All we need is a little finance


The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Aditya Soni, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur


Too many people have too little an idea about finance. Why would they? The fact that it could not even find a place in our schools’ syllabus is enough to tell us about the importance we give to a tool everyone is sure to be affected by. A result of this neglect is blind criticism. Because people have little knowledge about finance it is often seen as a devil’s lair. Bubbles and busts, scandals, frauds, recession – the reasons to hate finance are many. Work in Goldman Sachs and the world promptly labels you as greedy, unconscionable and even promiscuous. I wonder why no one hates physics. After all, did it not lead to the invention of nuclear bomb?

The point is, few people realize that our lives have been made so easy as a result of some brilliant financial innovations. Imagine if no one had come up with the idea of a common paper currency. We would still be struggling with the barter system, stuck in the stone ages for an eternity. So where did the idea of paper currency come from? No, it was neither some brilliant economist nor a powerful king. As all financial tools have, this too had its birth amidst the common folk. Remember the time when gold was used as a measure of value? To buy anything you needed some set amount of gold coins. The problem was that there was no secure place to store the gold and as a result, theft was rampant. As a result, people sought to keep their gold with the goldsmith, who had a strong and reliable safe. The goldsmith, in turn issued a ‘receipt’ which could be shown later to withdraw the gold. The line scripted on that piece of paper still lives with us today- “I promise to pay the bearer the sum of x Rupees”

Imagine if lending was never invented. No one could buy a house or start a business if they did not have the required resources beforehand. Historical records tell us that Cattle were often lent to other members of the family and society. But why would people give away their wealth for others to use? For goodwill, initially. However, the creditors soon realized that the cattle were multiplying and the offspring were kept by the debtors themselves. It seemed almost as if a cost was being levied on the creditors for doing good. Therefore, now if someone lent 10 cattle, he wanted more than that after a fixed time period. This lead to the birth of interest rates.

In the 17th century, another innovation in Amsterdam, Netherlands changed the world as we know it. World’s first stock exchange, the Amsterdam Stock Exchange was founded in 1602 with the Dutch East India Company becoming the first to issue stock. The consequence of this innovation was that companies could now raise more capital than ever before which enabled them to operate at never-before-seen scales. The era of multinational behemoths had begun. People could now own a part of a company and have a share in its profits. They began to trade the piece of paper certifying their share in the company with each other and it gave rise to the price of that share. The price would go up and down with the performance of the company because that decided how much profits the shareholders were going to get. Soon, everyone in Europe realized the power of the stock market. The Dutch East India Company (traded as VOC) became the largest trading company in the world with a fleet of 4,785 ships. In contrast, its nearest competitor the British East India Company had only 2,690 ships and a mere one-fifth the tonnage capacity as VOC. The shareholders too made a killing as VOC paid an annual dividend of 18% for almost 200 years!

There are a number of other innovations in finance which have changed our lives for good- insurance, limited liability, futures and options, etc. These are just some examples of how wonderful inventions in finance are and how they have shaped the journey of mankind.

Now the question arises that aren’t these very innovations responsible for creating all the financial crises we faced? Let me ask a different question. Were the Wright brothers evil and wrong in inventing the airplane when MH370 happened? The point is, we cannot isolate the good from the bad. We need to take a holistic view and strive to make the system better. Will there ever be a perfect financial system? Of-course not, because finance is all about people and people are complex. As we evolve, so will finance and we need to ensure that it happens. So the next time you see a Goldman banker, think before you label her greedy or materialistic. She might be changing the world!