On Babylonia, Pangali, Fibonacci, and paper money

This week’s learning is part 1 of an extensive 12 part series on The Ascent of Money by Niall Ferguson. Even though money and finance play a huge role in our lives, I didn’t really know much about financial history or understand the key building blocks of the global financial system. This is my attempt at synthesizing Niall Ferguson’s excellent book. I hope you find it as useful and as fascinating as I did.

We begin with the most obvious financial instrument – cash. Records of paper money first existed in Babylonia and the concept of interest is believed to have stemmed from the natural gain in livestock (a farmer’s cows gave birth..) over a period of time.

Europe, however, was still very backward in this regard thanks to its use of Roman numerals. This was until a young Italian mathematician named Fibonacci published a book after studying more advanced Arabic and Indian systems including decimals, exchange rates. While the Fibonacci sequence was the work of Pangali, an Indian mathematician, his work spread rapidly from Pisa and was adopted extensively in Venice, the trading hub.

Jews in Venice and around the continent began taking active part in the business of money lending because the bible forbade Christians from doing so. The Old Testament, however, had an ‘out clause’ which allowed Jews to lend money to non-Jews. Hence, the famous story of “The Merchant of Venice” with Shylock the Jew asking for the famous pound of flesh.

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Sketch by EB

Before we proceed, it is also important to understand 3 underlying conclusions from ‘The Ascent of Money’ –

1. Poverty is not a consequence of financiers stealing money from the poor but more the absence of a proper financial system for the needy to seek support from. Loan sharks in poor neighborhoods often charge interest rates of 11 million per cent per year. Financial systems are key to removing poverty..

2. Finance tends to amplify human behavior and our tendency to over react. The world is far from flat in terms of income distribution and there is a big reward to those who are financially literate.

3. There is nothing as hard to predict as boom and bust in finance. Finance has an evolutionary aspect to it – financial products keep coming into existence and only the fittest survive.

Wish you a happy weekend and happy week!