The History of Some Key Financial Products

To most people unfamiliar with investment banking, instruments
like government securities, repurchase agreements, mortgagebacked
securities, and Eurobonds seem unnecessarily complex
and sophisticated, invented solely for the benefit of traders and
speculators.
In fact, these seemingly modern financial innovations were
developed many centuries ago to circumvent the Church’s prohibition
against charging interest for the loan of money.1 Until at
least the fifteenth century, Church canon law held that usury—
charging interest on loans—was contrary to the law of God. The
Church forbade lending at interest and reinforced this interdiction
regularly. Writing in the early fifth century, St. Augustine
bluntly called usury a crime. As a recent illustrious banker and
eminent Christian has pointed out:
Thomas Aquinas, the brilliant and widely influential systematizer of
medieval thought, shared the view that taking interest in any form was
morally wrong. The Protestant Luther also shared this view—in fact, if
anything, he held it even more forcefully. For him, usury was so wrong
that money-lenders deserved to be excommunicated and should be
denied a Christian burial. The Councils of Lyons in 1274, of Vienna in 1311, and of Vienna
in 1392 instituted heavy penalties for usury. The prohibition lasted
until the early 1500s, when the search for ways to overcome this
interdiction gave rise to newer types of financial products, many
of which are essential for modern financial markets.
If the sophisticated instruments of investment banking have
been around for almost a millennium, many staples of our financial
life today were invented only recently. Take paper money,
the limited-liability corporation, and the stock exchange—all
three are not even five hundred years old. And it is not a coincidence
that they were invented just before the beginning of the
Industrial Revolution.
The lesson of history is that governments have favored the
growth of money markets and banks as ways to finance their
own needs. Initially, banks were the instruments used by governments
to finance their wars. States resorted to borrowing to
finance the expenses of their maritime expeditions, or to invest
in such things as canals and waterways. Then, in the early nineteenth
century, these banks played a role in financing the needed
infrastructure and the development of industry.