Financial history

Bread, cash, dosh, dough, loot, lucre, moolah, readies, the where­ withal: call it what you like, money matters. T o Christians, the love of it is the root of all evil. T o generals, it is the sinews of war; to revolutionaries, the shackles of labour. But what exactly is money? Is it a mountain of silver, as the Spanish conquistadors thought? Or will mere clay tablets and printed paper suffice? How did we come to live in a world where most money is invisible, little more than numbers on a computer screen? Where
did money come from? And where did it all go?
Last year (2007) the income of the average American (just under $34,000) went up by at most 5 per cent. But the cost of living rose by 4 . 1 per cent. So in real terms M r Average actually became just 0.9 per cent better off. Allowing for inflation, the income of the median household in the United States has in fact scarcely changed since 1990, increasing by just 7 per cent in eighteen years. 2
 N o w compare M r Average's situation with that of Lloyd Blankfein, chief executive officer at Goldman Sachs, the investment bank. In 2007 he received $68.5 million in salary, bonus and stock awards, an increase of 25 per cent on the previous year, and roughly two thousand times more than Joe Public earned. That same year, Goldman Sachs's net revenues of $46 billion exceeded the entire gross domestic product ( G D P ) of more than a hundred countries, including Croatia, Serbia and Slovenia; Bolivia, Ecuador and Guatemala; Angola, Syria and Tunisia. The bank's total assets for the first time passed the $ i trillion mark.3

 Yet Lloyd Blankfein is far from being the financial world's highest earner. The veteran hedge fund manager George Soros made $2.9 billion. Ken Griffin of Citadel, like the founders of two other leading hedge funds, took home more than $ 2 billion. Meanwhile nearly a billion people around the world

struggle to get by on just $ 1 a day.

Angry that the world is so unfair? Infuriated by fat-cat cap­italists and billion-bonus bankers? Baffled by the yawning chasm between the Haves, the Have-nots - and the Have-yachts? You are not alone. Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the 'real' economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.

Despite our deeply rooted prejudices against 'filthy lucre', how­ ever, money is the root of most progress. T o adapt a phrase from Jacob Bronowski (whose marvellous television history of scientific progress I watched avidly as a schoolboy), the ascent of money has been essential to the ascent of man. Far from being the work of mere leeches intent on sucking the life's blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in

man's advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evo­lution of credit and debt was as important as any technological

innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance.

Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit. Perhaps, too, it will be a financial crisis that signals the twilight of American global primacy.

Behind each great historical phenomenon there lies a financial secret, and this book sets out to illuminate the most important of these. For example, the Renaissance created such a boom in the

market for art and architecture because Italian bankers like the Medici made fortunes by applying Oriental mathematics to money. The Dutch Republic prevailed over the Habsburg Empire because having the world's first modern stock market was finan­cially preferable to having the world's biggest silver mine. The problems of the French monarchy could not be resolved without a revolution because a convicted Scots murderer had wrecked the French financial system by unleashing the first stock market bubble and bust. It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo. It was finan­cial folly, a self-destructive cycle of defaults and devaluations,

that turned Argentina from the world's sixth-richest country in the 1880s into the inflation-ridden basket case of the 1980s. 

At times, the ascent of money has seemed inexorable. In 2006 the measured economic output of the entire world was around $ 4 7 trillion. The total market capitalization of the world's stock markets was $ 5 1 trillion, 1 0 per cent larger. The total value of domestic and international bonds was $68 trillion, 50 per cent larger. The amount of derivatives outstanding was $473 trillion, more than ten times larger. Planet Finance is beginning to dwarf Planet Earth. And Planet Finance seems to spin faster too. Every

day two trillion dollars change hands on foreign exchange markets. Every month seven trillion dollars change hands on global stock markets. Every minute of every hour of every day of every week, someone, somewhere, is trading. And all the time new financial life forms are evolving. In 2006, for example, the volume of leveraged buyouts (takeovers of firms financed by borrowing) surged to $ 7 5 3 billion. An explosion of 'securitiz­ation', whereby individual debts like mortgages are 'tranched'

then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations above $3 trillion. 

For all these reasons, then - whether you are struggling to make ends meet or striving to be a master of the universe - it has never been more necessary to understand the ascent of money than it is today. If this book helps to break down that dangerous barrier which has arisen between financial knowledge and other kinds of knowledge, then I shall not have toiled in vain.