The accumulated expenses of the War of the Spanish Succession (1701–1714) left each of the great powers of Europe with unprecedented burdens of government debt. The overlapping Great Northern War (1700–1721) also encumbered Sweden and Russia with pressing financial problems. The competitive experiments with ways to deal with their amassed debts among the emerging nation-states of Europe over the next decade ended with Britain alone holding the key to success in war finance. Spain retreated from European expansion to focus on its increasingly productive colonies in Latin America while strengthening mercantile ties with France and allowing provincial elites to regain their local authority over both taxes and coinage. Austria focused on exploiting the trade and finance possibilities through its acquisition of the remaining provinces of the southern Netherlands, which meant renewing the privileges of the city authorities there as well. The Netherlands found that the resources of Holland no longer sufficed to maintain its role among the Great Powers, and the Dutch merchant capitalists turned instead to invest in emerging powers, first Britain, then Germany, Russia, and finally even the new republic calling itself the United States of America. France, having dallied with an attempt to imitate the financial successes of the Netherlands and Great Britain under the tutelage of John Law during the years 1716–1720, reverted to its previous reliance on domestic financiers to sustain both royal authority and provincial aristocracy.

Britain alone among the contesting military powers of Europe in the eighteenth century succeeded in convincing a large and diverse number of individuals to hold onto their claims against the government. Especially important were the foreigners holding British sovereign debt, which included not only the expatriate community of French Huguenots and Sephardic Jews settled in London after the Acts of Toleration in 1689, but also Dutch and German merchant elites, and even the Swiss city of Basel. In the first generation of British financial innovation after 1688, Parliament created a unique combination of chartered corporations to hold most of the national debt created by war finance.

Two factors have led to the rise of finance historically: long-distance trade and long-lived productive assets. Markets for goods and services and markets for assets both require some form of finance to bridge the time between when agreement on a trade is reached and when actual delivery occurs or when the structure is completed. Expanded trade and improved standards of living that result from the beneficial uses of finance, however, more often than not have led to increased conflict with outsiders or even with traditional power elites inside an economy. Preserving the benefits of finance in the long run, therefore, is and always has been very hard. Ultimately, the operations of finance through institutions (banks) or through markets (stock exchanges) have to be supported by and meet the approval of government authorities (regulators). Coordination of the innovations that arise spontaneously in banking, capital markets, or government powers is necessarily difficult. While these observations seem painfully obvious to observers of the ongoing financial travails after the crisis of 2008, they also help to clarify our understanding of the rise and fall of ancient civilizations and the vagaries that afflicted pre-industrial societies.

Rise of cities and the beginnings of finance

The archaeologist and historian of the ancient Near East, Marc Van de Mieroop, begins his history with the establishment of Uruk, the first city known to history, around 3000 BC (Van der Mieroop 2005, p. 23). The location of Uruk on the lower Euphrates River just north of the marshes that extend into the Persian Gulf probably arose after thousands of preceding years of settled agriculture and villages scattered throughout the alluvial plain known as the Fertile Crescent. These early residents had access to a variety of fish and shellfish, primitive grains, and possibly domesticated animals. They had developed pottery, along with permanent dwellings usually arranged around a central temple (or market or meeting place). The creation of an impressive stepped temple (ziggurat) with its surrounding precincts covering over 100 hectares by 3000 BC, clearly implied a central authority with the ability to sustain a population large enough to have specialized functions. These surely included soldiers and priests, but also construction workers, boatmen, farmers, shepherds, craftsmen for textiles and pottery, and trade.

Had Napoleon fully understood the possibilities of Dutch finance for financing and provisioning his armies, he might have been able to establish his empire over Continental Europe. As it turned out, despite his brilliant efforts at re-shaping French public finances and re-organizing the French military, he failed to coordinate successfully banks, capital markets, and financial regulation for France and paid scant attention to the financial institutions in satellite kingdoms. To finance his imperial ambitions, however, Napoleon did appreciate the merits of Britain's financial innovations that had stymied the advances of the French revolutionary armies on the Continent. After assuming power in the coup of 18 Brumaire (November 9–10, 1799), he quickly imitated the essential features of British finance, at least as he saw them. He established the Banque de France in 1800, re-vitalized the Caisse d'amortissement pour la dette publique, and reconstituted the Bourse de Paris. With these three organizations, Napoleon mimicked the financial structure of Britain with its Bank of England, sinking fund (Commissioners for the Reduction of the National Debt), and London Stock Exchange. All of these had proven their worth in helping Britain finance its successful wars against France over the past century. But, like John Law nearly a century earlier, Napoleon felt that all these financial organizations would function even more effectively if he kept them under central control, whether by himself or by trusted civil servants. His constant intervention in the management of the national debt continually frustrated his minister in charge, Count Mollien. Further, his insistence on levying massive annual contributions from satellite kingdoms raised by new, heavier taxes undercut the legitimacy of the new regimes he created throughout Continental Europe.

Despite his incomprehension of the subtleties of British public finance, anchored in deeply rooted commercial finance both at home and abroad, Napoleon clearly understood the importance for the economic system he created on the European Continent of enforcing impersonal exchanges through constant monitoring by individuals connected to each other through a multitude of relationships. At the same time his armies occupied a country, he created a network of personal enforcers of exchanges. By installing members of his family or trusted generals as rulers of unified kingdoms throughout Continental Europe, Napoleon mimicked in many ways the networks of trusted correspondents that merchant bankers in Europe had established in previous centuries.

For many years, I offered a graduate seminar in “Financial History” at the University of Illinois. The course always began with an overview of the most recent financial difficulties confronting the international economy. The first time I offered the course, I worked backwards from the present and ended as far back as student interest or my knowledge base allowed. It soon became clear, however, that instead of re-tracing a supposed evolutionary trail of financial development and disorders, I should skip back to “how it all began,” and then take the narrative arc forward to the present. But how far back was it necessary to go? That question was answered at first in terms of my limited knowledge. When I became fascinated by the events of 1720 with the Mississippi and South Sea bubbles in Paris, London, and Amsterdam, that was where I would begin the rest of the course.

When I took these ideas to the graduate students at the London School of Economics in 2006, there was definitely an air of triumphalism about the “Great Moderation” and the ongoing globalization of finance, but this changed rapidly over the course of the next five years as the “Great Recession” began in 2007 and kept unfolding. Increasingly, I had to explain how difficult it was to get different national financial systems coordinated effectively while financial innovations occurred. While trying valiantly to keep up the morale of the students, who increasingly came from the corps of continuing layoffs in the financial sector, I also had to go farther and farther back to begin a new, more nuanced, and much longer “narrative arc” for the material. The variety of international backgrounds and experiences of the LSE students, reflected in their research papers, helped greatly to expand my knowledge base back in time. To date, it only goes back to Babylon based on the ongoing work of ancient archaeologists. The intervening millennia suffer from lack of surviving written documentation comparable to clay tablets and bullae until the parchment records of medieval Europe appear. Even so, there are enough examples of successful financial innovations in the past to restore my faith that this crisis, too, shall pass.