The title of the financial historian William Goetzmann’s new book is hard to argue with: Money Changes Everything.
In his book, Goetzmann, a professor of finance and the director of the International Center for Finance at the Yale School of Management, has documented how financial innovations—from the invention of money to capital markets—have always played a critical role in developing every culture around the world. In the fallout from the Great Recession, it’s been commonplace to vilify those working in the financial-services industry. But Goetzmann argues that finance is a worthwhile endeavor, beyond just earning a ton of money: Its innovations have made the growth of human civilization possible.
I recently spoke with Goetzmann about his new book and the role of financiers in human societies past and present. A lightly edited transcript of our conversation follows.
Bourree Lam: Can you make a case for why it’s a good (or bad) idea to go into finance or to take part in financial innovation? For example, how would a career in investment banking further our civilization?
William Goetzmann: For a long time, students—particularly MBA students—went into investment banking in droves. So the question I would ask my students over the years is: Why are you doing it? What I was hoping is that they would think about the benefits to society. So the answer is pretty clear, if you take a look at the role that investment banking has played in concentrating capital into enterprises—essentially helping to raise money for businesses.
Finance is just a tool. There are different businesses to raise money for. But if you think of the enormous technological revolution that we've gone through over the last 20 years, it has helped channel funds into important companies like Apple and Google on the tech side—but also other kinds of innovative enterprises that wouldn't have been able to source capital in other kinds of ways. Investment bankers played this intermediary role between people that need to save, or organizations that want to invest money, and the companies that have a value proposition and need the capital. That's the important role that they play.
What you see in history is that if you go back in time, there were very few corporations and there wasn't much enterprise. So it was really when capital markets opened up that investment bankers could get money to build railroads around the world, canals, help raise money to electrify cities, and so on. So, that's the way I think about the benefits of that intermediary role.
Lam: Is whether it’s worthwhile to go into finance a question your students struggle with?
Goetzmann: You know, I don't think so. What I found, particularly for my MBA students, is that they get very excited by thinking about these larger social roles that business plays. The students that take my classes opt in because they're curious about the humanities side and the history side. I've been told that for students who go back into things like hedge funds or Wall Street, it’s helped them think about the meaning of finance and what they're doing.
Lam: I think it's refreshing to hear that some people going into finance are interested in a sense of purpose beyond making money. Are there other examples in history where some human achievements would literally not have been possible without financial innovation?
Goetzmann: One of the most important things that financial technology did is, before you had financial markets where you could borrow money, or in situations where you didn't have very developed financial markets—the medieval period up until the modern era—families that had a lot of money could finance enterprises. But if you were poor, but you had a great idea, you couldn't get the money without giving up the ownership entirely. So capital markets really democratized entrepreneurship. It's appeared in different places and different times, but with the ability in Great Britain to patent your ideas, then you could take the patent and say, “Look, I've got this new idea for a diving bell,” or “I've got a great new process for ginning cotton,” and you didn't already have to be funded. Before that, sometimes you'd be captive to folks that already had the capital.
So that's one big thing. It was a great democratizer. Even though now, we think about it as a source of great inequality. It's ironic. You think about Kickstarter now, it's got that same kind of democratization theme to it.
I love the world of asset management, because most of that is devoted to people's retirement and preparing them for an economic life in the long term, after their working life has passed. The invention of something like bonds and annuities and stock that people could buy with some level of trust—those created this possibility of people being able to save for themselves or for their family members. It created an economic future that they couldn't really create before. Before capital markets and financial innovations like that, a retirement plan was to have a lot of kids and then make sure enough of them lived long enough to support you when you got old. Finance, on the one hand, reduced the need to have a savings plan that was based on reproduction. Then, also, in some sense, it freed up the children to do what they want.
Lam: We hear often about the finance industry being ethical or unethical, and I was wondering if you came across that in different time periods.
Goetzmann: I think that anytime you have a very powerful tool that can focus and create value, anything that has the monetary value that finance has—you're going to attract people who are bad apples. There's no question that financial markets have created the possibility of scams and frauds on an enormous scale. For example, what we're seeing now with the invasion of the Swift system and the theft of $80 million—there's no question that there are real serious ethical breaches.
There’s one thing that people focus a lot on. The first thing that comes to mind is the word greed. It's a moral term. It's not well-defined, by the way, but it's a term that harkens back to the seven deadly sins. It comes from a long-term cultural norm to expect people to curtail their desire for more. When you think about it in economic terms, it means you simply prefer more to less, no matter how much you have. Economist have put the notion of greed into a framework for understanding it, even though it seems like one of the most commonly-used and misunderstood words there is when it comes to issues of money and wealth. It's the first term that's used when finance is criticized, the fact that somebody wants money and that they're accumulating it.
Karl Marx, for example, had these really powerful and compelling images of greed: money bags, and people who just wanted to save and not give. I think that's something that, as a culture, we have to ask ourselves when somebody starts using the term greed. We have to take a step back and look at how much of that is a projection of not cultural values—but cultural stereotypes.
Lam: How have you seen this projection of cultural values play out in different civilizations, in terms of how their financial sectors have developed?
Goetzmann: The strongest one is the prescription against usury. In the Islamic world, borrowing and lending and debt finance is sharply constrained. In the Christian world, usury was condemned and the definition of usury shifted around a little bit because you couldn't entirely constrain people from borrowing and lending. But you could call someone a usurer, and it evokes great hatred and vilification. You see these connections between attacks on finance and anti-Semitism throughout European history as an example of that.
Jeremy Bentham—he's an Englishman from the 18th-century—wrote a long treatise called Defence of Usury. In that, he took a philosophical rational view of the attack on usury, and asked if we're really better off if we capped interest rates and didn't allow people to borrow and so forth.
Lam: What was it like going into the financial industry, say, 1,000 years ago, versus today?
Goetzmann: 1,000 years ago was the period in Europe when the economy was really lighting up after the turn of the millennium. Between 1,000 and 1,200 years ago, I would say it was the beginning of the “bourgeoisization”—where people of the merchant class that used financial tools garnered a lot more respect and actually began to take control of cities in the Italian city-states and southern France. That was a period that, in some ways, was quite admirable because rule wasn't based on descent.
In China, if you go back 1,000 years ago, you get to the Song dynasty which was this amazing period in financial innovation that embodies a couple of contrasts. On the one hand, there were very clever financial innovations, such as paper money and the creation of long-distance money transfers through paper instruments. But also, the development of a financial bureaucracy. The government took over things like the tea and horse trade, and nationalized a lot of financial operations and sharply constrained the profit that merchants would make.
So just in the moment when merchants in Europe were getting the upper hand, and running the cities themselves, in China there was a constant, grabbing hand that saw the profits that merchant could make out of trade and said, “Why doesn't the government get that? Why should the merchants get that profit?”
Lam: Were people working in finance always relatively well compensated throughout history?
Goetzmann: Not necessarily. There have always been a lot of people hopeful of making money through financial operations, but there are a lot of failures as well as successes. But maybe what you're asking is this: What about at the very top?
We've got this huge inequality spread that's occurred now, and there's been a fair amount of documentation that there’s been a dramatic trend up until the last few years. From what I've seen, that inequality really is a phenomenon of the late 20th and early 21st centuries—the ratio between what a head of a bank makes and what a teller makes. I wouldn't say that the situation we see now, where we have people making billions of dollars through arbitrage and hedge funds, I'm not sure that's something that's occurred in the past, partially because now we have such deep and complex capital markets. It’s not something that attracted as much human capital as it did before.
I would say that the stakes in the financial markets are so much higher than they were before. So if you think about not the ratio between the highest-paid and the lowest-paid in an organization but the ratio between the compensation of the highest hedge-fund managers compared to the scale of investment opportunities in the world—those things may very well have remained stable through time. The ocean is getting bigger, so the top fisherman are collecting more.
Jakob Fugger, who was known as the richest man in the world, was the head of a merchant trading operation. But you can also think about him as a financier in the 16th century. And in the records of the grand historian Sima Qian in China, he wrote about the wealthiest people and how they made their money. Some of them made their money through finance and lending.
Lam: How has the public’s attitude towards the financial industry evolved?
Goetzmann: There are certainly periods of anger from time to time. I'm wondering whether there are periods when financiers were celebrated for what they did, and I would say in the Dutch republic, where there was a strong sense of self-reliance and almost a Protestant ethic, the people who became the first investment bankers—actually they were merchant bankers—they were highly respected members of the community. They played an important role. I think they were admired, and did a lot of charitable work in terms of getting money to orphanages and so on.
Think of Florence, the Medici and the Bardi and the other bankers—they developed into bankers even though they started out in the wool trade. The financial class also came to be the ruling class in town. But I would say they were also admired, perhaps because in order to get that broad admiration they gave a lot of money to churches and public art and things like that. It could be that that's a kind of necessary condition to stem the antagonism towards them.
One of the most famous acts of terrorism in the United States happened in 1920, when an anarchist set off a bomb right in front of the New York Stock Exchange. There have been attempts on the lives of the financiers, and there were very conflicting sentiments towards capital and labor in the early part of the 20th century in the United States. It led to an extraordinary amount of violence, and required the law and government to reconcile these differences.