How did the current financial system come to pass? Niall Ferguson takes us through the prism of history to explain its development. The book aims to show how, despite its proneness to crises and inequality, the financial system and money itself are drivers of human history and progress. Like all natural systems, the financial system is evolutionary in nature with continuous competition for limited resources leading to inevitable cycles of prosperity and decline. Ferguson defines “Market selection” as the financial equivalent of natural selection. This has never before been more relevant than the technological revolution of the 20th century. The financial world is constantly changing through new techniques and innovations in the same way the natural world constantly evolves. The businesses that adapt to these new situations grow and prosper whilst those that ignore the reality are doomed to failure. The lists of former conglomerates that failed to innovate and eventually became extinct include most notably Kodak, Nokia, Xerox, Blockbuster, Yahoo, IBM, JCPenney, Blackberry and Sears.

In God we Trust…

Many people fail to understand that the value of money is attributed to the latent trust principle associated with its usage. Value does not come from its intrinsic worth but its promise or guarantee. This notion is supported by the fact that the vast majority of money in the world doesn’t even physically exist. Instead, millions of virtual transactions transfer electronically across the world without ever materializing physically. The integration of credit into the financial system was one of the most important developments in human history.

From the “idle to the industrious

Despite poor public relations in light of the Great Financial Recessions and credit collapse, banks provide the best medium through which nations; communities and individuals can escape poverty and prosper. Financial institutions facilitate the transfer of idle, static funds into dynamic forms of credit thereby enabling the poor to access credit at reasonable rates of interest. Microfinance schemes across the developing world offer hopeful examples of how the re-distribution of money via affordable credit schemes enables and promotes the re-distribution of wealth.

  • Only scientific & technological advancements surpass the role of credit in advancing human progression
  • The “expansion” of money means that credit actually creates money
  • The first merchant banks appeared in medieval Italy due to increased trade with the Arab world and a growing requirement for credit to fund trade
  • Medieval Italy was again the source for the next major financial development: Bonds!
  • As Italian city states fought over territory, they were in constant need of external funding to pay for armaments and soldiers.

The rise and dominance of European empires between the 18th and 20th centuries has its origins in the dominance of their developed financial systems. These systems were able to dominate their Asian peers which although rich in resources, had an inefficient, absolutist financial system. The message from history is clear; societies with a strong financial system will prosper at the expense of those that are financially inefficient.



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