Abstract
William N. Goetzmann’s impressive new volume is an engaging and thought-provoking history of finance. The author skilfully brings to life sweeping historical events, revolutionary changes in thought, and the trials and triumphs of financial innovators. He describes the archaeological efforts of others (and himself) to uncover a vast array of primary material, appending the discussion with enjoyable personal anecdotes about fellow scholars in the field. This book is, as Goetzmann describes, a ‘personal narrative about the people, places, and things that […] have shaped the history of finance as a technology of civilization’ (p. 3).
In the introduction, Goetzmann establishes his conceptual framework. Finance, he argues, serves four main functions. It reallocates economic value through time, reallocates risk, reallocates capital toward productive investments, and finally expands access to, and the complexity of, these allocations, allowing different dimensions through which individuals can move economic value, risk, and capital through time and space. Goetzmann deals with the practical matters of how financial technology has operated by describing ‘hardware’ and ‘software’. Hardware is the ‘financial architecture’, meaning the contracts, corporations, banks and markets that allow changes to the nature of money to occur (p. 11). Software, on the other hand, is the intangible changes in thought, such as algorithmic calculation, that prompt financial innovation. Each plays an equally important role in Goetzmann’s account. The book is primarily concerned with two themes – how humans have used finance to solve the many problems of time, value, risk and capital throughout history, and how the increasing complexity of financial technology has both inspired many achievements, and led to serious problems. Finance, in this book, is thus both hero and villain, or simply ‘a protagonist uncertain of moral valence’ (p. 41).
In part 1, Goetzmann traces the parallel development or urban civilisations and financial technology. Focussing on the ancient Near East, Athens, and Rome, the author shows the integral role finance played in ancient societies, developing out of a need for intertemporal contracting, and for the investment in, and organisation of, long-distance trade.
Part 2 focusses on the experience of China from the Bronze Age to the nineteenth century. Offering some well-needed balance to a generally Eurocentric view of financial innovation, Goetzmann argues that a variety of solutions can exist to financial problems as they have manifested throughout history. The author traces the development of coins, the provision of loans, and the development of accounting systems in China, arguing that the emergence of these technologies in both China and Europe, despite radically different institutional and political contexts, suggests they are relatively ‘robust’ hardware. On the other hand, contextual elements unique to China, in this case a strong state, forced a close relationship between government and private enterprise, and precluded the development of government bonds.
This forms the basis of Goetzmann’s engagement with the Great Divergence debate. Interrogating the existing reasons why China did not have an industrial revolution despite being technologically advanced in the eighteenth century, Goetzmann criticises the supporting role often given to finance. He argues that the stability of the state, and the lack of government bonds, meant that China had fewer organised means to bring private investors and capital together. Less available capital resulted in less investment in potentially productive new technologies, and hence less capacity for an industrial revolution. This is an interesting and valuable contribution to the existing explanations of economic divergence between China and Europe.
Europe, however, had an extremely fragmented political and economic system, a need for state debt, and thus developed a series of creative ‘financial experiments’ (p. 203). In part 3, Goetzmann examines this ‘European Crucible’ from the medieval age to the nineteenth century, tracing the development of investment markets, the corporate form, extra-government banking institutions, and complex contracts on lives, property, and trading ventures. Financial software also plays a significant role, with the author discussing intellectual advances in financial mathematics and probability analysis. The author follows stories of unbridled wealth from speculation, and the inevitable despair from the first financial bubbles. This section is by far the most substantial at almost 200 pages, and for the financial enthusiasts includes travel guides for accessing what remains of historic centres of financial innovation in Venice and Toulouse.
Part 4 concludes this book by discussing the development of finance in the twentieth century. In particular, the ability of sovereign debt to affect global politics and conflict is explored. The democratisation of debt, with mass participation in the stock market, is also argued to have amplified the potential advantages and failures of finance. The discussion of the tempering effect that both Marx and Keynes had on the classical economic doctrine of the time is particularly valuable. Marx’s recommended response to the failures of capitalism – revolution – led to Russia rejecting modern finance and dividing the modern world. Keynes’ solution – a more prominent role for government – led to financial solutions in the postwar era in the form of government social security. Goetzmann concludes with some speculation of how humanity will continue to solve financial solutions in an increasingly complex world.
Despite the title, this volume does not actually argue that money made civilization possible. Causality is challenging, even impossible, to disentangle, and Goetzmann rightly recognises that financial technology often emerged as a way for humanity to solve some problem associated with civilisation. Civilisation and finance, therefore, made each other possible. For example, Goetzmann argues in part 1 that financial technology emerged through a need for intertemporal contracting in newly developed cities in the Near East. Thus, just as finance made these cities possible, without cities there may never have been sufficient impetus for the development of finance. The hyperbolic title, therefore, is somewhat misleading. Also unhelpful was the minimal referencing. The author covers a remarkable amount of ground, in terms of time, ideology, and discipline, and often refers to scholarly disputes with no details as to authors or works. A more detailed system of references would have been valuable.
Both these quite minor faults are forgiven when the book is appreciated in relation to its intended wide readership. Goetzmann has a lively, personalised prose, while still delivering an appropriate integration with theory and, for the most part, a clear key message. The author synthesises an impressive range of primary and secondary, quantitative and qualitative material, from the judicial orations of ancient Greece to movements in the Dow Jones index. The author has sacrificed the depth of analysis and iron-clad referencing that quite rightly give credence in academic circles. However, it has sufficient range and integration with current scholarship to appeal to specialists in financial, accounting, and economic history, while being readable and appealing to a broader audience. This is essential reading for those interested in how humans continue to excel at problem-solving, and the way in which, for good or ill, money and finance is inherently linked to the structure of our daily lives. As Goetzmann himself puts it, ‘The experience of five millennia of financial innovation […] suggests that finance and civilization will forever be intertwined’ (p. 521).