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.