Tracing the evolution of financial world over 4,000 years

Money isn’t everything, but everything needs money. Some philosophers consider it to be an evil. Economists consider it a blood-circulating lifeline for the smooth functioning of the economy. The financial sector comprises banking, insurance, the capital market, and real estate. It contributes a share of 31 percent of global Gross Domestic Product (GDP), and a share of 21 percent of the GDP of the Indian economy.

Britain’s most renowned historian, Niall Ferguson, brilliantly portrayed the financial history of the world in his book ‘The Ascent of Money’. Ferguson traced the evolution of the financial world over four thousand years. Money evolved as a medium of exchange in the form of seashells initially, to gold, to paper currency, and to digital currency, completely doing away with physical form and entering the realm of accounting adjustment.

Money, as a facilitator of borrowing and lending, ushered in the development of the banking system. Governments introduced Bond markets for the securitisation of interest payments in the thirteenth century. Equity shares in corporations evolved in the seventeenth century. From the eighteenth century, insurance funds and pension funds started operating against risks. Futures and options offered more specialised financial instruments in the nineteenth century. The twentieth century saw the rise of real estate finance. Western financial models spread around the world, first in the guise of imperialism, then in the guise of globalisation. He argues that “From ancient Mesopotamia to present-day China, the ascent of money has been one of the driving forces behind progress: a complex process of innovation intermediation and integration that has been as vital as the advance of science or the spread of law in mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.

Ferguson also discloses that the financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes. The fundamental reason for these upheavals, according to Ferguson, is that financial matters deal with the future, which is uncertain, unpredictable, and risky. The second reason is human behaviour, which veers from euphoria to despondency in anticipating the future financial eventualities. The third reason is the evolutionary forces present in the financial world. Ferguson emphasises that the fundamental impulse that keeps the capitalist engine in motion comes from the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates...incessantly destroying the old one, incessantly creating new ones. The process of Creative Destruction is the essential fact about capitalism. Financial crises are inherent to the financial system. Investment Banks and Bond insurance companies became extinct after some financial crises. New financial innovations emerged. He also emphasises the consolidation of the cooperative banking sector after the 1980s Savings and Loan crisis, and most institutions moving to shareholder ownership.

Foreign Direct Investment (FDI) and foreign aid, as facilitated through the International Monetary Fund and the World Bank, will impact a country’s economy. He provides two examples. Economic hit man John Perkins confesses that “we make this big loan, most of it comes back to the United States, the economy is left with debt with lots of interest, and they basically become our servants.” Ferguson reveals that the 1980s saw the rise of an altogether different kind of economic hit man, far more intimidating than Perkins like George Soros, new economic hit man, who made billions with market speculation in the Malaysian in 1977 and in the United Kingdom in 1992. There are two major issues Ferguson did not delve into extensively. Apart from economic hit men, there are persons and firms that indulge in exploiting loopholes in the financial system to gain excessive wealth, like inside trading, fudging of accounts, and window dressing of financial statements of firms. The financial system does not automatically adjust itself in the long run without outside intervention. We know from many financial crises that government intervention, monetary policies, and setting up guidelines for financial institutions, such as the Securities Exchange Board of India, played a pivotal role in stabilising the financial system.

Further, other financial innovations like Bonds, banking, equity shares, insurance, ‘mono-line’ finance services like consumer finance, internet banking, investment banking, different kinds of funds such as hedge funds, sovereign wealth funds, and subprime finance made it possible for the participation of vast members of the population without limiting finance to the whims of the elite. This financial evolution was not foreseen even by Marx, which led to his false predictions about the inevitable collapse of capitalism. Ferguson pointed out that those who talk about the death of capitalism forget that the state and financial markets have always existed in a symbiotic relationship, and without public finance, much of the financial innovations would never have occurred.