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the three biggest risks most investors face are that their portfolios won’t provide the returns needed to meet their spending needs, that their portfolios will face ruin, and that a large share of their wealth will be taken away (e.g., through high taxes).
Ironically and typically, the enormity of the Ming Dynasty’s wealth and power is one possible explanation of what eventually led to its fall. Believing that they did not need anything else, the emperors put an end to China’s exploration of the world, closed its doors, and retired to lives of pleasure, and turned over the running of government to their ministers and eunuchs, which led to dysfunctional infighting, corruption, weakness, and vulnerability to attack.
The Commercial Revolution (1100s–1500s) The Commercial Revolution was the move away from a solely agriculture-based economy to one that included trade in a variety of goods. This evolution began in the 12th century, and by 1500, it was centered in the Italian city-states
The Renaissance (1300s–1600s) A new way of thinking in many respects modeled after the ancient Greeks and Romans started in Italian city-states around 1300 and passed through Europe until the 1600s, in a period known as the Renaissance. Renaissance thinkers made a big pivot toward using logical reasoning instead of divine intention as the way to explain how the world works.
The Age of Exploration and Colonialism (1400s–1700s) The Age of Exploration began in the 1400s when Europeans traveled all over the world in search of wealth, creating widespread contact between many different peoples for the first time and beginning to shrink the world. It roughly coincided with the Renaissance because the technological marvels of the Renaissance translated into advancements in shipbuilding and navigation, and the riches that those ships brought back financed further Renaissance advancements. Ruling families supported these money-making explorations and split the profits with
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The Reformation (1517–1648) Beginning in the 1500s in Europe, Protestant religious movements initiated a revolution against the Roman Catholic Church, which contributed to a series of wars and the bringing down of the then-existing European order. As previously explained, at the time, the existing order consisted of monarchs, nobles, and the church in symbiotic relationships.
The Wars of Religion were intertwined with the wars against the existing orders and existing elites. They included an extended civil war in France in which an estimated 3 million people died and later contributed to an extended civil war in the UK. In the end, the Reformation led to Protestants earning substantial rights and freedoms.
The New World Order Following the Thirty Years’ War (1648) On its surface, the Thirty Years’ War pitted Protestant countries against Catholic ones; however, the full story was more complicated with wider geopolitical interests related to wealth and power playing a role of who lined up with whom. At the end of the war the new order was laid out at the Peace of Westphalia. The most important breakthroughs that came from it were the establishment of geographic borders and the sovereign rights of the people within those borders to decide what happens in their domains. Like most periods after major
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The Invention of Capitalism (1600s) Beginning with the Dutch, the development of publicly available and popularly used equity markets allowed savers to effectively transfer their buying power to entrepreneurs who could put that buying power to productive and profitable use. This significantly improved the allocation of resources and was stimulative to economies because it produced new buying power. It also produced the capital markets cycles.
The Scientific Revolution (1500s–1600s) The Scientific Revolution was an extension of the Renaissance-era shift from finding truth in religion to finding truth in logical reasoning and the Reformation’s drive to question authority and think for oneself. These factors led to the development of the scientific method, which improved humanity’s understanding of the world, establishing protocols by which scientific discoveries could be investigated and proven and ushering in many discoveries that raised living standards.
The scientific method was pioneered by Francis Bacon in the early 1600s, though many important advances in astronomy—particularly the work of Copernicus and Galileo—took place earlier, in the 1500s.
The First Industrial Revolution (1700s–1800s) Beginning in the UK in the 1700s, freeing people to be inventive and productive and providing them with capital led many societies to shift to new machine-based manufacturing processes, creating the first sustained and widespread period of productivity improvement in thousands of years.
The new urban populations needed new types of goods and services, which required the government to get bigger and spend money on things like housing, sanitation, and education, as well as on the infrastructure for the new industrial capitalist system, such as courts, regulators, and central banks. Power moved into the hands of central government bureaucrats and the capitalists who controlled the means of production.
The Enlightenment and the Age of Revolutions (1600s–1700s) Also known as the Age of Reason, the Enlightenment was essentially the scientific method applied to how humans should behave. This way of thinking became widespread in Europe in the 1700s and 1800s and was an extension of the diminishing of the rights of the monarchy and the church and the increasing of the rights of the individual that characterized earlier intellectual movements.
In particular, the Enlightenment ideas of these and other figures promoted rationality and individual liberties and undermined monarchic and religious powers, creating a movement toward overthrowing monarchies known as the Age of Revolutions. This wave of revolutions included the American, French, Spanish, German, Portuguese, and Italian.
The Napoleonic Wars and the New World Order that Followed (1803–1815) The Napoleonic Wars lasted from 1803 to 1815, when Great Britain and its allies defeated Napoleon and his allies. As is usual, the victors got together to create a new world order, which was hashed out at the Congress of Vienna. It drew new boundaries to ensure that no European power would become too dominant, based on balance of power concepts that would avoid war. The British emerged as the world’s leading empire, and as is typical after the war and the establishment of a new order, there was an extended period of peace
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Western Powers Move into Asia (1800S) The British and other Western powers brought their gunboats to India, China, and Japan in the mid-1700s and into the 1800s, causing dramatic disruptions to the course of their histories. At the time, both China and Japan were isolationist.
Second Industrial Revolution (1850s–early 1900s) Beginning in the mid-1800s, a second big wave of innovation took place, centered at first around steam-powered locomotion (e.g., railroads) and then electricity, telephones, interchangeable manufacturing parts, and other innovations at the turn of the 20th century. Whereas the First Industrial Revolution was centered on the UK, the Second Industrial Revolution primarily benefited the United States.
Invention of Communism (1848) The invention and development of communism in the mid-1800s came as a reaction against both capitalism and the wealth gaps it created and the benefits of the Industrial Revolutions going more to the owners of the new technologies than to the workers.
THE BIG CYCLE RISE AND DECLINE OF THE DUTCH EMPIRE AND THE GUILDER After a series of attempted revolts in the mid-1500s, the Dutch, who were under the control of Habsburg Spain, finally became powerful enough to gain de facto independence in 1581. From 1625 until their collapse in 1795, the Dutch gained enough wealth and power to eclipse both the Habsburgs and China as the world’s richest empire. The Dutch Empire rose for all the classic reasons explained in earlier chapters, peaking around 1650 in what is now remembered as the Dutch Golden Age.
This allowed its currency, the Dutch guilder, to emerge as the first global reserve currency.
The Dutch invented ships that could go around the world to collect riches, capitalism that could finance these and other productive endeavors, and many more breakthroughs that made them rich and powerful. The Dutch created the world’s first mega-corporation, the Dutch East India Company, which accounted for about one-third of world trade.3 Dutch openness to new ideas, people, and technology helped them rise quickly.
The Dutch also created the world’s first reserve currency other than gold and silver, the Dutch guilder, supported by an innovative banking and currency system put into place via the establishment of the Bank of Amsterdam.
The Dutch invented capitalism as we know it. This was great for the Dutch and great for the world, but like most great inventions, it brought with it some potentially deadly consequences.
The Dutch created that when they invented the world’s first publicly listed company (the Dutch East India Company) and the first stock exchange in 1602.
The formation of the Amsterdam Stock Exchange in August 1602 and the listing of the Dutch East India Company spread share ownership much wider
The Dutch East India Company was an equally revolutionary invention. The world’s first transnational corporation, it had many of the features you see in companies today—shareholders,
In 1609, the Bank of Amsterdam was established as an exchange bank to protect commercial creditors from unreliable commodity money in general circulation.
The New World Order: The Thirty Years’ War and the Peace of Westphalia
The fighting was about money, religion (Protestants versus Catholics), and geopolitics.
The Habsburgs lost the war. That left them in a meaningfully weakened position.
the deal that was cut at Westphalia invented countries as we know them, which is to say it allowed sovereignty of the state with the ability to make choices within its geographic borders
It also made the religious authorities much less powerful. The Peace of Westphalia reflected what I call the “exhaustion of war,” which contributed to a long period of peace and prosperity that followed.
wars are devastating financially; that is true for the winners and much more so for the losers.
The Dutch Golden Age led the Dutch to shift their attentions to “living the good life” in a way that weakened their finances. Other powers rose too and began to challenge them. The arrival of capitalism, combined with the new approaches of the Enlightenment, led to an economic transformation called the Industrial Revolution, which was centered in Britain.
In the 1700s, the Industrial Revolution led the British to overtake the Dutch as the preeminent economic and financial power in Europe.
After 1688, as Great Britain became more competitive, Dutch merchants shifted their operations to London, hastening its rise as an international center of finance.
THE DECLINE Around 1750 the British (and the French) became stronger than the Dutch, both because their own power had grown and because the Dutch had become weaker. As is classic, the Dutch a) became more indebted, b) experienced a lot of internal fighting over wealth,8 and c) weakened militarily. All this made them vulnerable to decline and attack.
Financial losses and large debts led to the classic move by the central bank to print more money. As the Bank of Amsterdam printed more and more paper money to provide loans to the Dutch East India Company, it soon became clear that there would not be enough gold and silver to cover all the paper claims on it. That led to the classic “run on the bank” dynamic, in which investors exchanged their paper money for precious metals.
At the core of this new, human-centric philosophy was the idea that society should be based on reason and science and that the government’s power comes from the people, not from God.
This list gives a sense of the timing and pace of innovation in the UK: 1712: Steam engine invented. 1719: Silk factory established. 1733: Flying shuttle (basic weaving machine) invented. 1764: Spinning jenny (multi-spindle weaving machine) invented. 1765: Separate condenser (for steam engines) invented. 1769: Water frame (hydraulic power for weaving machines) invented; steam engine upgraded. 1785: Power loom invented; iron refining developed. 1801: Steam-powered locomotive on wheels invented. 1816: Steam-powered locomotive on rail patented. 1825: Railway construction initiated on a line
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the Second Industrial Revolution, a sustained period of innovation in which science as well as engineering played a major role, as synthetics and new alloys were produced and the use of new energy sources like petroleum and electricity exploded.
Transportation, communications, and infrastructure improved,
The result was a sizable increase in output per worker in the countries able to make the switch efficiently—primarily the US and Germany.
The combination of social change and rising inequality sparked significant tensions.
Geopolitical Rivals Emerge In addition to its domestic issues, the UK faced challengers to its empire abroad, competing for influence with France in Africa, Russia in the Middle East and Central Asia, and the US in the Americas.
Its most significant rivalry, however, was with Germany.
When the new world order began at the Congress of Vienna, Germany was still divided into a number of smaller states.
The rivalry between the UK and Germany was just one of many building across Europe—France and Germany were at odds, Germany was increasingly concerned about Russian industrialization, and Austria and Russia were struggling for influence in the Balkans. Though these countries were intertwined through marriage and commerce more than ever before, and despite most people believing it wouldn’t happen, in 1914 the powder keg exploded into all-out war. This was the first world war because this was the first time the world had become so small and so interconnected that most of the major parts of the
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The war killed about 8.5 million soldiers and 13 million civilians, leaving all of Europe exhausted, weakened, and indebted.
