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.”
Would you hazard a guess at when this warning was uttered and by whom?
These statements were made over 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 necessity of gauging value by a tangible means of exchange – is embedded in our DNA.
A statement such as Cicero’s could easily be attributed to any number of modern-day politicians or pundits. What is important is that, whether it is Cicero or Fox News, regardless when such statements are made, they reflect a distinct psychological component to our perception of the 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 who countered Cicero, but whose words are lost to us.
Power, control, survival, conquest, subservience, corruption – these are some of the elements that have defined the human experience since our start as a species. Money and its representation in the mind (i.e. the psychology of money) has from time immemorial been at the nexus of these phenomena, influencing the propagation of commerce and the development of finance and progressively more complex economies.
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
Knowing the origins and understanding the trajectory of one’s industry not only adds meaning to one’s professional life, it also impresses clients. Awareness of economic history leads to a better understanding of market trends, a better awareness of what products sell and what people need.
Clients prefer interesting bankers, brokers, money managers. It isn’t always just 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.
Knowing what was leads to a better grasp of what could be, even what will be. Indeed, the ability to predict events, whether rooted in science or mysticism, is an important skill for an FP to have. Clients actually want to admire, respect, and be in awe of their financial professional. You just have to give them the chance to do it. So, let’s dive in.
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 and persisted as an integral component of the human experience.
We won’t be delving too deeply into a comprehensive history of commerce. Instead, allow me to present my interpretation of key events, highlighting what I feel are relevant psychological milestones. My experience shows that today’s financial professional needs a grounding in such a psychological history of money, and it is not only the actual milestones, but also what these momentous developments have meant to our culture, that warrant reflection. With each milestone, consider the impact on the collective consciousness. The evolution of commerce and banking was not simply a product of the evolution of humanity, but was rather the central facilitator of 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 contemplating each milestone I provide, I ask you to consider how these developments dramatically altered everyday life.
Money has always been the main engine for civilization’s growth and progress. Tracing its trajectory globally, we see that banking practices originally began in Asia, spread to Europe and then to the Americas, Australia, and Africa, and eventually reached even the most remote places in the world.
The development of cohesive societies varied greatly in different parts of the world, but it had at least one denominator in common – some form of money to facilitate commercial relationships. Now, let us explore select money-specific developments throughout history, and ascertain their 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. People lent each other cows that were given back after the birthing season along with a new calf. In fact the word for interest and calf was the same in these ancient cultures. The ancient Babylonians, for instance, were bringing up the charging of excessive interest rates when making loans to the poor as early as 1800 B.C.
At the same time, many cultures, especially theocracies guided by religious leaders, prohibited the practice of benefitting through the charging of interest. Convening in 325 A.D., the First Council of Nicaea forbade clergy to engage in usury, which at the time meant receiving interest of any kind, while the canon merely forbade the clergy to lend money at interest of over one percent monthly. Later ecumenical councils applied this regulation to the laity.
It would take centuries for such prohibitions to be relaxed; at the same time, the collective conscious became etched with the image of the lecherous money lender. Here was an individual who produced no physical commodities, provided no service beyond trading in the provision of credit. For a culture with no checking accounts or credit cards, in which you were measured on your ability to produce something of tangible value, the business of making money through lending was seen in a bad light.
The consolidation of wealth and power
In the 1500s and early 1600s, exchange banks were formed in the Netherlands and in parts of Italy in order to provide currency exchange, made necessary by expanding international trade. Privately owned financial institutions developed alongside state-owned banks. The great banking families of the 1600s and 1700s emerged in Europe: the de’ Medicis, the Fuggers, the Rothschilds.
When you study these families, you see they that they were very effective in leveraging their wealth to control entire populations. They wielded enormous power, dominating all aspects of culture, through cooperation or coercion, and were revered as well as feared for the power with which their money endowed them.
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 London Stock Exchange was formally instituted, with 550 subscribers and 100 clerks. Stocks were 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 was previously impossible, and provided an even more robust means for the economy’s 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. Common shares became known as equities.
The prominence of Wall Street in our culture
Money has also always been a component of man’s proclivity for waging war on his fellow man. As the expenses of waging the Revolutionary War grew, banks’ shares 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 – the precursor to the New York Stock Exchange – was formed in Philadelphia in 1790.
This brings us to Wall Street, so named because it ran along a wall that had been built by the Dutch to fortify New Amsterdam. In those times, 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, becoming the epicenter of global finance and, for our purposes – the crux of the relationship between money and the mind.
The fledgling stock exchange grew to meet the needs 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. It was only in the 19th century, with the rise of American business corporations, that commercial securities came to dominate the volume of business transacted.
It costs more today to buy a new car in the US 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 outrageously wealthy 1. In 1914, the first year income tax was collected, Americans paid a per capita 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 inform 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 such an integral part of our culture, our proclivity for consumption has in turn consumed us on many levels. Understanding how this happened is the first step to extricating yourself from this particular matrix.
As best you can, that is.
1A worker earning $4 000 per year in 1916 would be making an adjusted equivalent of $92 000 in 2016 money, but someone with a $4 000 salary in 1976 would be pulling in a paltry $17 000 today.