Money Changes Everything
Money Changes Everything

Money Changes Everything

Finance has four key elements: 1.  It reallocates economic value through time; 2.  It reallocates risk; 3.  It reallocates capital; and 4.  It expands the access to, and the complexity of, these reallocations. (Location 185)

Third, finance reallocates capital. The stock market, for example, allows the flow of investment into productive enterprises. Banks, for example, make loans to businesses with the potential for profits. In this way finance is a technology for facilitating economic growth. (Location 197)

Financial contracts are typically struck between someone who wants to shift value to the present and someone who wants to shift value to the future. There are two broad reasons for shifting money to the present: consumption and production. (Location 208)

They play a special role in the economy, because they are based on the notion of growth. (Location 217)

Finance removes the prerequisite of wealth from entrepreneurship. It feeds capital to potentially productive projects regardless of whether or not the entrepreneur is rich. (Location 222)

Consumption loans have been criticized as promoting profligate behavior and exploiting desperate borrowers. Productive loans can lead capital astray; easy money can fuel foolish projects just as it can fund profitable enterprise. (Location 226)

Investing money rather than spending it requires delaying gratification. No one likes to delay gratification without a good reason. For investors, a key incentive is the expectation of higher future consumption. (Location 235)

The rate of return on the investment can be thought of as the price of time. (Location 239)

Financial markets allow strangers to exchange value through time more efficiently than traditional reciprocity arrangements do. They do not require shared belief systems or cultural norms, simply a structure for documentation and enforcement. (Location 289)

These first financiers depended on a variety of outcomes and events: political decisions, agricultural output, the fortunes of overseas trade ventures, the fluctuating price of commodities, and the honesty of employees. (Location 296)

Finance also played a role in another key aspect of civilization: the development of knowledge. (Location 300)

underwritten by investors hopeful of a future profit. In this way, finance has been a cofactor in civilization’s expansion and outreach. (Location 302)

His contract with the Spanish crown was extraordinarily complex: he received not only political favors but also 10% of future revenues from transatlantic trade. (Location 306)

Finance stimulated the development of quantitative models of the future and the maintenance of deep records about the past. (Location 312)

of the capacity for reason and the dangers of miscalculation. (Location 314)

what might be thought of as hardware and software. The hardware is constituted by such things as financial contracts, corporations, banks, markets, and monetary and legal systems. (Location 320)

financial architecture. (Location 321)

finance is a system of thought; a means of framing and solving complex problems about money, time, and value. In essence, this is the software of the technology. (Location 323)

Financial solutions improved the capability of humankind to create cities, to explore new worlds, to expand and equalize economic opportunity, to control risk, and to provide for an uncertain future. (Location 328)

The first is that of the inventors and users of financial tools. (Location 333)

researcher. History is discovery, and historians are explorers. Much of this book unfolds from research by archaeologists, classicists, historians, economists, and mathematicians. Just as important, however, are those who are devoted to preserving the past—librarians, collectors, and dealers—all of whom treasure the documentary evidence of history. (Location 342)

We might never understand the first inflation-indexed security if not for economist Robert Shiller’s personal mission to help people insure themselves against everyday economic risks. (Location 349)

For finance, this means coins, documents, correspondence, and places where these things were made and exchanged. (Location 352)

Yet another perspective is cultural. Although this book is not a cultural history of finance—in many instances, artists, writers, moral philosophers, dramatists, and even comedians have interpreted financial markets, and this in turn has influenced the course of these markets’ development. (Location 355)

My personal view is that the trajectory of technological innovation has been mostly upward and will continue to be so. (Location 365)

The problems they created have been serious at times, but as a global society, we seem to make progress in dealing with them. (Location 367)

The argument in this book is that financial technology allowed for more complex political institutions, enhanced social mobility, and greater economic growth—in short, all the major indicators of complex society we call civilization. (Location 369)

how to equilibrate between the needs of the present and those of the future; and how to make the benefits of finance broadly available to everyone in society, wealthy and poor. (Location 372)

He has decoded precisely this idealized Sumerian framework for administrative time. (Location 577)

By the late third millennium BCE, the ancient Sumerians had decoupled economic time from astronomical time— (Location 581)

360 is evenly divisible by, for example, 2, 3, 4, 5, 6, 8, 9, 10, 12, 15, 18, 20, 24, 36, 40, 45, 60, 72, 90, 120, and 180. (Location 583)

Mesopotamians apparently thought in terms of round quantities and neat fractions, and mathematical tools were utilitarian as opposed to philosophical. (Location 585)

The system could be used for contracting through time and for verifying receipt of goods between parties. (Location 594)

There is also evidence that financial contracting developed alongside and stimulated conceptual development. (Location 598)

Since the special characteristics of the Sumerian economic system are so fundamental to the emergence of finance, it is important to understand it in a broader context. (Location 606)

Thus, with the birth of an economy based on central planning and redistribution came indebtedness and taxes. (Location 649)

It is not surprising that these Sumerian cities fought for decades over agricultural land, since grain was the foundation of the ancient economy. (Location 662)

Interestingly, even the untrained eye can easily identify these giant numbers in the inscription: three round punch marks with smaller punch marks inside of them representing a big number times another big number. (Location 668)

Now, however, the tablet is not a claim on an individual, it is a claim on an entire city-state. (Location 671)

evidence of compound interest. (Location 672)

Compounding causes the debt to grow exponentially through time rather than in equal proportion each year, which is what led to the vast numbers. (Location 673)

Enmetena’s claim of compound interest is based on the premise that the profits from one year can be reinvested in the same productive enterprise the next year. (Location 691)

It was therefore simply a rhetorical device invoking the language of mathematics and finance for demanding heavy reparations from Lagash. In effect, the cone argues that, because the debt was impossible for Lagash to pay, the ruler of Umma “owned” them. (Location 694)

From a financial perspective, this document is something akin to an earnings growth model of a business enterprise, in which livestock represent the investment and the sale of dairy products represents the annual earnings. (Location 717)

All people, urban as well as rural, tend to lend things to one another. (Location 730)

When people started living in large communities like Uruk, they shared their lives with strangers as well as friends. It may have been possible to know everyone in a large farming village, but not in a vast city, such as Uruk. (Location 734)

Cambridge University’s Paul Millett traced this developmental relationship between urbanization and interest loans in ancient Athens. (Location 739)

Interest is a sweetener to induce someone to lend you what you need. (Location 741)

but loans in which the “gift” is repaid with interest allows a lender to accumulate wealth—to obtain repayment even when he or she isn’t in need. (Location 742)

The invention of interest, in the very shadow of the gates of Eden—may have been humankind’s original fall from grace. Indeed, explicit contracting, record-keeping and documentation of effort and rations that characterize the ancient city states appear to be a departure from the idealistic world of communal life. (Location 745)

The invention of debt and the emergence of interest to incentivize lending is the most significant of all innovations in the history of finance. Debt allowed borrowers to use money from the future to meet obligations in the present. For example, suppose a farmer suddenly discovered (Location 755)

In this sense it substitutes for the spoiled grain—it has the effect of moving the future harvest to the present. Smoothing (Location 759)

Contracts were made in both silver and barley, and they ranged from interest-bearing loans to zero-interest loans to antichretic loans (loans with the interest paid in labor). (Location 770)

Their analysis demonstrates the fundamental role that borrowing and lending played in the ancient economy in the Ur III period and suggests that even in a highly controlled and hierarchical economy, lending was essential. (Location 778)

These merchants ran accounts with the household—the merchants were advanced silver and wool, and with these goods the merchants bought and delivered back to the household various other commodities, such as onions, chickpeas, garlic, barley, madder, raisins, dates, wheat, oxen, and goats; as well as other necessities, such as alum, gypsum, alkali, grinding stones, bitumen, and ox hides; and precious items, such as copper boxes, gold, and aromatics. (Location 782)

liquidity for merchants to buy and deliver goods, it also allowed financial profit. (Location 787)

By 2000 BCE, roughly a millennium after the appearance of the concept of interest, even highly controlled economies needed a way to manage the complex intertemporal needs. (Location 791)

However, the Sumerians were just the first in a series of increasingly numerate societies spanning another two and a half millennia that relied on financial contracts, record-keeping, and markets. (Location 821)

The letters these ancient financiers left us shed light not only on their business operations but also on their lives and personalities. (Location 825)

Hammurabi’s code specifies the rate of interest on silver at 20% and on barley at 33⅓%. (Location 833)

The code is a uniform legal framework for the entire the Babylonian empire. (Location 834)

It describes the obligations of merchants, brokers, and agents and their fiduciary duties and limits to their liabilities in case of attack or theft. It places limits on the term of debt indenture (three years). In short, it creates a comprehensive, uniform framework for commerce. (Location 838)

The Code of Hammurabi is as much a part of the financial architecture of the ancient Near East as loan tablets, mortgage tablets, leases, letters of credit, and the whole range of financial documents that sprung forth during Old Babylonian times. (Location 845)

These houses were all from the Old Babylonian period of Ur, and their documents were thus written in Akkadian, despite the millennia-long Sumerian heritage of the city. (Location 855)

He was educated, self-reliant, and careful with his money, and he kept his own accounts rather than hiring a scribe. Despite his training, however, Dumuzi-gamil avoided lavish prose in favor of what Marc Van De Mieroop calls “terse phraseology.” Benjamin Franklin springs to mind. (Location 867)

According to the manner in which the Mesopotamians calculated interest, this equaled a 3.78% annual rate. (Location 872)

Marc Van De Mieroop suspects that Dumuzi-gamil was acting as a banker—taking in deposits at low rates of interest, and in the interim, making productive use of the money. (Location 874)

There is little doubt that Dumuzi-gamil’s loan represented the productive use of the time value of money. When he borrowed business capital from Shumi-abum, he apparently had a plan for increasing his wealth. (Location 880)

Without the ability to shift money through time—to borrow against future income—Dumuzi-gamil might not have been able to set up shop. (Location 882)

The short-term loans were clearly consumption loans, while Dumuzi-gamil’s was for productive purposes—for developing the bakery business and for lending activities. (Location 890)

Borrowing was more typically a response to emergencies, and Dumuzi-gamil was probably not very popular with his creditors, given the high interest rates he charged. (Location 891)

Among Dumuzi-gamil’s records are indications that certain payments were credited to individuals. (Location 894)

but its use in the dealings of individuals is a subtle but important advance in financial thought. (Location 896)

Neighborly lending appears to have been on the decline in second-millennium Ur—sales were recorded even between brothers. Almost all these sales were denominated in silver. (Location 903)

It is interesting to note that Mesopotamian legal codes guaranteed property rights to an even greater extent than they guaranteed what we now call human rights. (Location 912)

This seems cruel and exploitive, but it may have been efficient. (Location 914)

people work harder and produce more when they are in debt. (Location 915)

such as Dumuzi-gamil, accrued wealth through borrowing and lending. (Location 925)

Around the corner from Dumuzi-gamil lived Ea-nasir—a like-minded entrepreneur. He made his fortune by organizing and financing maritime expeditions from Ur to Dilmun. Archaeologists believe that Dilmun was the key entrepôt in the Mesopotamian copper trade. (Location 929)

Ea-nasir’s tablets indicate that considerable diplomacy was required to equitably partition the profits from the Dilmun trade. (Location 938)

The contributors expected to gain if the expedition was a success. (Location 940)

in which the limited partner assumed no liability beyond the value of the paid-in capital. It was a joint venture with silent, but contributing, investors. (Location 945)

People were able to insure themselves against personal failure—if their own venture collapsed, then the investment in Ea-nasir’s might carry them through hard times. (Location 960)

In Mesopotamia during the Old Babylonian period, considerable evidence suggests that people were using investments and financial contracts—and even the legal definitions of the family—to finance their retirement. (Location 970)

In fact, in 1788 BCE a financial catastrophe occurred. Rim-Sin issued a royal edict declaring all loans null and void. Debtors must have rejoiced, and creditors must have panicked. (Location 1001)

After Rim-Sin’s edict, Marc Van De Mieroop finds little evidence of financial dealings—with the exception of lawsuits. (Location 1003)

Financiers indirectly provided silver to the temple and the palace, but they did so at a high social cost. (Location 1011)

Following Ea-nasir, there are virtually no documents relating to the Dilmun trade for another thousand years. Ur apparently ceased to be the flourishing maritime entrepôt it had been in its heyday. (Location 1020)

could not offset the potential loss faced by investors subject to debt forgiveness. (Location 1023)

Loans and investment contracts of the ancient Near East could be denominated in grain and even in units of labor; however, many of them were denominated in silver. This is strange, because silver is not native to Mesopotamia. (Location 1031)

Van De Mieroop argues that silver developed as a unit of value and medium of exchange in Mesopotamia because the political structure up until the late second millennium was fragmented into city-states that had to trade with one another and had to trade externally to obtain key goods. (Location 1043)

Values in accounts were written down in silver but not necessarily settled up in silver. Silver became a unit for expressing the value of many different kinds of goods in a single monetary dimension—a tool of thought as much as a tool of transacting. (Location 1047)

The Assur trade was financed by loans as well as sophisticated equity trading partnerships that extended over multiple years. (Location 1062)

On the other hand, much like Ea-nasir’s Dilmun ventures, it allowed investors to diversify their risk. Investing in ten ventures like Amur-Igtar’s was a good way to avoid losing everything to one unlucky expedition. (Location 1080)

the kārum where merchants and moneylenders lived and worked. In excavations over a number of years, Weiss and his team uncovered an extensive residential district in the lower town, which was undoubtedly the place where the caravans stopped and traded. (Location 1108)

Grain was the “coin of the realm” within a household system that produced and distributed subsistence goods locally to its members. In contrast, silver was the medium of exchange that connected Mesopotamian cities with the broader world. (Location 1120)

In both settings, finance served as a crucial factor in the economy. Short-term loans smoothed income and consumption shocks to households both great and small. (Location 1127)

merchants were allocated resources in advance that allowed them to trade at opportune times. (Location 1128)

either a means to draw the needy into debt slavery or as a means to deprive landowners of property. (Location 1131)

Nippur was a prosperous and productive protectorate of the Persian kings, who built grand royal residences at Susa and Persepolis. (Location 1154)

Through careful business dealings, they amassed a considerable fortune, and the family business remained under their active control until about 417 BCE. Some years were better than others, but one particular date stands out as important for the Murašu. (Location 1159)

One of Sogdianus’s first imperial acts was to summon his powerful half-brother to the imperial city of Susa—perhaps to put him under the sword and consolidate his own power. (Location 1166)

they were land rich but cash poor, and the mercenaries and supplies to fight Sogdianus could only be obtained with silver. (Location 1169)

Ochus’s backers mortgaged their vast property holdings in the Euphrates valley to the Murašu and used the proceeds to hire an army. (Location 1170)

The overthrow of Sogdianus may be the first war we know of to have been fought on borrowed money, but it certainly was not the last. (Location 1173)

In the fifth century BCE, the Murašu firm provided this essential line of credit, and it probably turned the tide of victory. But fate is not always kind. The landholders who supported Ochus remained mired in debt, and many faced foreclosure. (Location 1176)

Babylon by this time had long lost its role as the capital of Mesopotamia, but it survived as an important trade center and as a center of astronomical observation. (Location 1183)

Slotsky hypothesizes that they were “pieces in some mathematical ‘grand scheme’ of the world.”3 (Location 1193)

Although there were common trends through time, agricultural subsistence in late Mesopotamia—as in early Mesopotamia—was local. (Location 1206)

It was unexpected—Alexander was thirty-two years old—a young, powerful commander in his prime. He fell ill and died within two weeks, leaving no clear successor. (Location 1211)

The Drehem tablet—the idealized mathematical forecast of the exponential growth of a herd of cattle—suggests that the technology of mathematical calculation, and the abstraction that naturally grows with symbolic representation, may have been a by-product of the development in early Mesopotamia of record-keeping and representation. (Location 1224)

Financial contracts allowed Mesopotamians to move value through time and to attribute a cost to it. Time was not only a dimension but also a commodity (Location 1231)

Finance developed out of the need for intertemporal contracting, which was the economic foundation of the first cities. (Location 1242)

Technology is a set of methods and ideas that develops and is maintained by culture. (Location 1247)

No one is born knowing how to calculate compound interest. It relies on the ability to pass this know-how down through time. (Location 1247)

The Greeks invented banking, coinage, and commercial courts. (Location 1264)

The Romans built on these innovations and added business corporations, limited liability investments, and a form of central banking. (Location 1264)

Athens and Rome had to make grain flow toward the center. (Location 1269)

The Athenian legal framework can be thought of as a financial technology. (Location 1384)

Greek merchant voyages to Ukraine undoubtedly involved great risk. (Location 1386)

but its vital architecture was legal: a tradition of contracting and commercial law. (Location 1389)

Abstract wealth, on the other hand, took the form of bank deposits, accounts, and contracts. These assets existed as rights defended in court, contracts between two parties, or accounts held in trust by a banker. (Location 1394)

The earliest known bankers in Piraeus were the trapezitai Antisthenes and Archestratos, who operated at the end of the fifth century. (Location 1423)

The fact that it was passed each generation to a freed slave reveals a lot about the way slavery—property rights over human capital—allowed business owners to capitalize on specialized, technical training. (Location 1426)

the true assets are not a stockpile of currency, a grand edifice, or a legion of clerks. (Location 1428)

Instead it is the business acumen of the banker, the eye for opportunities, the canny assessment of risk, and the reputation for integrity. (Location 1429)

plus a simple calculating table and a careful record-keeping system—constituted a bank in ancient Athens. (Location 1430)

but they may also have been key intermediaries in the process of investment. (Location 1445)

but they also may have helped oversee and direct investments for their clients. (Location 1447)

Bankers also may have served as facilitators of economic investments—either because they profited economically or because this enhanced their reputations and connections. (Location 1455)

first according to market value and then according to the annual net income they generated. Both of these approaches must have been (Location 1471)

Athenians may not have been endowed with farmland, but they were endowed with silver. (Location 1497)

Athenians did not have to have commodities to exchange at other ports. Their silver was accepted everywhere. (Location 1512)

Virtually everything in Athens was fungible—anything could be pledged as collateral, even slaves, mining rights, and entire workshops. (Location 1546)

Whole businesses could change hands as financial needs and resources shifted. (Location 1548)

Athens had a financial system that facilitated investments and spread risks, and it supported the complex, import-based economy that the great city required. (Location 1581)

Athens is most famous as the birthplace of democracy. (Location 1586)

The basic instrument of this realignment was a system of public finance that had a number of unprecedented elements. Without financial innovation—and unique financial resources—the experiment of democracy in ancient Athens may not have succeeded. (Location 1594)

created a fiscal structure for Athens based on a central fund, which was used to finance wars and to advance the other collective interests of the people. (Location 1597)

This was a means by which money was fairly dispensed through Athenian citizenry and allegiance to the state was developed. (Location 1610)

One of the coin’s most important functions was to serve as a liquid, ready store of value for the Athenian government. (Location 1653)

Ancient Athenians also saw it as their treasury—their great monetary weapon against invasion. (Location 1662)

The back door of the Parthenon led to the treasury. Athena cast a protecting eye over her eponymous city below, but her protection was backed up with financial might. Coinage was not only a brilliant economic invention—it was also a great political one. (Location 1664)

Payment in (legitimate) coin had no counterparty risk; it was immediate and precise. The Athenian owls suited not only the internal political requirements of Athens. They also fit the need of a network of trade among peoples who did not share Athenian government or other institutions. (Location 1677)

He points out that coins appeared in the political context of warring city-states. (Location 1700)

He argues that the emergence of coinage is connected to the increased reliance of the state on the marketplace and the need of the government to stimulate it. (Location 1702)

This process theorized by Bresson is entirely consistent with Schaps’s proposal that coinage signified governmental commitment to maintaining a functional market via support of the money supply. (Location 1712)

Although they used a silver-based pricing system, more than likely they recorded their small payments or obligations in accounts—like running a tab at a local store. (Location 1719)

Take away any of these features—records, reputation, or repeat business—and the use of small accounts as money breaks down. (Location 1724)

At the same time, barter with their cargo of commodities is inconvenient and not necessarily economically efficient. (Location 1729)

trading some goods for local coinage would have been a simple means to allow foreigners to shop in an unknown land. (Location 1731)

Coins gave trading power to the individual as opposed to the state. (Location 1737)

The two big factors that distinguished Athens from most prior ancient societies were the reliance on maritime trade and the development of a unique governance system. (Location 1746)

Strict regulatory constraints prevented grain re-exports and the financing of non-Athenian grain trade. (Location 1751)

The dispersion of capital investment in trade means that the evidence itself is dispersed and fragmentary. (Location 1753)

It proved that, with a sufficient financial structure, a large and complex society that relied fundamentally on international trade was possible. (Location 1758)

The trade economy worked by decentralizing capital investment and allowing the invisible hand to allocate capital to the grain trade. (Location 1760)

Athenian democracy also required a structure for decentralizing governance, but at the same time it also relied on a means to unify its citizens behind an abstract institution—the state—to which citizens would willingly pay taxes and for which they would adhere to the demands of public service. (Location 1761)

Rome’s financial system was more complex than anything that preceded it, and by some accounts it was as sophisticated as anything that appeared until the Industrial Revolution.1 Rome’s financial architecture matched the complexity of the empire’s economy. (Location 1772)

merchants needed capital, trade credit, and insurance against risks. (Location 1777)

administered. To address these logistics, Rome privatized various functions of the state, including tax collection, military supply, and construction. (Location 1780)

At is greatest extent, a group of roughly 10,000 people ruled an empire of 60 million. (Location 1796)

Four years before Tiberius died, Rome was struck by a financial crisis involving mortgages and defaults. (Location 1833)

The aging Tiberius famously had many of the coup’s supporters killed and pitched into the Tiber River. (Location 1837)

By 33 CE, Rome already had a legacy of financial crises characterized by credit contractions and mortgage defaults. (Location 1869)

The Roman treasury then functioned in the way the US Treasury traditionally has done when faced with a financial crisis—it relieved the lack of credit through loans and used intermediary institutions to implement the solution. (Location 1870)

Significantly, the emperor is not handing out money, he is overseeing accounts—the value is in the contractual tax records. (Location 1907)

The name “argentarii” suggests they had their origin as money changers, as did, perhaps the Athenian bankers. (Location 1920)

The documents contained years of loans, lawsuits, and other transactions and revealed that the Sulpicii were a family of bankers, and the house, perhaps, was their place of business. (Location 1955)

Unlike the serene Seneca, however, the Sulpicii bankers were almost certainly among those clamoring to meet the fleet. (Location 1991)

In fact, the submerged city is an underwater national preserve for snorkelers to explore. (Location 1994)

Jean Andreau, the leading expert on banking in classical antiquity, points out that the Sulpicii raised capital by borrowing from the upper classes. (Location 2014)

Through specialized intermediaries like Hesychus, they advanced loans on commercial enterprises. (Location 2017)

Small-time financial intermediaries evidently borrowed from lenders farther up the food chain. This arms-length financial architecture allowed senators and emperors to invest in business without getting their hands dirty. (Location 2019)

Roman law evolved to address this potential problem by limiting the extent of the slaveholder’s liability. (Location 2033)

and gives the latter a free hand, then his or her liability was limited to the capital invested with the slave via an account called a peculium. (Location 2037)

unless the creditor can show that a particular loan was made at the master’s direction. (Location 2038)

Investors could take more risk if the potential liability of any single investment was limited to the peculium. (Location 2040)

Sulpicii has a natural interpretation as his peculium. The emperor profited from Hesychus’s business acumen, but his vast wealth was shielded from the slave’s creditors, who could only recover the balance of the peculium. (Location 2042)

The banker holding the deposits and the slave’s other financial assets, including loans and liabilities, would have been in a perfect position to vouch for his net worth. (Location 2044)

Thus, before investing alongside anyone, you would need to assess their financial assets and liabilities. (Location 2080)

In contrast to the Roman societas, the modern corporation enjoys entity shielding. (Location 2087)

Corporate-like institutions owned collectively among hundreds or perhaps thousands of investors offered a novel form of business venture; one in which investors were not directly involved in the activities of the company but instead were passive recipients of profits according to their ownership shares. (Location 2111)

Investors could buy and sell fractions of a business without the complicated legal entanglements implied by partnerships. (Location 2114)

They assumed the uncertainty of revenue collection in return for the potential to extract excess profits. This was good for the state but perhaps painful for provincial taxpayers. (Location 2121)

As the ownership base of the companies expanded, so too did their political influence. This led to power struggles. (Location 2126)

She argues that we may be missing an important piece of Roman law—the law from the Republican era that governed the creation of the publican societies. (Location 2161)

Malmendier argues that Roman law under the republic must have been a flexible, adaptive system. (Location 2184)

The publican societies were a means by which the state could contract out for vital services without building a bureaucracy. (Location 2186)

It brought Rome to the brink of financial failure. (Location 2199)

it borrowed from Hieron of Syracuse—and then defaulted. (Location 2202)

It raided its widow and orphan funds; it levied a wealth tax; in 210 it simply begged its wealthy citizens for loans, and in 205 it sold off state property in Campania. (Location 2204)

The economic consequence was a dramatic increase in the Roman money supply. (Location 2208)

It went from being metal poor to metal rich, and just as in the case of ancient Athens, the power of money gave it the power to pay armies and navies, and to create a currency that dominated the global marketplace. (Location 2209)

Rome’s monetary upgrade was a strategic advantage for the expansion of the empire. (Location 2228)

Soldiers paid in coin became used to buying in coin. (Location 2232)

gave it liquidity; and fostered trade, market development, and specialization in manufacturing. (Location 2234)

He observes that the expansion of Rome’s money supply also took place in the virtual realm, through the rapid growth of credit institutions like banks and investment organizations. (Location 2239)

Hence the “virtualization” of value through accounting—as long as accounts themselves were safe—removed certain kinds of risk posed by physical coinage. (Location 2246)

In short, Rome became an empire because of its financial technology—coinage as well as investment and credit institutions. Finance was not a sideshow—it was the lifeblood of Rome. (Location 2250)

Germanic tribes cut the empire off from northern European mines, and the Moors disrupted Iberian mining. (Location 2255)

A new denomination, the antoninianus (nominally worth two denarii) was introduced, but its silver content was not double that of the denarius. (Location 2257)

He theorizes that the debasement of the currency in the late Roman Empire also explains the disappearance of deposit banking after the middle of the third century CE. (Location 2264)

Anthropogenic lead levels did not climb as high as those in the Roman era until 1200 CE. Roman finance—the mining and smelting of lead-rich ore to mint silver—left a permanent mark on the world in many ways—including on the Greenland ice cap. The airborne lead pollution around the mines in fact left a chemical residue in the bones of the Iberian people. (Location 2300)

Financial levers existed to address financial and economic failures—from imperial debt forgiveness to currency debasement. (Location 2314)

Roman conquest made the ruling classes of Rome rich. They had to invest their wealth somewhere, and it certainly trickled down through the credit system. (Location 2317)

indeed it can lead to conflicts concerning default. (Location 2318)

It is thus not surprising that, as the emperors consolidated their power, the usefulness of the publican companies declined. It is tempting to draw the conclusion that the corporate form first emerged as a means to negotiate and resolve conflicts between political and economic powers. (Location 2323)

The Chinese experience demonstrates that varieties of solutions are possible to the fundamental problems of time and value. (Location 2350)

The financial development of China helps us understand what tools are necessary or unnecessary. (Location 2365)

While China also created debt instruments and mathematical tools for the calculation of interest, it was distinct in three specific ways. (Location 2366)

The great, unifying financial theme of Chinese finance is money. (Location 2368)

The second distinctively Chinese financial technology is sophisticated bureaucracy. (Location 2374)

China sometimes broke into smaller states or was conquered by its Asian neighbors, but through long stretches of history, China’s major challenge was how to manage a political entity of great size and varied cultures. (Location 2375)

Even bigger problems were managing, motivating, and controlling the vast human bureaucracy necessary to run such a state. (Location 2380)

The third distinctively Chinese financial development is the role of government in enterprise. (Location 2386)

Through the lens of modern capitalism, China is a classic example of the grabbing state. (Location 2388)

in which individualism is subordinated to collectivism. (Location 2389)

Even when the state sought to fund private businesses, government officials could not keep themselves out of them. (Location 2392)

because of the power of the state, rather than its weakness. (Location 2395)

learned how to borrow from investors by offering them promises of future repayments. (Location 2397)

However, up until the nineteenth century, the Chinese state did not issue debt. (Location 2402)

Yes, but they are more than this. Financial markets do two things. (Location 2406)

First, they trade promises about the future. (Location 2406)

Second, they provide a mechanism for individual savings and financial planning. (Location 2407)

Chinese government borrowings not only financed the country’s international indemnities, they also helped create a vast rail transportation system, which, in turn, helped modernize the Chinese economy. (Location 2413)

At its apex in the 1920s, Shanghai was one of the great banking centers in the world and had a stock market to rival many in Europe. (Location 2417)

Like the Egyptian Valley of the Kings, most of the ancient royal graves had been plundered long ago. Zheng and her crew began digging into an earthen palace foundation—a potentially promising ceremonial site. (Location 2431)

Fu Hao was a consort of emperor Wu Ding [武丁]—one of the longest reigning Shang emperors. (Location 2442)

who maintained her own walled estate outside the capital city. (Location 2443)

Quite unlike Mesopotamia, the Chinese writing system did not evolve from accounting records. (Location 2464)

Thus the early use of writing in China reflects the fundamental anxiety people everywhere share about the unknown future and suggests that the ancient Chinese ruler played a key role in moderating between his subjects and the unknown. (Location 2471)

China developed a monetary society quite independently, but, in similar fashion to the civilizations of Greece and Rome, money ultimately played an important role in governance and the economy. (Location 2482)

Chinese coins appear to have developed as metallic replacements for the cowrie shells. (Location 2492)

Coinage is a tool for storing, measuring, and transferring value. (Location 2501)

However, there is one other important feature that money requires. It must be are hard to come by. To be a store of wealth, it is crucial that money not easily be gathered or made. (Location 2504)

The anthropologist Benjamin Lee Whorf was one of the first scholars to theorize that language affects thought as much as thought affects language— (Location 2553)

that the mode of expression cannot be separated from the content. (Location 2554)

However, writings from later centuries leave little doubt that China’s rulers fully recognized the potential of money and the marketplace. (Location 2556)

Although never conquered from the outside, this extended empire ultimately fell to centrifugal forces, breaking up into separate states. (Location 2562)

Inside these inner walls, the rulers of the Tian family built their palace and kept an iron workshop to make tools and weapons, a bronze workshop for metal vessels, and the royal mint for coining money. (Location 2622)

Academy may actually be a misnomer, since there is actually no evidence of a formal educational institution—it was apparently not an ancient university. Rather, it might have been a community of scholars serving at the pleasure of the state. (Location 2629)

The seventy-six chapters in the Guanzi range from Daoist geomancy to discourses on politics and education to musical treatises and medical texts— (Location 2644)

He is more clever than wise. (Location 2646)

He is a problem solver rather than a paragon of virtue. (Location 2647)

He understands human nature and is willing, at times, to exploit it for the good of the state. (Location 2647)

solutions that relied on factors like symbols of imperial favor and the hidden power of the market. (Location 2654)

Light and heavy refers to relative prices of goods, which in turn creates incentives for trade and leads to a price equilibrium. (Location 2660)

To the Guanzi authors, money—not armies, legal doctrines, piety, or philosophy—was the secret to managing men and bringing peace to the world. (Location 2670)

The Guanzi regards coinage not as the goal of economic policy but only as a medium—an abstraction for which they chose an interesting metaphor. “Knife coins are the channels and ditches,” (Location 2703)

Guanzi suggests that money is the channel through which economic activity flows. (Location 2705)

The importance of this insight cannot be overstated. It took the philosophers in Europe 2,000 years before they fully understood this. (Location 2707)

was curiously like the warring city-states era of the Italian Renaissance. (Location 2711)

but also competitive “weapons” in the battles among the rival states. (Location 2713)

The metaphor of a fluid served the scholars well in conceptualizing how the market adjusted spontaneously to price differentials. (Location 2722)

The ruler who controls prices does not have to control the flow of goods—price ratios will motivate trade to achieve the desired results. (Location 2726)

People were motivated by profit. (Location 2727)

According to the Guanzi, “If the myriad of goods can flow unobstructed, they will be put in motion. If they are put in motion, then they will be cheap.” (Location 2729)

With free trade come lower prices and the sharing of benefits across regions. The leaders of the modern World Trade Organization could not have put it better. (Location 2731)

Great fortunes in the Warring States era were made by smelting iron, trading with barbarians, developing real estate, owning and hiring out slaves, peddling food and other goods, selling grain, farming, robbing graves, sharpening knives, and lending money. (Location 2737)

so that his tallies might be matched against theirs. (Location 2748)

This simple problem tells us several things. First, loans might be as small as sixty copper coins for terms as short as sixteen days. (Location 2789)

Even not compounded, this rate annualized exceeds Babylonian rates of 33⅓%. (Location 2791)

ancient Mesopotamia for short-term loans—far exceeded the productive capacity of capital. (Location 2792)

From this vantage point, however, it is clear that Chinese cities exist on a vertical as well as a horizontal plane. (Location 2801)

The first emperor of Qin fully recognized the power of monetary authority. (Location 2833)

he also eliminated all rival currencies—nationalizing and standardizing the production of money. (Location 2834)

The central problem of Chinese government has long been the management of a large bureaucracy. (Location 2839)

In a sense, much of the philosophical discourse in China before and after the reunification relates in some way to the problem of bureaucracy—a system in which one person works (Location 2841)

under the direction of another in an organization. (Location 2843)

“principal-agent problem”: a principal (boss) must delegate a task to an agent (employee). (Location 2844)

Particularly with the unification of previously independent states, the challenge of forcing agents to work in the best interest of the principal is a large one. (Location 2850)

The best solution to the agency problem is for the agent to be completely devoted to his or her task, and to behave correctly. This, (Location 2851)

His writings focus on correct behavior. (Location 2856)

An ideal Confucian official would be righteous, generous, and forgiving. (Location 2859)

Confucianism appeals to the noblest instincts of humankind and is predicated on the belief that everyone has the potential to behave in a righteous manner and that they should strive throughout life to achieve this goal. (Location 2861)

or at least presupposed that people will act in their own best interests rather than in the interests of their superiors or subordinates. (Location 2864)

These ideas later came to be referred to as “Legalism,” although no such intellectual categorization existed in antiquity. (Location 2869)

the new emperor could not count on kinship as the basis for authority. (Location 2877)

According to Han Feizi, “When a sage rules a state he does not count on people doing good on their own but rather takes measures to keep them from doing wrong.”1 (Location 2878)

Modern economic theory poses two solutions to the agency problem: incentives and monitoring. (Location 2892)

Minting more money created incentives to sell grain to the state of Qi. (Location 2894)

Incentive theory says that, if the manager has stock options, he or she will take actions that will make them more valuable. (Location 2899)

In contrast, a Confucian view of the CEO would question why the leader must be bribed to work in the best interest of the shareholder. (Location 2901)

Contemporary society is extraordinarily critical of high CEO compensation. (Location 2903)

The Zhouli [周禮] (The rites of Zhou) is a remarkably odd document. It does not present itself as the teachings of a philosopher or the account of a wise minister. (Location 2907)

the book makes clear that a major function of the state is the maintenance of the relationship between humankind and the supernatural—presumably a reflection of the idea that the Chinese emperor rules with the mandate of heaven. (Location 2915)

Most interesting are his instruments of power—a corps of accountants and auditors to oversee the financial system of the entire kingdom. (Location 2925)

The accounting office made sure that these riches were regularly counted and that all inflows and outflows of the treasury were documented and reviewed on a regular basis. (Location 2931)

Monitoring can be thought of as accounting: checking the numerical quantities of what goes into a bureaucrat’s office and what comes out; making the official sign for goods received and obtain receipts for goods delivered; (Location 2938)

“socialist,” because he freed slaves, stripped wealthy landowners of property, and eliminated debt. (Location 2945)

Its organizational structure provided a solution to the basic question of what a governing bureaucracy should look like and what checks and balances were needed to incentivize and oversee government officials. (Location 2951)

In the Zhouli, the government served as lender, not borrower. (Location 2954)

The implication of the Zhouli is that the government, not private moneylenders, should be making loans. (Location 2955)

However, the most interesting thing about the emergence of paper money is that it was not the first or the only paper security created to transfer value. (Location 2958)

This growth was spurred as much by economics as by a quest for political control. (Location 2965)

Everywhere the excavators looked, they found evidence of written culture: Buddhist religious texts written in Sanskrit, Chinese letters and notes, and what have come to be understood as texts written in the now-dead Tocharian languages of Central Asia. (Location 2994)

rolls of Indian script on parchment, abandoned where they lay nearly two millennia ago. (Location 2997)

With merchants traveling great distances, living in foreign cities, taking orders from people who spoke and wrote different languages, and worshipping different gods, the Silk Road became a prime vector in the transmission of knowledge and culture across the continent, including writing systems. (Location 2999)

It is perhaps ironic that the richest woman in China today is entrepreneur Zhang Yin [張茵], who amassed a multibillion-dollar fortune by collecting and reprocessing American scrap paper. (Location 3025)

The terse receipts do not say, but the rate of interest in the Tang capital city seems somewhat less than 20% per year. (Location 3051)

He also paid two coins in interest, suggesting roughly a 15% annualized discount rate. (Location 3053)

Pawnshops were a technology that created liquidity—and they relied on paper as the prime medium of record and contracting. Not (Location 3058)

The chancelleries liked the system, because it provided them with ready cash to meet expenses in the capital. (Location 3069)

The Song dynasty (960–1279 CE) is one of the most widely admired periods of Chinese history—it is sometimes called the Chinese Renaissance. All the high arts flourished: poetry, theater, painting, calligraphy, gardening, music, and architecture. (Location 3087)

printing. In part because national examinations were the basis for appointment and promotion to government posts, literacy was widespread—books were published and sold in bookstores, and even relatively poor students had access to the Chinese classics of literature and mathematics. (Location 3096)

Paper was adopted as a primary instrument of state finance. (Location 3106)

Despite being a golden age of Chinese culture, the Song was also a period during which the country fought a constant and ultimately losing battle against rival states, particularly the steppe peoples to the north and west—the Mongols and related groups. (Location 3112)

It had a strange feature in its economy, dating to the time it was incorporated into the Chinese state—it used iron money. (Location 3120)

The only problem was that, while iron had intrinsic value, it was not quite valuable enough. (Location 3125)

However, it is tempting to speculate on the economic impetus to substitute paper for iron coinage. (Location 3136)

Such shortages would also have created a motivation to maintain less than 100% reserves to back paper notes. (Location 3138)

Only sixteen merchant houses were granted a monopoly on the printing of promissory notes called jiaozi [艾子]. Customers could deposit strings of iron cash and in return (Location 3143)

There were fees for redemptions, and the issuing merchants used some stamp or design to indicate which house issued the bill. (Location 3149)

However, the intent of the elaborate design is obvious—the government had to stay one step ahead of the counterfeiters. (Location 3152)

Some merchants were slow about honoring redemptions. (Location 3156)

We do not know whether one of them gave in to temptation and simply took the cash or whether a counterfeiter presented fake bills for redemption. (Location 3157)

In the year 1016, the Chinese government revoked the private monopoly on paper money in Sichuan and nationalized the printing of currency. In 1023, it established a bureau of exchange medium, Jiaozi wu [交子務], and began to issue notes with cash reserves equal to about 30%. (Location 3158)

Perhaps the rebellion of the previous generation taught the government the importance of separating the locus of production from densely populated areas. (Location 3162)

For a time, the use of paper currency was confined to the southern provinces and was forbidden in the north, perhaps because much of China’s international commerce took place through the southern provinces. (Location 3172)

Like modern-day baseball tickets, these vouchers were “scalped”—that is, a secondary market developed for salt tickets, and people began to use them like money. (Location 3177)

Speculators with no intention of running a power plant can step in and buy them with the expectation of selling them in the future when prices go up. (Location 3185)

However, when floods destroyed the salt pans, the right to sell salt that did not exist was worth little. (Location 3189)

Despite such risks, the salt business was largely predictable, and profits were regulated to such an extent that the vouchers had a reliable economic value. (Location 3190)

Among many other things, he developed the basic theoretical framework of the principal-agent problem. (Location 3197)

Like early paper money, not only does it have a stated face value, (Location 3206)

but it also has blanks for dates and the name of the official spending it. (Location 3207)

Instead of pictures of a string of cash—or even the motifs of golden cocks, dragons, or turtles—it bears an image of a flying horse. (Location 3208)

The government authority that issued it was an army agency stationed in Sichuan. (Location 3211)

century. A separate voucher system developed to facilitate the provisioning of the border armies. Procurement officers used vouchers like this to pay for requisitioned goods on the military frontier. (Location 3212)

In clear reference to the ancient minister Guan Zhong, Wang sought to wrest control of the price system, the ratios of exchange (qingzhong) from the private sector, to ensure the smooth flow of resources throughout the empire. (Location 3232)

The Tea and Horse Agency (Cha ma si 茶馬司) grew to great power under Wang’s rule. (Location 3235)

Powerful merchants profited from state privilege and concessions in the tea and horse trade before Wang’s reform, but under Wang, the state cut out the intermediary—creating a business in the government to capture profits for the state. (Location 3238)

Wang’s crusade against private enterprise did not eliminate the quest for profit, but rather it replaced private sector with public sector, maintaining enterprise but channeling its benefits through the central government—the “single source.” (Location 3245)

Enterprise was fine, as long as it was controlled and regulated and validated from above. (Location 3247)

However, the fundamental theme of economic expropriation by the state, legitimized by his clever use of Chinese history and ancient precedent—from invocations of the Guanzi to adaptations of the Zhouli—became part of the new lexicon of Chinese government rule. (Location 3250)

but few politicians refined it as well as he did, using timeless and familiar populist rhetoric. (Location 3253)

With these pieces of paper, made as I have described, he causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. (Location 3279)

Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to anyone but the emperor. (Location 3284)

The merchants accept his price readily, for in the first place they would not get so good a one from anybody else, and secondly they are paid without any delay. (Location 3286)

while all the time the money he pays away costs him nothing at all. (Location 3289)

by taking them to the mint shall get a handsome price for them. (Location 3290)

Still, in this way, nearly all the valuables in the country come into the Khan’s possession. (Location 3292)

It describes a monetary system carefully regulated by the central government and used as an economic instrument of policy. (Location 3300)

but also as a means to certify and legitimize the capital of foreign merchants operating in China. (Location 3302)

Notice that the government set the redemption price higher than the prevailing market prices to motivate redemption—a ploy straight from the millennium-old Guanzi. (Location 3303)

The sheer volume and detail of Chinese scientific and technical knowledge from the centuries before direct contact with Europe makes it virtually impossible to argue that Western societies were the world’s sole source of light and truth. (Location 3320)

Joseph Needham himself began to wonder why the Industrial Revolution occurred in Europe rather than in China. (Location 3325)

In the span of a single lifetime (the 1820s to the First World War), the transportation system in Europe rapidly evolved from horse-drawn carriages to canals to railroads to automobiles to the beginnings of air transportation. (Location 3327)

For each one of these amazing technological developments, Needham and the other authors of Science and Civilization in China are able to point to some feature of Chinese science that could have led to a similar development. (Location 3331)

One simple answer is chance. Watt, Fulton, and Bell were rare geniuses. Perhaps the Industrial Revolution was a random confluence of genius at a certain moment of history; a genetic “sport.” (Location 3337)

The Chinese educational system was nothing if not egalitarian; although one might question whether Thomas Edison would have had time to play with electricity if he had taken six years out of his life to memorize the Chinese classics. (Location 3342)

served to systematically speed up, organize, and make optimal use of random processes of discovery. In his view, it was the development of the scientific method that made the difference. (Location 3346)

Historian Mark Elvin argues that Song China fell victim to a “high equilibrium trap.” Its agricultural advances around the first millennium were so successful that there was no apparent need for further innovation. In contrast, Europe started from a lower level of development and thus had greater need for radical technological change. (Location 3350)

yet another particularly radical idea—geographical determinism. (Location 3354)

What all these explanations ignore is the supporting role of finance in technological development. Technology requires genius, (Location 3356)

Entrepreneurs need motivation to keep experimenting when their peers are working a steady job—patents and legal protection allow the former to capitalize on their innovations. (Location 3358)

While the centralized Chinese government had the capacity to reward individuals for creating new technologies, it typically did not simply allow the market to provide financing for new ideas. (Location 3361)

The Industrial Revolution resulted in rising income inequality in Europe and a shift in income toward investors. (Location 3371)

“The shift of income to capitalists was necessary in order to provide the savings needed to implement the new factory methods … it was the rising share of profits that induced the savings that met the demand for capital and allowed output to expand.” (Location 3373)

albeit at the expense of rising inequality—induced further investment and sustained technological development. (Location 3375)

By the time of the Industrial Revolution in Europe, commercial banks and organized securities exchanges had existed for at least two centuries. (Location 3380)

there was a demand for investment opportunity and the structural know-how to create products that met this demand. (Location 3382)

securities. It would seem to be a short conceptual leap to the development of corporate capitalism, in which business entities—like perhaps the salt monopoly—would have investors who contributed capital and received, in return, a certificate indicating ownership shares. (Location 3389)

The single missing ingredient in Chinese financial technology was the dimension of time. Weak European governments continually resorted to deficit financing and borrowing through the late Middle Ages and Renaissance. China did not. (Location 3394)

In 1174, Venice was locked in a battle with Constantinople, and the city needed to build a fleet. It issued bonds to its citizens—promises of future repayment. A market for… (Location 3396)

In contrast, when the Song government was confronted with a military crisis, it did not issue… (Location 3398)

not shifting the cost into… (Location 3400)

This has subtle implications for the conception of time and the… (Location 3401)

State borrowing is, in some sense, a national… (Location 3402)

In simple terms, a state borrows to invest in activities that increase… (Location 3403)

In China, the government since the time of the Guanzi was seen as providing instead a… (Location 3404)

The mechanism for the divergence in financial systems—at least from the Chinese perspective, was the failure to develop mechanisms for government borrowing in the Song dynasty, just at the moment when European nations were learning of the… (Location 3407)

Although private enterprise and capitalism existed in China all the way up to 1949, it rarely was divorced from the involvement and oversight of government officials. State sponsorship and control were the… (Location 3413)

First, although the roots of written language were closely tied to accounting, finance, and urbanism in the Near East, this was not true of China—rather it appears in… (Location 3417)

Comparing the early financial development of China to that of the ancient Near East and Mediterranean civilizations clearly shows that a financial system of great complexity… (Location 3419)

This means that financial technology is not only robust, but also that certain parallel solutions to basic problems are discovered and rediscovered by clever entrepreneurs or officials time and again, and that certain institutions and techniques can be thought of as… (Location 3422)

The scale and scope of China led, early on, to theories about management based on an understanding of… (Location 3426)

These problems are critical in a bureaucratic system in which each administrator is responsible for reporting accounts to a superior. This system of accounting may not seem extraordinary in the modern era but certainly the problem of… (Location 3430)

However, it must also have created localized economic problems as well, since monetary policy and decisions about the quantity of money in… (Location 3435)

Thus, the value of the currency rose and ultimately collapsed with the state. This is a lesson learned… (Location 3440)

In Part III I argue that the fragmentation of European states was the stimulus for a variety of creative, somewhat independent financial experiments. (Location 3451)

These innovations, in turn, changed human behavior. (Location 3454)

Europeans ultimately turned themselves and the rest of the world into investors. (Location 3456)

Europe became a vast laboratory for financial experimentation. As we shall see, the development of modern financial technology was anything but linear. (Location 3462)

Instead, the Templars responded to the needs of a constellation of European rulers who lacked financial power, who relied chronically on loans to meet military and political needs, and yet at the same time required neutral, nonpolitical entities with whom to entrust their finances. (Location 3517)

The English kings borrowed from the Templar order, using their valuables as collateral. (Location 3530)

The Templars created and serviced a range of what we now would call “financial products.” (Location 3545)

Banks—whether public, private, or nonprofit—rely on two key advantages. The first is financial expertise and the second is capital. (Location 3560)

Some of their wealth came in the form of gifts. Pious donors would give money, land, and treasure to the Templars. Some of this came when a monk joined the order and brought his personal assets with him. (Location 3565)

These grants to the Templars essentially assigned to them the economic rights pertaining to the property. (Location 3586)

In cases in which the grant to the Templars was made by the king or a feudal lord, they acquired judicial rights as well, occasionally resulting in dual local court systems. (Location 3590)

Where once knights swore to uphold the defense of Jerusalem, young lawyers now swear allegiance to the law. The Templar precinct still preserves a sense of a sacred mission. (Location 3664)

was that European finance was born out of the political weakness and fragmentation of the continent into city-states, (Location 3667)

This weakness caused European kings to constantly raise money through assignment of properties and rents and, once they had hocked everything else, to expand their kingdoms militarily to generate other sources of revenues. (Location 3668)

Financial technology is redundant, adaptive, and sometimes mercurial. (Location 3675)

Given the random outcome of historical events, another set of institutions might have emerged to solve the same financial problems. (Location 3676)

The Templar treasure was not the gold and silver stored in their treasuries, but the hundreds of properties they owned under what was essentially a feudal system of fiefs, bailiwicks, and rentes. (Location 3679)

Feudal rights were the rights of a ruler to assign land or the yield of the land in return for support. (Location 3682)

fief law ultimately became a framework for a system of purely monetary obligations and was the conceptual foundation for Europe’s unique financial architecture. (Location 3686)

emerged to solve economic problems of time and geography, but they inevitably engendered new problems. (Location 3688)

Its wealth made it a political target, and the loss of its original mission rendered it peripheral to the Catholic Church in the early fourteenth century. (Location 3691)

Unlike modern central banks, it was not accountable to a nation-state—a feature that ultimately led to its downfall. (Location 3695)

Finance became one of Venice’s key instruments of power in its rise as a mercantile empire. Its financial architecture was every bit as important as its bricks and mortar. (Location 3704)

remnants of successive stages of the world’s financial architecture—beginning, of course, with the fundamental fact that the city emerged, flourished, and declined by its maritime trade—mercantile adventures that risked lives and fortune on the open sea to buy and sell goods across the Mediterranean world and beyond. (Location 3720)

The emergence of Europe in the Middle Ages was not the re-emergence of a unified empire built on the ashes of Rome, but instead the appearance of small, aggressive, trade-oriented mercantile city-states. (Location 3775)

It did so through a forced loan, a prestiti settled on Venetian citizens according to their wealth. (Location 3821)

The key feature of this arrangement was that, although it was mandatory, the loan differed from a tax, in that Venice promised to pay 5% interest until the debt was retired. (Location 3830)

The first government bond ever issued was thus a result of fiscal weakness rather than strength; (Location 3844)

The prices of prestiti through time indicate how investors viewed Venice’s prospects for continued payment of its debt. (Location 3862)

Despite being the first to develop a government credit market, the pattern of prices for its debt suggests that the creditworthiness of Venice reached its peak circa 1340. (Location 3866)

the final promise of Europe’s longest-lived independent republic. (Location 3870)

In this way, it was possible to economically hedge against the depletion of earnings capacity as the body and mind grow old; (Location 3875)

It was also a way to pass along an asset that did not have to be managed. (Location 3877)

Merchant capitalism in cities like Venice and its rivals created conditions for social mobility and threatened to upset the social order. A religious backlash is perhaps not surprising. (Location 3884)

Indeed, the perpetual loans of Venice spanned God’s own time—infinite duration. Investors inevitably measured the passage of time by intervals between the payment of paghe. (Location 3899)

argues that the scholastic attitude toward usury is evidence of a major transition in the way time itself was imagined. (Location 3902)

Natural time, the notion goes, is time measured by the sweat of the brow, agrarian work measured by the cycle of the seasons and the feast days of saints. (Location 3905)

While recognizing the benefits of this evolution, Le Goff expresses ambiguity about the progress. (Location 3909)

Consider serfdom, a condition of permanent bondage that prevailed before the growth of urbanism and the re-emergence of trade in the Middle Ages. (Location 3913)

legal scholars were reviving Roman law—the Code of Justinian was rediscovered. (Location 3922)

Roman legal tradition at the end of the empire rather than at the beginning. (Location 3923)

Its drawback was that it imposed an arbitrary, ancient, and restrictive framework on the emerging financial system. (Location 3925)

Roman law defined a loan as a contract called “mutuum”: a sum of money conferred to a borrower, which was then repaid to the lender in the same amount. (Location 3927)

premium for equity investment but not for debt. (Location 3942)

Without it, no one could be induced to invest in risky trade ventures. (Location 3944)

Of course, the liquidity provided by the Rialto market was one of the great attractions of prestiti. (Location 3951)

This concept remains today the basis for all modern asset valuation models. Third was the notion of alternative use of capital as a benchmark for return. This, too, later became a key asset valuation tool. (Location 3963)

For the state, it represented a means to shift resources from the future to the present— (Location 3966)

meant that it was a joint venture in shifting money through time and ultimately depended on sharing responsibility for the survival and growth of state resources. (Location 3970)

With this spread came an acute awareness that time had a price; (Location 3973)

Fibonacci was a citizen of Pisa, one of Venice’s rivals in Mediterranean trade. (Location 3984)

calculation through the use of cumbersome Roman numerals—or through the use of the counting board and the abacus to do sums, fractions, and multiplication— (Location 3988)

After introducing numbers and arithmetic, it then jumps into how to value merchandise, bartering, how to calculate profits in a company, and, despite church laws against usury, it shows how to calculate interest rates. (Location 3995)

The challenge was how to convert quickly and surely from rolls to packs. (Location 4008)

Trading against Arab merchants trained in rapid commodity conversions forced Pisans to adapt to Arabic mathematics more surely than any academic treatise would have done. (Location 4009)

Arabic numbers were actually adapted by Islamic scholars from Indian numerals as were, (Location 4015)

Khwārizmi applied his mathematical tools to legal issues—particularly problems of inheritance, such as how to divide up assets and liabilities among surviving family members. The Liber Abaci also has problems related to division of assets, but these are business assets rather than family assets. (Location 4020)

Fibonacci then applies the Rule of Three to determine the profit per pound of investment and then shows how the profits to investors who commended different amount of capital can be determined. (Location 4034)

Notice what is required in this problem. The unknown in the equation is time, and the difficulty is that the investor withdraws a fixed amount each year from savings until the capital is depleted. (Location 4043)

the commodification of the sacred through the technology of finance condemned so vociferously by William of Auxerre. (Location 4047)

Evidently even complex banking problems were also part of the shared knowledge of business mathematics of the medieval world by the turn of the twelfth century. (Location 4054)

How much better is it to get payments quarterly as opposed to annually? (Location 4071)

For me, the experience of reading Larry Sigler’s 2002 translation of Liber Abaci was extraordinary. (Location 4088)

The famous geometric progression equation is really a puzzle about what happens when a pair of rabbits starts to breed unchecked—an echo of the Drehem tablet (see Chapter 2). (Location 4094)

A key feature of these early “reckoning schools” is that they were lay schools, not religious schools. (Location 4108)

Van Egmond’s study suggests that, largely because of these reckoning schools, Florence became a major center of mathematical training and knowledge in the Renaissance. (Location 4115)

documentary record through time of the monetary inflows and outflows of the business. Each transaction is captured by two entries—a debit from one account and a credit to another. (Location 4125)

Fibonacci’s financial methods reflect a process of reasoning that built from one solution to the next, from basic insight to increasingly complex solutions. (Location 4145)

The canal systems of the Netherlands are one of the great feats of human engineering; much of the Netherlands is the product of hydrological innovation and technology that began in the Middle Ages and continues today. (Location 4168)

Whether the country was run by the Spanish, French, or Dutch, the water companies maintained power of taxation and the ability to raise their own armies in times of need—armies to fight floods. (Location 4175)

He is an expert on international capital markets and on subtle techniques of stock and commodity trading to generate profits. (Location 4184)

but that it is a living financial document, a perpetuity created more than 350 years ago that continues to accrue interest. (Location 4201)

The water board bonds—of which four from the seventeenth century are known for sure—are not such a financial drag. (Location 4219)

The stream of future payments for a child with long life expectancy should cost more than a stream of future payments tied to the life of an aging adult. (Location 4276)

This allowed the state to pool together the risks of many families, which in turn made everyone better off. (Location 4296)

However, he had a simple insight. If there is sufficient past history to study, it is possible to analyze complex games of skill involving unknown probabilities. (Location 4325)

Among all the great thinkers involved in the development of probability, Jacob Bernoulli is arguably the most important. He connected games of chance to real-world problems. (Location 4333)

The implication of Halley’s calculations is that governments were not benefiting financially from annuity sales. They were playing a losing game against their citizens. (Location 4380)

What’s worse, this dramatic loss would be disguised by time. (Location 4383)

The fundamental tool used to give regulators confidence in the expected loss calculation is Jacob Bernoulli’s law of large numbers. (Location 4390)

De Moivre noted that the time value of money seriously complicates the calculations for correctly valuing life annuities. (Location 4413)

With each new French government issue of life annuities, financial engineers in Holland and Switzerland bought them up and then issued bonds collateralized by the annuity cash flow. (Location 4456)

exceeded the analytical capacity of the mathematician. Bernoulli conceived of a means to attack even the most complex situations with probabilistic tools through the use of statistical data; history could be used to estimate probabilities, (Location 4484)

Mark Elvin, one of the leading thinkers about the great divergence between China and the West, is particularly puzzled by the absence of mathematical probability in China, or the adoption of the tools of probability from the West. (Location 4508)

It could not be due to a lack of useful application of statistics in China. (Location 4523)

The second is Henri Lefèvre, the accountant for the Rothschild bank in Paris who designed a way to calculate complex positions of stocks and bonds simultaneously. (Location 4593)

in a stock’s price from one date to another should be proportional to the square root of the time between the dates. (Location 4625)

but at its heart it contained a novel economic—as opposed to mathematical—insight. (Location 4701)

However, the Black-Scholes formula gives a solution to the option price today by mathematically rolling time backward. (Location 4710)

the path-breaking paper was not at first well received. The Journal of Political Economy, where it ultimately was published, needed serious urging from Chicago Professor Merton Miller to be convinced of its contribution. (Location 4714)

who applied mathematics to speculation, took the blame when markets crashed. (Location 4720)

For example, the Brownian motion process on which it was based assumed that the price never jumped. (Location 4723)

Investors who thought they had “portfolio insurance” discovered that they were only partly insured. (Location 4725)

which argues that the standard probability models, based as they are on Bernoulli’s original formulation, cannot account for the frequent occurrence of extreme events. (Location 4739)

that is, they conform to the standard bell-curve distribution. (Location 4741)

The “high priest” of non-normality before Nassim Taleb ever started to trade or write about extreme events was Benoit Mandelbrot, the creator of fractal geometry, a mathematician who both carried the mantle of French mathematical finance and who also believed he had discovered its fatal flaw. Mandelbrot was a student of Paul (Location 4743)

He developed a mathematics around these unusual Lévy processes that he called “fractal geometry.” (Location 4755)

For most quants in practice (and professors studying the markets), the leap is too great, and the payoff in terms of understanding may not be sufficient. (Location 4764)

I think this is what most excited him about his work—thinking of it in historical context as a culmination of applications of probability to markets. (Location 4768)

Models are crude attempts to characterize a reality that is complex and continually evolving. (Location 4772)

One of Europe’s contributions to finance was the corporation: a business enterprise financed by shareholders. (Location 4787)

The earlier appearance of the share company in Roman Republican times was just one of many instances of the invention of the corporation. (Location 4790)

The key is that both of these paths of development evolved parallel solutions to the problem of raising capital, managing an enterprise, and providing liquidity to investors. The earliest corporations in Europe (at least since Roman times) appear in the western Mediterranean in the fourteenth century. (Location 4793)

and they would have faced loss of their current contracts in any case. (Location 4818)

Innovation breeds further invention. The Casa di San Giorgio regularly declared dividends, but there was typically a lag between the declaration and the payment due to the timing of tax revenues. (Location 4824)

A significant number of Genoese were investors, the dividends from the shares represented a financial asset, and the bank of San Giorgio created a convenient structure for holding and transferring wealth. (Location 4834)

The law of Toulouse allowed widespread freedom for citizens to contract on financial obligations of all sorts. (Location 4859)

The Toulousain law was a system that accepted banking, lending, and the charging of interest, a system that defended the rights and claims of creditors even as the attacks on usury spread through other parts of Europe. (Location 4866)

On this novel legal base, Toulousain economy and society flourished, and Toulouse became an important stop on the European road to capitalism. (Location 4870)

They paid off at harvest time in quantities of grain, of which the uchaux holder received a proportional share. (Location 4892)

In the true spirit of capitalism, mill companies competed vigorously for prime anchoring locations in the stream. (Location 4893)

Building on land required owning or leasing the property and getting requisite municipal permissions. (Location 4897)

a group of investors who pooled their capital, acquired development rights, built mills, ran them for profit, and divided the gains according to their respective shares. They obtained the rights by means of the age-old transfer of fief from the count of Toulouse. (Location 4909)

Courts treated it as a legal entity separate from the shareholders and managers. It could hold property and write contracts in its name. (Location 4919)

the shares of the Bazacle mill company provided a steady source of income to a significant number of middle-class investors. (Location 4921)

The shares were passed down from generation to generation, as well as bought, sold, and used as collateral for loans. (Location 4924)

As a financing vehicle, it brought together the considerable capital needed to build a large-scale enterprise. (Location 4925)

Its organizational form was suitable for a perpetually lived institution. (Location 4928)

The carefully researched work was truly interdisciplinary. It moved from hydrology to medieval politics, to the legal foundations of the firm to the operations, management, and governance of the organization, to a thoughtful evaluation of the role of the Toulouse company in society. (Location 4930)

point out some of the key passages in the document. One remarkable feature of the charter document is that it is a private contract, not a royal decree. (Location 4943)

but the corporation is an organization that is designed to operate autonomously, perhaps for several centuries. (Location 4949)

The Honor del Bazacle charter is more like a complete set of rules for playing a game. These rules needed to ensure that no single player, either unintentionally or willfully, could ruin the game or cheat the other players. (Location 4952)

The entrepreneur was both a hydrological and a financial engineer, structuring a deal to revive the ancient firm. (Location 4974)

Despite its long history of joint-stock ownership, the company of Bazacle was ultimately nationalized by the French government in the twentieth century. (Location 4983)

Professor Sicard attributes the firm’s survival to the widespread acceptance of specified contractual property rights. (Location 4990)

Does Airbus have a natural advantage (or disadvantage) as a government-owned enterprise? (Location 5009)

Beyond the issue of private versus public ownership is the question of whether it is feasible for the owners of a milling company to entirely delegate the responsibility for managing the enterprise. (Location 5014)

We saw in China that the rewards to the private sector were subject to the control and sometimes expropriation of the state. (Location 5046)

The financial architecture of global trading enterprises in turn laid the foundation for the modern economy. (Location 5051)

travels around the Horn of Africa and voyages through the Straits of Magellan, trips that took years and in which ships were lost and people died. (Location 5053)

the success or failure of the voyages until their return. We saw in Chapter 15 that European mathematics responded to the need to quantify, manage, and hedge risk in the investment markets. (Location 5055)

The government had few options. It could tax, it could borrow, and it could sell concessions and rights—and most of the concessions and rights that could be sold already had been. The monopoly on most foreign trade, for example, was long held by the Company of Merchant Adventurers. (Location 5075)

Henry was promised one-fifth of the profits in exchange for this exclusive right. Cabot underwrote the cost of the expedition himself. (Location 5097)

The shares held by the company’s investors represented fractions of ownership, yet unlike modern stock shares, they also obliged the investors to put up extra capital when the company needed it. (Location 5112)

Although Lok was well connected, he could not quite raise all the funds required for the first Frobisher voyage, and thus covered the bulk of the expenses with a personal guarantee. (Location 5144)

The company form provided a flexible business structure for channeling capital into business enterprise. (Location 5207)

the unknown quality of gold ore, the uncertainty of survival in the New World, the challenges of the Spanish in the Pacific, competition with the Portuguese and Dutch. (Location 5213)

Second, it tapped into the natural human tendency to gamble and speculate. (Location 5251)

Great Britain entered a new financial era, in the words of writer and entrepreneur Daniel Defoe, a “Projecting Age.” (Location 5305)

The true novelty was the assembling of these techniques by the creative imagination. (Location 5375)

Investing became a numbers game—it transformed investor consciousness from a long-term vision of return on capital to daily monitoring of the market to see whether you’ve won on your bet. (Location 5394)

The more people invested in these projects, the more liquid the shares and subscriptions became. Even when the initial subscriptions were limited to a few investors, as they sold their rights, the pool of owners and speculators continued to widen. (Location 5422)