《Money Changes Everything: How Finance Made Civilization Possible》
If you want to know everything about the financial history of civilization, Yale finance professor William Goetzmannio Money Changes Everything wonerything about the financial historyut it will fulfill most of it. The book delivers on its promise to trace the foundational elements of finance from Sumerian culture to the great economies of Athens and Rome, to Fibonacci and Marco Polo, to the complex financial instruments of today. This substantial tome is Goetzmann’s love letter to finance.
Of course, no one book can capture all there is to know about financial history. But Money Changes Everything comes awfully close to a comprehensive review of financial infrastructure. It tracks the development of finance’s “hardware” (contracts, corporations, and banks) to its “software” (recording, calculation, algorithms, and probability theory). Beyond any critique, the book is fascinating. Who knew Louis Bachelier’s work on option pricing, stock prediction, and the development of Brownian motion (the random movement of particles) were developed before Albert Einstein’s work on motion? The intersection of war, nation-building, finance, mathematics, and even art is given an exhaustive analysis in this book.
For many who follow history and the regulatory state, there are familiar trends that echo through our financial past. Typically, past is prologue. As early as 1,900 BCE, Rim-Sin, ruler of the Sumerian city-state of Ur, responded to a financial crisis by declaring all loans null and void. Later, he banned interest payments. Some scholars speculate that those interventions were responsible for capital and population shifts from Ur to nearby Lara. That’s just one regulatory folly—and perhaps not the first—out of many that occurred in history.
Fast-forward to 396 BCE and the Athenian empire. Despite its prestige, grain dealers who “hoarded” their product faced the death penalty, making the modest punishment in Wickard v. Filburn seem like an afterthought. Beyond capital punishment, Athens set specific limitations on countless enterprises. Two-thirds of imported grain had to go to Athens. Athenian citizens were forbidden to ship to any other port. And, once grain was brought to the city, there were laws limiting profit margins. Regulators in ancient times evidently took their grain seriously.
Government power also extended to some of the novel financial and technological instruments that arose. Just as the internet, drones, and new financial products are regulated almost as soon as they are devised, throughout history the ruling class has often viewed innovation as a threat that must be micromanaged.
Consider the medieval Knights Templar, who were among the first international bankers. As they were trained soldiers who took a vow of poverty and were financially backed by the church, they were perhaps ideally suited to handle other people’s gold and land. Kings and nobles often deposited valuables with the Knights; at one point, the English Crown Jewels were kept with the Knights Templar rather than in the Tower of London. Kings would also borrow from the Knights to finance military operations. Pensions and annuities were funded from this nascent bank.
Government ultimately couldn’t abide the power of the Knights. Early in the14th century, King Philip IV of France became incensed that they wouldn’t cancel the debt he was accruing in his War with the English. So he ordered his troops to seize the Knights’ vaults and land, and imprison, torture, and execute all the Knights they could find.
beyond war, betrayal, and frequent discussions of financially based artwork, a main theme of the book centers on China. Namely, how could a nation that invented metal coin age, paper money, and securitized lending not lead the world in finance? Why were all of the early corporate powers—e.g., the Dutch East India Company and the Honor del Bazacle (the oldest known corporation) — all formed in Europe? And why did China, of all places, adopt communism in the 20th century?
According to Goetzmann, the answer is that “when financial innovations occurred in China, they were often appropriated for the benefit of the government, not the individual.” New private ventures were crowded out by state-run monopolies. This set the nation back compared to its early competitors, despite its innovative financial history.
Goetzmann does have a particular academic focus on China, so prepare for numerous discussions on language, art, culture, and economics. (Curiously he fails to mention a major financial innovation by one of China’s neighbors: one of the first futures markets in the world, the Dojima Rice Exchange in Japan.) The comparisons between Europe and China constitute a considerable chunk of the book, arguably to the exclusion of other notable developments in finance.
Naturally, most of the second half of the book centers on the American experiment and the somewhat surprising divergence of thought between U.S. and British investors.
Some argue that finance is more about avoiding risk than taking risks. Accordingly, Great Britain’s Henry Lowenfeld attempted to manage risk by heavily investing in bonds. National bonds currently have a zero risk-weighting, so it might make sense to arrange a portfolio largely of safe investments.
As John Maynard Keynes observed, however, Americans are more risk-tolerant; they have a fascination with stocks, dividends, and greater returns. It was American Edgar Lawrence Smith in the 1920s who discovered the “equity premium”: over the long-term, stocks beat bonds. Later, Harry Markowitz and Bill Sharpe proved that a diverse portfolio of stocks and bonds could be just as safe as all bonds and return a far greater profit. The technology of finance extends not just to instruments like stock puts and calls, but to the new math and theory that prove there are better ways of making money and advancing progress.
According to Goetzmann, the first element of finance is the reallocation of economic value through time. Whether it’s charging interest, the modern mortgage, the concept of net present value, or a complex derivative, how economic actors value and discount money over time is a central tenet in both finance and regulation. Today, regulators struggle with the value to place on emitting a ton of carbon dioxide and how much to discount the potential benefit of an avoided emission centuries into the future. At a 3% discount rate, a particular rule may move forward. However, considering some rules forecast benefits generations into the future, a 7% rate can reduce the monetized gains to practically zero.
As the author notes, mathematics aids in the calculation of how money changes over time or the acceptable level of risk, but many decisions are moral and political regardless of the arithmetic. In the past, banning interest used to be de rigueur even though that meant the lender lost money on virtually every deal. Today, political considerations often masquerade as moral imperatives, obscuring the rational decisions that should be guided by economics and mathematics. Doubling the minimum wage and the over-time threshold are sold on moral grounds, with specious economic arguments floundering in the background. Despite the litany of rigorous research, many decisions by those in today’s governments don’t revolve around established financial or economic literature.
In sum, Goetzmann’s work is a fascinating tour through the history of currency, finance, probability, and risk. Regardless of the reader, there will doubtless be several surprises in each chapter. From the libertarian perspective, the common theme through this historical journey is the innovative brilliance of our species to devise new technology to solve intricate problems—and how those innovations are often banned or curtailed by monarchs, dictators, and politicians acting in their own self-interest. From Ur to Wall Street and Silicon Valley, past is prologue in regulation.
SAM BATKINS is director of regulatory policy at the American Action Forum