An Overview of Finance History


This article retraces the history of finance, from its birth during the Neolithic times to today’s blockchain technology.

The purpose of studying history

The purpose of studying history is to analyze and determine repeating patterns in order to outgrow them or simply make the most out of them. Humanity has been facing endless cycles and although the events may differ in place or matter, their essence remains the same. 

An example of such a phenomenon happening are wars. Wars have taken place for as long as humankind has existed. As depicted in this Owlcation article, main reasons for war include economic or territorial gain, ideology influence (religion, nationalism, values) and safety and survival. 

While all wars have different triggers, different opponents and different stakes, their essence is generally a mix of the causes seen previously. By studying history, we can better comprehend our human nature and thus, forecast and prevent tragedies from happening. This historical knowledge is the main reason why some people like researcher Sascha Glaeser think the recent Ukraine invasion could have been avoided. He even states: “Let us learn from history and ensure that such a mistake is not repeated.”

The perks of studying finance history

Finance is the management of money supply. Therefore, studying the history of finance is studying how money was managed at different points in time and the overall evolution of money management.

In this article, we will identify what caused the creation of finance in the first place. This information will essentially bring us clarity regarding human behavior, and general societal patterns. In turn, acknowledging these patterns will later help us in outgrowing them by improving our societies and, most importantly, providing creative solutions for the decades to come.

The Birth of Finance (7100 BCE – 500)



Acknowledgingly, this is quite a large period to cover in only a few lines. However, it is during this time that trade was born, the Lydian electrum coins manufactured and the first markets for capitals created. 



The need for trading



Back in the Neolithic times when humans transitioned from nomadic hunter-gatherers to settled farmers, a need for trade soon emerged. Indeed, tribe members shifted the ways they were collaborating with one another. Instead of hunting as a group, they would farm and create shelters. The endeavor being much more demanding, they had to split the tasks and thus, needed to trade one resource for another. 



At first, keeping track of debt was easy because communities were restrained. However, the larger these communities grew, the more challenging it became. In order to ease the process, Sumerian agriculturalists used bullas (or clay enveloppes), which were used as precursors to writing.



The first mediums of exchange to materialize one’s debt were natural means such as shells or feathers. For instance, in Çatal Höyük (a Turkish archaeological site), cowrie shells were used.



The first interests



We can retrace the birth of writing around 1750 BCE. Whilst the first drawings were cavemen’s hunts, the first pieces of writing kept track of workers’ salaries. Furthermore, they were not printed out, let alone written on paper. They were in fact carved in clay tablets called Drehem Tablets.



As previously mentioned, writing was first used to keep track of debt within communities. It is also thanks to agricultural requirements that the concept of interest was born.



In Sumerian language, the word “mash” which means “interests” is the same used to nominate calves. Why? Because when a farmer would lend a cow to another farmer, he would expect some kind of return, in the form of an interest… or calf.



Cowrie shells and feathers were enough until it became nearly impossible to determine a unique value. Value being created with scarcity, how could one possibly measure the preciosity of an abundant material? Furthermore, it was complicated to split shells and feathers… This is when the first metal mediums of exchange were created such as knives or spades. It was during the Zhou Dynasty (1050–771 BC) in China. 



Over a century later, in 600 BCE, in the Kingdom of Lydia (modern day Turkey), the first precious metal coins were created and used as “money”. These coins are called Lydian electrum coins. They were made of electrum, which is mainly gold and silver.



The first monopoly



Around the same period, the world experienced its first monopoly. Do you remember the Thales theorem from middle school? Well, this man, Thales, is also famous for creating the first monopoly, and it was… in the olive oil market!



Thales, who is a mathematician and philosopher, was often mocked by his peers because no matter how smart he was he could not make good money. Thales took it a little personally and wanted to demonstrate them otherwise.



He therefore used his philosophy and astronomy knowledge to predict the weather, and, thus, the outputs of yearly harvests. Thales predicted they were going to be prosperous. He then rented out all the oil presses around his area at a discount for a future period. 



Obviously, that period corresponded to the harvest period. His predictions were indeed correct, so during the harvest period, all the farmers had to discuss with him to access oil presses. Thales made huge profits allowing him to focus on philosophy and mathematics without having to worry about money all year long.



The First Capital Markets (500 – 1880)



This period of time has set the basis for our society. As the world started to become more homogeneous, worldwide flows of capitals and ideas increased. This is when we saw the rise of monotheistic religions and, of course, the industrial revolution.



The rise of monotheism



Contrary to popular belief, Judaïsm and Christianity have more in common with Greek, Roman or Egyptian religions. Humanity slowly drifted towards this unique belief of monotheism over the centuries. The transition was especially made with the birth of Islam in 610.




During Antiquity, it may have been that the several Gods were in fact the expression of the same holy entity. As explained in this Livescience article, although the existence of multiple gods was accepted, ancient people were told to only worship one. Later on, these other ‘gods’ became ‘demons’, questioning the whole poly/monotheistic dynamic.



Alongside the questioning of these moral values, came the sad observation that if finance enabled people to become rich and prosperous, it also created evil within society. At first, people who were unable to pay back their debt, would sell themselves as slaves. Whilst the consequences of unpaid debt have grown less harmful over time, they were still impactful.

Middle Ages



Medieval times were marked by the rise of monotheistic religions (mainly Islam and Christianity), which had biased views on interests. Prophet Mahomet simply prohibited interests rates within Islam, whilst Charlemagne, the Christian Emperor slowly made his way in banning them across Christian Europe. 



While Charlemagne succeeded at his endeavor, soon, a need for capital flow rose within the European economy. Thus, compelling the population to return to the old Summerian ways. By the middle of the Middle Ages, interests on loans were available to Christian entrepreneurs.

As capital flows had to cover larger distances, in 1024, the Song Dynasty in China introduced the first circulating paper currency. Coins became excessively heavy to carry around, so they shifted to ‘I owe you’ papers representing the amount that one party owed the other. Essentially, the paper had no value, but it worked because people trusted its saying.



It is also during this time that the first international companies (Italian super-companies) are established, along with the first insurance contracts (Genoa, 1347). All these improvements in money management were possible thanks to Fibonacci’s development of time value of money. Not only is he considered to be ‘the first financial engineer’, he also used to provide business math education to the emerging nobility class, aka the future bankers.



The Industrial Revolution



The Industrial Revolution is the transition from handmade manufacture to mass production through machinery (chemical, iron, steam & water power, mechanized factory…). These developments created incredible business opportunities. Moreover, entrepreneurs played a crucial role in the development of society at the time.



The Industrial Revolution generated huge technological advancements, including medical ones thanks to which, mortality rates decreased. Consequently, life expectancy rose and the global population exploded (910+ million people in 1800 vs. 7.3+ billion people in 2015). 



This financial era is also marked by great improvements in statistics and mathematics. These advances provided finance people with additional knowledge of risk and scale of operations. Naturally, as risk was better managed, scalability mastered, and the people wealthier, banks started encouraging broad public participation (households) in capital investments. 



To manage these foreign and domestic capitals, banks across Europe and Asia created stock exchanges. In the early 1700s, a few economic bubbles happened. The most famous ones are the Tulip bubble (Netherlands) and the Mississippi bubble (France). 



To prevent further crises from happening, in 1720, the first real insurance company was created. It benefitted from the financial improvements previously mentioned, which enabled them to diversify risk widely. These insurance contracts were sold to the public by the end of the Industrial Revolution, in the 1800s.



The modern welfare state



Like anytime humanity welcomed a new technological improvement, life conditions increased. Soon, common people were presented with opportunities to grow their personal wealth. As we saw previously, they could now invest in the stock market, and sign insurance contracts. However, another opportunity presented itself: moving to the New World.



Indeed, European citizens were presented with the opportunity to go build their wealth overseas. As their home citizenship did not provide them any further advantages, the European workforce started traveling across the Atlantic Ocean. Recently unified Imperial Germany’s first Chancellor, Otto von Bismarck, was not happy with it. I mean, who was he going to govern if his people left the country?



Therefore, he figured out a way to regain control over the newly available financial resources and human capital flows. He decided to create government-based insurance contracts where the State would engage itself to provide for its citizens regarding aging, illness and accidents. Not only did his citizens decide to remain in their country, but this social system also encouraged the international workforce to come to Imperial Germany. This was the birth of the first modern welfare state.



Modern Finance (1920 – Today)



Modern Finance is the era we are currently in. It started with the creation of computers which totally shifted our relationship to mathematics and statistics. Indeed, even though man is able to calculate risk, computers can achieve the same results in a timely manner. Thus, generating further productivity.



The Great Depression



As the United States and European countries developed after World War I, citizens of concerned countries became more and more well-off. The economy was prosperous. Technological improvements started affecting households with the creation of radio, cars and various home appliances. 



As people became richer, they were able to further indebt themselves in order to acquire the latest items. Once these items were purchased, households started investing their life savings and extra income in the stock market. Although the population became richer and richer, spendings decreased and supply slowed up to a culminating point: the stock market crash in 1929.



Panic sales and mismanagement of the crisis led to a decade of poverty, unemployment and suffering. Eventually, the US government decided to stop pegging the dollar at gold value. Although it was a complicated move (all trading partners had to follow), the crisis was finally settled around 1939.  



Alongside computers, radio and television, much later on, in 1983, the Internet was created. Many countries and companies did not believe in the game-changing aspect of the Internet, thinking it was just a phase the world would grow out of. 



Nowadays, the Internet gathers the largest and most accessible base of knowledge in Human History. It enables more social interactions and eases communication and, more generally, flow of information… which are essential to commerce and trading.



The Sub-prime Crisis



With the second millenium came technological advances and further implementation of the Internet within the financial systems. Paradoxically, the economy was slow-paced and interest rates averaged 0.2%. It was the Federal Reserve’s way of stimulating the economy. Indeed, low interest rates encourage borrowing, which in turn increases spending, and productivity.



Investors, however, were not so satisfied with the situation (the interest rates being their return for lending their money). Consequently, they started searching for new ways to increase their returns. This is when their attention turned towards mortgages.



Essentially, the subprime crisis happened when the mortgage investors were excessively betting on subprimes (risky mortgages). As prices rose, a speculative bubble created itself, and bursted in the end of 2008. 



This event marked the first global financial crisis of the second millennium and led to the creation of Bitcoin by Satoshi Nakamoto.



Bitcoin, blockchain & beyond



Blockchain technology was already in place during the subprime crisis, but was impractical at the time. It became usable with the birth of Bitcoin in 2009. Bitcoin is the first crypto currency created by the famously anonymous Satoshi Nakamoto.



The main characteristics of a disposable medium of exchange are the following: legitimized, hard to forge, durable, portable and divisible. If the Internet allowed information to flow easily, it did not help much in forging a new, widely accessible currency.



Indeed, although money and financial assets have been digitized and payments can occur across the globe instantly, funds remain in FIAT currencies. This is why bitcoin, and more generally, blockchain technology is a revolution. 



For the first time in History, we have set the basis for a fully transparent and autonomous financial system, free of intermediaries such as banks or other financial institutions. This is what we call Decentralized Finance (DeFi). It allows anyone, anywhere to get access to financial services without relying on a third party or governments to grant it to them.

Since the Industrial Revolution, technology has drastically improved and all systems of our lives have been affected. However, the financial sector still strives for major improvements.

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