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- [00:01]
Host 1
We don't seem to be able to live within our means. I mean, we really are in trouble in that aspect of things, are we not?
- [00:07]
Neil Ferguson
Yes, deep trouble. If you borrow to consume, well, that way lies trouble. And that's what we've been doing. You're finally going to be forced, whether you're China, Europe, the uk, the United States, to do something radical. And this is where Mr. Milei is interesting.
- [00:26]
Host 1
Are we headed in a sort of 1920s direction, 1930s direction?
- [00:32]
Neil Ferguson
The ideologies are the same old, same old. It's sort of depressing that we can't come up with new material. But here we are. Those who enter adulthood without a clue about how interest rates work, who don't know what a bond yield is, who've never made an investment in the stock market and never will, those people will have worse lives than the people who get informed. You will be poor.
- [00:58]
Host 1
Samuel Ferguson, welcome back to Trigonometry.
- [01:00]
Neil Ferguson
Good to be back.
- [01:01]
Host 1
You are one, of course, one of our favorite historians to have on the show. And the thing that we want to talk to you about today is money. One of the things you have been prominent in trying to raise attention for an awareness of is the level of indebtedness the Western world is in, particularly as it relates to our military spending, because there's some historical patterns that are very unfavorable on that side of things. We'll get into that. But we thought, you being one of the world's most interesting and prominent historians, the first thing we should talk about is something you wrote about immediately after the financial crisis in your book called the Ascent of Money, which is money, debt, finance. And the best place to start, I think, is right at the very beginning, which is, what is money and where does it come from?
- [01:48]
Neil Ferguson
Well, it's great to be back. When you said we want to talk about money, I thought, I don't owe them anything. In fact, I had the involuntary Scottish reaction. I nearly touched my wallet just to make sure it was there. Money is a very ancient thing. It's the way in which human beings transact that is superior to barter. And so we find thousands of years ago, you know, 2,000 years before Christ, that IOUs are being carved in little pieces of clay in ancient Mesopotamia. And that's really the origins of money. Because if I owe you two silver rings, it's much more convenient to just write that down than for me to say, I think that's roughly three sheep or maybe two and a half goats. So money is just a way of making exchange Much smoother than if you tried to do it by barter. I mean, if you've ever tried barter, you'll realize immediately the difficulty, that sheep and so forth are not that fungible. So that's the key concept behind money. And almost anything can serve as money. When you say money these days, there are still people who think that it's pieces of paper or cloth, banknotes. Those have largely gone extinct in England, as far as I can see. But Americans still tend to think of money as dollar bills. Older people will remember coins, round metal objects. So that was money for quite a few centuries, but that's relatively recent by historic standards. The first money is, as I said, clay tablets with inscriptions on them. Shells have been used as money. Large, inconveniently large stones have been used as money. Pretty much anything can be used as money. Stephen Colbert once asked me on the Colbert Report, am I money? And I said, yes, if you know, if you want to be. If you want to be a medium of exchange, then you can be money.
- [04:03]
Host 1
And I imagine that there is a bit of a transition between barter and money in the sense that an IOU carved in a tablet, it implies a level of social trust or some sort of cultural adaptation and innovation to facilitate. Is that a fair assumption?
- [04:22]
Neil Ferguson
It's important for money to work, that it should be trusted. And in fact, I think I once wrote in the Ascent of Money that it's. It's trust inscribed, particularly if it's a piece of. Of clay. I mean, its intrinsic worth is almost zero. But if it says that it's exchangeable for two silver rings or three sheep, then you kind of have to believe that a counterparty will agree that that's the case. So there's an element of. Of trust. That is why we don't really encounter money in prehistoric societies. It's something that really is associated with the beginnings of civilization. Of course, today most money is invisible. It really exists in electronic ledgers of banks, and that's most money today. Relatively small amounts of money consist of banknotes and coins, tiny in some cases. And so most money is in fact, invisible electronic items in bank accounts. And in fact, most money is created by banks when they credit somebody with an amount of money. We all have to trust banks for a system based on fractional reserve banking to work. You mentioned that the ascended money was written after the financial crisis. That's incorrect. It was written before the financial crisis and published just before the failure of Lehman Brothers, which tells you that I anticipated the financial crisis, which I did because the book was begun in 2006 at a point when very few people realized a huge financial crisis was coming. But that was my motivation for writing it. I was very confident that a large financial crisis was coming. And at the heart of that crisis was a loss of trust in banks. Also young, you may not remember the lines outside Northern Rock. There were genuine bank runs in Britain and the United States. And so at the heart of modern money is the role of banks. If you lose trust in banks, then you're in a financial crisis.
- [06:29]
Host 2
And there's always been a connection between money and precious metals, particularly gold and silver. Why is that?
- [06:39]
Neil Ferguson
I'm not sure if always is right. Periodically there has been. Gold is something that has been prized by human beings since time immemorial for the obvious reason that it looks nice and it's extremely durable and it's scarce. I mean, these things are quite a combination. So we've valued gold and most civilizations have valued gold, but not always as money. And so gold was valued by, say, Inca civilization in South America, but wasn't used as money. The interesting thing that happened in the course of history was that people began to use amounts, fixed amounts of gold and fixed amounts of silver for payments. And the sort of classic gold and silver coins are precisely that. But the problem is that because gold is very rare and silver's relatively rare, you can only really use gold and silver coins for quite big transactions. And so you have the problem of, well, what do we do for small change? And hence the need to use base metals to produce coins for smaller scale transactions. But the link that you mentioned becomes hugely important in the course of the late 17th, 18th and 19th centuries, when it is decided, beginning in this country, England, to create a fixed relationship between money and gold comes to be called the gold standard. And so pounds are defined in terms of a quantity of gold. This is one of Isaac Newton's many contributions to our civilization. At the same time, there were other systems that define money in terms of a quantity of silver and systems which did both, bimetallic systems. So for much in modern history, the kind of history that tends to get taught in schools in the 18th and 19th centuries, say at the time of the American Revolution, the French Revolution, going right through the 19th century, the time of Britain's rise to imperial dominance, we are in a world where there are fixed legal relationships between money and precious metal. And so you can go to the bank of England and say, I got this, this banknote that says £100 on it. I'd like the requisite amount of gold. So that was the kind of system that for a period of centuries became very dominant, persisted through into the early 20th century. It was suspended during wartime for reasons we can get into. And it finally entirely broke down after World War II. It had a kind of afterlife as the Bretton woods system, when only the dollar had a relationship to gold. And then in 1971, Richard Nixon severed that final link. And since 1971, there's been no link between precious metal and money, except that central banks like to keep in their reserves some quantity of gold.
- [09:52]
Host 2
And before we get into that, because I think that's very important to the conversation that we are having, I would like to delve into a very interesting story you told in the book, which is a man called. I think it's Francisco Pizarro and his journey from Spain to South America and creating a form of currency.
- [10:15]
Neil Ferguson
So the dream, if you were in medieval Europe, was, if only we could find some more gold, because there just wasn't that much. And indeed, part of the problem for medieval economies is just there doesn't seem to be that much gold or silver in these relatively underdeveloped agricultural economies that produces some interesting innovations. One of them is the bill of exchange, which is another form of iou, only this time on paper, where merchant A says, I'll pay you, merchant B x amount in three months time. And these IOUs, bills of exchange were tremendously important, particularly in the period after the Black Death, when there's a serious labor shortage in Europe and there's also a chronic shortage of precious metals. So what do you do in a world where there isn't enough gold? Go and find some, obviously, and pretty clear that there isn't much in, say, England, not famous for its gold mines. And so a lot of exploration, a lot of what sends men in ships around the world, across the Atlantic or around the Cape of Good Hope. In the other direction is the search for gold. And interestingly enough, the Spaniards strike it rich in Central and in South America, they find substantial deposits of precious metal in what, today's Bolivia, Peru, Mexico. And that is enormously good news for the Spanish or Castilian Empire, which acquires not only the territory and the people living there as a result of the conquistador's success, but also it accesses all the mineral rights. I mean, there is literally a giant mountain of solid silver, Potosi, which I remember visiting when we filmed the television series of A Sense of Money. There is a television version, by the way, for those who've lost the power of reading books. You can find it all. It was all stolen by YouTube, the intellectual property brazenly nicked. So the series of Ascend money shows you the silver mountain, the great mountain, great mine of Potosi, which is one of the principal sources for bullion for gold and silver. And those were then sent from Spain's empire in the Americas, all around the world, principally to pay for the incessant wars that the Spanish kings fought in Europe and elsewhere.
- [12:47]
Host 1
I think this is taking us partly towards the modern conversation we want to have, but I also think it's an important conversation to have from a historical perspective as well, which is the leap from IOU for this thing that you've given me to IOU because you've given me money that I then have to repay you at a higher level. That is an extraordinary cultural adaptation that I imagine, first of all, it'd be interesting to know when that happens and how that happens. But also I imagine that is transformative for human society because among other things, allows you to effectively do things now that otherwise you'd have to wait 20 years to do.
- [13:27]
Neil Ferguson
That's right. In the end, the most important development is to have institutions that can smooth all the different transactions that people want to make. And these come to be called banks. And we can see the first modern banks emerging in Renaissance Italy in Florence. The Medici start out is essentially foreign exchange dealers where you can bring in your coins that you picked up trading in Germany and exchange them for coins that are more likely to be acceptable in. In Rome. And they sat on benches banky. And that's where the word bank comes from. So what do banks do? Well, banks create a kind of centralized exchange where people with money can deposit it and people who need money can borrow it again, to put it really simply. And this clearly greases the wheels of commerce. It's part of the reason why you see a significant uptick in economic development in northern Italy at the time of the Renaissance. There is a more advanced financial system there. At the same time, you can see in London, the merchants of London start to move beyond there being goldsmiths to there being banks. Bankers who can lend money to kings are really the progenitors of the modern city of London. Kings matter because. And also republics. But kings mostly matter because they. They always have greater financial needs than they can, that they can satisfy with taxes on their subjects. And so one of the early sources of debt finance is just the need that monarchs have. King of Spain needs money because he's fighting wars against the Dutch who decide to revolt against Spanish rule. That's part of the attraction of having silver and gold mines in the new World. You can finance the wars that way. So what we see happening in early modern Europe is the emergence of the modern financial institutions we know today. Banks and systems of public debt where governments can borrow from their subjects, or in the case of the Venetian Republic, from citizens, in order to finance those big expenditures like wars, that you can't really finance out of current tax revenues because they're way more expensive than the annual tax revenues can afford. Those are two big leaps forward in the financial system. And so by the time you get to, let's say, 1700, you've already got certain key components of modern finance. You've got the concept of money as being coinage, but also potentially notes. You've got banks which allow borrowers and lenders to transact through some kind of central institution. And you've got the beginnings of a bond market. I'll pause to explain bonds. Quite important thing to understand. So in a bond, the government will say, you're going to lend me, the government, 100. Fill in the currency blank and each year I'll pay you 5 of that currency at 5%. And I'll keep doing that for a fixed amount of time. It might be 10 years, it might be 100 years, it might be in perpetuity. And these bonds are the basis of government debt management. And they originate in Italy, in Venice, and then all the different Italian city states develop that system of public finance.
- [17:19]
Host 1
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- [19:15]
Neil Ferguson
Well, it complicates matters that Christianity and indeed Islam both take a rather dim view of lending money at interest. There are even laws against it and the crime is defined as usury. And so this makes the business of being a Medici somewhat more complicated than it would otherwise have been. The way around it is that you don't explicitly charge interest, but you have commissions or payment arrangements that in effect charge interest. So there are ways around their workarounds.
- [19:56]
Host 1
Sorry to interrupt. Just I think it's worth asking, where do the restrictions, I mean, for two major religions to take a dim view of this, and you put it very diplomatically there, to have that attitude to lending, there's got to be some pretty serious motivation for that, that view. Where does that resistance to the idea of lending come from?
- [20:18]
Neil Ferguson
Well, the love of money is the root of all evil. Those are doubtless lines that you know that there is a recurrent theme in Christianity that casts a shadow over the love of money, not money itself. It's the love of money that's the root of all evil and views with some skepticism the activity of money changing. I think this has quite deep roots that are probably pre Christian. Somehow. It's all right if you own a bunch of sheep and the flock naturally increases because the sheep have lambs, but it's not okay if that process happens to your flock of money. So there's an aversion to the notion of the natural increase of money through interest or the interest that you might get from lending it out. So there's this moral distinction that gets drawn early on between it being okay for you to increase your agricultural capital through the natural increase of the sheep, but it's not okay for you to Increase your finance capital. That moral opprobrium that's cast over money lending has an important feature because there is a group, a religious minority that isn't constrained when it comes to lending money at interest, and that is the Jews. And so part of the issue, if you don't know what I'm talking about, try Shakespeare's Merchant to Venice, is that there is a group lending money at interest in Italy, indeed in much of Europe, that is neither Christian or for that matter, Muslim. It's a, it's a racial religious minority comes to be seen as a racial minority. And that's part of the reason that, that there is a kind of suspicion, antagonism towards the lending of money.
- [22:13]
Host 1
But is there not also another thing? We have this great saying in Russian about borrowing money, which is when you, when you, when you borrow money, you take someone else's money, you get someone else's money for a short period of time, and when you pay it back, you give away your own money forever. There is a disconnect in terms of how you feel about the process. And I mean, I don't know what the etymology of the term usury means, but there's a sort of, I think, instinctive feeling that people have, which is that someone who gives you money and charges you for that, it's almost like if you borrow, I don't know, a rake from your neighbor to rake your garden, they wouldn't charge you for it. So why would you charge me for borrowing 100 quid?
- [22:55]
Neil Ferguson
So that kind of argument is, is quite common not only in Eastern Europe, but in, in Western Europe too. And I think one explanation for this is that if you go back to the medieval and early modern period, interest rates are quite high. Why is that? Well, it's, it's risky to lend money. People who lent money to British kings, or indeed any European kings, would frequently be disappointed because the kings would say, you know what? You remember that money I owe you? I decided not to pay you, and what's your recourse? You don't have any. And if you put up too much trouble, off with your head. So part of the problem is that interest rates in the medieval and early modern period are pretty high. I mean, double digits. And that makes it feel like it's really expensive, you know, credit card rate, expensive to borrow money. That's part of the story. Interest rates trend down historically as markets become more liquid, become more efficient, and risk is reduced because the rule of law starts to protect creditors. But in the early modern period, it's an expensive thing to take out a loan. And it's expensive because so many people default on their loans. I think that's the best explanation I can really give you.
- [24:11]
Host 1
Sorry, France, I just want to come back because I've interrupted Neil twice at this point.
- [24:15]
Neil Ferguson
I mean, obviously if I borrowed your rake for a year and used it aggressively to rake my garden and the leaves and earth in my garden and I give it back to you, it would have worn down someone. So the rake would in practice be worth less. If I borrow your car for a year and say give it back to you and. And I say, well, thanks. Thanks very much. And you don't charge me your mug because the car's worth a lot less than it was after I've spent a year driving it around, not worrying too much about it because not my car. So I mean practice.
- [24:50]
Host 1
And you have no use for. I have no use for it for a year, which I have to find some way of compensating.
- [24:55]
Neil Ferguson
Precisely.
- [24:55]
Host 1
So I'm not suggesting it's logical.
- [24:57]
Neil Ferguson
It isn't logical. No, it's not. So the key thing to get across here, let's be clear. The constant drumbeat of hostility to money lenders, to bankers, to Jewish bankers, to non Jewish bankers, is kind of absurd. It's based on the kind of stupid notion that money doesn't have a price. But of course it has a price. Just as the use of a car for a year or a rake for a year has a price.
- [25:24]
Host 1
That's right. And so I derailed you only because I think this is an important distinction. But you were talking about the way that Renaissance Europe made adaptations that took finance, created modern finance, or the beginnings of modern finance. And you were talking about why they were able to do that.
- [25:44]
Neil Ferguson
I think it's a very striking feature of world history that these things happen in Europe. They do not happen, say in China, which has a much simpler monetary system, which has a. A system of coinage, no real system of public debt, fairly basic and rather low yield system of taxation. China's empire runs on different rails. Why is that? And the I think most plausible answer, which I also try to explore in a book called Civilization, is that Europe is divided into a lot of relatively same sized polities and these policies are in aggressive competition with one another. They regularly make war on one another. Periodically, one of them will try to create a European wide empire and the others then band together to stop that. And war is in many ways the driver of financial innovation in Europe. And it just takes a very different form from the geopolitics of East Asia, which is characterized by one fairly large and more or less homogenous empire with a relatively low level financial system, with taxes as a share of gdp, much smaller. So one of the lessons of financial history is that you need to have the kind of stress of regular warfare to propel financial innovation forwards as well as to propel scientific innovation, exploration. People are motivated by a sense that, that there isn't enough money for the needs of the state. And that's why you set sail for the Americas, thinking you're going to the Indies, you're looking for precious metal. That's why you sit down, come up with the idea of public debt. Hey, wouldn't it be a good idea if the rich people lent the government money to fight the war? These innovations, I think, are propelled by the imperatives of geopolitical conflict in Europe.
- [27:47]
Host 2
But in a way that we talk about the borrowing and the attitudes to people who lent us money. Is that why Shakespeare talked about a pound of flesh when it came to Shylock?
- [28:03]
Neil Ferguson
Well, if you think about the Merchant of Venice, Shylock is trying to collect on a debt, but decides when it's clear that he can't be paid, that he will take full advantage of what he thinks is his power as a creditor and demand the death of the debtor. And that leads, of course, to his coming a cropper. Because as Shakespeare makes clear, that's actually a wicked thing to do.
- [28:34]
Host 2
Absolutely. But it's also, there's a hypocrisy there because as we've alluded to, without borrowing, without taking essentially financial risk, innovation can't happen. And that's innovation. Whether it comes to exploration, whether it comes to setting up a business, whether it comes to, you know, a government, for instance, building infrastructure. We need to borrow. This is essential, isn't it?
- [29:02]
Neil Ferguson
Well, it's very risky. I mean, Sherlock's been asked to finance oceanic trade, and ships sink quite regularly in those days. So there's quite substantial risk in financing any maritime trade. That's, of course, the side of things which would make you sympathetic to Shylock before he decides to go for the pound of flesh. But I mean, I think the point you make is a really critical one. Just as there's a cost to my borrowing a car for a year or for that matter, a tractor, so there's a cost to my borrowing £100,000 to start a business. And anybody who's going to bet on my business being successful will need to be compensated for the risk. And that's at the heart of almost all financial transactions. What's the appropriate compensation? Because there are risks. One risk is the default risk which Shylock encounters. Ah, sorry, I can't pay. The ships all sank. What can I do? It was the weather. But there's other, other risk too. Suppose that we contract this debt in pounds, but we do it in the 1970s and in the period of the loan the inflation rate rockets up, as it did when I was a kid, into above 20%. And so the debtor gets to pay back in these depreciated pounds, the purchasing power of which has been reduced in a year by 20%. There's also a risk there. So if you're lending, you ask yourself what's the default risk and what's the depreciation or inflation risk that I am running an efficient financial markets, to use a term that's been much abused over the years, deliver. If there's sufficient information and sufficient liquidity, they deliver a reasonable price for those risks.
- [30:56]
Host 2
And we're talking about risks. And one of the stories that you tell in the book, which was fascinating, which is all about risk, is the story of Nathan Rothschild which every people know, it's a famous name but particularly the anti Semites who will be, you know, the moment they hear the word Rothschild, immediately they're kind of the light bulbs start pinging. So let's talk about the story of Nathan Rothschild because that's a story about financial risk lending, but also vast amounts of wealth that come as a result of that.
- [31:30]
Neil Ferguson
Yes, the story of how the Rothschilds made their first million is a, a famous one. It's even been made in to movies a couple of times, once by the Nazis. And, and that gets to your point that this story has often been used by anti Semitic writers. I, I wrote a history of the Rothchilds back in the 1990s based on the archives of the, the bank here in London and tried to tease out what had really happened. And it's important to tell these stories with historical documentation and, and as much accuracy as you can muster because it's really the only possible antidote to the, the anti Semitic myths that the myth says that in a somewhat illicit way the Rothchilds make money from the outcome of the Battle of Waterloo, while heroic Frenchmen and Britons are, not to mention Germans are perishing in the battle. They're profiting. So what really was going on? What was going on was that Britain, other European countries fought recurrent wars with France from the 1790s, from the period after the French Revolution. Right. Up until the Battle of Waterloo in 1815. And a variety of different instruments were used to finance these wars, including bonds, which the British government was able to issue in substantial quantities. And bankers. And the Rothschilds were one of a very significant number of bankers who contributed to financing the war effort against Revolutionary and then Napoleonic France. One of the most important things that the Rothschild brothers did, there were five. In the course of the period prior to 1815, they left Frankfurt and established themselves in five different financial locations. That was the original base in Frankfurt. There was a house in Vienna, a house in Naples, a house in Paris, and a house in London. These five houses of Rothschild contributed primarily by advancing gold to the armies in the field. If you're an armed force marching your way, say, up from Spain towards France, you really can't pay with paper. The locals want to have hard currency. And so part of the challenge was getting the gold to where it was needed ultimately by the Duke of Wellington's army. And the Rothschilds had been involved in those transactions, as well as other transactions occasioned by the Napoleonic wars. Okay, this is where it gets exciting. So the Napoleon wars appeared to be over before 1815. It appeared that Napoleon had been defeated and he had been sent into exile on the Isle of Elba and peace had arrived. And when peace arrived, there was significantly less need for the gold that had been used to finance his ultimate defeat. When Napoleon makes a comeback for 100 days in 1815 culminate at the Battle of Waterloo, the Rothschilds, of course, are scrambled into action again to help finance another campaign against Napoleon. But nobody knows how long it's going to last. And indeed, it's reasonable to expect a long time, because Napoleon has an incredible record of military success. And he's back. The Emperor is back. He appears to be back in control of France when the news breaks that he's been defeated in the Battle of Waterloo. It takes a while for that news to spread. No Internet, no telegraphs. The only way you can actually get news around Europe in 1815 is to have guys on horseback riding to the Channel coast, handing the message to somebody in a boat who gets across the Channel, hands the message to another guy on a horse, horse gallops to London, news is delivered. The Rothschilds clearly got the news before the British government that Napoleon had been defeated. So their couriers were faster. And this certainly was part of the reason that they were able to make a significant amount of money. But as I showed in the book, the House of Rothschild, also known as the world's banker in all good bookshops. There was a terrible moment when they thought they had actually blown up because they didn't expect Napoleon to lose. They'd expected a protracted campaign and they'd accumulated a lot of gold in the expectation of that continued campaign. When they heard the news that it was all over and he'd lost again, there's a moment of panic within the Brotherhood. They're writing to one another, who has the money? I thought you had the money. Wait, where's the money? They really thought they'd overextended themselves and were about to come a crop. And Nathan Rothschild was not the eldest brother, but he was the smartest brother, he was the one in London. And Nathan was one of these people who can, as they say in New York, turn on a dime. As soon as he realizes what's happened, Nathan radically shifts the position and goes long British government bonds, known to this day as gilts. He goes long British bonds because he thinks peace is now here. It's all over. These bonds are going to rally. In other words, interest rates are going to come down. We're going to peacetime economy. And it's that trade. Buying bonds before the rest of the market knew that Napoleon had been defeated, that made them a million pounds, which at that time was a lot of money. That's what really happened. And it then becomes part of the mythology of the Rothschilds right down to the present day.
- [37:22]
Host 1
Where is the allegation of cynicism or sinister behavior within, within that? Where, where is the divergence between what you're telling, which is what happened and.
- [37:33]
Neil Ferguson
And the myths beginning really not long afterwards in the 1820s, particularly in, in France, critics of the Rothschilds, who certainly included people sympathetic to Bonaparte, who were hostile to the restored royal regime, began to portray all of this in a somewhat scurrilous light. And there are two kind of pieces to this. One is, well, you know, heroic people are laying down their lives and they're sitting in London making money. And the second one is, well, there's some kind of insider knowledge, there's something disreputable about the fact that they front run the market before even the British government knows, knows the story. But, but that's sort of not enough for a conspiracy theory to have legs, right? And so quite quickly, what you get is this element of the supernatural that there's something really not quite right about the fact that they can know this so early. And so you get the legend of a kind of talisman that protects the family and makes the success of the business. And this idea that there's a secret power at work is interesting because it exists in the anti Semitic literature or the anti Rothschild literature, and it exists in Jewish literature, including in Russia, with the notion that there's something magical about this family. They're kind of the super Jews, and Rothschilds refer to themselves as, you know, the royal family of Judaism. And so this idea that there's something kind of more to it than just business acumen, I think is part of what fuels this really powerful conspiracy theory. I mean, I think what's interesting is it morphs into a series of apocryphal sayings along the lines of, you know, the time to invest is when there's blood in the streets or the sound of guns or of cannon fire is a chance to make money. Those apocryphal sayings arise in the course of this story, morphing into a myth.
- [39:39]
Host 1
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- [42:01]
Neil Ferguson
I think that's right. In the course of the 19th century, which is over time, an increasingly democratic age, where more or less everywhere there are widening of the franchise, politics changes. And one of the targets of the more democratic politics is the relationships between bankers and politicians. And you get this in most countries in the United States, there was always a skepticism about financial power. It was right at the earliest stages of the republic that you had the debate over whether there should even be a central bank. The decision not to allow New York to have too much political power to create Washington, D.C. is part of resistance, particularly by the southern founders, to Alexander Hamilton's vision of a quite British form of United States in which all power, financial and political, would be concentrated in New York. So the 19th century debate evolves in interesting ways to offer a critique of those who run the financial markets. And the Rothschilds were the dominant financial family for most of the 19th century, far bigger than, say, J.P. morgan, who was a newcomer new on the block. In the late 19th century, the Rothschilds and finance become almost synonymous with one another. The relationship between that financial world and the political world of kings and. And of ministers, prime ministers and finance ministers. Now, those relationships existed, of course they existed because the governments are consistently encountering the problem. You seem to have a deficit, your majesty. And here's the choice. Raise taxes or call the Rothschilds, obviously politically more convenient to go down the borrowing route. These relationships exist, they're documented, there's correspondence. I spent a great deal of my time in the 90s piecing all that together. The critique that comes from democratic political figures is, well, there's something not quite right about this. I mean, a. Aren't they making a crazy amount of Money, and surely that's ultimately taxpayers money. And B, isn't it a little bit cozy that the Prime Minister is so close to the Rothschilds that, oh, his daughter's just married a member of the family? Those are the critiques, but they come from both the left and the right. And this is a really important thing. The critique of finance, or finance capitalism, is a socialist critique. It's there in Marx, but it also becomes a critique on the far right. And in the 1820s, those distinctions aren't yet clear. They're just radicals. And radicals don't like this. They don't like the Rothschilds, they don't like the restored monarchy. By the time you get to the 1840s, 1850s, there are two flavors. You can be a Marxist, a social democrat, you can be for the workers and against the capitalists, but that's not quite strong enough drink for you. Then you can join the nascent radical right, which ultimately evolves through populism into fascism. And you say, you know what the real story here is? The Jews are taking the money of the Christians. And that's, I think, the kind of bifurcation that you see in the democratic politics of the 19th century.
- [45:26]
Host 2
Doesn't a lot of this anger, resentment, frustration come from people who don't really understand money. They don't understand finance, they don't understand the bond market. So where you have this absence of knowledge, what then gets fed into it is conspiracy theories, anger, resentment, which then leads to antisemitism, resentment, which then leads to movements like communism, socialism, et cetera, fascism.
- [45:56]
Neil Ferguson
I think one of the odd things about the way education evolves in the course of the 19th century is that while we generally agree that it's a good idea to teach people that literacy and numeracy, not to mention some history and maybe a foreign language, we never really sit down and teach them about finance. And indeed, financial illiteracy is a very striking feature of our world today. It's a very complex financial world. Everybody is expected soon after they leave education, and perhaps even before then to understand how a loan works, even if it's just a student loan. We expect people intuitively to know how interest rates work when they've probably only encountered the concept in a mathematics class. So we have that problem that nobody really quite understands what a bond yield is. That is still true. I read just the other day in the newspaper that some British political figure didn't actually understand what a bond yield was. I remember noticing at Harvard when I was teaching a financial history course, which was a Popular course that quite a few of the teaching fellows, the graduate students, couldn't in fact explain very well to the undergraduates what bond yields were. So I think it's true that ignorance is one of the precursors to conspiracy theories. When you actually explain what an interest rate is and what risk is, the kind of risk that you run if, if you're a lender, why being a banker can give you sleepless nights. I think it becomes a little less mysterious why the Rothschilds became wealthy. From the very outset. They ran colossal risk, not only in 1814, 15, but recurrently through the 19th century. They take on the risk, for example, of financing railways. They're very early to see the potential, and railways are the big capital expenditure. They're the data centers of the 19th century. But to a large extent, these railroads in, in Britain and Western Europe are built by private finance. Further east, it's the government that does it. There's enormous risk involved in building a railroad. It's an extremely expensive undertaking. It's pretty unregulated market. And a lot of companies that built railroads did not make money and indeed went bust. So I think people don't have a good understanding of risk, nor do they have a good understanding of the difference between risk and uncertainty. Something I try to explain in the Ascent of Money goes back to a distinction the Chicago economist Frank Knight drew about 100 years ago. Risk is calculable. I mean, I roughly know the probability that each one of us will experience a car accident in the next year. We can kind of put a number on that because it's fairly normally distributed. We all can figure out what our risk of being diagnosed with cancer is. Mine's higher than yours because I'm older than you. All that's calculable. And so when we're calculating how much we should pay in health insurance, that isn't actually tremendously difficult to figure out. But what is the probability of war breaking out that involves Britain? Actually, that's impossible to say. What's the probability there'll be another pandemic? Nobody knows. When will there be a huge earthquake in San Francisco that completely up. Up in Silicon Valley? Nobody knows. So that's the domain of uncertainty. So anybody who's embarking on a large scale investment, whether they're lending the money or buying the equity, we'll come to that in a minute. Is taking on risk. Some of it's calculable and some of it's not. That is ultimately at the heart of capitalism, the cost of risk and uncertainty.
- [49:43]
Host 1
You know, One of the things to pick up on there is you corrected me and I'm grateful for your correction and that you wrote your book before the financial crisis. I didn't know about that because I became aware of it shortly after. What, what did you see that other people didn't see?
- [49:58]
Neil Ferguson
So in 2006, there were a couple of red lights that were flashing on the dashboard and I wrote about it at the time that there was a lot of debt accumulating the financial system, household debt, particularly the famous subprime mortgages, loans that were taken out by relatively low income families to buy homes. But there was also a lot of debt on bank balance sheets and then there was debt that was not on their balance sheets. In various off balance sheet vehicles. Part one, part two, the cost of debt, interest rates were rising and therefore there was going to be a steady and sustained squeeze on any vulnerable borrowers, anybody who had overextended, or any institution that was undercapitalized. You could see that, I could see that from late 2006. And I think the moment of truth for me was when one of my friends, Jim Tisch of Lowe's Corporation, sat me down with his mortgage specialist and she, she showed me a chart of when the subprime mortgages would reset. Because the way the subprime mortgages worked was that you had a sweetener period when the payments that you had to make per month were relatively low, artificially low, but they reset after a certain period of time to a much higher market rate. And those resets were pretty much pre programmed to happen in the course of 07. And so you could see that the trouble would start to build in the course of 2007 and then finally would spill over in the full blown crisis that we saw in 2008. First bear stearns, then Lehman Brothers, because the overextended investment banks were really the weak link. The interesting thing looking back on it is how few people saw that. That was partly because if you were making money in the market, you were incentivized not to see it. If the music is still playing, we'll keep dancing. That was what Chuck Prince, one of the bank CEOs famously said. But I think there was also a kind of failure on the part of some economists fully to understand the precariousness of the debt dynamics. And in some ways it's an advantage to be an economic historian because you don't have some fancy mathematical model that you have to focus on. You're really just looking to spot pattern, do pattern recognition, to see well, we've seen this kind of debt dynamic before. I think it's important to bring into the conversation something we haven't talked about yet, which is the equity market, because we've talked about banks, we've talked about bonds, but we haven't talked about the stock market. And that's funny because actually people typically focus a lot more on the stock market than they do on the bond market. And certainly in the United States, most conversations about Wall street are really conversations about the stock market. And it's worth just understanding that because it was collateral damage in the financial crisis. I mean, equity markets tanked in the wake of the Lehman Brothers bankruptcy, but it wasn't really at the heart of the crisis. So let's just quickly do a refresher on that because stock or equities are just a way in which we can own a piece of a business, a piece of a company, whether it's Apple or Alphabet or a much smaller company. If it's a publicly traded company, you can go and buy a little piece of its equity, of its capital. There's more risk involved because the company can go bust and you get nothing if that happens. But there's more upside because if the company is Nvidia and you were smart enough to buy Nvidia stock on the eve of the launch of Chat GPT, then your upside is massively bigger than in any other asset class. I wanted to throw that in because if you want to understand how the financial system works, you've got to populate it with all the different components, of course, and they kind of, they accumulate over time. There's no equity market prior to the 18th century. That's essentially when you start to see something like a modern stock market emerge. Similarly, there isn't really much of an insurance market in the modern sense until the 18th century and the 19th century.
- [54:24]
Host 1
And that brings us perfectly to where we are today. Because one of the ingredients Francis mentioned ignorance. But another ingredient I think is pain. Another ingredient is terrible economic times. Another ingredient is war. Another ingredient are basically times when people feel that something has gone wrong. And the rise of the radical left and the radical right is something that I think is happening in our society today. I think it's undeniable. You know, here in the uk, the Zach Polanski's of the world in, in the US you have both the radical left and the radical right. And you know, we've spoken to people on both sides of that. It's happening. I don't know how you feel about it. I mean, You've talked a lot about the indebtedness levels and it's obvious that's a huge problem. Are we headed in a sort of 1920s direction, 1930s direction?
- [55:21]
Neil Ferguson
Well, it's a good question because the ideologies are the same old, same old. Yeah, I mean it's sort of depressing that we can't come up with new material but it's like the writers have just gone home and we're stuck with oh, I'm really disillusioned. What can I, what can I have for my disillusionment? It's like, well sir, we can offer you can offer you Marxism if you'd like that or if you'd rather something stronger. We've got some anti Semitism so it's essentially Zorin Mumdani or Nick Fuentes and that's like really? We got 100 years on the clock and it's those guys again. That's somewhat disappointing. I feel we could be more creative. Maybe we're not reading enough manga, you know, we're short of new ideas. So the question is, do we get the macroeconomic context in which those ideas come in from the margins and become very popular? Because right now the people attracted to the extreme ideas are still clearly a minority I think.
- [56:20]
Host 1
I mean, sorry to interrupt Neil, but Mamdani's mayor of New York.
- [56:23]
Neil Ferguson
Yeah, but he's not going to be President of the United States. I mean remember New York politics is not at all representative of U.S. politics.
- [56:29]
Host 1
And I'm just making the point they are making inroad.
- [56:33]
Neil Ferguson
Oh, unquestionably. But the key question is do we have enough economic volatility of the kind they had in the 20s and 30s to propel today's wannabe Hitler into a position of political power? Lots of so called far right populace aspiring to power and the question is how many get there? And obviously how radical are they when they get there? Same question for the left. New York can take a kind of punt on socialism. Maybe Minneapolis might do it too, but I'm not sure that many other cities are going to do it. But remember, all this is happening after a period of sustained economic expansion where economists have predicted several of the last zero recessions. Apart from the shock of the March 2020 onset of COVID the economy has essentially been are on expansion mode. Certainly in the US since the financial crisis there hasn't been that much in the way of volatility by the standards of the 20th century. So when Andrew Ross Sorkin publishes his new book 1929, we're all supposed to read it. Looking for traces of the 1920s in the 2000s. And of course there are some because they're 1920s people offering projects of implausible economic viability. Step forward, Sam Altman of OpenAI. There's margin credit. There are traders who buy stocks on the YOLO principle, you only live once. Or on the FOMO principle because they have fear of missing out. That's all quite 1920s. So what's the probability that we get the great shock of 29 followed by a decade of depression as we did in the 1930s? That is very low probability because we're unlikely to make the policy mistakes that were made back then.
- [58:37]
Host 1
Which were what?
- [58:38]
Neil Ferguson
Well, the key lesson of the Great Depression is that the Federal Reserve did almost everything wrong. Everything to make matters worse. And when I was trying to navigate through the financial crisis after I published the book, I did a lot of talks and a lot of institutions. The question was always, is it the Great Depression? And I would say, well, no, because Ben Bernanke, who was then the Fed chair, knows the financial history of the Great Depression and he's not going to do what the Fed did then, which was actually to tighten monetary policy. And that had the effect of causing multiple bank failures persistently right the way through, from late 29 all the way until Franklin Roosevelt is sworn in and finally shuts down all the banks in the famous Roosevelt bank holiday. We're not going to do that again. No central banker would make those mistakes again. And in a sense we've run the experiment because when the financial crisis happened, the Fed and other central banks did what came to be euphemistically called quantitative easing. That is, they expanded the balance sheet, they bought lots of stuff that was otherwise going to tank in price, they bailed out key financial players and we didn't have a Great Depression. And that's. I think, therefore it's reasonable to assume that we're not going to have a Great Depression when the next recession hits, which eventually it will. My student Tyler Goodspeed has a brilliant book coming out early next year called Recession, which everyone will have to read, showing what it takes to cause a recession. And it's usually more than one thing that goes wrong. I think we will get at some point enough bad news to check the capex boom in AI. We'll get enough bad news, maybe geopolitical bad news, to make investors much more worried than they currently are about Taiwan. At some point I'll be sitting here with you guys talking about how we got into the latest financial mess. But I doubt very much that that financial mess will lead to the kind of economic pain that we saw in the 1930s, without which it's hard to believe so many authoritarian leaders would have come to power. It's very hard to imagine the collapse of German democracy and the advent of Hitler without the huge shocks of hyperinflation in 1923. And then a crash, a crash where, I mean, unemployment is like north of 25% in Germany by 1932. I can't see us going there again. So the bad ideologies, they're back. They never really went away, they're just back and somewhat attractive to me. The weird thing is that they're attractive at a time of relative economic prosperity when there really isn't that much pain. You mentioned pain. Well, we ain't seen pain.
- [61:28]
Host 1
Mass immigration, mass illegal immigration is probably a big driver of it and I think maybe that's where some of the appeals.
- [61:37]
Neil Ferguson
Unquestionably. But the interesting thing about that is that if you cut it off, which is happening in both the us you're.
- [61:44]
Host 1
Going to get economic depression.
- [61:45]
Neil Ferguson
Well, there'll be economic problem, not depression, but you'll have some. There's some economic cost to that.
- [61:50]
Host 1
Yeah.
- [61:50]
Neil Ferguson
It's hard to run the NHS with immigrants. I would assume it's the US economy without cheap labor from the south runs in a very different way. And so all of the changes that are currently being made in response to disillusionment about immigration will have some kind of as yet unclear economic.
- [62:08]
Host 1
Yeah, it's got to be calibrated correctly. I certainly feel that in the uk. I don't know how reliant Britain is on boat crossings from France. No, I don't think we are relying on that at all. In fact, I think it's a massive cost and drain on the economy.
- [62:22]
Neil Ferguson
Absolutely.
- [62:23]
Host 1
But there's one other thing on, on economics and finance that I think is a giant problem and I, I wonder if you know, how it's ever going to get solved, which is we don't seem to be able to live within our means. And this is where, you know, Francis did, I think as good a job as anyone can do of making the case. Why Borrowing can be a really useful tool and it has been. It allows civilization to grow fast. It allows us to do things before we otherwise would have have been take risks, etc. But when you become addicted to it in the way that we have, I mean, we really are in trouble in that aspect of things. Are we not?
- [62:59]
Host 2
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- [64:34]
Host 1
I mean, we really are in trouble in that aspect of things, are we not?
- [64:37]
Neil Ferguson
Yes, deep trouble. If you borrow to invest and you acquire some productive asset, then what's not to like? It'll probably help you repay the debt. But if you borrow to consume, well, that way lies trouble. And that's what we've been doing. Let's put it really simply. The systems of public debt that evolved in the 20th century to finance wars, particularly the world wars after the 1945 Allied victory began to transition to financing welfare. So we went from warfare to welfare states. Those welfare states which evolved in the 40s and then got another expansion in the 60s, assumed certain demographic features about fertility and longevity which have completely changed. So we now don't have really any countries outside of sub Saharan Africa where fertility is above the replacement rate, 2.1 children on average per woman, and we have in most countries retirement ages that were kind of devised in the mid 20th century. While life expectancy is steadily increased and people can expect therefore to spend substantial parts of their lives retired, our welfare states can't cope with that on either side of the Atlantic. In the us, the real driver of the debt and the deficit is Social Security, it's a retirement program. And Medicare, free healthcare for the elderly. In the uk, you have a whole system of benefits that can trace back to the attlee government after 1945. It's all anachronistic and it's really hard to reform. Why is it hard to reform? Because there's a very, very powerful constituency that likes the status quo called the elderly, and they're a huge proportion of the electorate and dependably vote. I think I read the other day that 40% of the German electorate, more than 40%, is now above retirement age. So you can't get radical reforms through with that basic obstacle. Nobody who tries to reform these welfare states survives politically. Emmanuel Macron has been dead in the water since France. Why? Because he tried to make a microscopic increase in the French retirement age and he's been twisting in the wind ever since. This is the problem. What does it lead to? It leads to there being deficits every year, and not just in the bad years, which is wrong. The deficits every year in the US, 6 plus percent of GDP every year as far as the eye can see. Gross debt now above 120% of GDP, higher than it was at the end of World War II. This is not sustainable. Ferguson's law, which I promulgated in January because everybody should have a law and I decided I would have it. So I said, Ferguson's law states that any great power that spends more interest payments on its debt than on defense won't be great for much longer. Well, the UK stopped being a great power a long time ago. Been in violation of Ferguson's law for many years. But the US only crossed this threshold last year. And it's going to stay well above it for the foreseeable future until by about 2040, I think I worked it out, the US will spend twice as much on debt service, on debt interest, as it spends on defense. These are completely unsustainable trends. Problem is, politically, nobody wants or dares to go there. And so your next question is going to be, so how does this end, Neil? How does it end? And that's the big question. And there are a finite number of options. Very, very limited range of options. Happy ever after option. Okay, it has been done. You can have a really large debt and you can grow your way out of it. That's what Britain did after the Napoleonic War was going back to the time of the Rothschilds. Britain just ran primary budget surplus and grew thanks to the industrial revolution. So that's the good way out. If that's to happen here in the 2000 and twenties. We need AI to be every bit as good as Sam Altman says it is. And the productivity growth to be so great that in a couple of years time this podcast will be generated by GPT6 and you guys will be out of a job. So that's the good news, that productivity gains will get you out of jail. Do I think that's likely? No, I think it's quite unlikely.
- [69:03]
Host 1
I think there's social consequences to that outcome.
- [69:07]
Neil Ferguson
I think you would not be the only aggrieved people in this scenario. There'd be an entire generation of people with university degrees who wouldn't even be Uber drivers because the cars would also be driving themselves. Plan B. So then you kind of default. You say, go back to the medieval monarch approach. Ah, you know that money that we owe you? I don't know, but I'm, I'm really sorry about this. I don't know how to pay you. Defaulting on the bondholders is something that used to be more or less recurrent every decade experience in Latin America. But if you default on the people who receive benefits, particularly old age benefits, I don't know. I'm just thinking you better have a plan for the private sector because your political career will be cut very short. What about plan C? How about we inflate it all away? How about we do what we did repeatedly after World War II and we just reduce the real value of all these liabilities with a big, sudden, unexpected increase in inflation? That's going to be pretty unpopular too. The other problem is that a lot of the liabilities these days are index linked. Because we went through this once before and then the decision was, let's not do that again. Let's make sure that we can't inflate away the debt. So the number of ways out of this problem is pretty small. I think what ends up happening is some combination of default, where in practice we reduce what we said we would pay out and some element of inflation we inflate away or use financial repression, some of the liabilities. None of which is going to be fun, particularly for the people who've got.
- [70:54]
Host 1
Significant.
- [70:56]
Neil Ferguson
Amounts of money they expect to receive from government or the people who've accumulated lots of pounds or dollars in savings. But I don't see any other way out.
- [71:07]
Host 2
And it's not just the Western world. I was reading about this. China's got a debt of 17.8 trillion.
- [71:15]
Neil Ferguson
The Chinese debt's interesting because it's mostly at the local level and it tends to kind of get passed over by people who are taken in by Xi Jinping is awesome, but actually Xi Jinping is not awesome. The public finances of China, if you drill down, are about as bad as those of the United States. It's just that it's mostly local government debt. If you add up the liabilities of the public sector about the same relative to GDP and the deficit, the Chinese deficit might be even larger. The IMF did a study, I think, a couple of years ago now, where they calculated that the real deficit of the entire public sector was more like 15, 16% of GDP. So China has this problem. Of course it does, because it has a very rapidly aging population and its fertility rate has collapsed. So the demographics are the real driver here. If you leave your system unadjusted, it's just going to go insolvent unless you have a miracle rise in fertility that's vanishingly improbable, very, very unlikely. Or you might have a pandemic that really kills the elderly rather than just kind of half heartedly does the way Covid did. So those seem like pretty unlikely solutions. You're finally going to be forced, whether you're China, Europe, the uk, the United States, to do something radical. And this is where Mr. Milei is interesting. The Argentine President is the only really fiscally radical leader in the world. He's the only one who's serious about this, who in his first year as president said, I'm reducing the deficit from 5% of GDP to zero. And he did it. So Milei has shown that you can be radical, but what's really interesting is you have to be, as the Argentines were staring at 200, 300% inflation, you have to have your economy just flat face down in the ground to get the votes to do the radical stuff.
- [73:14]
Host 1
Well, look on the bright side, Neil, that's probably going to happen.
- [73:17]
Neil Ferguson
I console myself that in the end everybody is Argentine. Eventually they all get there and then everybody needs to Malay.
- [73:25]
Host 2
Neil, what a pleasure. We could carry on this conversation for many, many hours. It's always a fascinating insight. Final question is always the same. What's the one thing that we're not talking about that we really should be?
- [73:40]
Neil Ferguson
Well, maybe we have been talking about it. I'm always struck by how much less fun these conversations are, conversations about money than conversations about sex or political extremism. And I actually think we've just had the conversation that a lot of people would rather not have. Cause culture war is more fun. I mean, the culture war is just much more fun.
- [74:04]
Host 2
But is it really a woman?
- [74:06]
Neil Ferguson
But my message. Right, you see, already we have laughs, but I think we're talking right now. What we've just done is we talked about the difficult, nasty, gnarly stuff that isn't gonna go away. I mean, you may not be interested in financial history. Financial history is interested in you. And those who don't understand debt dynamics, those who enter adulthood without a clue about how interest rates work, who don't know what a bond yield is, who have never made an investment in the stock market and never will, Those people will have worse lives than the people who get informed. So the thing about the stuff I do a core boring, but important. And if you can't get your head around the stuff that's boring but important, if you can't bear to get through the ascent of money because you'd just rather watch Nick Fuentes on YouTube, you will be poor and I will laugh.
- [75:07]
Host 1
There we go. Fantastic, Neil, fantastic. Thank you very much.