From 0 to 1: how a world without finance grows financeTwelve constraints, twelve institutions

One person, one plot of land, one harvest a year. Income and consumption do not happen at the same time, so there is saving. A second person arrives, so there is lending. A loan may not be repaid, so there are commitments. As people multiply, money appears. Harvests are uncertain, so there is insurance. Savers want to withdraw at any time while borrowers want to use the funds for a long time, so there are banks. No single person can afford a ship, so there are shares. Shares must be saleable, so there are markets. Prices gather everyone's information. Ordinary people have neither the time nor the expertise, so there is delegation. Trustees may not do their duty, so there are custody, disclosure and regulation. Even with all these institutions in place, people still make mistakes, so there are defaults. Twelve constraints grow the skeleton of today's financial system.

1. A chain

Each institution exists to solve a problem left by the one before, and each creates a new one. Arranged in logical order, the twelve institutions form a chain.

Twelve constraints, twelve institutions

Each chapter adds just one constraint and grows one institution; that institution in turn leaves the next problem. Choose any step to see its constraint, its institution and the problem it leaves.

2. Summary of Part One

The world derived in these twelve steps is today's financial system. The problems of time, risk and information are shared out through saving, insurance and markets. Ordinary people hand their money to a few professional institutions, then constrain those institutions through custody, disclosure and suitability, and constrain themselves through defaults. Every institution makes claims on the future more accessible, more credible or cheaper, and every one carries a cost. A large part of that cost is the cost of having others think, act and check on one's behalf.

This cost explains many of today's arrangements: why only people with enough assets can afford an adviser, why a principal can see only a manager's past performance, why defaults can only be designed for the circumstances of the majority. If this cost fell sharply, some institutions would change and some would not. The problems of time, risk and maturity would remain; the ways of delegating, checking and sticking to a plan might be entirely different.

Summary of Part One

The twelve institutions seen from three angles: the conclusion of each, what it means for products, and what happens when the cost of having others think and act for us collapses.

The degrees of impact under "When agency costs fall" are judgements, not estimates.

3. Where the principles sit

The order of the derivation is a logical order: each step presupposes the one before. The order in which the principles were proposed is a historical order, and the two often disagree. Many institutions grew up in practice first; only decades or even more than a century later did someone explain why they were necessary and under what premises they hold.

Where the principles sit

Across: the order of the derivation. Up: the year each principle was proposed. Tap a dot to see the principle and who proposed it. A principle that comes later in the logic but earlier in history shows practice growing institutions before theory explained them.

Dots are collected automatically from each chapter's principle cards. The vertical axis is split at 1900; earlier years are compressed. Several principles from one chapter are spread left to right in order of appearance. Hollow dots are principles re-examined in Part Two, drawn at the chapter where they are re-examined.