Jan 19 2009

“The Ascent of Money” – Economic historian Niall Ferguson on the Colbert Report

Niall Ferguson | January 13th | ColbertNation.com

Harvard Economic historian Niall Ferguson on the Colbert Report explains the concept of “invisible money”. I just bought Ferguson’s new book, The Ascent of Money over the holidays and am looking forward to reading it. In his interview with Colbert, the historian explains that money as we know it is only worth something because we think it is worth something. Colbert can’t seem to believe that there’s no underlying intrinsic value such as a gold standard backing the value of his dollar bill, which has in fact been the case since the early 1970s in America.

Ferguson says that money represents a relationship of trust between a creditor and debtor, which is one reason there seems to be so little money available for spending in the economy today. Macroeconomic uncertainty and low consumer confidence are the main causes of the today’s global recession. In a climate of fear and uncertainty, the trust underpinning our monetary system dries up. Banks are afraid to make loans, consumers are afraid to make big purchases, and firms are afraid to make capital investments. The result? Low aggregate demand, falling income and output and rising unemployment.

Paul Krugman, in his latest book the The Return of Depression Economics argues that the fundamental solution to a financial crisis such as today’s is to drastically increase the money supply. The $350 billion that the Bush administration has pumped into the financial system already seems to have done very little to prime the economic pumps, so to speak. To restore trust, and thus stimulate real spending in the economy once again, creating income, output, and real employment, massive monetary stimulus will be needed. A trillion dollar stimulus package by an Obama administration should not come as a surprise, should it be put to the nation to vote on in the near future.

Our love of money is a little less impassioned than it was a few years ago, according to Ferguson. Not because money no longer serves an essential function in our lives, rather because we have lost much of our faith in our monetary system’s ability to create and maintain stable economic conditions and long-run economic growth. To restore Americans’ faith in the almighty dollar and put the economy back on a track towards stability and growth, a massive fiscal and monetary stimulus is needed. Okay, time to start reading The Ascent of Money and to watch less Comedy Central!

5 responses so far

5 Responses to ““The Ascent of Money” – Economic historian Niall Ferguson on the Colbert Report”

  1. elementaryfinanceon 19 Jan 2009 at 10:36 pm

    Even if the value of money is based on gold, what is gold based on? The value is set in the open market. Value is not objective. Something only has monetary value if people are willing to pay for it. Isn't that why we are in the housing crisis?

  2. Myoung-Jin Kimon 13 Mar 2009 at 10:32 am

    I find this very fascinating because I always thought (before learning economics) that banks kept our money (instead of loaning them to other people) and the money is always there for us. But I don’t think this is the safest way of keeping money. I forgot exactly when, but a few months ago, the banking crisis in England proved that. When the people in England wanted their money from the banks, the banks were not able to give the money back to them because they lost all the money.

  3. Alex Boedtkeron 13 Mar 2009 at 6:38 pm

    I have to admit I was shocked as well when I heard that banks do not hold gold or something behind money but now that I think about it it wouldn't make a difference. The only reason Gold would back money would be because people believe it has value sam as money. The only reason anything has value is because people give it value.

    How the economy still works today based on that trust is beyond me but then again if everybody just stopped trusting something had a value we would all get no where.

  4. Peteon 10 May 2009 at 5:08 am

    I think you've reversed the order of macroeconomics dynamics. Aggregate demand leads to trust. The conviction of banks is that, if they loan businesses money they'll default on the loan. Because there is little or no demand for the output of business. Consumers are uncertain about their job security. This has led to a reduction or a decline in consumer purchases. At this point the only solution is for the government to create jobs through public spending to jump start demand. People like Nail Ferguson seem to think the best solution is to do nothing or give tax cuts to the rich. The former will make a bad situation worse, and the later will not work, because I’m yet to meet a businessman who increases production when inventory is rising or orders are falling.

  5. Oliviaon 10 Feb 2012 at 6:52 am

    A good article.

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