The Book that Revolutionized ‘Finance’

‘Modern’ finance has evolved to such complexity that at the height of the frenzy that caused the financial crisis of 2008 there were only a handful professionals who actually knew how a ‘particular’ financial instrument worked, whereas the investors who held them didn’t bothered about.

Finance has thus seen a lot of upheaval in its evolution through a series of events both good and bad. Because of the sheer skill and the depth of knowledge it demands ‘finance’ brings to it awe and fear and at times an aura of radiance too. It has been through numerous events like the crisis like situations, booms and depressions, business cycles and scams and frauds thus making it a vibrant and happening field than any other.

But how did the journey of ‘finance’ begin?

By the 12 century as the means and modes of transportation grew, coupled with discoveries of new lands and territories, there was a phenomenal rise in opportunity for trade between different countries and regions; the trades were mostly conducted in spices, cloth, oil, commodities and metal with different weighing and measuring systems and the presence of different currencies in different regions (currencies such as lira, soldi, denari, massamutini, bezants, tareni etc existed in some parts of Europe).

Because of the lack of a common currency platform the merchants and traders had to suffer a great loss of time in accurately determining the correct value of the exchange since a commodity could only be valued relatively or the value being determined in terms of any third commodity. The problem with the coins was its debasement and irregular content of silver or gold in it. Because everything that got traded had a relative value in something other the traders did suffer losses that were not recognizable easily at the moment of negotiation.

However, a scholar mathematician from Italy known as Fibonacci (remember Fibonacci series) whose real name was Leonardo of Pisa (1170-1240) tried to simplify many financial calculations through his mathematical approach to finance, his writings and teachings summarized in the chapters of the famous book that revolutionized finance or started the financial revolution,the book was titled ‘Liber Abaci’.

The book ‘Liber Abaci’ (published by 1202) was the first of its kind of book at that time which gave a detailed understanding and treatment and tools for financial calculations. This was also the time when trade between countries was growing at a very high rate and accurate calculations meant having a cutting edge for the merchant.

Fibonacci, the author of Liber Abaci, had a zeal for learning and traveled extensively to different regions and countries and learnt from whomsoever he could, being exposed to multicultural education he could assimilate the Indian method of calculation and the Arabic numeral system into his work. Among other things Fibonacci also made use of Algebra and extended its application and scope.

The book ‘Liber Abaci’ gave mathematical formula based treatment to finance and contained a wide range of practical mathematical tools for the traders that helped them understand the concepts including calculation of present values, compounding interest calculation, dividing profit from business ventures and pricing of goods and monies involving complex variety weights, measures and currencies.

Fibonacci’s major contribution was not only in providing tool of calculation but also for recording a written expression of the problem the transaction that scored over the abacus which was then the only useful tool to solve the exchange problems. It also helped the money exchangers model the bounds of fluctuations in relative valuation of currencies.

Around and after his time a regular market for government debt was beginning to take shape. In 1171 Venice issued a mandatory debt of 5% interest to all citizens to finance the construction of fleet to fight Byzantium. The roots of this debt revolution couldn’t have been made possible without the use and application of mathematical techniques of Liber Abaci.

The spark of the financial revolution was thus truly ignited by Liber Abaci, it was due to this phenomenal contribution that traders could knew the correct picture of their positions and exposures in a variety of trades that could help their understanding on pricing and risk taking.

Thus beginning in Liber Abaci, the further journey of finance is very interesting and colorful too. Many further scholars contributed to it through their knowledge and findings giving rise to new approaches in managing the monetary systems, debts of nations, shaping the standards of governance and redefining international trade and boundaries of it through numerous theories and models.

Different countries continue to have their own currencies bases and also have common platform for currency trades. However, the volatility caused by externality of monetary policies of advanced nations that fluctuate the asset prices of other nations and the speculative nature of trade in currency and commodity and inflation being some of the challenges that need to be solved by another set of such scholarly works.

 

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Reference: FIBONACCI AND THE FINANCIAL REVOLUTION by William N. Goetzmann

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