The Times August 20, 2005


Cents and sensibility

Without it, modern economies would be impossible. And it really is worth the paper it’s printed on. Howard Davies explains the history of money. It grows on trees you know

“YOU AIN’T GOT ANY REAL money, ’av yer guv?” asked my taxi driver last week as I offered him a Clydesdale Bank tenner, proudly decorated with a lithograph of one Mary Slessor, not a household name this side of the Wall. I had just flown in from Edinburgh, where even the Alliance & Leicester cash machines dish out Monopoly money, so the answer was no. Grudgingly, he trousered Ms Slessor, grumbling that he would never find anyone else mug enough to take it. Wait for a Scottish accent, I helpfully suggested, or maybe an Australian, as Clydesdale belongs to the National Australia Bank Group.


Scottish banknotes are among the more exotic flora of the monetary landscape in England. (Not the most exotic — try passing a Manx fiver in your local Slug and Lettuce.) But a new survey of money and credit through history reminds us that there have been thousands of ways of storing value, many of which have proved illusory, and have cost dear those who believed in them. It also demonstrates that modern finance is not so modern as we think: most of the complex instruments that make the City and Wall Street rich today have their roots long in the past.


The most basic test of a financial instrument — confidence in it as a promise to pay — will be met by a Clydesdale tenner. But there are three other principles on which our financial system is based. The first is what theorists call intertemporal value transfer — what you and I call loans — that allow the long and the short to transact with each other. The second we might call contingent claims, in which one side of the contract pays the other depending on the outcome of some event. These include straightforward gambles, futures and options, but also insurance policies, whether life or general.


The third key principle is negotiability, in other words the ability to buy and sell financial contracts after they have been agreed. If I lend you money for five years, but then find I need it back earlier, I can sell the promise to someone else, perhaps at a discount, in return for cash today. Your obligations are thereby transferred, usually without your permission.


These three fundamental principles underlie most of what goes on in financial markets today. The language may sound different, but the underlying economics are the same. The principles seem simple, but they all depend heavily on respect for property rights, and on trust. In many societies these essential underpinnings have been lacking. Where that is so, the financial system remains underdeveloped, with damaging consequences for economic growth and prosperity.


The Chinese play a crucial role in the story. The earliest financial contracts for which we have reliable records date from the Zhou period, beginning around 1000BC. (It is a nice irony that now China has once again assumed a crucial role in global finance, three millennia later, the central bank governor is a Zhou.) The Chinese invented paper money and, even more importantly, what we now term fiat money — notes that have value because the Government says so, rather than because they are backed with explicit quantities of precious metal. Yet, after 400 years of use, the Chinese abandoned paper money in the 15th century, with immensely damaging consequences for their development.


In the early modern period the West took up the cause of financial innovation, most notably the Dutch, whose claim to have invented the joint stock company is the strongest. The Dutch East India Company was the first major limited liability venture. The British followed close behind, and from 1694 the Bank of England played a crucial role in overseeing the London market. Playing host to an increasingly flourishing capital market proved to be a decisive advantage for the Government, not least in allowing it to finance successful wars.


One key characteristic of financial innovation is mobility. There are few durable patents in financial markets. So the tables were quickly turned on the British Empire when the American colonies, with French assistance, resorted to imaginative debt issues to finance their War of Independence. The rebels sold a remarkable range of instruments in an effort to appeal to risk-seeking investors. Some were linked to the price of tobacco, others were essentially lottery tickets, still others were “tontines”, a kind of life insurance where the last survivor scoops the pool. At difficult moments, when the redcoats were on top, American debt traded as low as five cents in the dollar. Later, the new government redeemed it at par, creating confidence in one of the two underpinnings of the US capital market today: the Treasury Bill.


The other, of course, is the New York Stock Exchange, built on the back of the Buttonwood Agreement, a deal struck between the market brokers in 1792 to fix commissions and implement a closed shop. An anti-competitive arrangement of that kind would now be outlawed almost everywhere, outside Cuba and North Korea, but it served the US well for 150 years.


The Origins of Value, written by a star-studded cast of economic historians, rightly emphasises the elements of continuity in financial markets. But we are left with an uncomfortable question. Have financial markets now become detached from the real economy that they are supposed to serve? Can we make sense of the massive escalation in the scale of financial transactions? In the US and the UK, financial assets now total more than 400 per cent of GDP. Across the world they are growing about twice as rapidly as the economy as a whole.


Are we heading for another crash, like the South Sea Bubble, John Law’s Mississippi scheme or Leopold’s Congo adventure, fascinatingly described here, with pretty pictures of defunct bonds decorated with non-existent cities and railway engines? In one sense, we must hope not, but in another we should expect disappointment, and even welcome it. Markets are prone to irrational exuberance, to coin a phrase, and have always been so. They allow optimists to pursue their dreams with funds provided by their more cautious counterparts. Without such a mechanism, we depend on the chance coincidence of enterprise and wealth, and our growth potential is thereby much reduced.


In another context, Gordon Brown often likes to say that the Government has done away with “boom and bust”. In financial markets, he is unlikely to have succeeded, and in the long run we would suffer if he did.



Edited by William N. Goetzman and K. Geert Rouwenhorst

OUP, £30; 404pp

£27 (free p&p) 0870 1608080


From the Magazine | Time Bonus Section October 2005: Global Business

Really Old Money


Posted Sunday, Sep. 18, 2005
The year was 1262, and the glorious city-state of Venice was enmeshed in a vicious naval campaign against the emperor of Byzantium and his Genovese allies. The Venetian government needed money, so the Great Council drafted the Ligatio pecuniae. The decree guaranteed 5% interest on money lent to the city-state for its war. The Venetians prevailed and, in the process, established the precursor to the system of borrowing on which every modern government relies. Without it, we wouldn't have deficit financing, Treasury bills or Alan Greenspan.

That is just one of the stories colorfully told and illustrated in The Origins of Value (Oxford), edited by William N. Goetzmann and K. Geert Rouwenhorst. The two economic historians turn what could have been a bone-dry survey of arcane financial instruments into a lively history of finance. Even more improbably, the book is gorgeous. You can see the crimson illumination on the Ligatio pecuniae and read the fine print on a futures contract from the Dutch West India Co. Each chapter is a minihistory written by stars like Niall Ferguson and Robert Shiller, who explain in rich prose the connections between Chinese pawnshops, Greek moneylenders and, ultimately, the cash in your pocket. --By Jyoti Thottam


From the Sep. 26, 2005 issue of TIME magazine


The Origins of Value: The Financial Innovations that Created Modern Capital Markets. Edited by William N. Goetzmann and K. Geert Rouwenhorst. Oxford University Press; 416 pages; $50 and £30

An academic history of the development of financial markets, from the invention of interest and Roman shares to 20th-century bonds, this book has more attractive pictures than mind-boggling equations. Possibly the first book designed expressly for Wall Street coffee tables.


Geld und Mehr

Geld und Mehr

BÜCHER & THESEN / 4000 Jahre Geldanlage

239 words

1 January 2006

Frankfurter Allgemeine Sonntagszeitung



All rights reserved. Copyright Frankfurter Allgemeine Zeitung GmbH, Frankfurt am Main

Von der Einführung der Zinsen in Mesopotamien weit vor Christi Geburt, über die Erfindung des Papiergeldes in China, bis zur Entstehung von Investmentfonds und anderen modernen Finanzprodukten im 20. Jahrhundert: "The Origins of Value" beschreibt, wie Finanzinnovationen in den vergangenen 4000 Jahren die Welt verändert haben.

Der Leser erfährt, warum Kredite, Zinsen, Aktien, Anleihen oder Börsen entstanden sind. Er lernt zum Beispiel, wie im antiken Rom eine frühe Form des Aktieninvestments entwickelt wurde und was es mit dem ersten weltumspannenden Unternehmen auf sich hatte, der Dutch East India Company, die von Europa aus Asien eroberte. Neugierige entdecken, wie in Amsterdam der Handel mit Optionen und Futures zum Blühen kam und warum die Rothschilds nach dem Ende des Napoleonischen Krieges zwischen England und Frankreich die ersten Eurobonds auf den Markt brachten.

Geschrieben ist all das von wohlbekannten Ökonomen wie Robert Shiller, Niall Ferguson oder Valerie Hansen - auf Englisch. Und präsentiert wird es nicht als Paperback, sondern in einem dicken, schön ausgestatteten Bildband. Allen, die an Finanzgeschichte schon länger interessiert sind, wird der Band wenig aufregende Erkenntnisse bieten. Dafür macht er sich auf jedem Beistelltisch im Vorzimmer eines Vermögensverwalters oder Investmentbankers ganz prächtig.


William N. Goetzmann und K. Geert Rouwenhorst: The Origins of Value, Oxford University Press 2005, 416 Seiten, Preis: 50 Dollar oder rund 47 Euro

All rights reserved. (c) F.A.Z. GmbH, Frankfurt am Main

The Best Books of 2005

Barron's, 5 December 2005, 1228 words, By Jay Palmer, (English)

Business books can, of course, be things of beauty. The Origins of Value (Oxford, $50), edited by William Goetzmann and Geert Rouwenhorst, would be a nice addition to any investor's coffee table. Large and lavishly illustrated, it's a collection of essays by leading scholars on everything from the invention of interest in ancient Samaria to bonds in early America.



A globe-trotting history of modern finance BOOK REVIEW THE ORIGINS OF VALUE: Stephen Fidler on an edifying account of financial markets, from pawnshops in seventh-century China to the first stock exchange in Holland.


866 words

27 December 2005

Financial Times

London Ed1

Page 8


(c) 2005 The Financial Times Limited. All rights reserved

Loans, bets and trades. These three words, more or less, encapsulate all transactions in the world's financial markets. Raw computing power in the past 20 years has pushed modern finance to levels of sophistication that make it hard for laymen to grasp. But understand these building blocks and you understand, at root, what financial markets are about.

Academics like to use posher words for these three ideas. Loans are a mechanism for allowing an intertemporal transfer of value, a procedure first recorded in written loan contracts in Mesopotamia, present-day Iraq, about 3,000 years ago.

Bets are contingent claims in which one side pays the other depending on the outcome of a future event. They also seem to have emerged in Mesopotamia but were developed in 17th-century Holland, where a market developed in options on shares. Insurance and all types of risk hedging are, in essence, bets.

Trades, which allow the transfers of financial claims, are the key to financial markets. True negotiability was evident in China in the 11th century in the development of paper money, an experiment that lasted 400 years and that failed only as financial markets were developing in Europe.

This academic but beautifully produced and revealing book casts light on where, when and why these concepts first emerged and how they developed.

Consider interest, for example, an extraordinary and hardly self-evident innovation, mistrusted throughout history. According to Aristotle: "The most hated sort (of wealth) and with the greatest reason is usury."

Its development in the ancient Middle East is associated with a loss of self-sufficiency by individualsas labour specialisation occurred with the emergence of crafts. The need for exchange that resulted spurred not only credit but the first recorded writing.

The book does not argue that concepts developed in one place necessarily influenced the subsequent development of similar financial instruments. But it roams around the world from China - where pawnshops, noted in the seventh century, were almost the only private financial institutions before the 19th century - to Italy, where the beginnings of modern state finance emerged, and beyond to the US and Africa.

The raising of money from the citizens of the Italian cities of Venice, Florence and Genoa - mainly through irredeemable forced loans - allowed governments to convert private wealth into military power and thereby expand their territory. These governments were raising money at rates of 5 to 7 per cent a year, while the European monarchies were compelled to borrow at much higher rates.

The importance of developments in the Netherlands in the 17th century is deservedly emphasised. One chapter shows how the foundation of the first joint stock company in 1602, the Dutch East India Company, developed out of earlier methods of financing single voyages. It also explains how this spawned the development of a secondary market in corporate securities - the first modern stock exchange.

These innovations found their way across the English Channel with William III, Prince of Orange, who assumed the English throne in 1688. Accompanying him was a group of brokers, dealers and speculators who then adapted and improved the Dutch innovations to finance Britain's growing empire.

In doing so, they created the City of London.

The authors have also uncovered some fascinating historical footnotes, including a financial instrument that has been paying interest since it was issued in the 17th century: the oldest live security in the modern capital markets.

That perpetual security was a bond issued by one of Holland's many water boards, responsible for a 33.5km stretch of dyke. It has paid interest in Carolus guilders, Flemish pounds, guilders and now, since one of the authors presented the coupons to a successor company, in euros.

The book also describes how speculators moved in to benefit from anomalies that emerged in the market for annuities in the 1830s - which the British government used to finance itself. In return for an up-front sum, the government would pay an annual amount until the person specified in the contract died.

At age 90, life expectancy was so short that about two-thirds of an annuity's purchase price was repaid every year.

As a result, speculators scoured the countryside looking for hearty 90-year-olds, who found themselves suddenly the subject of unusual and unexpected attention and often the best medical care. In 1834, the government ended the anomaly, putting an upper age limit of 80 on annuities.

I must, however, quibble with the eminent historian Niall Ferguson. He claims to have found the first eurobonds, issued by Russia more than 140 years before the 1963 bonds by Autostrade, the Italian motorway concern, that usually claim that distinction.

But Ferguson has his definitions wrong: the eurobond was innovative because it was issued by a foreign borrower in a currency other than the currency of the country in which it is issued. Ferguson's Russian bonds, raised by Rothschilds, were sterling-denominated foreign bonds


The Best Books of 2005

By Jay Palmer

1228 words

5 December 2005




(c) 2005 Dow Jones & Company, Inc.

Throughout the year, oil prices have been blamed for practically every twitch of the stock market. But if you really want to worry, turn to Twilight in the Desert (Wiley, $24.95) by the provocative Matt Simmons, an investment banker to the energy industry. He suggests there is worse to come -- that Saudi Arabia is about to run out of oil and that in fact the country's leaders have known this for years but are deliberately distorting the facts.

DisneyWar (Simon & Schuster, $29.95), by noted business writer James Stewart, is an anecdote-filled tale of the corporate battle between Disney's former chief executive, Michael Eisner, and, among others, the founder's nephew Roy Disney. The stories of angst, egos and stress speak volumes about life in America's executive suites.

The entertainment industry, of course, is endlessly entertaining. The Big Picture (Random House, $25.95), by Edward Jay Epstein, tells how Hollywood really works. Ranging from the early days of the studio-system under the likes of Louis B. Mayer up to today, Epstein shows how stars like Brad Pitt and Nicole Kidman now make more than the studios, whose earnings come less from ticket sales than from movie tie-ins like toys and DVDs.

An earlier era of U.S. mega-moguls comes to life in Charles Morris' The Tycoons (Times Books, $28), a look at Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan. The quartet, our reviewer noted, "were like four midwives who helped deliver the baby [the American super-economy] and then fought over it, each grabbing hold of an arm or a leg and yanking with all of his might."

Some of the books from 2005 could help investors make some real dough. Just published and receiving much buzz, The Little Book That Beats the Market (Wiley, $19.95) by hedge-fund manager and Columbia Business School professor, Joel Greenblatt, offers elegantly simple advice for both children and accomplished investors. The focus: buying good companies (those with high returns on capital) at bargain prices (compared with earnings).

Wharton professor Jeremy Siegel warns against "the constant pursuit of growth" in The Future for Investors (Crown Business, $27.50). He recommends that investors buy stocks with sustainable cash flows and dividend payouts and recognize the economic power shifts from the West to China, India and the developing world.

In Unconventional Success (Free Press, $27.50), David Swensen, Yale's chief investment officer, delivers what our reviewer called "a devastating critique of investment firms that hypocritically prattle about putting their clients' interests first." Swensen says individuals would be best off with an indexed portfolio, spread over the core asset classes.

There are always other approaches. Fortune's Formula (Hill and Wang, $27), by William Poundstone, is the tale of how physicists from Bell Labs developed a formula for gambling based on probability theory. After meeting with wild success in Las Vegas, the gamblers turned to Wall Street. Their Princeton-Newport Partners hedge fund did make money with the plan -- until the firm was shut down for stock-parking practices and insider-trading problems.

The unsavory side of brokerage-house research gets a full airing in Blood on the Street (Free Press, $26) by former Wall Street Journal reporter Charles Gasparino. It details how corrupt research proliferated during the dot-com boom. Although the boundless optimism of that era has faded, the lessons are well worth remembering.

Kurt Eichenwald's Conspiracy of Fools (Broadway, $26) takes a fresh approach to another scandal of the bubble era: Enron. Written, according to our reviewer, "in the manner of a breezy crypto-thriller and told from the viewpoint of a fly on the wall," the book follows the rise and fall of the company in gory detail.

John Bogle, founder of the Vanguard mutual-funds group, launches a personal crusade against all that he sees as wrong in business and finance in The Battle for the Soul of Capitalism (Yale, $25). Among his targets: inflated corporate pay, the shaky state of the U.S. pension scene and too great an emphasis on the short term. He even suggests a high tax on short-term trading gains.

Plenty of others on Wall Street also have opinions. In What Goes Up (Little Brown, $27.95), author Eric Weiner stitches together interviews with 173 men and women of the Street. They speak out, our reviewer wrote, "on everything from Mayday (the end of fixed commissions) and Black Monday to LBO orgies, M&A mania, Milken's milkings, the collapsing of Long-Term Capital Management, crusading Spitzer and grabby Grasso."

Business books can, of course, be things of beauty. The Origins of Value (Oxford, $50), edited by William Goetzmann and Geert Rouwenhorst, would be a nice addition to any investor's coffee table. Large and lavishly illustrated, it's a collection of essays by leading scholars on everything from the invention of interest in ancient Samaria to bonds in early America.

What were 2005's big ideas? Jared Diamond's Collapse (Viking, $29.95) looks at why some societies fail (Easter Island, the Mayan civilization and Viking Greenland) while others succeed. It's a thoughtful context for investors and other citizens of Earth.

Simon Winchester's A Crack in the Edge of the World (Harper Collins, $27.95) looks at the repercussions of the Great California Earthquake of 1906. Along the way, it delves into the geological forces that created the Asian tsunami and that still threaten not only California but also the huge section of middle-America south of St. Louis -- areas along the New Madrid fault.

The World Is Flat (Farrar, Straus, $27.50), by New York Times Pulitzer Prize-winner Thomas Friedman, examines the trends bringing tech innovation, foreign investment and capital flows to the Third World. But if the Third World is to become capitalist, first it needs help, and that's the thesis of Jeffrey Sachs' The End of Poverty (Penguin Press, $27.95). The Columbia University economist lays out a plan to eliminate extreme world poverty within 20 years.

One Billion Customers (Free Press, $27), by James McGregor, zeros in on the ultimate developing market, China. A former Wall Street Journal China bureau chief, McGregor argues that the transition from the Cultural Revolution and the subsequent scramble for capitalistic wealth has scarred China and left it in desperate need of overcoming lingering barriers to growth. Some advice to Western firms entering China: "Assume your procurement department is corrupt until proven innocent."

Few subjects divide Americans more than genetic manipulation -- from cloning and stem cells to modifed foods. Gina Smith's The Genomics Age (Amacom, $24) paints what our reviewer called "an enjoyable, easy-reading picture of the science for the nonscientist."

Luckily, there is always wine. And in this world, no one, absolutely no one, has had more impact on drinking and buying habits than Robert Parker. In The Emperor of Wine (Ecco, $25.95), Elin McCoy explains how Parker became so important that he can ruin a vineyard with a wine rating and influence what kinds of wines are made.

Let's raise a glass to the books of 2005.


Copyright 2005 TSL Education Limited  
The Times Higher Education Supplement

December 16, 2005



SECTION: BOOKS; No.1722; Pg.22

LENGTH: 1587 words

HEADLINE: Flying Cash Was Start Of Easy Money

BYLINE: Christopher Ondaatje

The Origins of Value: The Financial Innovations that Created Modern Capital Markets Edited by William N. Goetzmann and K. Geert Rouwenhorst Oxford University Press 403pp, Pounds 30.00 ISBN 0 19 517571 9

This volume, edited by two professors of finance at the Yale School of Management, is an all-embracing historical survey of the financial innovations that have changed the world. The 21 essays by a distinguished and adventurous group of historians and economists trace the "origins of value" from its beginnings in the
Near East some 5,000 years ago. The book provides startling information about how the invention of interest in ancient Mesopotamia and of paper money in China much later led eventually to today's financial tools - stocks, bonds, mortgages, cheques, mutual funds and so on - and to the creation of corporations such as the Dutch East India Company and institutions such as the New York Stock Exchange. Rather than being a comprehensive history of corporate finance, The Origins of Value consists of analyses of particular episodes in financial history that reveal much about modern financial instruments.

Innovations in finance have been based on surprisingly few basic principles. The editors single out three: "The intertemporal transfer of value through time, the ability to contract on future outcomes and the negotiability of claims." These principles underlie every essay. The simplest financial instrument is an intertemporal transfer of value - that is, a loan with interest payable by the borrower to the lender. The editors remind us that "civilisation has had an ambiguous attitude towards lending and interest". The Roman Catholic Church discouraged the use of interest during the 13th and 14th centuries, and Islam still discourages usury.

The first essay, by Marc van de Mieroop, a historian of the ancient Near East, concerns "The invention of interest". The earliest financial contracts appear to have been in the form of clay balls called bullae.

These hollow envelopes contained small clay tokens that represented some type of economic agreement. Signs impressed into the "envelope" represented the tokens sealed inside and prevented anyone from tampering with the contents of a bulla. By about 1800BC, Babylonians were using clay tablets with loan contracts written in cuneiform script and fired so as to form a permanent record of an agreement. Babylonians used a sophisticated arithmetic based on a sexagesimal system of numerals, which made ratios and multiples easy to calculate. Tablets from the old Babylonian period question, for example, how long it would take for a unit of silver to grow to 64 times its original value if the value doubled every five years - which corresponds to a 20 per cent annual interest rate that compounds every five years.

Comparable examples from
China are discussed by Valerie Hansen and Ana Mata-Fink. Chinese financial contracts go back to the Zhon period (1027-221BC), when they were written on bronze vessels. Retail loans found at Changan on the Silk Road dating from the Han Dynasty (206BC-220AD) may be the first use of portable assets as security for a loan. As for the second foundational principle of finance, the ability to contract on future outcomes, a classic example would be life insurance. Oscar Gelderblom and Joost Jonker document the development of modern futures trading and options trading in Amsterdam in the period 1550-1650 and reveal that the early Dutch options are the precursor of today's markets in derivatives.

Negotiability of claims, the third principle, is a defining characteristic of a capital market such as the New York Stock Exchange. As the editors note, although "negotiability does not make finance, it makes it easier".

Essays by Ned Downing and by Richard Sylla explain how historical forces shaped the liquidity of this powerful institution.

The first application of negotiability, however, was in
China, where it reached its most dramatic expression in the early 11th century AD with the invention of paper money by the Song Dynasty after the Tang Dynasty fell in 907AD. Before this, the Chinese had used bronze coins for currency rather than precious metals such as gold and silver, which were used in the Mediterranean and in the Near East. The Chinese could do this because of the Chinese state's overriding dominance of the economy.

As Richard von Glahn explains in an illuminating essay (which the editors dub "the first truly comprehensive study of the development of paper money in China"), unlike in the West: "Chinese monetary thought and policy was predicated on enabling the ruler to overcome the vicissitudes of dearth and plenty and to provide for the material needs of his subjectsI by tightly controlling the supply of money to ensure stable prices and ample supplies of goods." Chinese philosophers and statesmen always asserted that "money is an artefact of the supreme ruling authority". They believed that it was the ruler's stamp and not the intrinsic value of the monetary medium that conferred value. With such a belief among the rulers, it is not surprising that paper money should emerge.

The idea came about like this. The Tang Government had used bronze coins, but when bronze became scarce it introduced an iron coinage, too. The inconvenience of transporting this coinage led the Tang rulers to create depositories at their imperial capital where merchants could deposit coins in return for promissory notes known as feiqian ("flying cash") redeemable in provincial capitals. The Song Dynasty continued this practice. These "exchange bills" gained significant credibility. In 1005, the Prefect of Chengdu, Zhang Yong, undertook strategic reforms to try to stabilise the monetary system and regulate what had become a de facto paper currency.

Technological innovations in paper-making and printing also helped the advance of paper money. The experiment lasted more than 400 years.

Other chapters detail the development of the first modern corporation, the Dutch East India Company, which in 1602 provided a novel mechanism for financing the exploration and commercial expansion of European business ventures around the globe; and the earliest mutual funds, which were developed in
Holland after the financial crisis of 1772-73. The Dutch also created a market for Russian debt by subscribing directly to loans and issuing loan-backed bonds themselves; the same bankers repackaged the early loans of the young US in the late 18th century. In 1818, the House of Rothschild issued the first "Eurobonds", in which its loan to Prussia was underwritten by allowing the country to repay the loan in a currency not its own. There is discussion, too, of King Leopold of Belgium, who took corporate finance to its most inhuman extent by turning the Congo into a privately held corporation at the end of the 19th century.

All this history makes for fascinating reading and provides a good grounding for understanding the creation of corporate capitalism - the defining economic institution of the 20th century. Its growth in the early part of the century culminated in the first age of globalisation.

So what lessons can we learn? In one of the later essays,
Robert Shiller writes about the invention of inflation-indexed bonds in early America. A modern example of this is Fannie Mae, the mortgage insurance agency. I was particularly interested in this essay because Shiller, a professor of economics at Yale, wrote Irrational Exuberance, in which he warned of the 2000 stock market collapse, and then, in a recently revised edition, of a significantly overpriced housing market likely to collapse in much the same way as the late 1990s stock market bubble.

His clinical and daunting study of the psychological origins of volatility in financial markets also warns us of the extraordinary growth in the mutual funds industry. The disappearance of the individual stockholder as the backbone of the
US stock market has been one of the least recognised but most profound economic trends of the past half century. Direct ownership of stock by US households has declined from 91 per cent in 1950 to just 32 per cent today. The 9 per cent ownership in 1950 by financial institutions, such as mutual funds, crossed the 50 per cent mark in 1983, and now stands at 68 per cent of all stocks. This is a dangerous concentration of ownership, and it is hard to imagine that an economy dominated by individual stock ownership will ever return.

Although Shiller's recent unnerving warnings do not belong in The Origins of Value, they cannot be ignored. As the editors note: "Innovations in the modern world of finance have come to be almost expected, financial instruments spring from the minds of investment bankers almost overnight, and then are analysed, valued, traded, saved and hedged themselves - sometimes to be replaced by new financial instruments, and other times to be part of the permanent toolkit of financial engineers and investors."

The incredible ability of human beings to create has now reached frightening levels. It seems almost inevitable that such innovation must lead to abuse and self-destruction. If it achieves nothing else, this remarkable book gives us an invaluable historical perspective on a terrifying age of financial revolution.

Christopher Ondaatje retired in 1988 after some three decades as an investment banker and became a philanthropist and author. His latest book is Woolf in