The Well-Read Investor

Episode 14: William Goetzmann

William Goetzman, Edwin J. Beinecke Professor of Finance and Management Studies and Faculty Director of the International Center for Finance at the Yale School of Management, discusses his book, Money Changes Everything: How Finance Made Civilization Possible.

Today our guest is Professor William Goetzmann, here to talk about his book Money Changes Everything: How Finance Made Civilization Possible. Will is the Edwin J. Beinecke Professor of Finance and Management Studies and Faculty Director of the International Center for Finance at the Yale School of Management. I think of him as sort of an economic archeologist and polymath whose past work includes stock market predictability, alternative investing, factor investing, behavioral finance and the art market to name a few. Professor Goetzmann has written and co-authored a number of books, two of my personal favorites in addition to our conversation today are The Origins of Value: The Financial Innovations that Created Modern Capital Markets and The Great Mirror of Folly: Finance, Culture and the Crash of 1720 –both of which he contributed to and edited. You can follow him on twitter @Wgoetzmann.

INTRO

Mike Hanson (00:10):

Hello everyone it’s 2021 and welcome to another edition of the Well-Read Investor, the podcast that profits your mind and your money.

Today our guest is Professor William Goetzman, here to talk about his book Money Changes Everything: How Finance Made Civilization Possible. Will is the Edwin J. Beinecke Professor of Finance and Management Studies and Faculty Director of the International Center for Finance at the Yale School of Management. I think of him as sort of an economic archeologist and polymath whose past work includes stock market predictability, alternative investing, factor investing, behavioral finance and the art market to name a few. Professor Goetzmann has written and co-authored a number of book. You can follow him on twitter @Wgoetzmann.

I know many who consider themselves history buffs, and I know many who think they know money. But when I try and pin folks down to ask: “what exactly is money?”, I get funny answers. Money is, of course, vital to civilization, we use it most every day and it permeates our lives of course, yet we struggle to understand it, even in this industry. Money isn’t a thing, it’s more like an idea, a kind of social construct we all follow. It’s not gold or paper or electronic bits—those are just mechanisms of money. We tend to naturally think of money as a thing, But if we all stopped believing in it at once, money would cease to exist. That truly fascinates me. That’s why some refer to it as a “trust” system. But to me, money is a complex adaptive system—something we speak about often on this program—allowing transfer of value between parties, bolstered by laws and property rights, and is always changing, morphing, and adapting. There is so much to say, but I hope this conversation provides a small glimpse and further food for thought. If you can understand money a little better, you might treat your investments a bit differently too.

Lastly, if you’re enjoying our show, we think you’ll dig our book reviews. We’ve got book recommendations with insights and summaries designed specifically for investors to take you beyond the podcast and enhance your reading all year round. Follow us on twitter @wellreadpod and Instagram at @wellreadinvestorpod for all the latest or just google the Well-Read Investor and you’ll find our home site for all Well Read content.

Now, here’s our conversation with Professor Will Goetzmann. Enjoy!

Mike Hanson (02:45):

Will, thank you so much for being on the show. Your books have been very influential in my day to day thinking about finance and we actually think a lot about history in my line of work. Money Changes Everything. We always ask our guests the same question each time, which is why should every well-read investor want to read Money Changes Everything?

Will Goetzmann (03:05):

Well, you would be surprised at how often the same problems crop up over and over again throughout history and the same opportunities. So when I began writing the book, I discovered that problems that we're solving today are things that had been addressed in antiquity in in the history of the United States, which is how do we construct contracts that allow us to move money back and forth through time. And when you think of things like Bitcoin other kinds of cryptocurrency, blockchain, they have deep roots in the problems of how to contract through time and  transfer value.

Michael Hanson (03:47):

Tell us a little bit just about your career and the process of writing this book. I know it took you some years to assemble such a magisterial view of how finance has changed over time.

Will Goetzmann (03:57):

Money Changes Everything started out as a film, as a plan for a television series, actually, which would engage people in learning about finance in a way that they wouldn't normally do so. A lot of people love history, a lot of people love stories. And so it began with a narrative about how things came to be. And it evolved from that into a series of chapters that would describe a television series and when the series never happened, I kept writing the chapters and learning more and doing more research. As a matter of fact, I realized I knew nothing about some topic like Chinese finance, how did the Chinese civilization address financial problems moving money across this vast empire saving dealing with uncertainties about auditing and accounting. Anyway, I would dive into those topics and then doing a bunch of academic research and publish articles. That way I would learn about the interesting things about one area that I'd never paid attention to until I started asking those questions.

Michael Hanson (05:04):

Now, you go very deep. One of my favorite parts of the book is towards the beginning when you discuss Mesopotamia and just some of the articles that you inspected and just how high interest was back then too, on things like grain. Would you tell us a little bit about that?

Will Goetzmann (05:18):

Actually I started in my life as an archeologist. When I was in college, I spent every summer out excavating in wilds of South Texas and other places. And then also I worked as a filmmaker and that's what happened after college for a bit and went on wonderful adventures and in Labrador and Baffin Land and so forth. So a lot of the characters that appear in the book that know a lot about Mesopotamia are old friends of mine who I knew in a former life. So I would spend a lot of time talking to them. I still do actually about what's the current research on cuneiform and how do we get priced series that go all the way back to BC and, and it's great. So I think that that comes through in the book actually, when I was writing the book I had to cut out 50 pages of stuff about Mesopotamia, because I was so excited about it.

Mike Hanson (06:13):

You described this thing and I've seen you do this both online and in the book, but there's this thing it's like a pineapple, that's like  an accounting mechanism about how they initially did accounting. And you make the point that language in fact is very much influenced by the development of finance. Is that right?

Will Goetzmann (06:26):

Yes. Everybody wants to know where writing came from, and of course in different parts of the world it probably started in different ways. But in the ancient near East, it started with in cities, as people began to live together, and then they began to have to pay taxes and there was no money at that time. So the taxes were things like bushels of wheat and goats and so forth. You know, when your tax bill comes, you have to pay it. You have to make a promise as to what you're going to pay. And so people began to record those promises on clay. Cause that's all, there was, there was no paper. So those little markings on clay became very simplified down to a writing system called cuneiform. And it took thousand years for this to develop into something that was a script of sorts, but even the earliest things, 3000 BC, you can see that they're all about things like transfer a property promises of delivery and contracting. So the way that scholars currently look at the origins of writing is that it began as a way of recording economic things, as opposed to, let's say a way of recording historical narratives or great Epic travels or Wars and so forth.

Mike Hanson (07:48):

As a historian you've gone back and looked at so many different time periods. What do you believe are some of the most unloved time periods that you wish investors knew a little bit more about today? Or just, or just economics in general?

Will Goetzmann (07:59):

Well, that's a good question. When we look back in the past, we're always looking for some kind of romance or excitement. And so I'm trying to think of what are the dismal periods. And of course, one dismal period is called the dark ages, somewhere between about 600 AD and about a thousand AD, Europe was in the doldrums. It was far behind what was going on in China, for example. China was going through their you would call it the Chinese Renaissance where there was literature and art and writing and innovation and science. But your Europe was a backwater at that time. What I think is interesting about that period is Europe began to absorb knowledge. And some of that knowledge was financial knowledge.

Will Goetzmann :

The ways of doing calculations for across different markets. Europeans began in a very difficult situation, which is they didn't even have a writing system that would allow them to do calculations on paper. So Roman numerals are impossible to deal with. But at that time, the Arabic numerals were being developed and diffused throughout the Asian continent, finally, in about eight or 900 AD they get to the Europeans and they learn, they can use these things to do very rapid calculations when they're trading for things like spice and silks and other kinds of commodities. The  knowledge that they absorbed turned Europe, particularly the Mediterranean world into quite an active mercantile place. So by a thousand AD it had absorbed and innovated and then became a financial powerhouse but all through this process of borrowing from innovations to their East.

Mike Hanson (09:48):

That’s really interesting. I heard you say once that in your view finance is not ideological or ethical, it's a type of technology. Explain that a little bit? What you mean by that?

Will Goetzmann (09:58):

Yeah. So finance is a way of doing things actually. We often think about finance as some kind of peculiar cultural phenomenon, or even something that is a exploitative kind of business. I don't think about it that way. I think about it as a technology that moves value backwards and forwards through time. So a loan, for example, suddenly gives you money in the present so you can buy a house and then you have to pay that off over, let's say 30 years. But you've been able to magically make money appear. And if you're making a loan to somebody, it's a way for you to move your own money into the future when you need it most. So anyway, that's a little bit of a technical background, but the important thing is not what the finance does itself, but how you use it.

Will Goetzmann:

If you use it to exploit people then it can be bad if you use it to solve people's fundamental economic problems, like the creation of social security, for example, that's a financial structure and it's a wonderful way for us to provide for our own retirement, but also to help people who are not so fortunate. Those kind of things we might not think about as finance, but you know, the amazing thing that's happened in the last maybe just a hundred years is the widespread access to the ability to invest and save for the future. I mean, it just was not possible if you go back in most places over a hundred or 200 years ago, you couldn't buy stocks on the New York stock exchange. You couldn't form portfolios, unless you're really wealthy. Now we have 401k accounts, mutual funds and they're really fairly low costs for most people in the United States. And also for many societies around the world, that's an amazing innovation. It gives us the ability to plan for our own future it, but more important than that, it also gives us the ability to tap into the sources of economic growth in society.

Michael Hanson (12:09):

What is most interesting to you these days about the technology of finance? I know you've spoken about Bitcoin a little bit here and there. What piques your interest these days is innovation?

Will Goetzmann (12:19):

I'm very interested in crowdfunding. It hasn't c caught on like I think it should, but the serious returns that people get from investing in the stock market or the economy in general, they come from new ideas that really take off. When you think about who has made money on all of the big tech companies, of course, if you bought Apple years ago, and even IBM back in the early 20th century, you would have seen those investments grow, but in the last 20 years or so, the access to getting in on the ground floor has been a bit more constrained. So Facebook and Google would have been hard to be an early investor in those, unless you were tapped into some kind of institution or are private equity partnership or venture capital partnership. So, that's just a problem of technology. There's no reason why all of us shouldn't be able to buy into new ideas that could be really transformative, make a lot of money, but also change the world for the better. So that's the way I think about crowdfunding, it gives a chance to really not just slowly grow well, but occasionally participate in some of these extraordinary innovations.

Michael Hanson (13:41):

On that notion with greater accessibility. One thing I see as well is that the costs, or perhaps you would even say the rent you pay to intermediaries seems to be going down consistently, especially in the world of asset management. Do you see that as a recurring trend, do you think that's intermediaries will always have their moment, or do you think an intermediaries won't always be so necessary?

Will Goetzmann (14:00):

Intermediation is important, it takes on different roles depending on what kind of assets they are. For example, on venture capital, yes, we can all think about what might be the next new thing, but we may not know whether the people that are building companies are really up to the task of taking the technology and having it generate money. You need people that are intermediaries that can figure out whether or not this company has the capacity to really become successful. And that's what we pay venture capitalists for. Now when they’re in the middle zone, they are able to learn a lot from the companies that may not be public information. But we end up paying a lot for that service, or we think it's a lot. But I couldn't imagine being in a circumstance where we don't have some way of accessing useful information that separate the good companies from the bad.

Michael Hanson (15:00):

It’s so interesting because in the world of information deluge, in fact, in some ways it's almost as if the intermediary has become more important because how do you know what to know or to think, and how do you organize all the information?

Will Goetzmann (15:12):

That's a perpetual problem. We can suddenly access information about every publicly traded stock in the world and not just prices, but news and so forth. So yes, intermediaries funnel information and then trade on it in a market. One of the things I am also excited about is the role of arbitragers and speculators and hedge funds in the market, because they are the information gatherers and they try and use that information to find opportunities to make money in the market. Well, in fact, the reason why our markets work so well is that these speculations that they do drive prices towards their true economic value.

Will Goetzmann:

Some of the most detested people in the world are short sellers because they're betting that company stocks will go down. So I've done a fair amount of work studying short selling. And I've found that, that can be a useful function if there is a company that is let's say fraudulent, short sellers that discover that we'll not only announce to the world that they think the company is fake or doing bad things, but they also put their money where their mouth is. They take a bet that they're right on this company not being good. And people don't like you to be negative about anything, but short sellers manage to push prices down from inflated values by taking their positions.

Michael Hanson (16:51):

It's so funny too, because every time we get into a crisis mode, there are calls to ban short-selling. And in fact, I think if my memory serves even through this year during COVID, there were calls in Europe to ban things like short selling and all the rest of it. And yet I totally agree with you that they really do serve a market function, but I've also seen here and there you give comments on Bitcoin, and I'm wondering just what your thoughts are on it in terms of its viability, is it is it speculative in your view, do you see the blockchain being widely implemented? What do you think about that?

Will Goetzmann (17:21):

Well, blockchain is the technology behind Bitcoin and Bitcoin is one of a number of cryptocurrencies and the way that cryptocurrencies is developing is kind of interesting. They're all slightly different from each other and they're taking their own roles. Not all of them are good as stores of value. Not all of them are ideal for transferring money from country to country, but some of them are designed specifically for that kind of purpose. And so I think that we're going to have a market that will never replace standard currencies, but a crypto currency market that will have specialized tools that that can be used. There are a lot of markets in history where multiple currencies were used. If we go back to let's say Hong Kong and Shanghai in the early 20th century people used five or six different currencies regularly to quote security prices and do transfer value and so forth. And you wonder why didn't they just simplify things? Why did they need all of these special kinds of currencies? And the answer is sometimes you need more than one tool.  I think we're going to have more of that as we go forward, multiple ways of paying people and a specialization, as I said, in the functions of these tools.

Michael Hanson (18:43):

I hadn't quite heard that point made in just that way. In your experience when you see situations such as these, do you believe eventually, something like Bitcoin will be regulated at the federal level? Do you see something like that?

Will Goetzmann (18:56):

I'm not sure Bitcoin is the one that is most prone to being regulated. It could be, I mean, it is something that you can use to transfer money. And whenever you have the capability of transferring large sums of money from person to person, then you have tax authorities that are interested in who's doing that. And whenever you have an opportunity to move money across national boundaries, without the authorities understanding that, that's called money laundering. Since the 1970s, the world has gotten better and better at regulating money laundering through a system called the Swift system and through norms that banks have adopted such as knowing your customer. But as those norms and regulations have grown up of there are walls and people find ways around those walls. So some forms of cryptocurrency maybe helping to find ways around those walls, but, this is never a problem that's ever going to be sewed up tightly by the world's governments. We see that from Swift being very useful most all the time, but every once in a while, some horrible story about a scandal involving billions of dollars illegally transferred appears. So I expect the same thing's going to happen in the world of cryptocurrencies.

Michael Hanson (20:19):

Yeah. Well, one thing's for sure, crime is as consistent as taxes and government itself. So I want to just switch gears and go back to talking about history. One book that's hard to get, but is also among my favorites is the book you edited and also worked on, The Origins of Value, which is a beautiful book. It's one of the reasons I covet it because you really want a physical copy of that, it's got beautiful illustrations. And I've heard you actually say that, you see history in the actual documents and in the actual materials. Could you just tell us a little bit about your perspective on that, how you really see the physical objects, like the bonds and so forth and what you've learned from some of those things?

Will Goetzmann (20:55):

Well, finance is the technology, and those are the tools, the stocks and the bonds, the certificates they're printed on paper. We’ve always needed some way of recording and ensuring that contracts is legitimate. I'm interested in that whole process of development. What's really cool is the first paper money that was invented in China about a thousand years ago now probably, required a new form of printing. The Chinese had to invent the copper plate engraving process so that they could create millions of paper notes. That looked exactly the same, because if they didn't, then there would be some counterfeiting. So I'm fascinated with what designs they use to actually represent the legitimacy of these documents.

Will Goetzmann:

And even down to the kinds of paper that was necessary, the Chinese had to use Mulberry bark paper. It was very flexible and tough, cause these new contracts is paper money. It had to survive through passing down through many hands. So even that was a kind of an interesting challenge. Even up to end of paper securities, which we’re pretty close to now. The challenge has been to figure out how to prevent counterfeiting, the tricks that are necessary. One of the most famous people involved in that was Benjamin Franklin. His view was, a good artist can fake anything that another artists has done, but a good artist can't fake nature. So he figured out a way to take leaves from real bushes and trees and to make an impression of the leaves and with some kind of soft lead or something, I don't know exactly how he did it but then use that in a printing plate because every leaf is unique actually. And an artist can never completely fake the detailed veins in a leaf. So that was a brilliant idea. And that was some of the very first currency printed in America.

Michael Hanson (23:02):

It sounds basically like a fingerprint. But with that book, you really dealt with some heavy hitters in editing that book Origins of Finance. And I know you've, of course in your career, you've dealt with those sorts of folks, Robert Schiller and the like, do disagreements happen and in history. And how was it editing that book? I mean, were there disagreements about what happened or conclusions made?

Will Goetzmann (23:21):

Many of the contributors to The Origins of Value were people that just agreed to do it because they knew Garrett and myself, Garrett Roinhorse, my coauthor and co-editor. And so they may not have been particularly working on one topic, but they were willing to write a chapter for us. And so we saw them also discover things they hadn't thought about before. And so we kind of pushed them and said, you know, would do a chapter on the origins of Chinese paper money. Richard Von Golan did this, and he knew a lot about the topic, but it was wonderful to see him really condense the whole topic together, and make it interesting and clear and complete for people. We pleaded, we begged and we got wonderful stuff from amazing collection of scholars.

Michael Hanson (24:11):

Yeah, no doubt. So you've been involved in education for a long time with some of the best and brightest. In your experience what do you wish people knew about finance that they don't?

Will Goetzmann (24:20):

Well, I wish that people would consider finance as a part of their daily lives, rather than as something that represents a threat. And the fact is finance is a part of our daily lives. Everything from our need to make payments for things, but also as you're planning for your future or trying to hedge against terrible things that could happen. We've just gone through a lot of storms on the East coast, and insurance has been a godsend for many people. But insurance is a financial tool that pays off when something bad happens. That's a wonderful thing that that we've created, without financial tools and without calculation of the probabilities of storms hitting we just wouldn't be able to do that. So, think about the parts in your daily life that really relate to finance and they aren't scary there and they offer you opportunities to make your life better.

Mike Hanson (25:17):

So what's next for you? What are the next big projects?

Will Goetzmann (25:24):

So I've been interested in behavioral finance for a long time. I have been working a lot on how people react to things like bad news and good news, and whether that makes a difference to the prices in the security markets. It used to be that finance scholars relied only on numbers, but now we can suck in vast amounts of texts and then we can model the thinking of society by extracting themes out of this text. So that whole way of suddenly studying texts instead of just numbers, that's got me that's got me going. Some of the projects that we have been working on have to do with trying to see whether people react to sudden bad news around them, for example with Robert Schiller and Docile Kim, we got news about all of the earthquakes that happened around the United States over the last three decades or so. And then we look to see whether or not people reacted to that by forecasting, whether or not the stock market was going to do well or not. Do you think earthquakes have nothing to do with the stock market?

Will Goetzmann:

Unless there's a really big one, but these are all small ones, but they do scare you and make you think about your safety. What we found is that if there's been a recent earthquake near you within 30 miles or so, then you tend to forecast that the stock market is going to go down rather than up. So that's a really interesting thing. It means we can't really shed our fears and enthusiasms when we think about the stock market. You probably hear this much more than I do. Everybody's asking, are we in a stock market bubble? When is this thing going to burst? How can I get out? How can I leave the ship before it's stinks? Well, those emotions really do matter when we're thinking about what sets stock market prices and those emotions might come from something other than thinking about stocks, and it forces you to say to yourself, look, I can't just go on gut instinct when I'm thinking about whether or not I want to take money out of the market. You got to fight your human instincts all the time, you have to think in an awkward self-controlled way, and if that's what the financial mind is versus the emotional mind,  they're at odds with each other constantly when you're making these economic decisions.

Mike Hanson (27:57):

Of course, COVID is going to be such a case study in that. And I tend to agree with you as well. Professor Schiller's work has been interesting on narrative economics and without a question of a doubt, confirmation bias and narrative is just a huge role, at least in the short term of markets. Well. outside of financial work, what do you like to read for fun? What are some of the things you're interested in?

Will Goetzmann (28:11):

I read a lot of history, so that's always on deck for me. And then, during COVID, I've just had to think about ways of reading more than one book at a time. So I’m reading sequences of mystery novels and science fiction books and escapist literature is so important to me at this particular time. The ability to forget about the anxieties of politics and the stress of COVID and dive into something that's fun.

Michael Hanson (28:42):

What types of history are on deck for you right now? We've actually had John professor John Gaddis on the show as to talk about the cold War and other things like that. And he, of course, was great. What is interesting to you at the moment?

Will Goetzmann (28:54):

This is redundant, but I've been reading a lot of ancient archeology. I've been reading a lot of stuff about the ancient near East. So I follow that pretty actively. I've also been reading, it isn't necessarily strictly history, but Francis Fukuyama and his work tries to integrate the kind of big long-term historical trends in society in a way that can help make predictions about where we go from here. So that's been quite exciting.

Michael Hanson (29:24):

Fukiyama gets kind of a bad rap for the whole end of history thing, but he is really very useful and insightful as any, I've also enjoyed his books. I think we'll wrap things up there. Professor Will Goetzmann , thank you so much for doing this. This was really our pleasure and our listeners are going to love this. Thanks again.

Will Goetzmann (29:40):

Yeah, appreciate the opportunity.

Mike Hanson (29:51):

That was our talk with Professor Will Goetzmann. As all great historians do, I find, Will has a way of showing us the whole story in anecdotes and objects. He often takes a thing as simple as a rock demonstrates so much to us about how money works just by describing it. Fascinating, wish we had more time with him.

Join us In two weeks on Wednesday, February 3rd,  as we host Aswath Damodaran to discuss his book, Narrative and Numbers: The Value of Stories in Business. We’ll talk about how narratives of many kinds drive perceptions of value, and how you as an investor can make more informed decisions by understanding the popular narratives of the day. This is a topic many are thinking about these days, and you don’t want to miss it.

Until then, may all your reading profit your mind and your money. Take care.

DISCLOSURE (30:46):

Investing in securities involves the risk of loss, past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded and personal investment advice. No assurances are made we will continue to hold these views, which may change at any time, based on new information, analysis or reconsideration. Copyright Fisher Investments, 2020.

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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.

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