Key Messages
The Evolution Of The Financial System: Adapt Or Perish
It’s no secret that the financial world is constantly changing, and different firms who are able to adapt quickly to new situations are the ones that succeed.
It’s a perfect example of Darwin’s theory of natural selection applied to the business world – those firms best suited to their environments prosper and multiply, while those that fail to do so become obsolete.
The way this works in the financial system can be compared to how species evolve in nature – firms that stay up-to-date with financial techniques and innovations prosper, while those who lag behind face extinction.
Similarly, large-scale catastrophes like the 2008 collapse lead to massive extinctions of existing practices, resulting in new types of firms taking over these spaces.
In short, it’s safe to say that the financial system is an evolutionary one where businesses fight for resources and those most capable of adapting win out in the end.
The Value Of Money Is Rooted In The Mutual Trust Of A Society
The Ascent of Money explains that the value of money does not come from its physical form, but rather from society‘s trust in it and its ability to facilitate exchanges.
The Spanish conquistadors are an example of this, as they thought that having more coins minted would give them a larger sum of money.
However, due to the abundance of coins this had the opposite effect on their worth.
This is because when there is more money in circulation, each individual coin is worth less than before.
The lesson here is that no matter what form money may take – whether it be a precious metal or paper currency – if we lack trust in it then it will soon become worthless.
We rely on our shared understanding and confidence in the worth of money for it to hold any value at all.
Furthermore, with much of today’s money existing virtually we trust that it can be transferred safely without needing ever materialize physically.
It is only through our collective belief in its power that something with inherently little or no intrinsic value can maintain an entire economy.
In essence, the value of money comes from our trust placed in it and not from its original form.
Credit And Debit: A Crucial Feature Of The Financial System That Creates Money
The system of credit and debit is essential to the financial system as it allows for an increase in money supply.
Without it, the financial system would stall because there wouldn’t be enough money to fund investments or purchase goods.
It all started with ancient Mesopotamia where lenders were given clay tablets inscribed with how much they owed – effectively, an IOU – as payment for deposits.
Over time, this evolved into our modern-day system of credit and debit.
Banks are the primary creators of credit, which then leads to the expansion of money.
This works by a bank taking your deposit of say €100 and then lending out €90 of it.
That other person may put that loaned through another bank, which gets a €80 loan and repeats the process again.
This means that €270 has been created out of nothing from the original €100 – widening the money supply substantially!
Credit and debit are therefore an essential part of our modern financial system, not just providing stability but also creating more funds that can be used to keep it functioning smoothly.
The Evolution Of The Financial System: How Centuries Of Innovation Led To Our Modern System
The modern financial system we know today has been shaped by centuries of economic, social and cultural developments.
It is a complex network of interconnected financial markets and institutions that have evolved over time.
One key element of the financial system was first seen in medieval Italy – increased trade with the Arab world and better systems of accountancy created the first banks.
These banks provided merchants with access to credit so they could fund their business and trading activities, as well as providing much needed funding for governments at war.
In 17th century Holland, the joint-stock companies were born and this funding mechanism spread rapidly across the world.
By getting people to buy shares in a company, companies were able to raise funds on a larger scale than ever before.
The stock market was then able to give people an easy way to buy or sell these shares in companies.
The next stage of development saw insurance companies analyze the financial markets in order to create huge investment portfolios that could manage risk more effectively.
Government involvement with the markets also increased throughout the twentieth century with regulatory changes designed to create a stable property-owning democracy based on real estate investments in the 1920s.
Taken together, these interconnected pieces form today’s modern financial system – one which has been crafted through centuries of evolution and development.
Finance Can Offer A Way Out Of Poverty: The Power Of Credit And Banks
Finance, and more specifically access to credit, is a powerful tool for providing a reliable path out of poverty.
Historically, it has been the most effective method for helping communities, countries, and individuals to rise out of difficult financial circumstances and onto solid footing.
Banks offer many advantages in this regard as they provide depositors an ability to save money while simultaneously making it available to those who need it.
Through loans and other forms of credit, potential borrowers can access funds that they would otherwise not have had otherwise.
This allows them to make choices that can benefit their future such as investing in property or enterprise or running the business of their dreams.
Microfinance is especially useful here since even small amounts of accessible credit can make a massive difference when it comes to areas affected by poverty.
By investing in items necessary for success such as livestock or funding microbusinesses, potentially life-changing opportunities open up for those in need.
In short – finance through accessibility to credit is an incredibly powerful tool when it comes to providing people with routes out from poverty – something our world desperately needs!
The Western Financial Model: A Story Of Prosperity, Empire-Building And Globalization
It is clear that societies with a strong financial system will have disproportionate success when compared to those without.
This is because the “moving capital” of a financial system allows for greater incentives, competition, and development of resources as opposed to inefficient systems such as communism or feudalism.
The Ascent of Money by Niall Ferguson elaborates on this phenomenon which has allowed Western nations and their financial systems to dominate much of the world in economic power, particularly compared to Asian countries Rich in resources yet lacking in financial understanding.
In addition to the rise of European Empires due partly to their financial might, we have seen further examples throughout history showing how those with well-developed and efficient financial systems are not only able to outperform but often supplant less adept competitors.
Examples include the Netherlands independence from the much larger Spanish Habsburg Empire through virtue of its superior banking structures and society prospering at expense of others as a result of globalization in pursuit for more resources and sources of profits in 20th century.
These events demonstrate that societies who can successfully leverage their technology, expertise, experience and capital will always be better equipped to succeed in a globalized environment than those without any (or inadequate) foundations leading to financially inefficient landscapes.
The Financial System Is A Reflection Of Human Nature: Irrational, Inequality And Crowd-Driven
It’s no surprise that the financial system isn’t perfect.
After all, it’s run by human beings who are inherently irrational.
Our mood swings, from optimism to pessimism, tend to be amplified when it comes to money.
We also jump on the bandwagon and follow what other people are doing before making our own decisions.
What’s more is that humans value certain things differently and not everyone is valued equally.
These inequalities are reflected in the financial system; where rewards aren’t shared fairly (or evenly) amongst those who have the right skills and attitude for success.
Financial markets can crash suddenly due to investor confidence which tends to be fragile at best, while people may rush into investments en masse once they see what other investors are doing.
This is why the financial system mirrors human nature – it can be deeply irrational and unequal.
Stock Market Bubbles: Irrational Confidence, Fraudulent Ceos, And Naive Investors
The stock market is like a balloon that can often inflate quickly.
When people have a lot of confidence in it, the prices of stocks and shares rise and the market expands.
But when faith in the market drops, money is taken out and it deflates.
Sometimes these fluctuations become dramatic, with prices rising to unsustainable levels as if they’re an overfilled balloon – until eventually they burst, leading to huge falls in price.
These are known as stock market bubbles, and unfortunately they occur quite frequently.
People are usually caught off guard by these bubbles because they don’t take into account the up-and-down nature of the market – instead assuming that growth will continue forever without any dips or dips in fortunes along the way.
This leads to investors taking substantial losses when prices drop suddenly following a bubble bursting.
A few potential causes of bubbles include greedy executives exploiting unsuspecting investors with false promises of high returns; not Hefty understanding on how finances work; and CEOs who normally last only 25 years on Wall Street meaning that their experience may be too short for them to fully appreciate what’s happening to their investments over time.
These precarious conditions contribute to expansive growth that soon crashes down again after reaching unsustainable heights – causing those who bought in at its peak to suffer major losses as a result.
This perfectly describes why stock markets tend to develop bubbles all of which eventually burst just like any other bubbles do!
Politically-Driven Inflation And Hyperinflation: The Weakening Of Wealth And Credibility
The political mismanagement of a currency can lead to inflation and, in extreme cases, even hyperinflation.
This phenomenon can wreak havoc in the financial markets, as it is the ultimate power that states ultimately hold over those markets.
When governments issue too much money or fail to control their national debt adequately, the result can be catastrophic.
Hyperinflation is particularly dangerous for those who hold government bonds and savings in a given currency since these forms of wealth become steadily devalued.
In some instances, there are intentional reasons as to why a government might choose to deliberately cause currency depreciation and consequently hyperinflation – for instance, so as to reduce its domestic debt burden.
But at other times it can be because of bad policy decisions resulting from political instability or long-term economic issues that remain unresolved.
Hyperinflation takes an immense toll on society, impacting not only individuals with fixed salaries but also those whose wealth is tied up in savings accounts or government bonds – not to mention the external investors who will be hesitant when lending due to increased risk perception associated with an unreliable borrower.
Ultimately, this means that everyone stands to suffer under hyperinflationary policies caused by political mismanagement of a currency
The Struggle For Financial Security: The Imperfect World Of Private Insurance And The Welfare State
Private insurance and the welfare state are both imperfect systems when it comes to minimizing financial risk and uncertainty.
By taking out private insurance, you may have better overall coverage, but there is still always a chance that unexpected costs will arise.
Similarly, many rely on the welfare state to provide necessary support in times of need, yet there is no guarantee that this assistance will be available when needed.
The two Protestant ministers who invented modern insurance did so in order to provide financial aid to families without having to rely on charity alone.
Unfortunately, before long it became apparent that not everyone could take out private insurance – people who were too poor or lazy often had no means of obtaining protection and often ended up in poverty with no safety net in place.
This prompted politicians to create schemes and subsidies for those who couldn’t afford private insurance, with the intention of promoting social stability and increasing their electoral prospects.
This created the welfare state which aimed at providing universal health care, old-age pensions and free education as well as other forms of support such as financial aid programs and student loans.
However even with this improved system there are debates regarding whether these efforts are a disincentive for people to work hard or save money due to high taxes associated with universal coverage.
Furthermore changes have been made over the past few decades due to an aging population meaning skyrocketing health care costs and pensions; pushing some governments into dismantling parts of these welfare systems.
Regardless individuals must choose between expensive private insurance schemes which offer uncertain coverage or hoping that shrinking welfare states provide enough support when needed; making clear just how imperfect both systems are when minimizing financial risk and uncertainty in life today.
The Clash Between Political Aims And Financial Reality: An Unfortunate Lesson From The Twentieth-Century Real Estate Market
The deregulating of the real estate market is proof that political decisions can have a dramatic effect on our finances.
This is most clearly illustrated by the events surrounding the 2008 financial crisis, which was primarily caused by deregulation of the US housing market.
In 2003, under the George W.
Bush Administration, subprime loans were promoted as a way to increase property ownership- especially amongst ethnic minorities.
While this may have seemed like a positive political move, it came with some huge financial risks.
Those who gave out the original loans knew there was a high chance of default, and so they repackaged and sold these risky loans around the world to those who didn’t understand their nature.
Unfortunately for many people across the globe when those borrowers began to default on their loan payments, house prices plummeted and large institutions such as pension funds suffered greatly due to holding worthless debt.
This quickly spread further into world financial systems and led to large-scale global economic instability.
It’s clear that when political decisions are made without considering financial risks, it can have devastating effects on our global economy- far beyond just one country or region.
Wrap Up
The Ascent of Money Book Summary provides a clear final conclusion on the financial system – that it is an evolutionary, interconnected framework that has been developed over centuries, and it allows people access to credit and a way out of poverty.
Despite its flaws, the financial system is still invaluable because it is the best method for creating capital and money and for allocating this money where it is most needed in order to support economic development and human progress.
However, one should be aware of the risks inherent in the financial system such as irrational and unequal behavior, stock market bubbles, inflation increase (and hyperinflation), political mismanagement of currency as well as imperfect private insurance and welfare systems.
