Do we need finance?

The 2007-2008 financial crisis prompted a lot of criticism and questions. It spawned multiple movies dramatizing the banks and bankers responsible for the crash. It was even partially responsible for the Occupy Wall Street protests of 2011 that were monitored as part of counterterrorism efforts. The financial crisis has marked for generations of young Americans what excess and greed looks like. Because of this, there is a strong tendency to condemn finance writ large and to see it as a modern development. I would like to challenge the narrative of modernity in finance by providing some perspective on the history of finance.

We often think of finance as asset-backed securities, collateralized debt obligations, credit default swaps, and a host of other financial instruments that have expanded the realm of finance in the past few decades. However, our mortgages, car loans, student loans, credit cards, and other financial tools are also part of finance. The loan, a basic component of a financial agreement, has existed for centuries. In Money Changes Everything, William N. Goetzmann makes the case that finance is the basis of civilization. I wanted to discuss three things from the book that I thought were interesting: the study of financial history, time, and relationships in finance.

First, I would like to briefly discuss the study of financial history. I have taken many history courses over my more than two decades of formal education. In the Western Civilization courses I have taken, I scarcely recall discussing finance as an integral part of the Roman Empire. The role of finance in the expansion of empire, the availability of loans and credit, takes second seat to mythology, philosophy, and the basis of governance. While the contribution of the Roman Republic to the development of our own Republican system is immensely valuable, we often miss that the basis of our financial system was developed thousands of years ago (in fact, in the West, we can trace it to the Phoenicians before the Romans, according to Goetzmann).

Secondly, finance is about building relationships through time. Along with finance, major civilizations developed calendars. This is no mere coincidence. Goetzmann states, “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” (p.5). The ability to make an agreement that spans over weeks, months, or years requires a common conception of time. If I loan you money, I need to know when to expect repayment, and you need to know when you to pay it back. In Bob’s Burgers, Bob Belcher jokes, “What is past due?” to try to get out of a late payment on his mortgage. This gag is funny in part because we have an agreement with our creditors about when a payment is due and understand how long we have to pay that sum. However, Bob’s question is actually fundamental to the practice of finance. With smartphones that automatically update with time and date, it’s easy to forget that a calendar measuring time is an important feat.

The third idea I would like to address is that finance allows relationships between parties beyond familial relationships. Early systems of writing were used to create financial agreements (and customer complaints). With written language and a unified conception of time, a lender could loan money to someone outside of their family unit. Relationships could be built among customers and business owners, as well as trading relationships between different cultures. Finance creates an ability to trust that someone else will pay you because you have a written agreement, as well as trust that you will be charged appropriately for your loan. Of course, trust could also be misplaced. Some of the earliest financial laws were laws prohibiting usury, overcharging on loans, specifically compound interest.

The history of finance shows that crises happen again and again, but also that finance offers opportunities from housing to businesses to international trade. Importantly, finance allows us to develop agreements that help us plan for future needs. Finance now is often about “quantitative models of the future,” but the basic financial agreement is also about the future. Although it seems odd to say, a financial agreement contains an element of hope. Financial agreements are often abused and misused, but they also create the opportunity for first homes, for new cars, and for business dreams to come true. Of course, many people make financial agreements out of fear or desperation. Finance is a tool that has helped build a multitude of civilizations globally. As we look to the future, we must ask what values we want placed in our financial system.