by Machlin Fink

What leads to the prosperity of nations? It is an interesting question that many have tried to answer throughout time. It puzzles many that a small island off the northern edge continental Europe can come to dominate the globe for a period of time. There surely is not one answer to this question and, in fact, there are many more that can be written. Niall Ferguson takes on this question through the effect that financial institutions have on the prosperity of nations in his financial history of the world in The Ascent of Money.

Ferguson begins with the innovation that was money and more recently, fiat money. Having a medium of exchange was essential to the efficiency of trade and allowed markets to cross national borders to open up larger scale economic activity. This began with gold and silver coins which were actual commodities that had value but now as you look in your wallet there is nothing in there that is worth anything if it were not government-backed legal tender. More and more, paper money is becoming less important and has given way to credit and debit cards where many transactions happen without even seeing money.

The book goes on to talk about the effect this has on civilizations. As Europe was just emerging from the Middle Ages, if you looked east you would see a relatively more prosperous nation in China. Ferguson argues that much of the ascent of Europe in the following centuries was spurned by the ascent of money. The role of a centralized banking system that could extend credit as well as a free exchange stock and bond market allowed the flow of capital into projects that helped increase efficiency and productivity. This was imperative to the rise of England as a global leader in trade. England, a land mass of land just over 50,000 square miles, came to influence every corner of the globe. The book argues that the main reason, though many others exist, is that the development of their financial system allowed this to be possible and by 1700 the average English resident was about twenty-two times wealthier than his or her counterpart in China.

The Ascent of Money was written in 2008 just as the global financial system was experiencing a meltdown. Subsequently, Ferguson wrote and has discussed what could be considered the descent of money. Regardless of the current state of the economy, Ferguson makes a compelling case for the importance of money and the role it has played in the development of society.

This week the globalEDGE blog team will take a look at other global business books like Ferguson's The Ascent of Money in our globalEDGE book series. Check back each day this week for a new post on books that we recommend to increase your understanding of international business!