1. money is based on trust; the value
1. During the first episode of the
Ascent of Money from Bullion to Bubbles, host Niall Ferguson provides a compelling
introduction on how money came to dominate people’s lives. He begins with the world before money, and
how the Incan empire had no concept of money at all. This empire was decimated by the Spanish lust
for gold as the Spaniards amassed great stockpiles of gold and silver. What the Spaniards didn’t realize is that the
increase in precious metals they attained actually reduced their value. The Spaniards failed to see that money is
based on trust; the value recipients put on the money. As the amount of money rose, its value fell. Ferguson
goes on to discuss how credit, from the Latin credo or “to trust”, came about and how the entire economic history
of the world we live in today would not have been possible without credit. He states that when credit came about, early
lenders were despised and trust was not easily attained. He also discusses how Fibonacci (famous for
the Fibonacci sequence) lead to mathematical advances in commerce which followed
with the story of Shylock, the money lender, possibly the most famous money
lender in history thanks to Shakespeare.
Shylock was a Jew, and Jews at the time were merely tolerated in Venice, being forced to
live in a contained area known as the ghetto.
Jews served a huge financial purpose at the time though, as they could
charge interest on loans, which Christians could not do at the time, due to the
confines of the religion. Ferguson then goes on to
speak about the Medici family, one of the wealthiest families in history. The Medici family went from being small back
street lenders, to the most powerful financial force in Europe,
and they did so by becoming foreign exchange dealers. Giovanni Medici made the family totally legitimate
by capitalizing on loop holes in accounting practices at the time. He realized he could charge commission for
currency exchange which was not technically a form of interest. He also allowed borrowers to have credit for
money deposited in his banks. This is
where practical money lending developed into banking. He was able to grow his banking operation
into many locations on a large scale, which allowed for smaller interest rates
and more borrowers. The Medici family
made banking respectable for the first time and making them the first bankers
to be accepted politically. Next Ferguson discussed how
the bond market arose primarily to finance war.
War was impossible if you could not find a way to pay for it. Florence
hired mercenaries to fight wars for them at the time and the city went into
massive debt trying to finance war. To
pay for this, Florence
decided instead of taxing citizens, they would force citizens to lend money to
the government while collecting interest, which resulted in the first issuance
of bonds. Ultimately, problems arose
issued too many bonds, which caused the value to drop considerably in the eyes
of the public. This is how risk and
return in the bond market arose. Following
begins the history of the modern stock market.
He discusses how Jean Law was captivated by what was happening in Amsterdam, which at that
time was the capital of financial innovation.
was birth place of the first company.
Merchants realized that by pooling their resources, they could cut down
on the risk associated with lost vessels filled with profitable spices, and
pool their rewards. This pooling or resources created the Dutch East India
Trading Company. Citizens could buy investment
in the company, but could only sell that investment by trading with other
investors. Jean Law saw how lucrative
this type of financial activity could be.
He modified the Dutch trading system by incorporating banking and paper
money. However, eventually Jean Law’s
economic experiment ended in disaster for him and for the political environment
in general. This is where Ferguson leaves us.