Professor Goetzmann’s magisterial survey covers key developments in the history of finance, beginning with the invention of money nearly 6000 years ago in the ancient Near East and eastern Mediterranean. Money has been the economic lifeblood of all human societies ever since. Without it, there would simply be no human civilisation as we know it. Money, which facilitates all kinds of exchanges, interactions and connections, is deeply embedded in human culture, psyche and behaviour.
Classical civilisations, like Greece and Rome, built upon the financial innovations of the ancient Mesopotamians whose economies were organised around redistribution of local produce and long-distance trade. The Greeks and Romans developed sophisticated financial economies based on money and markets. As Athens and Rome quickly surpassed their local agricultural capacity, they grew heavily reliant upon a stable flow of grain imports to sustain and expand both polities. Bread was a basic staple. The challenge then, as now, was motivating farmers to produce wheat and merchants to transport it somewhere else. This was achieved by way of the “invisible hand” of the market, which was in operation long before the Scottish philosopher, Adam Smith, ever formulated it.
Expansion of the long-distance grain trade underpinned the invention of and need for coinage, particularly silver coinage. Silver was plentiful in Greece. These coins were struck in the Athenian treasury and circulated throughout the Hellenic world for nearly five centuries. The Athenian Owl coin became a symbol of Greek economic and political power for centuries. Aside from its symbolism, the Athenian Owl is inextricably associated with Greek democratic society. “Athenian democracy and Athenian finance evolved together”. In fact, the cultivation of western participatory democracy is located in the Athenian monetary revolution over two thousand five hundred years ago.
Rome became an empire because of its financial technology, and owed its longevity to its financial innovations. Without metallic currency, credit institutions, central banking and international trade, Rome could neither have fielded its vast legions nor maintained the integrity of its distant frontiers for as long as it did. Rome’s imperial system was built upon a dazzling array of financial innovations that were more complex than anything that preceded it and, according to Goetzmann (103), “as sophisticated as anything that appeared until the Industrial Revolution”.
China also made important breakthroughs in the areas of money and finance at this time. However, while the development of money, accounting records and financial instruments in ancient Mesopotamia occurred in parallel with a writing system, this did not happen in China where the evolution of its monetary society was linked to divination texts expounding Chinese thought and philosophy. Nonetheless, the Chinese appear to have developed a monetary system independently of, but in a similar fashion to, the Mesopotamian system in that money and finance played a key role in governance and the economy.
However, China’s most remarkable contribution to the development of money and finance was the invention of paper fiat money.
Paper money was developed and perfected in Sichuan in western China under the Song Dynasty, and gradually spread to other parts of China. Before long, the Chinese state had monopolised the issuance of paper money. From this point, paper fiat money was a primary instrument of state finance and a powerful tool of Chinese political control. As a result, the Song monetary system never developed mechanisms for government borrowing, such as a bond market. While weak European states resorted to deficit financing by issuing bonds (promises of future repayment of debt obligations), China simply printed more paper money. In fact, Chinese emperors could not resist the temptation to print paper money excessively, often recklessly, causing rampant inflation that rendered paper money worthless. By 1500, the Ming Dynasty had abandoned government-issued paper money, and it was not taken up again in China until the nineteenth century.
Meanwhile, in the Middle Ages, Europe became a laboratory for financial experimentation. While advances in financial technology in China were crucial in maintaining a vast empire under a centralised bureaucratic state, the situation in Europe was very different. Fierce competition between Europe’s fragmented, but geographically close, cities and states was the stimulus for a very competitive financial system that fostered a wide range of financial innovations and technologies, including, the emergence of banking institutions, the development of securities markets, the invention of the corporation, and the creation of sophisticated insurance contracts on lives, property, and trading ventures, all of which changed human behaviour and reconfigured society’s relationship with time and money.
A classic example of how a financial institution was created to solve a basic economic problem of time and space was the establishment of a non-profit bank by the Knights Templar, a religious order whose agents swore an oath of personal poverty. In fact, London’s first bank was established by the Templars in the twelfth century. The building still exists on its original site today. After the First Crusade recaptured Jerusalem in 1099 and Christian pilgrims began visiting the holy land again, the Knights Templar created a system by which pilgrims could deposit funds with the order in Europe and withdraw it in the Holy Land, a kind of mediaeval ATM that provided for the safe transfer of money across a vast geographical space. This system of long-distance remittance gave birth to a financial institution that solved the basic economic problem of shifting funds safely from Europe to the East. By the fourteenth century, the Knights Templar were managing the financial affairs of the kings and nobles of Europe and eventually controlled large parts of the European economy and the finances of some of its major kingdoms.
The birth of the modern corporation in western Europe amidst what Daniel Defoe called “the projecting age” marked a watershed in financial history. The rise of great mercantile ventures fed an explosion in publicly-listed insurance companies in Europe that created a new model for pooling risks at sea and tapping public funds to cover those risks. This, in turn, led to the development of more complex insurance contracts, including the life annuity – the forerunner of pension systems and income support schemes for retirees – that Professor Goetzmann calls one of Europe’s greatest contributions to humanity.
The modern era is associated with the democratization of finance – the “shareholder democracy” – the opening up of investment to all levels of society, unleashing those animal spirits that John Maynard Keynes warned everyone about. The proliferation of share markets everywhere during the 19th and early 20th centuries captured the imagination of small investors who rushed headlong into high-flying equities. In America, in the era known as the Roaring Twenties, investing in the stock market became a “national past-time”. However, busts inevitably follow booms. The 1929 Wall Street crash left many investors in ruin and exploded the myth of ever rising markets and prices. The violence of the 1929 crash and ensuing depression ushered in novel studies in the new field of market psychology and investor behaviour.
Today, the sun never sets on financial markets. Yet all the tropes of our modern financial system can be traced to earlier, often quite distant, financial technologies and innovations. From Mesopotamia, where the first financial contracts were invented, to the complexities of modern financial architecture – a period of almost 6000 years – Professor Goetzmann brings this fascinating story to life in an absorbing account of the long, rich and inseparable connection between money and human civilisation.
William N. Goetzmann. Money Changes Everything: How Finance Made Civilization Possible. Princeton, New Jersey: Princeton University Press, 2016.
Mark Donoghue has held faculty appointments at the Australian National University, National University of Singapore and the University of Notre Dame (Australia). He is currently on the faculty of the Singapore University of Social Sciences. He has published extensively in the field of the history of economic thought and is the author of Faithful Victorian: William Thomas Thornton, 1813-1880 (Palgrave, 2016).
Singapore Review of Books 