I never got past Econ 101 in college. In fact, I never had much interest in finance until reading a biography of Alexander Hamilton by Forrest McDonald in which the author explained how Hamilton’s financial policies actually worked, and converted the nation’s crushing Revolutionary War debt into liquid capital and jump-started American capitalism. McDonald also focused on the origin of Hamilton’s financial ideas—notably the writings of Scottish philosophers Adam Smith, David Hulme and James Steuart, and the financial wizardry of British chancellor of the exchequer Robert Walpole and French finance minister Jacques Necker. I was—and there is no other word for it—enchanted. I have since read a number of books on money and finance including two recent ones, “America’s Bank” by Roger Lowenstein, and “The Alchemists” by Neil Irwin. Which brings us to “Money Changes Everything” by financial historian William Goetzmann. I was disappointed that Hamilton and Smith are mentioned but once, and Hulme, Steuart, Walpole and Necker not at all, but this is a small quibble. The book is engagingly written and masterly in its presentation of 5000 years of financial history—a veritable magical mystery tour of how the use of money transformed both the ancient and modern world.
It seems finance has ever been with us, from the time hunters and gatherers first pooled their resources and created the world’s first cities in the Mesopotamia Valley. With an annual harvest of crops and livestock entering the cities for sale and distribution, some form of accounting was needed, and this led to the invention of numbers and basic math which in turn led to the creation of writing. Finance, notes the author, enables people to transact with each other over time and places a value on time itself. He cites the invention of debt and the emergence of interest to incentivize lending in third millennium Mesopotamia as “the most significant of all innovations in the history of finance.” Indeed, much of what we associate with a modern economy—mortgages, promissory notes, lines of credit, partnership contracts, and international trade—were developed at this time. The world’s first investors were something akin to capitalists—using money to make money. How big a role did finance play in the first cities? Very big. Archeologists have unearthed the world’s first financial district in the ancient city of Ur—the fabled birthplace of Abraham.
The classical civilizations of Greece and Rome developed sophisticated financial economies based on money and markets. Writes the author: “The Greeks invented banking, coinage, and commercial courts. The Romans built on these innovations and added business corporations, limited liability investments, and a form of central banking.” Unlike the cities of Mesopotamia, Athens and Rome both outgrew their local agricultural capacity and so became overseas traders to feed the people of their cities.
Since that time, finance has made its greatest advances where the power of the state has been limited. In the Middle Ages, it was the self-governing Italian city-states that took finance to the next level. The Lombards dominated European banking. Venice created the first bond market. Genoa refined the corporation with distinctly modern features, including a separate legal identity, dividend payments, and transferable shares. The first money-markets appeared in the free cities of Antwerp and Bruges, and the first stock exchanges appeared in the free cities of Amsterdam and London. Says the author—the freedom to speculate in an open market equates to freedom and self-rule.
What occurred in China is quite another story. The Chinese were the first to invent paper money, but they failed to develop a market for government credit or the equivalent of modern corporations. Private business in China, then as now, was vulnerable to expropriation by corrupt mandarines. “The intricate bureaucratic structure that made China the world’s longest-lived continuous civilization,” says Goetzmann, “survived by regularly seizing commercial opportunities from private entrepreneurs and crowding out private enterprise with state-supported monopolies.” At the expense of free enterprise, the Chinese state was always financially secure, therefore, never having to borrow money, such as governments in the West. Indeed, the Chinese government itself served as lender to business, rather than the other way around. As a result, economic development was minimal. The Middle Kingdom failed to originate its own industrial revolution. Ironically, the Chinese were richer, per capita, in the 12th century under the Song Dynasty than they were under Chairman Mao. When China modernized in the 19th century, it was funded by China’s then burgeoning private enterprise. China’s railway system was funded by the sale of bonds.
In the West, where the rule of law, the existence of intellectual property rights, the ability of inventors and entrepreneurs to benefit from innovation, and the ready availability of profit-seeking capital stimulated economic growth and—oh-by-way— funded the Industrial Revolution and drove the Great Age of Discovery. At the heart of it was the freedom to choose. The English and Dutch East India companies that dominated world trade for 200 years and helped colonize North America were privately-funded enterprises. Which brings us back to Alexander Hamilton. He had only to study the development of Western Europe's financial tools to make provision for the war debt and restore public credit, and in doing so convert the nation’s economy from one of agriculture and land-based wealth to one of business and liquid capital.
While finance has shaped civilization and made our world an infinitely better place to live, it has a dark side. Abuses have always been a part of the game. The anecdote is transparency. Finance is about trust. Investors need to know exactly how their money is being invested. It was a lack of transparency that led to the 2008 financial crisis: Wall Street practices had become overly complex—securitized bonds were issued with hundreds of pages of documentation, and credit was measured by employing highly contrived mathematical models that few could understand, and fewer still tried to understand. Banks in Europe and American invested billions in packaged loans without really knowing what they were buying. The result was very nearly catastrophic. Had it not been for the world’s lenders of last resort—the central banks in Great Britain, in Europe, and in the United States, the world economy would have suffered a financial meltdown the likes of which had not been seen since the Great Depression.
There is a great deal more to Goetzmann's book, of course, including chapters on Karl Marx and Communism, John Maynard Keynes, Russia, the secret of successful investing (there is none), and three profound concluding chapters: “The New Financial World,” "Re-Engineering the Future,” and “Post-War Theory.” Five stars.
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Top reviews from other countries
William Jordan
Interesting - but very long - book on the history of financial systems
Reviewed in the United Kingdom on December 2, 2016Amazon Customer
Everything was in good time. The only diapointment so far was that ...
Reviewed in Canada on October 25, 2016
