Table of Contents
What is the world's financial history 3000 years on?
3000 Years of World Financial HistoryThis book starts with the history of finance from the ancient Greek-Roman period and goes all the way to modern times. It goes on at great length, from the invention of money to the derivatives of financial commodities. In the beginning, finance was a necessity, and its later development was more of a coincidence. When reading the history of finance in this book, one will find that without finance, human society probably would not have progressed, and society would not have been rich and strong. However, after any country has progressed to a certain level, finance seems to become too important, so important that it has caused the concentration of wealth, social decay, and political problems to be mixed up together. Therefore, finance is sometimes good and sometimes bad. It is not always possible to learn from the past, but perhaps by reviewing the experience of our predecessors occasionally, we can look at things in front of us from a different perspective.
Euro-American Financial Events
The history of finance is very long and it is not necessary to organize it all here. However, I would like to organize the events that I think are more related to the origin of financial concepts and have a deeper impression in this article. This book is mainly about the financial history of Europe and the United States, so I will organize the events that happened in Europe and the United States here.
Origins of the financial sector
Early European societies were city-states, each with a different background and a different way of dealing with money, but basically, the common understanding was that gold and silver had value. According to this book, Thoreau's reforms in Athens, which minted full-value currency, was the main reason for the commercial development of Athens. The financial industry was also developed in Athenian society due to its geographical location and the demands of war. Roughly speaking, the middlemen in the ports used to trade only commodities, but it was inconvenient for people to carry gold and silver bullion, and even if they had currency, it was different from one place to another, so it was only natural that they also started to engage in money exchange business. In the process of helping people to exchange money, these ancient financial merchants began to leave money in their hands, and because it was often necessary to borrow money to go to sea at that time, the middlemen began to use credit to help people to borrow money or even invest in transactions to go to sea. After getting used to this pattern, they began to develop commercial behaviors such as deposit-taking, land mortgaging, and real estate lending, which are basically very similar to the concept of banking that we are familiar with nowadays.
Origins of finance-related laws
Many people may not have noticed that apart from financial behavior itself, the concept of law is also very important to finance. During the Athenian period, there was no law in finance, which was mainly operated by conventions and morals. In ancient Rome (the time of the Spartans), the Roman bailiffs created the Law of the Twelve Bronze Tables, and from then on there was a pattern of relying on independent laws to deal with disputes. The concepts of private ownership of property and equality of rights and responsibilities were also established in Roman law.
Multinational Banking Organizations, War and Finance
The origins of organized international credit began with the Knights Templar during the Crusades. The Knights Templar was originally an order of knights called the Knights Templar for the Wars of Religion, which received financial support from European countries and had branches all over the world. Later, the wars were fought with the financial support of the Knights, and the Knights became a bank, sharing the organization's locations for general business needs, providing exchange services, and so on.
When European royal families and religious organizations needed money, they needed to borrow. The Templars had a lot of money, and with the special fact that the rules of the Order did not allow individuals to take possession of property, and that borrowing from them was low-risk, the Templars became a reputable multinational organization, engaging in a great deal of financial activity.
The Knights Templar were eventually destroyed by the cash-strapped King Philip IV for possessing too much property, but it was the first large-scale multinational banking organization.
The need for financial borrowing often stems from war. Most of the events in Europe from the Middle Ages to modern times mentioned in this book revolved around the wars between the royal families for their interests, and the need for money for the wars. In the early period, the royal families had no other way to make money or to collect taxes at home, so they needed to borrow money, both domestically and from abroad. War is a long term, just take the example of the Hundred Years' War between Britain and France, it could be fought for a hundred years, during which both countries were consuming their financial resources. In the first place, it was the British who used the concept of wool monopoly to borrow money to gain the upper hand, and later it was the French who used the collateral of the land that was about to be restored to borrow even more money. In fact, we can say that it was the difference in financial strength and borrowing ability at that time that ultimately determined victory or defeat. This is also the reason why, in modern times, we all understand that the prosperity of the financial industry has a very direct impact on national strength.
Columbus discovered the New World and the Europeans brought in large quantities of gold and silver from the Americas. This had a direct impact on the European currency at the time because money was minted in gold and silver, and large quantities of gold and silver meant large quantities of money could be minted, so inflation multiplied several times in one century, which is known as the Price Revolution. People who depended on a fixed income such as lords and artisanal manufacturers became impoverished during this period, and most of them invested their money in trade. Spain was the earliest empire of this period, but the development of finance had a direct impact on the subsequent transfer of power.
The relationship between war and financial transactions in the Age of Sail gradually changed from financial transactions to aid war to the conscious use of financial means to control war. When Britain and Spain fought against each other with their invincible fleets, the Queen of England used the means of collecting the bills of exchange of the Spanish Crown and then cashing them to reduce the Spanish war power.
Legal entity and corporate structure
The Rise of Towns, Labor and Business Restructuring
Western Europe maintained a hereditary and lordship system for a long time. The king divided the land among many lords, who owned the land, and the people on the land were their slaves. The serfs worked for the lords, paid heavy taxes, and the lords had the power of life and death. Occasionally, people with skills escaped the control of the lords and concentrated in places where there were markets, where they could earn money from their skills. Most of these places were king's domains, and later developed into towns where there were more people.
The fugitives were originally criminals, but political developments changed this state of affairs. The King of England, whose relationship with the lords was becoming competitive, allowed people to live in towns for more than a year and automatically leave their relationship with the lords, and the towns were thus protected by law. The towns are protected by law. However, the towns still have to earn their own money to be economically viable. In towns, productivity increased through division of labor, specialization, and innovation to produce more products. In towns, money is more important than government power because it is a commodity economy, not a natural economy.
This is how the joint-stock company came into being. Originally, the lords would attack nearby towns that were weak, and the towns would have to pay the lords in exchange for their freedom. When the towns got bigger and started to have a certain degree of military and economic power, the lords would receive dividends in the form of taxes and would not have the right to govern. The power to govern was in the hands of rulers elected by the citizens. It is very similar to the present relationship between the shareholders and the general manager.
Fiduciary Liability and the Emergence of Legal Persons
Fiduciary duty is the foundation of integrity in the modern securities market.
Even in the face of existential danger, the appointee must be loyal to the appointor. Without such a system of responsibility, the corporate system cannot come into being.
The beginning of fiduciary duty is said to come from the story of a Dutch merchant ship, which set sail from Amsterdam in 1596 in search of a new route, laden with goods, and was frozen in the Arctic Ocean, waiting for the ice to melt. The captain and seventeen sailors stripped the decks for fuel, but even after seven months of waiting and eight men frozen to death, the ship's merchandise, which could have been used as supplies, was not utilized.
A company is an exploring ship. The captain is the general manager, the crew is the staff, and the owners are the shareholders. The captain carries the hopes of the shareholders and cannot betray their interests under any circumstances.
In practice it is not possible for everyone to comply with the fiduciary duty, the risk remains and it is still too difficult to assume commercial risk on all personal assets. Risks need to be managed, especially given the large amount of borrowing required for trading.
As the demand for trade expanded, the Dutch East India Company was formed, which was the origin of the transfer of risk to corporations. The corporation bore most of the risk, while the individual trader bore only the risk of the shareholders' investment.
With the emergence of the corporation, financial transactions flourished. Corporations could issue bonds and stocks, and with the gathering of large amounts of capital and legal persons to take risks, Europeans began to create very large corporations with corresponding risks. In the Industrial Revolution, a famous example is the South Sea Company. The South Sea Company was founded with a franchise to trade with the Spanish Crown in the South Atlantic. The South Sea Company, because of its claimed monopoly, was speculated in the market to the point of bubbling, but in reality, it could not make the profit it claimed to have made. The real problem was the emergence of shell companies, which followed suit and drew up a big cake to go public, causing the market to become even more frothy. Eventually the UK government announced that these transactions would be banned and the Bubble Act was enacted. This caused the stock market to crash, and the South Sea Company, which had been a very large company, plummeted and eventually collapsed. The British government later found out that the South Sea Company knew that the bubble was about to collapse and the board of directors asked investors to provide assets as collateral, so the assets of the board members were still high. Some government officials were also involved in stock trading, and they sold their shares before the enactment of the Bubble Act. As history evolved, people gradually realized that the original financial mechanism created by demand also created many problems. The various laws that appeared later, such as the prohibition of insider trading, were developed after the concept of the legal person was introduced.
Securities and Other Transactions
The emergence of standardized exchanges
The so-called business model can influence the rise and fall of a country. The Netherlands became an important trading center in the prosperous era because all European merchant ships had to pass through the Netherlands, thus saving transaction costs. Because there were too many small merchants, the Dutch invented the standardized exchange, which directly displayed samples of goods and provided information on net prices, transaction time and place, and payment methods.
The existence of exchanges, originally necessary for trade, gave rise to the first stock exchange, the Amsterdam Stock Exchange, which is the origin of modern finance.
Futures Options and Tulip Bubble
The origin of the futures option is in the seventeenth century. The rich people of Holland began to wear tulips, a rare plant at that time. Because tulips were so rare, the price of tulips went up and up in the market. At first, tulips were traded, but later they were listed on the stock exchange as an investment commodity, and ordinary people could buy a portion of the tulips with stock options. Later, the Dutch created futures options on the stock exchange, and in 1636 it was possible to sell tulips for the future in 1637, without payment before delivery, and even introduced leveraged trading and short selling.
We all know the story of the tulips later, the crazy trading caused the first large-scale bubble, one day suddenly someone shouted low quote triggered a collapse of investor confidence, the price all the way down wildly.
We should all be able to see that behind the tulip bubble was speculation. Everyone wanted to make a profit and everyone knew that it was a bubble, but they still invested heavily in it and that is why they lost confidence so quickly.
This time lag between the virtual and the real is the bubble.
Mass Real Estate Trading
Land ownership in Europe was originally a matter between lords and monarchs. It was only after King Henry VIII of England that mass land sales began. Henry VIII had originally pushed for a divorce and the Reformation, which put the crown above religion. In order to make money to support the royal family, Henry VIII started to sell church lands, which was different from the feudalization in the past, but instead, he bought and sold properties directly, thus, for Europeans, land was no longer something that could only be owned by noblemen or lords, but also became a commodity.
This change also led to subsequent social development. The general public bought land for herding, at first for herding, then for factories and crafts. In the Age of Lords, the agrarian society changed to an industrial society. The royal lords were not enough to control the society, and the king's power began to rely on merchants, so there were parliaments, and the state relied more on laws.
Currency and Exchange Rates
Concentration of Minting Power and Inflation
The Roman Republic began to turn autocratic into Octavian's time, which was the beginning of the centralization of the right to coin money. (Although there had been money before this, the quality of the gold and silver content varied, and different provinces used different currencies.) Octavian adopted the means of centralizing the minting of gold and silver coins, which centralized the power and made transactions easier.
However, with the concentration of power in the hands of a small number of people, finance gradually changed from a state of necessity to one of easy manipulation. In terms of financial policy, the post-Roman governments, in order to stabilize power or to increase revenue, used market control, high taxes, fines, and so on, and eventually began to devalue their currencies. In ancient times, the printing of banknotes was minting coins, which required the use of gold and silver. When the government had no money, it would mint more coins by reducing the gold content, thus increasing the circulation of money, which began to depreciate, and the depreciation of money would lead to inflation. There was also a period of massive inflation in the second and third centuries when people stopped believing in money and went back to bartering.
Paper Money and Central Banks
The function of a modern central bank is to issue money to regulate the supply of money.
The first paper money to circulate in large quantities was in the Netherlands. The booming trade in Holland not only gave rise to exchanges, but also made it difficult to pay for international trade on delivery, so merchants used IOUs guaranteed by the Federal Province of Holland. The speed of trade was faster than the speed of delivery, so IOUs began to circulate as currency. As trade developed, the Bank of Amsterdam was established and issued standardized bank notes, which became the most convenient form of payment. Dutch banknotes began to circulate in large quantities. However, officially, the currency was still minted, and paper money was only a form of payment, not a fiat currency. In fact, precious metals were used as the basis for the exchange rate for trade all over the world at that time.
For a long time, gold and silver minted fiat money was issued by the centralized European royal houses. The concept of a central bank has evolved through many attempts. In the 18th century, a Frenchman, John Law, founded the first private bank in France and obtained the royal consent to issue French banknotes. The idea was that the bank would be responsible for issuing coins and levying taxes, and the royal family would only need to collect a fixed amount of money from the bank, leaving the problem of the taxes that could not be levied to the bank. The amount of paper money that could be issued was determined by the gold reserves, as paper money was initially intended to be paid in gold. John Law's ideal was to control the economy through the supply of banknotes. Like the modern concept of economics, the bank could issue coins, but it had to be able to collect the coins back in order to control the economy, and this was done by offering shares of the relevant companies in exchange for the coins. Unfortunately, there was a problem with this idea, and that is, the stock market was too speculative, and investors were looking for capital gains, so the banks could not reasonably control the speculation of too high a price. In the end, this first experiment of issuing banknotes as an independent institution failed miserably, the stock bubble collapsed, and the banknotes lost their credibility and were abolished by the Crown.
Later, Western societies began to develop state-issued paper money when the United States gained its independence. When the U.S. was founded, the rule was that people could bring gold and silver to the mint to coin their own coins. The reason why the U.S. had to issue paper money was that it had just become independent and had no way of borrowing money from the outside world, nor did it have any gold or silver, so it had to issue its own Continental notes, which were similar to paper money. In Europe, the issue would have collapsed due to inflation, but the United States was a new continent, a distribution center for American goods, and there were no tariffs, so many people were attracted to trade with the United States, and the money they made offset the risk of inflation. However, Continental notes were not the only currency circulating in the United States. Bullion and other currencies were also in circulation, and the exchange rate fluctuated greatly.
Hamilton, the father of American finance and the first Secretary of the Treasury, advocated the establishment of a central bank to represent the United States and issue uniform paper money as fiat currency. The historical situation in the United States was different from that in Europe. The United States federal government had no gold or silver reserves, which simply means it was very poor, so the first central bank was the First Bank of the United States, a privately owned organization that had been licensed to issue currency for a period of time. In order to issue banknotes, it was necessary to have a share capital, which was raised by issuing shares to the market. In the early years of the United States, when the federal government was unstable and the states were acting on their own, state banks issued their own bank notes. The First Bank would collect state bank notes and then suddenly demand gold from the state banks, which prevented the banks from issuing too much bank notes and over-financing. The First Bank's use of financing helped the U.S. survive the first financial crisis when the stock market plummeted, which was a good thing. However, due to political factors, the First Bank of the United States was later closed without a charter. Wall Street lost its central bank and became an unregulated market. Later, there was a second bank for a short time, but again, it did not last under the political turmoil. As a result, the U.S. experienced economic crises caused by bank lending excesses from time to time. The biggest one was in 1907, when the JP Morgan Group bailed out the market, which led to the formation of the Federal Reserve Board and the creation of a central bank in the United States.
The gold standard and the dollar standard
The gradual acceptance of the gold standard in Europe from the United Kingdom, that is to say, the use of gold as the only uniform basis of valuation (gold is a fiat currency) began only in 1871, mainly because the discovery of a large number of silver mines in Europe made the price of silver more unstable. Although the supply of gold was theoretically stable, the political situation at the beginning was that Britain was the strongest and had the largest manufacturing industry, so it could also use the discount rate to attract foreign gold and thus manipulate the exchange rate. After World War I, because of the tug-of-war between the political blocs of the United States, Britain, France and Germany, the world saw the emergence of the gold standard bloc led by Britain, the silver standard bloc led by France, and the U.S. dollar bloc led by the U.S. After World War II, the world was in a depression. In the post-World War II depression, the only hope was to rely on the strength of the United States, so the dollar standard eventually won. The Bretton Woods system defined a fixed exchange rate between the US dollar and gold, which in effect gave the US dollar the same status as gold, and turned the Federal Reserve Board into the world's central bank.
When the Bretton Woods system was established, the U.S. economy was strong and always had surpluses and a large amount of gold in the treasury. However, later, with the Vietnam War and the Korean War, the United States began to be in debt, and the gold reserves were reduced to the extent that they were insufficient to pay the short-term foreign debt. Things evolved to the point where the Western European countries had to solve the dollar problem and signed the Dental Purchase and Addition Agreement, which lifted the requirement of gold as a standard and made it possible for each country to arrange the exchange rate freely. With free control of exchange rates, the degree of political manipulation could be deepened, and countries that were not strong enough to do so were subject to more speculative market influences. However, this problem seems to be unsolved so far.
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The author of this book is a Chinese economist, the current vice governor of the People's Bank of China and former president of the People's University of China. The good thing about this book is that it is easy to read, and the overall style is very colloquial and direct, especially because the author likes to compare the situation in China, and the well-written passages are kind of interesting to read. The author's overall understanding of finance is clearly stated at the beginning of the book:
That's the nature of finance: always use your money for people who have more money than you.
I started reading this book because I am interested in the history of finance. The first few chapters on the early stages of finance are relatively well-written, but after the Middle Ages, it is rather confusing, and there is no explanation of the more complicated financial terms in modern times, so I need to have a prior understanding before I read it to have a better understanding.
Another drawback of this book is that it does not list the sources of information. Although the author is a scholar, it feels more like a storybook, and it is difficult to verify the unfamiliar parts. For the above reasons, although I have spent some time to organize this book, I still suggest this book is suitable for those who have read too many finance-related books to take a look at the history story as a leisure after meals, but not suitable for reading as a financial science popularization book. If you are really interested in history, I suggest you to read it.Silk RoadThese are works with sources of information.
Finally, in fact, this book has talked about a lot of history, and if we want to talk about insights, we can summarize them in this excerpt.
When nations are strong, free-flowing money is the blood of the economy; money is concentrated where it is most efficient. The rule of social wealth is "creation"; what is not a good day today will be a good day tomorrow.
When a country fails, finance is a powerful tool for plundering wealth, and goods are concentrated in the pockets of a few in a certain direction. The rule of social wealth is modified to "plunder"; even if today is a good day, tomorrow may not be a good day.
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