The Ascent of Money

1. Financial innovation drives human progress and economic growth

The ascent of money has been essential to the ascent of man.

Financial evolution fuels civilization. From ancient Mesopotamian clay tablets to modern digital transactions, financial innovations have continuously reshaped society. These advancements in credit, banking, and investment have enabled:

• Expansion of trade beyond local barter systems
• Funding of large-scale projects and enterprises
• More efficient allocation of capital and resources
• Development of complex economic systems and institutions

The ability to represent and transfer value abstractly through financial instruments has been a key driver of human progress, allowing for greater specialization, technological advancement, and economic growth throughout history.

2. Banks emerged as intermediaries between savers and borrowers

Credit and debt, in short, are among the essential building blocks of economic development, as vital to creating the wealth of nations as mining, manufacturing or mobile telephony.

Banks bridge capital and opportunity. The development of banking institutions revolutionized finance by:

• Pooling savings from multiple depositors
• Extending credit to borrowers for productive ventures
• Creating a multiplier effect through fractional reserve lending
• Providing a safer alternative to storing wealth personally

Early innovations like the Medici bank in Renaissance Italy showcased how banks could facilitate trade, fund governments, and fuel economic growth. Modern banking systems, with central banks at their core, now form the backbone of global finance, enabling everything from personal mortgages to international trade.

3. Government bonds revolutionized public finance and warfare

War is the father of all things.

Bonds financed state-building and conflict. The development of government bonds transformed public finance and warfare:

• Allowed governments to borrow large sums for military campaigns
• Created a new class of investors with a stake in state success
• Enabled the funding of long-term infrastructure projects
• Led to the development of sophisticated financial markets

Key historical examples:

• Dutch Republic's use of bonds to finance independence from Spain
• Britain's funding of global empire through consols
• U.S. Civil War financed through "greenbacks" and war bonds

The ability to issue debt gave states unprecedented financial power, but also created new vulnerabilities and dependencies on financial markets.

4. Stock markets enabled large-scale corporate expansion

By 1913 an estimated $158 billion in securities were in existence worldwide, of which around $45 billion (28 per cent) were internationally held.

Stocks democratized ownership and risk. The emergence of joint-stock companies and stock markets facilitated:

• Pooling of capital from numerous small investors
• Limited liability, encouraging risk-taking and innovation
• Liquid markets for buying and selling ownership stakes
• Financing of large-scale enterprises like colonial trading companies

Notable developments:

• Dutch East India Company as the first modern corporation
• London and New York stock exchanges becoming global financial hubs
• Rise of professional investment management and speculation

Stock markets became central to modern capitalism, enabling rapid industrial growth but also creating new forms of financial instability and inequality.

5. Insurance and pensions managed risk and provided financial security

There is no question that the bond market was powerful. By the late eighteenth century, countries that combined all these institutional innovations - banks, bond markets, stock markets, insurance and property-owning democracy - performed better over the long run than those that did not.

Risk management fuels economic confidence. The development of insurance and pension systems allowed for:

• Protection against catastrophic personal and business losses
• Long-term financial planning and retirement security
• Pooling of risk across large populations
• Accumulation of vast investment capital in pension funds

Key innovations:

• Marine insurance supporting global trade
• Life insurance providing family financial security
• Social insurance systems like Germany's under Bismarck
• Modern pension funds as major institutional investors

These risk management tools reduced uncertainty, encouraged entrepreneurship, and created new pools of investment capital that further drove economic growth.

6. Real estate became the foundation of the property-owning democracy

Welcome to the wonderful dual country of 'Chimerica' - China plus America - which accounts for just over a tenth of the world's land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years.

Homeownership shapes economic and political systems. The expansion of property ownership, especially in the 20th century, led to:

• Creation of a broad middle class with assets and political stake
• Development of mortgage markets and mortgage-backed securities
• Use of home equity as a source of consumer spending and investment
• Political policies favoring homeownership and real estate investment

Key developments:

• U.S. government support for mortgages and homeownership post-WWII
• Subprime mortgage crisis revealing risks of over-financialization
• Debates over role of property rights in economic development

Real estate became both a pillar of personal wealth and a source of financial instability in many economies.

7. Financial globalization connected economies but increased volatility

Every shock to the financial system must result in casualties. Left to itself, natural selection should work fast to eliminate the weakest institutions in the market, which typically are gobbled up by the successful.

Global finance: opportunity and risk. The increasing interconnection of global financial markets led to:

• Rapid flow of capital across borders for investment opportunities
• Increased liquidity and efficiency in global markets
• Transmission of financial shocks and crises between countries
• Debates over benefits and risks of unrestricted capital flows

Major events shaping globalization:

• Gold standard era of the late 19th/early 20th century
• Bretton Woods system of fixed exchange rates post-WWII
• Floating exchange rates and capital account liberalization post-1971
• Asian financial crisis and debates over "hot money" flows

Financial globalization has created unprecedented opportunities for growth and investment, but also new systemic risks and challenges for economic management.

8. Financial crises are recurrent due to human nature and system complexity

What no one anticipated was that defaults on subprime mortgages by low-income households in cities like Detroit and Memphis could unleash so much financial havoc.

Crises: inevitable and unpredictable. Financial history is marked by recurring crises stemming from:

• Human tendencies toward irrational exuberance and panic
• Complexity and interconnectedness of financial systems
• Inherent instability of credit-based economies
• Difficulty in accurately pricing risk and uncertainty

Notable crises:

• Tulip mania in 17th century Netherlands
• South Sea Bubble in 18th century Britain
• Great Depression of the 1930s
• Global Financial Crisis of 2008

While each crisis has unique triggers, they often follow similar patterns of speculation, leverage, and panic. Understanding this history is crucial for policymakers and investors alike.

9. The ascent of money is marked by cycles of innovation and crisis

Though the line of financial history has a saw-tooth quality, its trajectory is unquestionably upwards.

Progress through upheaval. The financial system evolves through:

• Periods of innovation and expansion
• Crises that reveal system weaknesses
• Regulatory responses and new safeguards
• Adaptation and further innovation

This cyclical process has led to:

• More sophisticated financial instruments and markets
• Broader access to credit and investment opportunities
• Enhanced ability to manage and transfer risk
• Increased economic growth and development over the long term

Despite recurring crises, the overall trend of financial development has been positive, enabling unprecedented economic progress. However, each new stage of financial evolution brings both opportunities and new forms of risk.

Last updated: January 22, 2025