Here we are again. It's been a full year since our last continuing financial education week. Your initial financial education should have consisted of reading a good investing book, a good personal finance book, and a good behavioral finance book in addition to a physician-specific financial book like The White Coat Investor: A Doctor's Guide to Personal Finance and Investing. If you haven't yet done that, here is a link to my list of recommended books.
Continuing Financial Education (CFE) consists of reading a good finance book each year and regularly following a good blog or podcast such as this one. So if you haven't yet read a good financial book this year, now is the time. All this week I'll be profiling some of the great books I've read this year so you can select one of them for your own CFE. This is particularly helpful for you advanced readers who have already read all or most of those on the recommended list. You don't have to read all of them, just one of them, so don't get overwhelmed.
Today we'll begin with three financial history books I've read this year. I love history, and I love finance, so it's a great meld of interests for me, but understanding financial history is of critical importance to the do-it-yourself investor. Once you've read about what's happened in the past, you'll understand a lot more about why our current financial landscape looks like it does. In addition, in bad economic times it will be easier for you to stay the course with your investing plan since you'll recognize echoes of the past and remember that “this too shall pass.” These three books start our very specific, with a review of a single financial period, then move to a broad review of the financial history of a single country (the United States), and finally with a book that explores world financial history over several centuries.
America's First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837
Our first book is by Alasdair Roberts and tells the extremely interesting history of the economic downturn of the late 1830s. Most of know about The Great Depression of the 1930s, but few of us can rattle off the causes of the one a century before, which in many ways, was just as bad. This “first great depression” lasted 7 years, and followed a 3 year boom. There were bank runs (in fact half the banks in the country closed), deflation, and near-collapse of many industries (like cotton.) Even more interesting, there were a number of states that defaulted on their bonds. British creditors, in particular, were pretty upset about it and actually had lobbyists going to state legislatures to try to get them to pay their debts. The psychological aspects were some of the most important factors, as a lack of confidence in banks and the economy worsened the crisis in many ways.
Roberts walks the reader through the depression from start to finish in 264 pages. My wife makes fun of my reading interests, but I found it hard to put down. In the first chapter, entitled Boom and Bust, he writes this:
A great trauma such as this should not be regarded only as an economic phenomenon. Economic woes soon spawned other troubles, and in its later phases the Depression could as easily be viewed as a political, and a cultural, and a diplomatic crisis. Regardless of how the Depression is perceived, though, there is a common theme: the pervasive influence in American affairs by the superpower, Great Britain.
The second chapter deals with the crisis in the various states, and then the third about the crisis with the fairly weak (by today's standards) federal government. By chapter four, there was civil war in Rhode Island. This was all new to me, despite being a fairly avid student of history.
He wraps up the crisis in chapter 5 and demonstrates how this crisis led to war with Mexico and much of the interesting Texan history. Overall, the book is a fascinating study of a difficult time in American financial history and I cannot recommend it enough.
Buy The First Great Depression today!
An Empire of Wealth: The Epic History of American Economic Power
Our second book, by John Steele Gordon, is a broad economic history of the United States. The author begins by comparing the position of the US in economic affairs to the apogee of the Roman Empire as the only even remotely comparable situation. But while the Roman Empire conquered by force of arms, the US conquered by force of economy. In particular, our dominance in the armed conflicts of the 20th century, the most destructive in the history of the world, was due to our economy.
The United States, however, has always been, at most a reluctant imperialist. In the twentieth century it was the only Great Power that did not add to its sovereign territory as a result of war, although it was also the only one to emerge stronger than ever from each of that century's three Great Power conflicts….The reason is the American economy. For while the United States has only 6 percent of the land and the people, it has close to 30 percent of the world's gross domestic product, more than three times that of an other country. In virtually every field of economic endeavor, from mining to telecommunications, and by almost every measure, from agricultural production per capita to annual number of books published to number of Nobel Prizes won (more than 42 percent of them), the United States leads the world….The ultimate power of the United States, then, lies not in its military–potent as that military is, to be sure–but in its wealth, the wide distribution of that wealth among its population, its capacity to create still more wealth, and its seemingly bottomless imagination in developing new ways to use that wealth productively.
This 496-page book was published in 2005, begins with the arrival of the Europeans among the Neolithic hunter-gatherers of the Eastern seaboard, and ends with the events of September 11, 2001. In between, it hits every major American historical event but primarily discussing the economic impact of it. As I continued to read, I found economics to be a far major player in history than anything else. It seems to have mattered far more than religion, political ideas, technology, or any other cause. A good example of this was Jamestown. As Gordon writes:
The charter [of the Virginia Company] stated that the purposes of the company were to help build up England's merchant fleet, increase the number of the country's able mariners by broadening its trade, find precious metals, found a Protestant colony in a land that was under Spanish thread, and while they were at it, convert the heathen. The last objective would, in fact, receive precious little attention. Indeed, the English sent no missionaries at all. Instead, they apparently intended to Christianize the Indians through a sort of economic osmosis…Thus, from the very beginning, the English approach to colonization was profoundly different from that of the Spanish and French.
I thought the coverage of the “Robber Baron” period along with the economic causes and effects of the 20th-century world wars was also particularly exemplary in this book. I highly recommend it.
Buy An Empire of Wealth today!
The Birth of Plenty: How the Prosperity of the Modern World Was Created
Our final book today comes from one of my favorite authors, neurologist, financial guru, renaissance man, and WCI conference speaker Dr. William J. Bernstein. This 2010, 432-page book focuses on 1820. Prior to 1820, there was precious little growth in the world. Period. Since 1820, growth has been at an incredibly high rate by comparison to the entire remainder of the history of the world. Bernstein argues this is due to four factors.
Bernstein asks,
Most important of all, why did Hobbes's description of life in a state of nature as “solitary, poor, nasty, brutish, and short”–words that perfectly captured what life was like for the majority of people until the nineteenth century–disappear from Western Europe less than two centuries after it was set down on paper?
He acknowledges prior work, such as Jared Diamond's “Guns, Germs, and Steel” where Diamond explains that the answer to the question “Why do white man have all the cargo?” involves geography, climate, and microbiology. However, Bernstein's thesis is that the reason we're basically all rich now comes down to our factors. Here is his thesis:
In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather, it is about institutions–the framework within which human beings think, interact, and carry on business…Four such institutions stand out as a prerequisite for economic growth:
- Secure property rights, not only for physical property, but also for intellectual property and one's own person–civil liberties.
- A systematic procedure for examining and interpreting the world–the scientific method.
- A widely available and open source of funding for the development and production of new inventions-the modern capital marketplace.
- The ability to rapidly communicate vital information and transport people and goods.
The first section of the book delves into these topics, first laying out the logic of the thesis, next describing the historical development of each of these factors, and finally discussing the interdependency among the factors.
The second section delves into wealth inequality-why there is such a disparity in wealth between the world's haves and have-nots. US-based leftists may be disappointed to learn that he isn't talking about the difference between our nation's billionaires and our teachers, but between the countries that “made it” economically, and those that have not. First, it focuses on the successes- Holland and England along with England's child, the USA. Then the runners-up- France, Spain and Japan. Finally, he discusses the anatomy of failure as seen in the Muslim world and Latin America and relates it to his thesis.
The last two chapters sum it all up and discuss a number of related topics including the interactions between wealth, religion, democracy, and happiness. Finally, he uses his factors to explain the rise of the USA and our place in this unipolar world.
Overall, this is also an excellent book, not only for entertaining prose, but also to help the investor understand how and why wealth is created, maintained, and grown. It was well worth my time to read.
Buy The Birth of Plenty today!
What do you think? Have you read any of these books? What did you think of them? Why do you think it is important for the investor to be familiar with economic history? Comment below!
Thanks for the rundown, looks like a good list. I’ve not read any of these but An Empire Of Wealth has been on my Amazon wishlist for a long time. I think it’s important to have some historic knowledge because history is repetitive in many ways. The same things might not happen in the same ways again, but “systems” tend to repeat, so more knowledge of those systems can’t be bad thing.
Thanks. Just downloaded the first book. You would like “Manias, Panics, and Crashes,” by Kindleberger. It goes back even further. It demonstrates how human nature never changes. Speculative booms never cease to exist. You would also love “Hetty,” by Charles Slack. She was the Warren Buffett of her day back in 1860. There is a lot of history and finance in that book, as well as the true character of “The World’s Biggest Miser.” Enjoy!
Ahhh….the witch of Wall Street. Not sure she was the biggest miser, but she was certainly one of them!
The “HISTORY” of the stock market and economy is a very interesting concept. My thoughts here are related to history more than the specific books above.
I feel like the “history” of the US stock market is often depicted as a graph of the Dow Jones over the last 120 years. A tiny amount of time compared to how long humans have been around. The argument then goes that since the graph overall goes up, that it will continue to do so forever. So if you buy and hold for 30 years you should be safe.
I have wondered if this 120 year graph meets the criteria for what we would consider “statistically significant.” Is there a better measure of the economy over a longer period of time? Is there better argument for why we should believe that the stock market will be higher in 30 years, other than history?
You don’t think four independent 30 year periods isn’t enough data to use to predict the future? I mean, a 4 person randomized, placebo-controlled trial would be pretty useful don’t you think? 😉
And this study doesn’t even include randomization or a placebo =)
Humans have been around much longer than 120 years, but anything resembling the modern economy hasn’t. If you do calculations to make a trend-line based on historical data over this time, it will show a positive relationship. Some calculations will use moving average over more recent data points rather than a linear relationship over the entire period, which may give a better idea of what to expect in the near-term (ie when the market is experiencing big swings, you may not expect slow linear growth that the trend-line over the entire period would give).
There is no guarantee that the market will be higher in 30 years, but if you think that humans will keep progressing, improving technology, becoming more efficient, etc. like we have in the past 120 years, then it is likely the market will continue to improve as it has in the past 120 years.
Sometimes we forget what the stock market is. It’s a collection of individual, mostly profitable businesses. When you buy a share of the Vanguard Total Stock Market Fund, you just bought a tiny piece of 5000 successful businesses. I mean, a business doesn’t make it onto a stock exchange without a certain amount of success. Some will go bankrupt due to changing markets and poor management, while others will become wildly successful. But as these businesses make money, you make money as the owner. So even if the market doesn’t “go up” you still get the dividends. But think about what a 0% return over 30 years would mean. It would mean that on average, those companies didn’t make any money. The 5000 best companies in the US couldn’t make a profit. Really? That’s a pretty big stretch. I mean, think about what would have to happen for that sort of an outcome. A couple of Great Depressions. Nuclear War. A couple of Revolutions. You get the picture. Not exactly a scenario you’d want to bet against. Now whether that return is 2% real or 7%, reasonable people could disagree. But 0% real over 30 years….that takes a real pessimist.
Thanks for the thoughts. You do offer an alternative reason to believe other than “history.” It is logical. Basically, if there is no devastation, there will always be successful corporations, who have the power, and thus have the money. And we ride on their coattails, making some interest.
I’m not sure you get it. It’s not THEIR coattails. It’s OUR coattails. WE are the corporation. YOU are the fat cat with the power and the money. It’s a beautiful thing that even the lower class of Americans can be capitalists in a certain sense. Now obviously the more wealthy you are the more of the corporations you probably own, but all of us get to participate at a certain level. It really is pretty brilliant and responsible for a great deal of the fact that we don’t have to clear our own land and grow our own food and read by candlelight with the few spare minutes we get each day after eking out an existence.
Lombard Street, A Description of the Money Market. It is by Walter Bagehot. It is a total classic. This one is from 1873, and describes the role of the central bank in its function to lend freely and heavily in a panic, as long as there is good collateral. He advocated what Ben Bernanke did during the financial crisis. There is a lot of good history and finance in this must read book. It may not be for your audience, but I think the WCI would not be able to put it down.
Another good one for next year is “The Ascent of Money.” It is by Niall Ferguson. It comprises everything that interests you. History, finance, the formulation of money, the creation of bonds, history of bubbles, etc….Fascinating stuff. He goes back to the beginning of time! He talks about the invention of stocks.