Money Changes Everything: How Finance Made Civilization Possible Paperback – August 15, 2017 by William N Goetzmann (Princeton University Press)

This book shows that some of the best books on world history approach the subject indirectly. This book is about the history of finance but that approach gives you a better picture of world history than most books which deal with the subject directly.

The basic point here is that finance is a type of technology which allows a civilization to expand. The needs of an expanding civilization create a need for expanding financial methods which then enable the civilization to keep growing and thus generate new financing methods in a perpetual cycle. The basic definition of finance is that it enables people to move money through time. The most basic financial tool is the loan which was invented in Mesopotamia 5,000 years ago. A loan allows the borrower to receive present income to be paid with future income, while the lender gives up present income to receive future income.

As Western Civilization (broadly defined) went from ancient Mesopotamia to ancient Greece, Rome, the medieval Italian city-states, Holland, Britain and finally America, financial products became more complex. But one constant in the West was that most of the financing was done by private parties. Governments, for example, would borrow private funds by issuing bonds. Meanwhile, China took a different path by always having a strong central government with a vast bureaucracy. There it was more common for the government to lend money to private parties.

Goetzmann believes the West developed a decentralized financial system because it was politically decentralized to begin with. The West suffered two great collapses, the Bronze Age collapse and that of the Roman Empire, which never happened in China. The decentralized aspect of the West allowed for more financial experimentation than the centrally controlled culture of China. This made no difference globally until Western explorers began reaching China around the 16th century and then conquering it in the 19th century. China suddenly realized it was not the center of the world and the 2,000 year old imperial system collapsed in 1912.

Chaotic conditions followed in China until about 1978 when China felt confident enough to rejoin the international community and adopt Western technology, free market enterprise, modern financing, and some of the culture that went with those. But China has remained authoritarian politically with a strong central government. Only time will tell how the two different systems will perform in the future.