Investment: A History

Norton Reamer, Jesse Downing

• Publisher: Columbia Business School Publishing
• Year: 2016
• eBook ISBN: 9780231540858
• Topic: Economics
• Subtopic: Business History
• Index: Economics

Investing—the commitment of resources to achieve a return—affects individuals, families, companies, and nations, and has done so throughout history. Yet until the sixteenth century, investing was a privilege of only the elite classes. The story behind the democratization of investing is bound up with some of history's most epic events. It is also a tale rich with lessons for professional and everyday investors who hope to make wiser choices.

This entertaining history doubles as a sophisticated account of the opportunities and challenges facing the modern investor. It follows the rise of funded retirement; the evolution of investment vehicles and techniques; investment misdeeds and regulatory reform; government economic policy; the development of investment theory; and the emergence of new investment structures. Norton Reamer and Jesse Downing map these trends and profile the battle between low cost index and exchange-traded funds, on the one hand, and the higher-fee hedge funds and private equity, on the other. By helping us understand this history and its legacy of risk, Reamer and Downing hope to better educate readers about the individual and societal impact of investing and ultimately level the playing field.

CHAPTER ONE

A Privilege of the Power Elite

THIS BOOK EXPLORES THE HISTORICALLY dramatic development of the democratization of investment. Simply put, this means that a much larger proportion of the population in advanced societies has been able to participate meaningfully in the enterprise of investment. This process of democratization has transpired as a result of several fundamental changes: the advent of collective ownership through the modern corporate form and public markets; the spread of investable surpluses beginning with the Industrial Revolution; the development of the concept of retirement, motivating the need for sizable savings; the enhancement of the regulatory environment that aided the leveling of the playing field; and the implementation of economic policy changes that has provided an improved safety net against market failures.

This chapter focuses on the ancient and premodern investment environment. Here the emphasis is on three areas: the basic investment media of early history; the extreme inequality of the distribution of investment opportunity and benefit; and the surprising sophistication of early investment vehicles, strategies, and purposes.

The modern corporate form is a relatively recent historical phenomenon. Its characteristics—shared ownership, permanent existence, transferability of possession, and limited liability—are the result of an entirely new form of ownership, one that is not necessarily dependent on elite familial or status relations. In order to fully appreciate the distinctly radical nature of this new ownership form, we must understand that for many thousands of years, agricultural land was the primary store of wealth, source of income, and reservoir of gains for investors in ancient and premodern times. From Mesopotamia to Egypt, Greece, and Rome, it was the basic investment medium in early civilizations.

While lending was another pillar of investment in premodern times, it was hampered in its development by its capital limitations and the taint of usury. Trade, based on exchange value and growing geographical mobility rather than use value, was the “sleeper” in investment influence and importance. But ultimately it has triumphed in a collective ownership world.

However, although in this chapter we identify precursors to modern forms, we are not hypothesizing causation, nor are we giving a comprehensive account of each society’s history. Rather, we want the reader to understand that the arrangement of the investment landscape was historically contingent; the modern system was not necessarily “destined” to be, and there are other ways of organizing and approaching ownership and investment. That said, while there are multiple ways of conducting investment, the very existence of investment—defined as the commitment of resources for future returns—has been a universal phenomenon across history and cultures.

AGRICULTURAL LAND AND ESTATES

In many societies, land was literally intertwined with title, position, command, or rule. The major characteristic of land investors in ancient economies was high economic, social, and political standing. Given that many wealthy members of ancient societies associated agriculture with nobility and commerce or trade with low status, the preference for storing and accumulating wealth in land and estates is not surprising. While not always the most lucrative form of investment, it often bore lower risk than many forms of trade and commerce, and landowners consequently accepted lower returns than might have been available in other economic activities.

Investment in land was also the primary mechanism for the intergenerational transfer of wealth. For example, in Arrapha in the middle of the second millennium, it was actually illegal to convey land title to anyone other than family members. But as long as motivations exist to bypass public policy, humanity has a way of concocting creative schemes to do so, and there is some evidence of landowners officially adopting prospective buyers in such jurisdictions.¹

It was typical for elite landowners to avoid direct operating involvement even though they controlled the assets being managed. Many of those who owned land had other principal occupations, and passive ownership often became the dominant form of ownership. For example, in the conquered provinces belonging to Athens and Rome, military men often owned land they had neither the skill nor time to manage. Landownership among the ancients was commonly determined by noneconomic factors such as nobility, military rule, and claims to divine right. This policy frequently created a situation where the owners themselves lacked the knowledge to manage their assets and had to draw upon the talent of others to do so. Therefore, elite landowners often hired lower-status people, including slaves, to manage their estates.

Mesopotamian Agriculture

The historical record on investment management seems to have begun in that cradle of civilization, Mesopotamia, tucked between the Tigris and Euphrates Rivers, now part of present-day Iraq, Syria, Iran, and Turkey. Mesopotamia, simply translated as “land between the rivers” in Greek, hosted an array of different civilizations. Sumer, the southern region of Mesopotamia, was the first widely known civilization, and Sumerian city-states are well known for early inventions, including the wheel and a writing system as early as the fourth millennium B.C. In Mesopotamia much of the land was owned by the temple or the state, even though private property did indeed exist as well, as evidenced by examples of wealthy urban Mesopotamians who were absentee owners of land in the countryside.²

As Mesopotamia was settled, temples grew in importance until they were the center of power.³ Notably, the role of the temples in the north was less dominant than in the south. In terms of state or temple landownership, there were two priorities: first, the land had to be used for agricultural production; second, the land served as compensation for government officials.⁴ The scale of these agricultural projects made state ownership advantageous. For instance, the early Sumerians needed to irrigate their land because of inhospitable climate and irregular river flooding. This large-scale effort required the labor of all citizens. By proclaiming the land to be the property of the gods, leaders were able to convince individuals to contribute to the collective labor.⁵ It was the holy, and not the holy mina, that underpinned the Mesopotamian economic system at this time.

There is no proof that in these early periods land leases existed in these regions. However, in the third dynasty of Ur, farmers could rent land from the temple or the government.⁶ Around 2250–2000 B.C., a strong religious system gave way to a strong state. The tight control of the economy passed from the temples to the government.⁷

Mesopotamia also saw the emergence of public asset management. Temple and state landownership was supported by a rather advanced bureaucracy, which dealt in part with determining when and how public land should be rented. It established provisions and rules to which employees had to adhere, with the objective of reducing fraud. These public investment managers functioned in the city-state of Lagash in Sumer, where there was a surplus of land with superb water supply. This land would be temporarily removed from the public stock to be rented out. Farmers would compensate the governing authority—in silver (called the mas a.sa.ga)—for the privilege of farming and for the use of water on the site.⁸

The Akkadian civilization was a rather advanced society that developed around 2330 B.C. and lasted for almost two hundred years. After the fall of the Akkad dynasty and the rise of the third dynasty of Ur, much of the state was partitioned into military governorships, each of which was required to pay the empire a tax known as the gun mada.⁹ These military officials could structure land management in various ways: the household itself could farm the land with the aid of laborers or slaves, the landowner could hire a local manager who would superintend the cultivation, or the landowner could rent land to peasants.¹⁰

Babylonia was located in the central portion of the Fertile Crescent, and it was born out of the fusion of the Sumerian and Akkadian societies that had preceded it. Babylonia competed with Assyria, a society focused on expansion and conquest, which was located in the highlands of Mesopotamia. While records indicate that a few private owners acquired fields long before the Old Babylonian period (eighteenth and seventeenth centuries B.C.), as time went on more individuals and families in the south gradually began contracting to buy and bequeath fields as well. The land lease, which had become rare in the earlier Ur III period, became common once again. Written evidence appears widely around 1850 B.C., and the practice may have been widespread even earlier. Historical documents from cities and large towns provide information on the agricultural activities of wealthy citizens. Although it is clear that these landowners could till their own fields, lease their land to tenant farmers, or use slaves or hired laborers, surviving evidence unfortunately fails to show the relative frequency of these various landholding arrangements.¹¹

From the Old Babylonian period until the late Persian, land leases became common and there were numerous records of farmland renting. Over time, practices evolved somewhat. The fields that were rented became bigger, for example. Compulsory labor became less common, most likely because this arrangement became prohibitively expensive when the harvest was weak.¹² Therefore, there was a shift toward the use of tenant farmers because the farmers were motivated to maximize production, as a portion of the production was theirs to keep. Further, this framework made it simple for the owner to shift previously untilled land into cultivable fields. This was done by striking agreements whereby the tenant farmer would not be liable for any rent for the first year that a new swath of land was farmed, and the tenant would face only a low rate in the second year, again creating an impetus for assiduousness not present in the salaried structures.¹³

In many ways, the salaried farmer and the tenant farmer structures are the ancient analogues to modern compensation regimes seen in finance, such as the fixed and performance fees levied by money managers today. In the former configuration, the fiduciary is paid no matter how the investments fare, and the principal keeps all the surplus; in the latter, the steward is induced to be more proactive by being granted a share of the return from the land.

Greek Estate Management

Estate management was also important to the Greeks—so much so that it was contemplated in philosophical terms. In the famous work on economics Oeconomicus—written in the fourth century B.C. in the Greek tradition of dialogues—Xenophon portrayed a conversation with Socrates about estate management:

I once heard him [Socrates] discourse on the management of the household as well, in about these words.

“Tell me, Critoboulus,” he said, “is management of the household the name of a certain kind of knowledge, as medicine, smithing, and carpentry are?”

“It seems so to me, at least,” said Critoboulus.

“Then just as we are at no loss to say what the work of each of these arts is, can we say also what the work of household management is?”

“It seems, at any rate,” said Critoboulus, “that it is the part of a good household manager to manage his own household well.”

“But if someone were to entrust another’s household to him,” said Socrates, “could he not manage that, if he wanted to, as well as he does his own? For the one who knows carpentry can do equally for another what he does for himself; and so too, presumably, can the skilled household manager.”

“It seems so to me, at least, Socrates.”

“Is it possible, then,” said Socrates, “for one w...

Table of contents

• Cover 
• Title Page
• Copyright
• Dedication
• Contents 
• Acknowledgments
• Introduction: The Investment Challenge
• 1. A Privilege of the Power Elite
• 2. The Democratization of Investment: Joint-Stock Companies, the Industrial Revolution, and Public Markets
• 3. Retirement and Its Funding
• 4. New Clients and New Investments
• 5. Fraud, Market Manipulation, and Insider Trading
• 6. Progress in Managing Cyclical Crises
• 7. The Emergence of Investment Theory
• 8. More New Investment Forms
• 9. Innovation Creates a New Elite
• Conclusion: Investment in the Twenty-First Century
• Notes
• Bibliography
• Index