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Finance and Banking · Classes 9-10 · Chapter 1 · 1.2

Evolution of Finance.

Today a financial manager worries about share prices, risk and the world market. Not long ago the main job was keeping the books. What changed in between, and which decade brought which task?

1. From the Industrial Revolution to the American field

After the Industrial Revolution of the 17th century, production technique grew complex. Specialized and divided processes brought production to excellence, and to survive in the market the idea and use of finance became essential. In the 18th century accounting spread, and finance was mainly involved in evaluating and analysing financial statements. At the end of the 19th century, with the classical trend of micro economics, finance joined the own, specialized economics of the business.

Traditionally a financial manager's main duties were to keep the accounts and, by analysing them, to plan future action. Later came preparing reports that show the true state of the business, and managing liquid funds so that dues can be paid on time. The way finance developed in the USA over the last century later became known as the trend of evolution of finance across the world. That is why the USA is called the main exercising field, the grazing ground, of finance.

2. The thirties to the fifties: slump, liquidity, profit

In the decade before 1930 a trend of unification began among USA companies. Financial managers examined the financial statements to settle the framework of each unification.

In the 1930s unification did not succeed much in the USA. Many companies went bankrupt and a deep depression set in. Reorganizing a losing company to save it from bankruptcy became the financial manager's special duty. Collecting funds by selling shares started from this time.

In the 1940s the main concentration was liquidity. Finance made a cash flow budget and so secured a well-planned flow of cash.

In the 1950s finance used mathematical analysis to pick the most suitable investment project. The main aim was to maximize profit through long-term investment, raising sales and cutting expenditure. This is counted as the traditional trend of finance.

3. The sixties to the nineties: modern finance

Modern finance began its journey in the 1960s, and the capital market got priority. Shareholders are the owners of the company, so maximizing their property, meaning the market price of the shares, became the main objective of finance.

The concept of risk also arrived in this decade. Risk rises with profit, so a bigger profit is not always desirable.

The era of computerized work began in the 1970s. Finance became mathematics-based: most financial decisions rest on complex calculations, and doing those on a computer became very popular. Risk can then be measured and managed more correctly, and the traditional trends of capital structure grow more complex and mathematical.

Harry Markowitz, Merton Miller and Modigliani enriched business finance with theoretical analysis. For their contribution through mathematical analysis they received the Nobel Prize in the 1990s.

In the 1980s finance changed its earlier role and took a new form. Its main work was to distribute capital efficiently among the company's alternative projects, and to calculate and analyse the income of those projects.

In the 1990s the World Trade Organization (WTO) appeared and barriers to export and import began to fall worldwide. Finance then achieved internationality: an investment decision looks at where in the world production and selling pay, and raising funds looks at the nature of the world capital market. Modern finance is therefore an applied field built from accounting, economics and a few other subjects.

4. Fit it together yourself

First see the decades along one line. Tap a decade and its one-line focus appears.

decades tap a decade

Decade by decade

Before 1930. Companies unify; financial statements are examined to set the framework.

Now separate the work of four neighbouring decades. This is exactly where exams trip people up.

sort them which decade's work?

Which decade

Pick up a chip, then drop it in a decade's box.

Last, put the whole story in order, from the Industrial Revolution to the nineties.

in order which first?

Put in order

Start with the earliest stage.

5. Check yourself

Three questions in the exam's style. Start with the first.

check yourself pick one answer

Question 1

In which decade did the World Trade Organization appear?

In the second question, watch the decade.

check yourself pick one answer

Question 2

What is the full form of WTO?

The last one will make you think a little harder.

check yourself pick one answer

Question 3

Which is a feature of modern finance?

The whole note on eight cards.

cut from the note tap to turn over

Eight cards

QuestionIn which decade did the high depression and bankruptcies hit the USA?
AnswerThe 1930s.
QuestionIn which decade was liquidity the main concentration?
AnswerThe 1940s (cash flow budgets were made).
QuestionWhich decade's trend is the traditional trend of finance?
AnswerThe 1950s.
QuestionIn which decade did modern finance start?
AnswerThe 1960s.
QuestionWhat was the main objective of finance in the 1960s?
AnswerMaximizing shareholders' wealth, i.e. the market price of shares.
QuestionIn which decade did finance become mathematics-based and the computer era start?
AnswerThe 1970s.
QuestionIn which decade did Markowitz, Miller and Modigliani get the Nobel Prize?
AnswerThe 1990s.
QuestionIn which decade did the WTO appear?
AnswerThe 1990s.

Source: Finance and Banking, Classes 9-10 (NCTB), Chapter 1 “Finance and Business Finance”, section 1.2.