Money Changes Everything: How Finance Made Civilization Possible

Finance often receives bad publicity. People complain that financial tools are used by elites who live lavishly above us all, and that nothing of use can come from finance for ordinary people. And although there is a hint of truth in that sentiment, this book argues otherwise. This book argues that societies in general are only able to occur as a result of financial tools.

As the book argues, for modern society to exist, we need finance. We need common mediums of exchange, we need interest rates, we need loans, we need banks, and we need capital investment. Without common mediums of exchange, without loans, and without many other aspects of finance, much of modern society would be unfeasible.

Firstly, let’s consider usury and interest rates. The line between usury and interest rates is at times easy to see, but at other times more difficult to locate. Those who lend out their money can determine a rate of interest to be paid, and when that rate of interest is unreasonably high, it is considered usury. In older times, any form of interest was often considered usury. But we now know interest rates play an important role in money lending.

If there were no interest rates on loans, then there would be little incentive to take on the risk of loaning money in the first place. And as a result, money can become stuck and flow less. For example, suppose a large corporation has more money than they can spend. In such a case the company can loan their money at an interest rate, so that their money remains productive rather than unproductive. They can loan money to other companies at an interest rate which accurately reflects the risk of loaning to a particular company. And so, capital can be more productive because of interest rates.

Secondly, without a universal medium of exchange, the trading of goods and labour becomes incredibly difficult. For example, if there was no common currency, then a butcher and a carpenter would have to begin trading tools and meats with one another, two things which have very hard to compare values; and in addition to that, finding butches with a demand for carpentry tools adds another layer of difficulty. Whereas, when there is a universal medium of exchange, we know all butchers and carpenters alike can make use of the currency and so trade between one another more readily. Currencies allow for a greater flow of good inside society. People can obtain what they want because of modern money.

Thirdly, another important creation of finance is banks. Banks also free up the flow of money. Not only do they provide an incentive to save your money by paying interest rates, but they take otherwise unproductive money and loan it to those who can be more productive with said money. That is, rather than having your life savings sit inside a safe, doing nothing, it can instead sit inside a bank, where it can then be lent to someone who will use it for a small business project. So banks also lead to more productive societies.

Lastly, modern day mega-projects require the act of raising capital. When someone pursues a visionary project like building a new computer, innovating automobiles, or developing new medicines, massive amounts of money is often required. And in order to get that money, companies often rely on investors: people who want to buy ownership in or loan their money to a company. The investor takes on risk of failure, and the company gains the ability to complete their project by getting access to the funds of the investors. Without the ability to raise capital, many modern mega-projects would have never come to fruition.

So, finance is absolutely necessary for both modern and historic societies. Banks, interest, loans, and capital investment have served major functions inside modern and old societies. So much so that they are essential to the health and wellbeing of any society. And yes, finance can bring with it wealth inequality, corruption, and unfair class structures. But those seem more inherent into human nature than finance itself.

Humans always find a way to gain systems and take advantage of one another. In politics, there is no shortage of corruption; in interpersonal affairs, there is shortage of lying, cheating, and betrayal. And even in religious institutions, we find corruption and immorality. Finance, just like anything else, is a double-edged sword. It is an essential instrument to modern society that can be used for both good and evil. That, undeniably, is the main take-away from this book.

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$20,000. That is what I wasted on university before realizing my passion is just to read, write, and think.

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