1. William N. Goetzmann Yale School of Management
Financial Innovation
William N. Goetzmann
Yale School of Management

2. A Puzzle Why didn’t the industrial revolution begin in China?
Song dynasty ( )
Superior Eastern science
Organized central government
Wide rule of law
Meritocratic society
Unprecedented literacy
Answer: Finance

3. Overview Background and Motivation Foundations of Capital Markets
Historical Development

4. Foundations
Time
Chance
Market
Company

5. Time Loan Stocks Pension Institutions Exchange of value through time
Buying future dividends
Pension
Invest now for future reward
Institutions
Family, Bank, Fund, Government, Non-profit

6. Chance Future is Uncertain Options Insurance Structured products
Contract on outcomes
Fire, market drop, catastrophe
Options
Insurance
Structured products
Probability theory and stochsastic processes

7. Market Transferability Assets as close economic substitutes
Paper and electronic symbols of contracts
Complex network of equivalencies

8. Company Non-human entity Corporate capitalism Urban government
Church or order
Private corporation
Corporate capitalism

9. Historical Thesis
Europe’s advancement in financial technology was sparked in the late Middle Ages by deficit financing of municipal governments.
Corporate finance drew directly on existing government securities markets.
China never indigenously developed bonds or markets.
Lack of indigenous foundations led to conflict.

10. Elements of Financial Technology
Time is Money
Contracts and instruments that move money through time.
Present value comparison of cash flows in time.
Contingent Claims
Insurance
Contracting on economic outcomes.
Negotiability
Creating transferable claims and a market.
Corporate Capitalism
Separating financing from investment decision.

11. Roots of Finance: China
Contracts (bi-partite) 750 B.C.
Loans 750 B.C.
Financial institutions (pawnshops) 700 A.D.
Legal systems for international finance, 700 A.D.

12. Property Rights: 1000 B.C.

13. Securitized Lending 700 A.D.

14. Roman Equity Shares 200 B.C.

15. Iraq: Legal Contracts 1600 B.C.

16. Ptolemaic & Roman Egypt
Giro banks
Checking
Annuities
Shares
Mortgages
Chirographs

17. Feudal Foundations Assignment of property yields Medieval fiefs
Fief-rente
Census contracts
Bailiwicks
Bearer-rentes in Low Counties
Chirographs in Catalonia

18. Chirographs and Sticks

19. The Great Divergence 1100 – 1400 A.D.
China at war with steppe peoples.
Europe at war with Islam.
Both need money.

20. Map page 74

21. Finance in Song China

22. Europe: First Bonds & Shares
Adapted from Feudal “Census” loans.
Venice
Wartime finance
Rialto market
Genoa
Bank of St. George
Florence
Civic taxation and savings institutions.
See Pezzolo

23. First Bond Market, Rialto, Venice

24. Monte di Pieta Florentine Bond

25. Financial Economics 1200 A.D.
Leonardo of Pisa, Liber Abaci, 1202 A.D.
A business textbook
Trading problems
Exchange rates
Banks and loans
Analyzes a fief-rente as a present-value problem
Comparing flows using the time-value of money

26. First Business School?
Palazzo Mazzanti, Verona, School of Nicolò Tartaglia

27. A Perpetuity

28. Corporate Finance: 1600
Used liquid markets developed for government finance.
Used demand for savings and instruments by a new investor class.

29. Amsterdam: First Corporate Shares and Bonds

30. The London Exchange and Capitalism

31. Chinese Enterprise Family Based Proto-capitalism
Encounter with the West.

32. China learns to Borrow
Railroad Finance

34. Western Finance Created an investor class Created a capital market.
Diversification of personal risk.
Substituting financial security for family security.
Created a capital market.
Turning technological ideas into economic growth.
Financed the growth of global infrastructure.
Railroads, electrification and more.

35. Economic Lessons
Financial development depends upon political needs, context.
An organic, time-dependent process.
Can it be transplanted?
clash of financial technologies in Russia and China.

36. Conclusions
Financial capitalism became the polarizing phenomenon of the 20th Century.
The roots of that polarity lay deep in the diverging historical development of the nation-state.
Finance is an inter-connected set of mathematical, legal and social tools.