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May 13, 2016

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Home » Opinion » Book review

World’s debt to finance laid out in ‘Money Changes Everything’

FINANCE, especially when stripped to its bare essentials of borrowing and lending, had long been viewed with suspicion in China.

As traditional Chinese society placed a high premium on production (agriculture) and self-sufficiency, borrowing was discouraged and resorted to only in a crisis.

This has dramatically changed over the past decade, as finance evolved into an esoteric, respected and highly-profitable art, as well as a coveted career path for many of the country’s top students.

Given the soaring house prices in top-tier cities like Shanghai, those who have taken out huge mortgage loans are envied today, and I have even heard of couples temporarily divorcing just to secure mortgage loans.

On a much larger scale, a host of Chinese cities are attempting to build themselves into regional and global financial centers, and going to great lengths to recruit financial talent from Wall Street as part of efforts to engineer fresh growth.

In the once-maligned world of finance, major paradigm shifts appear to be taking place all around us.

But this is not to say that finance is anything new. In fact, according to William N. Goetzmann in his book “Money Changes Everything: How Finance Made Civilization Possible,” finance has always been a driving force in world history. Even in China’s imperial past, financial forces led to the rise and fall of dynasties.

Goetzmann writes that finance played a key role in the development of the first cities, the emergence of ancient empires, and the exploration of the world.

West Asia, for instance, saw some of the world’s first cities, first written languages, first laws, first contracts, and first advanced mathematics.

Goetzmann claims that “The legal system of the Babylonians depended crucially on the use of notarized and witnessed documents and contracts establishing individual rights and obligations, many of which are similar to modern financial instruments and contracts.”

In China, financial tools enabled rulers to hold together vast empires.

Finance played — and continues to play — a vital role in the world’s great historic transitions because, as Goetzmann explains, finance moves economic value forward and backward through time.

“Finance has increasingly made us creatures of time. Financial architecture exist in — and shapes — the possibilities of the temporal dimension.”

Here the resonance and dissonance between Chinese and European financial development reflects alternative historical paths, as new ideas were adopted, altered, and embedded into broader social, political, and cultural frameworks.

For instance, in Song Dynasty (960-1279) China there existed advanced paper technology for documenting and transferring ownership, as well as abstract concepts of value.

But as the author observes, “The single missing ingredient in Chinese financial technology was the dimension of time. Weak European governments continually resorted to deficit financing and borrowing through the late Middle Ages and Renaissance. China did not.”

Moral considerations

Moral consideration inclines Chinese to see borrowing as destabilizing.

As the author observed, state borrowing is, in some sense, a national pyramid scheme, predicated on the belief that money borrowed today is invested in assets that increase the future economic power of the state. In simpler terms, states borrow to invest in activities that increase future tax revenues.

“In China, the government since the time of the Guanzi was seen as providing instead a strategic, economic reserve … The financial ministry’s duty was to husband this reserve,” Goetzmann concludes (Guanzi, by the way, is a seminal book in Chinese political philosophy attributed to 7th century BC writer and statesman Guan Zhong).

This insight can help us understand the divergence in motivation that is probably more revealing than we have realized.

Westerners could not understand why the famed admiral Zheng He (1371-1433) completed expeditionary voyages to as far as East Africa for multiple times without enslaving natives or setting up colonies.

As the author observes in explicating the relationship between finance and knowledge, early Western voyagers were driven by greed, and underwritten by investors hopeful of future profit.

As there were long gaps of time between initial investment and returns (which might never come) such voyages helped develop novel financial concepts. For instance, in proceeding with the transatlantic voyages, Columbus’s contract with the Spanish crown was extraordinarily complex: he received not only political favors but also 10 percent of future revenues from his transatlantic trade.

Goetzmann also believes that the form of reciprocal gifting commitments among family, friends, or members of a community (still vibrant today, especially in rural China) fulfills the same function as a financial loan. But unlike a loan, the compensation is a future social obligation rather than interest payments, and it tightens a social network rather than loosening it.

Cultural implications

This view is probably open to discussion, for this kind of gifting is not based on hope of calculated returns, but enforced strictly by custom. But it is insightful to learn, while characterizing the relationship between finance and civilization, the author observes that modern financing offers a rich variety of ways to reconfigure human relationship.

“A dense, urban society creates relationships of all kinds. In a city you not only interact with family and long-term acquaintances. You also interact with people for whom traditional reciprocal relationships do not work,” Goetzmann observes, adding that “Urban life may demand one-off interactions with foreign visitors or repeated interactions with tradespeople who cannot reciprocate in ways you require.”

Unlike traditional Chinese society, cities do not require shared belief systems or cultural norms, simply a structure for documentation and enforcement.

While this is “progressive,” it can also lead to problems like bubbles, crises and crashes, exploitative corporations, scams — to name just a few. Recent crises force us to wonder if we should continue to see finance as a specialized inquiry free of moral constraints.

There was a time before flashy financial products were part of urban life; when fundamentals still mattered and a spade was still called a spade. We used to believe that wealth comes from honest work, not from those wealth-management products promising double-digit returns.

The coming and going of so many WMPs franchises near my home over the past 12 months lends new poignancy to the observation that in the reallocation of wealth made possible by the tools of finance, there is the potential for both social benefit and social disruption.




 

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