Review By Victor Niederhoffer, Daily Speculations
One of the best and most enjoyable ways to appreciate and navigate the world of markets today is to study its foundations and evolution. The highly recommended book The Origins of Value, by William Goetzmann and Geert Rouwenhorst contains a series of 20 essays that trace the history of finance from its origins in Sumerian and Roman times to today. Chapters on the origins of interest, the first corporations, the business and money used on the Chinese Silk Road and the Italian City States, the origin of bonds and stocks, mutual funds, conduct and returns in the Dutch East India Company, the innovations of John Law, the origins of the New York Stocks Exchange, Eurobonds, German Debt, annuities, and Fibonnoci's contributions, and King Leopold's finances and madness appear. The book considers these particular aspects of finance in the context of three principles, the transfer of value through time, the development of mediums for the transfer of uncertainty, and the ability to buy and sell to negotiate value.
There are numerous insights that I gained from this book about how things that we now take for granted were started and developed in a different time and place, but with uses very similar to today.
Every chapter is filled with fascninating facts about the structure and materials that we use today. Pictures, tables and maps illustrate how things actually looked and worked during that time. There are only 5 charts, but those are completely fascinating in that they show the prices, debt, equity, and dividends (incredibly high) of the Dutch East India Company, and moves in prices of equities and debt of big bank and insurance companies on the NYSE from 1790-1820.
The one criticism of the book is that it contains mainly facts and history, illustrations and examples and explanations. There is little of a grand framework of analysis to fit all the pieces together and provide a framework for how all the parts fit together. The authors' recommend The Rise of Financial Capitalism:International Capital Markets in the Age of Reason by Larry Neal for that. Along with Larry Harris's book, Trading and Exchanges, this book provides the ideal foundation for the study of markets and finance from the ground up.
Reviewed by Mark S. Rzepczynski
Book Review Editor: Martin S. Fridson, CFA
(doi: 10.2469/faj.v63.n2.4535)
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Abstract
Through vignettes on the beginnings of finance in various periods and cultures, this beautiful book links the universal and timeless quest for solutions to investment problems associated with moving funds through time and space.
This work is a rarity—a financial coffee table book. It is a beautifully printed work with numerous color pictures and a size appropriate for out-of-bookcase display. Its visual appeal conjures up a fascinating historical march through the major innovations in capital markets and makes the reader want to savor gems of information about the origins of valuation.
Given the format, 20 articles, we expect it would be easy to curl up and read interesting vignettes in The Origins of Value: The Financial Innovations That Created Modern Capital Markets on the beginnings of finance in various periods and cultures. Such hopes will be largely fulfilled, because the book, covering a wide breadth of topics over many centuries, offers numerous remarkable glimpses of financial history. Bona fide intellectual benefits, however, will come only through hard work. This book provides neither a casual read nor a whimsical ride through the past.
Editors William Goetzmann and Geert Rouwenhorst, formidable financial researchers in their own right, contribute original work to the book while also achieving the proper blend of articles to explain financial innovation. They start with the premise that the origins of value rest on three fundamental innovations—intertemporal transfer of value, contracting of future outcomes, and negotiation of claims and contracts. Goetzmann and Rouwenhorst then find moments in history when these key concepts were introduced or advanced. In a strong introduction that is one of the book’s highlights, the editors tie the key themes together and deftly link them through time.
Several of the topically and temporally diverse articles stand out as particularly intriguing history for financial professionals. They range from the invention of interest payments in ancient Sumeria through issuance of the first Eurobonds in 19th century Germany to contingencies for inflation and war reparations. The link between these sundry stories is the quest for solutions to investment problems associated with moving funds through time and space. Although the articles focus on specific epochs, the problems are universal—in many cases, involving the same issues faced by current practitioners.
Finance began thousands of years ago with the transition to an agrarian society. Consumption could not coincide with the planting of crops, so mechanisms were needed to borrow today what will be produced tomorrow. From this simple origin, interest payments expanded through the development of complex lending arrangements and the ability to transfer ownership of claims. The increasing sophistication of debt instruments is captured in the story of a Dutch perpetuity that is still paying interest today after hundreds of years.
The evolution of finance is ultimately a process of search, negotiation, and structuring of claims between those who need credit and those who possess savings. Goetzmann and Rouwenhorst repeatedly return to the core theme that those who wish to intermediate credit will always spur financial innovation. They portray the history of financial exchanges as the attempt to cut the cost of searching for intermediation.
The theme of how to protect investments through time is artfully depicted as the response to the risks of a particular period. The environment, in short, drives innovation. For example, a fascinating piece by Robert Shiller describes the use of inflation-protected securities in early America. So, today’s Treasury Inflation-Protected Securities are not a brand-new idea but an outstanding example of innovation bred by prevailing conditions. In a similar vein, the book describes in detail the development of futures and options as a means of protecting against changes in the environment or state of nature.
Because capital can be transferred effectively only if it is negotiable, the authors discuss reliance on paper notes as means of facilitating trade in a number of historical periods. The development of exchanges and rules for negotiability are other key topic areas. To make the transfer of ownership work, financiers had to be willing to commit to rules, codes, and regulations and, ultimately, had to trust.
In the belief that people have made history as much as events have, the book profiles such key financial innovators as Leonardo Pisano Fibonacci and John Law. Mathematician Fibonacci is known in financial circles mainly through the use of his proportional numbers in technical trading, yet his work is also important for determining present values. Law’s reputation has been sullied by association with stock manipulation and the stock market bubble of the Mississippi Company, but he was a true innovator in monetary economics as well as corporate finance. His story demonstrates the level of complexity achieved in finance more than 250 years ago. A surprising financial innovator was Benjamin Franklin, who worked on printing designs to increase the negotiability of bonds.
Property rights, regulation, and government involvement are present throughout The Origins of Value but, disappointingly, are never directly addressed as essential elements of the origin of value and financial innovation. Without a well-defined legal structure to enforce conduct, history would show a less impressive record of efficiency in payment of interest and contracting of future outcomes. Comparative economics suggests that well-developed capital markets are no accident; they are tightly bound to systems of laws and cultural values. For example, the Roman invention of stock shares was lost with changes in government. The editors discuss issues of path dependency and accidents in innovation but do not fully explore the legal environment that appears vital to progress in financial methods.
A further shortcoming of The Origins of Value is its limited investigation of the catalysts for innovation—namely, trade and the need for capital. The cradles of finance, both the Italian city-states and Amsterdam, were outgrowths of trade. What enabled trade to flourish, notwithstanding the supreme status of gold throughout the world, was the acceptance of paper money. How did this happen? The book details the development of paper money in China, where it arose in connection with the Silk Road trade, but not in other parts of the world. There are other regrettable omissions, especially in the areas of banking, insurance, and the simple concept of trust.
On the positive side, several articles on China provide a valuable cross-cultural perspective that is lacking in most discussions of financial history. In addition, the editors’ selection of illustrative historical incidents is astute. Unfortunately, the contributors vary widely in the quality of their writing and some fail to establish a connection with the overarching themes discussed in the introduction. Overall coherence might have been better served by organizing the book thematically rather than chronologically.
Aside from the introduction, The Origins of Value conveys little of the passion that has been a hallmark of the best books on science and innovation. Too often, a dry focus on the facts leaves the reader without a sense of the competitive struggles that forced modern finance to grapple with issues of risk and uncertainty.1 Readers who expect from the contributors a flair for storytelling together with the erudition will be disappointed.
Any book that attempts to cover such a vast historical range will necessarily emphasize particular topics and, as a consequence, generate controversy. Gaps will necessarily arise as a function of the selective research interests of the authors. We hope these editors will continue to study financial history and further address some of the issues that get short shrift in the present work.
Nevertheless, given the wealth of possible topics, the very fact that this book will cause controversy makes it useful. Like a good work of art, The Origins of Value gives rise to strong opinions. That trait alone may make it worth the price.
From the Publisher
From the invention of interest in Mesopotamia and the origin of paper money in China, to the creation of mutual funds, inflation-indexed bonds, and global financial securities, here is a sweeping survey of financial innovations that have changed the world.
Written by a distinguished group of experts--including Robert Shiller, Niall Ferguson, Valerie Hansen, and many others--and wonderfully illustrated with over one hundred color photographs of landmark financial documents (including the first paper money), The Origins of Value traces the evolution of finance through 4,000 years of history. Readers see how and why many of our most important financial tools and institutions--loans, interest rates, stocks, bonds, mutual funds, the corporation, and the New York Stock Exchange, to name a few--came into being. We see, for instance, how ancient Rome developed an early form of equity finance that resembles the modern corporation and read about the first modern corporation--the Dutch East India Company--and its innovative means of financing the exploration and expansion of European business ventures around the globe. We also meet remarkable financial innovators, such as the 13th century Italian Fibonacci of Pisa, whose mathematics of money became the foundation for later developments in the technology of Western European finance (and may explain why the West surpassed the East in financial sophistication). And we even discover a still-surviving "perpetuity" dating from the Dutch Age of Reason--an instrument that has been paying interest since the mid-17th century.
Placing our current age of financial revolution in fascinating historical perspective, The Origins of Value tells aremarkable story of invention, illuminating many key episodes in the course of financial history.
"A lively history of finance.... The book is gorgeous. You can see the crimson illumination on the Ligatio pecuniae and read the fine print on a futures contract from the Dutch West India Co. Each chapter is a minihistory written by stars like Niall Ferguson and Robert Shiller, who explain in rich prose the connections between Chinese pawnshops, Greek moneylenders and, ultimately, the cash in your pocket."--Jyoti Thottam, Time Magazine
"Possibly the first book designed expressly for Wall Street coffee tables."--The Economist
"A nice addition to any investor's coffee table. Large and lavishly illustrated, it's a collection of essays by leading scholars on everything from the invention of interest in ancient Samaria to bonds in early America."--Barron's
"A fascinating and insightful guide to the evolution of our modern financial system, set in its broad historical context so that the reader always sees the big picture." --Matthew Bishop, Business Editor, The Economist, and author of Essential Economics
"The Origins of Value makes an important contribution to our understanding of global financial history. It suggests connections across Eurasia (e.g. possible Chinese origin of tallies used in early Medieval Europe, or the roots in ancient Indian mathematics of formulas used by Italian merchants), and plausible answers to important historical questions, like the thirteenth-century divergence, in fiscal terms, of China and Western Europe. The reproduced documents allow readers to see how scrutinizing records of the distant past requires almost as much ingenuity as the fiscal innovations that are the focus of discussion." --James D. Tracy, author of Emperor Charles V, Impresario of War: Campaign Strategy, International Finance, and Domestic Politics
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Biography
William Goetzmann is the Edwin J. Beinecke Professor of Finance and Management Studies, and Director of the International Center for Finance at Yale. He has written extensively on historical capital markets and investing. And as former director of Denver's Museum of Western Art, he co-authored the award-winning book The West of the Imagination. K. Geert Rouwenhorst is Professor of Finance at the Yale School of Management and Deputy Director of the International Center for Finance at Yale. He is an expert on international finance and stock markets around the globe. The work of both authors, including their separate and joint research, has been published in all of the major academic journals in Finance, and has been widely featured in the financial press, including Barron's, The Wall Street Journal, The New York Times, Business Week and The Economist. The International Center for Finance at Yale is an interdisciplinary research institute focused on financial economics and the role of capital markets in society.
Table of Contents
Introduction : financial innovations in history 3
1 The invention of interest 17
2 Roman shares 31
3 How business was conducted on the Chinese Silk Road during the Tang Dynasty, 618-907 43
4 The origins of paper money in China 65
5 Paying in paper 91
6 From tallies and chirographs to Franklin's printing press at Passy 105
7 Fibonacci and the financial revolution 123
8 Bonds and government debt in Italian city-states, 1250-1650 145
9 Venture shares of the Dutch East India Company 165
10 Perpetuities in the stream of history 177
11 Amsterdam as the cradle of modern futures trading 189
12 Annuities in early modern Europe 207
13 John Law 225
14 The invention of inflation-indexed bonds in early America 239
15 The origins of mutual funds 249
16 Transatlantic paper and the emergence of the American capital market 271
17 The origins of the New York Stock Exchange 299
18 The first "Eurobonds" 313
19 German debt in the twentieth century 327
20 King Leopold's bonds 343
