How Finance brought About Civilization
Is finance the cause of civilization? That is the opinion of Professor William N Goetzman of the Yale School of Management, and hence his book Money Changes Everything: How Finance Made Civilization Possible. According to the thesis of this book, finance is the cause of civilization. Thanks to finance, humanity has progressed to the point where we are now.
But how can anyone say this? Do not we agree that finances are to blame for all the problems we have? Is (greedy) money not guilty of real estate bubble, crime, famine etc..? Are not they to blame for all these problems we have? Are not finances but a perversion of capitalism by which we are enslaved?
Let’s start at the beginning of history
Normally, it is considered that history began when humanity began to write. Writing is one of the great human inventions, because it allows us to transmit information without being next to one another. This is why knowledge becomes cumulative.
Some of the earliest written records found are in the Middle East. It is understood that it was born out of a need not to transmit stories or write poetry, but because of the accounting needs of the religious hierarchy.
The specialization of work and deliveries made it necessary to account for what each one was doing and delivering. Thanks to this writing, one could know how much was necessary to feed the population, to distribute work and technology made cities grow. That is, after writing came mathematics.
Years later, the Greek cities began to coin money (like many other civilizations). The currency of legal course made it not noly possible to organize exchanges better, but also to pay wages to workers. Maritime contracts and specific courts also emerged. Some of these contracts began to value “risk” as something to be paid, since for example, sailing the black sea at certain times of the year was more dangerous, so one expected greater rewards.
Goetzman identified Guan Zhong as the first economist in China. Coins were also minted in China, and he wrote not only about when to mint more or less coin, but also how to use coin minted against rival cities in case of war. Something very advanced for his time.
Marco Polo and Medieval Finance
One of the advances that Marco Polo reported on his trip from China was paper money, which began to be used around AD 1100 (according to Goetzman). the state printed bills and accepted as gold and silver as a means of exchange.
Since many people did not know how to read or write. These had images to make the people understand the value of them. Paper money, on the other hand, stopped being used in China around 1425. It seems that the government was not able to contain itself with the printer and ended up inventing hyperinflation.
In Marco Polo’s hometown, bonds were also invented to finance a battle against Constantinople where Venetian merchants were arrested in 1171. The Venetian government hoped to repay the money borrowed from the war, but they were defeated.
In return for not returning it, he paid a 6% interest on them. This changed everything, since bonds being possible to deliver a return became a way of saving. Of course many states copied the idea, making public debt somewhat normal.
A little further north and a hundred years later, in Toulouse in 1372 and 1373 the first capitalist enterprises were created by the merger of several mills. These had continuity until 1946, when after the Second World War they were nationalized. The information to the shareholders provided the price of grain, profits, dividends for example. As they grew, they created structures to solve confidence problems, such as differentiating the CEO from the board of directors.
Bubbles, derivatives and plans for retirement come
The bubble of the Dutch tulips is well known, as the first recorded bubble. A whole society went crazy over an imported flower. It is often used as an example of a bubble, even in the second part of the film Wall Street.
From this moment on, finance acquired a bad reputation. In a short time, the bubble of the southern seas came, as well as the Great Depression years later.
So Goetzman believes that the contribution of finance to humanity has been positive. After all, what can be more positive than the invention of writing, mathematics, finance, bonds, derivatives etc…? Oh, the irony. Sometimes I wish that we could turn back the clock.