Consider the following statement:
“The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.”
Can you hazard a guess on when this warning was uttered and who made these dire predictions?
These statements were actually made more than 2,000 years ago by Roman author, orator, and politician Cicero in 55 BC. Economic history has a habit of repeating itself, because money (or at least the concept of the necessity for some tangible system of exchange to gauge value) is embedded in our DNA.
Was Cicero’s assessment accurate? Such statements could easily be attributed to any number of politicians and pundits today (most likely from the Grand Old Party). However, we know there are certainly opposing viewpoints.
Whether it is Cicero or Fox News, regardless when such statements are made, they reflect that there is a distinct psychological component to our perception of our collective economic state. Here, Cicero offers an alarmist’s view that plays upon the insecurities of the populace. One wonders if there was an ancient liberal-leaning opponent that countered Cicero, yet is lost to time.
Power, control, survival, conquest, subservience, corruption—these are just some of the elements that have defined the human experience since our beginning. And, the psychology of the money and the mind has always been at the nexus of the development of finance, economics, and commerce.
Looking at the history of finance through a psychological lens can provide the financial professional with a better understanding of why markets behave the way they do.
KNOWLEDGE OF MONEY IS POWER
Addressing an intellectual and/or historical vacuum is good business. You are part of something bigger, so you need to develop a knowledge base of money history and economic theory, as well as awareness of the world and history affirm your identity and place in a very interesting and exciting industry.
This will not only add meaning to one’s life, it also impresses clients. Knowledge is power and understanding things outside oneself can only help in sharpening one’s mission. Awareness of economic history yields better understanding of market trends, and better awareness of what products sell and what people need.
Clients like and prefer interesting bankers, brokers, money managers. It is not always just all about the money for clients. They want someone with a pulse, someone with a heart and brain, someone they can get to know, respect, and trust. Boring never inspires.
Knowledge, understanding, and awareness of the past also enable one to understand the future and at times even predict events. These skill sets are very important. Clients want to like, admire, respect, aggrandize, be-in-awe-of their financial professional. These are all too human reactions which pervade all of our lives.
A SELECTIVE HISTORY OF OUR RELATIONSHIP WITH MONEY
To truly understand the symbiotic connection between money and the mind, it is essential to know from whence it came and how it developed as an integral component of the human experience.
However, I am not going to delve too deeply here into a comprehensive history of the development commerce. Instead, allow me to present my interpretation of key milestones, highlighting what I feel are relevant psychological factors.
I am convinced the financial professional needs grounding in such historical/psychological relevance. It is not only the actual milestones that warrant recollection, but also what these momentous developments meant psychologically to our culture.
With each milestone, consider the impact on the collective consciousness. The evolution of commerce and banking was not only a product of the evolution of humanity, but it actually was the central facilitator for progress. It is an ugly, cruel history, marked by inhumanity, greed, exploitation, violence, death, and destruction.
Nonetheless, it is our history. And, virtually every thread woven into this grand tapestry has in some manner; either directly or indirectly, influenced all of us today.
When considering each milestone I provide, think of the way in which these developments dramatically altered everyday life.
Money has always been the main engine for civilization’s growth and progress. Tracing the trajectory of world culture, banking practices originally began in Asia, extended into Europe and then to the Americas, Australia, Africa, and on to even the most remote countries of the world.
Development of cohesive societies varied greatly in different parts of the world, though they all had at least one common denominator—some form of money to facilitate commercial relationships. Now, let us explore some developments and ascertain the psychological ramifications.
THE STIGMA OF USURY
Consider the concept of money lending, perhaps the greatest engine for growth ever conceived.
As far back as the ancient Sumerians and Greeks, the borrowing of goods in exchange for a return enhanced by a premium was practiced, as they lent each other cows that were later given back along with a new calf, as payback, after the birthing season. In fact the word for interest and calf was the same in these ancient cultures.
Ancient Babylonians spoke of charging excessive interest rates for the poor as early as 1800 B.C.
However, many cultures, especially theocracies guided by religious leaders, prohibited the practice of benefitting through the charging of interest.
For instance, the First Council of Nicaea in 775 forbade clergy from engaging in usury, which meant, at the time, interest of any kind, and the canon merely forbade the clergy to lend money on interest above one per cent per month. Later ecumenical councils applied this regulation to the laity.
It would take centuries for such prohibitions to be relaxed, as the image of the lecherous money lender was etched in the collective conscious. Here was an individual who did not produce physical commodities or provide any service beyond trading in providing credit.
For a culture where there were no checking accounts or credit cards, where you were measured on your ability to produce something
Tangible of value, the business of making money through lending was cast in a negative light.
THE CONSOLIDATION OF WEALTH & POWER
In the 1500s and early 1600s, exchange banks were formed in the Netherlands and in other parts of Italy to deal with currency exchange based on expanding trade. Privately owned financial institutions developed simultaneously with state-owned banks.
Subsequently, the great banking families of the 1600s and 1700s emerged in Europe: the Medicis, the Fuggers, and the Rothschilds.
When you study these families, you see they that they very effective at leveraging their wealth to dominate entire populations. They wielded this power to dominate all aspects of the culture, thorough cooperation or coercion. They were always revered for the power their money created.
This model created even greater systems of commerce, with even larger footprints to facilitate power and control on regional and eventually global scales.
THE EMERGENCE OF STOCK TRADING
In 1801, the formal name London Stock Exchange was granted. It was made up of 550 subscribers and 100 clerks. Stocks became known as funds allocated by a company or the government from its capital for the purposes of financial investment.
This was a quite a radical concept, as it was able to distribute value in a way that previous was not possible, and provided an even more robust means for growth.
Shares became known as equal parts into which a company’s stocks are divided for their purchase by an individual or another company, who then becomes a shareholder and is entitled to a proportion of the company’s profits. Ordinary shares became known as equities.
THE PROMINENCE OF “WALL STREET” IN OUR CULTURE
Money has also always been a component of man’s proclivity to wage war on his fellow man. War debts had been created and the shares of these banks plus treasury bonds issued under Alexander Hamilton were utilized to finance the war debts of the Continental Congress and the Colonies.
As a result, a supply of securities was created and the first securities exchange was formed in Philadelphia in 1790—and the precursor to the New York Stock Exchange was born.
This brings us to Wall Street, the epicenter of the relationship between money and the mind, named as such because it ran along a wall that had been built by the Dutch to protect New York.
At that point in time, Wall Street was also a popular place to buy and sell furs, tobacco, spices, molasses and gunpowder. It has come to symbolize so much more.
This small group revolutionized the country: like all markets, the stock exchange grew to meet the need of buyers and sellers of certain commodities to keep in close contact with each other. The sellers wanted to convert securities into money, and the buyers wanted to purchase particular securities.
Interestingly, at first securities represented money loaned to governments. With the huge rise of American business corporations in the 19th century, commercial securities came to dominate the volume of business transacted.
It costs more to buy a new car today in the United States than it cost Christopher Columbus to equip and undertake three voyages to and from the New World.
In 1776, a man who made $4,000 a year was considered very wealthy. A worker earning $5,000 per year in 1978 would be making an adjusted equivalent of nearly $5,000 an hour in 2078.
In 1914, the first year income tax was collected, Americans paid a per capita average tax of 41 cents, and only 1% of the population was obligated to pay taxes at all.
I hope this brief history lesson has served to skew your perception of market development, enough so you have a better understanding of why we are the way we are and we do the things we do.
Ultimately, because money is so intertwined in our culture, our proclivity for consumption has in turn consumed us on many levels. Understanding these historical cycles is the first step to extricating yourself from the equation.
As best you can, that is.