Money. Money? Money! (V)

In trying to cover the history of finance from ancient Mesopotamia to modem microfinance, I have set myself an impossible task, no doubt. Much must be omitted in the interests of brevity and simplicity. Yet the attempt seems worth making if it can bring the modern financial system into sharper focus in the mind's eye
of the general reader.

I myself have learned a great deal in writing these articles, but three insights in particular stand out. The first is that poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channelled from the idle rich to the industrious poor. This point applies not just to the poor countries of the world. It can also be said of the poorest neighbourhoods in supposedly developed countries - the 'Africas within' - like the housing estates of my birthplace, Glasgow, where some people are scraping by on just £6 a day, for everything from toothpaste to transport, but where the interest rates charged by local loan sharks can be over eleven million per cent a year.



My second great realization has to do with equality and its absence. If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. As we are learning from a growing volume of research in the field of behavioural finance, money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility. But finance also exaggerates the differences between us, enriching the lucky and the smart, impoverishing the unlucky and not-so-smart. Financial globalization means that, after more than three hundred years of divergence, the world can no longer be divided neatly into rich developed countries and poor less-developed countries. The more integrated the world's financial markets become, the greater the opportunities for financially knowledgeable people wherever they live - and the bigger the risk of downward mobility for the financially illiterate. It emphatically is not a flat world in terms of overall income distribution, simply because the returns on capital have soared relative to the returns on unskilled and semi-skilled labour.

The rewards for 'getting it' have never been so immense. And the penalties for financial ignorance have never been so stiff. Finally, I have come to understand that few things are harder to predict accurately than the timing and magnitude of financial crises, because the financial system is so genuinely complex and so many of the relationships within it are non-linear, even chaotic.

The ascent of money has never been smooth, and each new challenge elicits a new response from the bankers and their ilk.

Like an Andean horizon, the history of finance is not a smooth upward curve but a series of jagged and irregular peaks and valleys. Or, to vary the metaphor, financial history looks like a classic case of evolution in action, albeit in a much tighter timeframe than evolution in the natural world. 'Just as some species become extinct in nature,' remarked US Assistant Secretary of the Treasury Anthony W. Ryan before Congress in September 2007, 'some new financing techniques may prove to be less successful than others.' Such Darwinian language seems remarkably apposite as I write.

Are we on the brink of a 'great dying' in the financial world - one of those mass extinctions of species that have occurred periodically, like the end-Cambrian extinction that killed off 90 per cent of Earth's species, or the Cretaceous-Tertiary catastrophe that wiped out the dinosaurs? It is a scenario that many biologists have reason to fear, as man-made climate change wreaks havoc with natural habitats around the globe. But a great
dying of financial institutions is also a scenario that we should worry about, as another man-made disaster works its way slowly and painfully through the global financial system.

For all these reasons, then - whether you are struggling to make ends meet or striving to be a master of the universe - it has never been more necessary to understand the ascent of money than it is today. If this book helps to break down that dangerous barrier which has arisen between financial knowledge and other kinds of knowledge, then I shall not have toiled in vain.