bashing Obama. He really doesn’t have much choice with his stimulus package, however flawed it may be. If ytou bash Obama, but sure to bash Bush, too.

    Peter Galuszka

  3. Anonymous Avatar

    “He shows the influence of culture. And individuals innovate. New ideas make a difference. Economics evolve.

    Yet, it always comes back to capital and the essentially human influences – fear and greed rage – that shape the economy.”

    Yup. For example.

    “…the Grassley-Sanders (!) amendment to the stimulus bill places new restrictions on hiring practices of firms receiving TARP funds; specifically, it will be more difficult for these firms to hire highly-skilled foreigners on H-1B visas. Seems to me that restricting extremely talented MBA’s and the like from staying in the U.S. is not necessarily the best medicine for firms that are struggling to stay afloat under an anchor of poisonous assets.”


    “…highly-skilled workers (such as those here on H-1B’s) seem to create jobs by improving existing companies and starting their own ventures. “

    Evan Herrnstadt


    So, what we have is fear and greed driving the Buy-American sentiment into the immigration market, where it stamps put the influence of cullture and the innovation of individuals.


  4. Anonymous Avatar

    Ray – American business bitches left and right that insufficient numbers of students study math and science, but then supports large expansions of H-1B visas that drives down the compensation received by those who study math and science.

    I’m not for stopping immigration, but why must we always crap on our own kids – regardless of their race, creed or color so that a few at the top can make more?

    If we want our kids to study math and science, we need to see that their compensation is not driven down. If there is a way to do this while keeping H-1B visas higher, I’d like to know how it works. But if no one can explain this, let’s keep the imported competition lower for a few years.


  5. Anonymous Avatar

    Well, I’d say tht your kids can compete with them here under US wages (even if depressed as you say) and US conditions, or else they will have to cmpete with them anyway on foreign soil.

    It’s a global economy.

    If that’s the way you feel, why not just close American schools to foreign students?

    The idea is that different cultures and innovation based on growing up facing different problems winds up creating new businesses that grow the economy and offer our kids (whther educated or not) more opportunities. Same as the idea that lowering taxes grows the economy. ;-).


  6. Anonymous Avatar

    If you’re looking for a big paycheck straight out of school, think about an engineering degree…….. Despite the high pay, the number of engineering degrees issued has barely budged the past 10 years; 67,000 degrees were handed out in 2006, the latest year available.

    There are several majors with better growth potential than the assorted engineering degrees. Engineering salaries tend to start high, but there is not huge growth on an annual basis.Meanwhile, the economics, finance and math majors are pursing jobs with salaries that often double once they’ve gotten some decent experience under their belts.

    The kinds of majors where you learn to integrate mathematics and science with the everyday world have a tremendous benefit in terms of earnings potential, These include economics, engineering, finance and mathematics.


    Economics integrated with science, who would have guessed?

    Hey, wait a minute, that’s MY gig. I should be getting more money. I’m going to have to talk to my boss, Ramesh, about that.


  7. James Atticus Bowden Avatar
    James Atticus Bowden

    PG: You’re right. I need to bash Bush on the bail outs too. I’ll amend my post when I get back from travel.

    But, bashing Bush doesn’t make any part of BHO’s stimulus the right thing to do. He certainly doesn’t have to do it.

    The point about capital in the South is that most of the U.S. dollars were converted to paper Confederate money – and a lot of wealth had been converted to paper Confederate war bonds. They went to zero. So, most of the capital left the region.

    Lacking an infusion of capital, it took 90 years to build it back up.

  8. Anonymous Avatar

    Thanks for your reply. Re: Confederate money, lose a war and your money and bonds go to hell. Happens everywhere — Weimar Germany, Nazi dough. Even in the Soviet Union after losing the Cold War, the ruble switched around into a new Russian Federation currency. Inflation went to 2,000 percent a year for a while. And when East Germany fell, Helmut Kohl proposed a very generous and expensive exchange rate for east marks. It cost the West Germans a hell of a lot but they wanted East Germany back in the fold before the Russians changed their mind.

    Peter Galuszka

  9. Anonymous Avatar

    On reflection, one more question. If it were 1890, why in hell would anyone want to buy Confederate bonds?


  10. James Atticus Bowden Avatar
    James Atticus Bowden

    PG: I updated the post.

    You lost me about 1890 and Confederate bonds? Huh?

  11. Anonymous Avatar

    Learning economics by studying history.

    JAB should love this one.

    Which five states have the highest current deficits today?

    Which five state have the highest aggregate taxes, and per capita budget ?

    Which five have had the highest debt ratios in recent years?

    Hint, California is number one.


    Bonus quiz.

    Now compare those states to some Euripean ones like Iceland, Scotland, and Greece.


  12. Anonymous Avatar

    Mighty fair of you to add “W” to the fray.
    Regarding yur questionj, I’m not sure what I am talking about. I was referring to this statement in your post:

    “This bubble doesn’t compare to a real catastrophe. Like what happened in the South when the capital value of the money went to zero in 1865. It took 90 years and 3 generations to come back.”

    Of course the money goes away when the C.S.A. falls. What took 90 years to come back? It couldn’t have been the money.


  13. James Atticus Bowden Avatar
    James Atticus Bowden

    Anon: Thanks for the quiz. Will you post the answers?

    PG: If you look at per capita distribution of wealth by state or region, yes, it took 90 years to rebuild the base of capital in the South.

    There was some investment from outside the region, but not much until WW I. If you grow capital at 7% or so – it doubles in 10 years. It took a long time to build up capital in the South.

    That would be a good Phd for some young econ student to do a monetary history of the region like Friedmann did for the whole US.

  14. Anonymous Avatar

    Yo Bowden,
    Thanks for your explanation. I see you weren’t talking about money but macro-regional economics. I guess what you say is right but it really does depend on what sub groups of the South you are talking about, at least in the context of the historical periods you refer to.
    As far as a young scholar I hope you don’t have me in mind. I am almost as old as you are.

    All the best and I want my martini.
    Peter Galuszka

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