Following this account of the history of money, which takes us right up to the fiat system, this chapter will explain the evolution of finance that led to the welfare state.

Initially, in Roman times, we had coins. Coins were a financial technology that allowed the empire to pay soldiers, expand, and facilitate trade. This system worked very well, except that eventually there were too many devaluations. At some point when they stopped expanding and stopped getting spoils from their wars and territory expansion, their system collapsed.

Financial innovation was limited during the early Middle Ages until the introduction of the Florin, a stable currency. Concurrently, banking developments in Italy and Antwerp introduced the concept of "time value of money"—in other words, discounting. They developed discounting to create a form of paper money: a "promissory note", which is a promise to repay a principal amount, such as $100, plus interest at a future date.

This system created a financial technology that allows the holder to sell the note before the end of the term, so if you sell it after 4 months out of a 6-month term, the person will actually pay a premium to compensate for the loss of yield for the remaining 2 months.

This financial technology was developed in Antwerp and Amsterdam during that period. Later, we saw the evolution of central banks and the notion of lender of last resort. It can be argued that during the era of the Bank of Amsterdam , the use of coins in international trade was abandoned in favor of scriptural money.

In the 18th century, another key financial technology emerged: insurance. An illustrative anecdote from Neil Ferguson's book "The Ascent of Money", explains The founding of the first modern insurance company, Scottish Widows. The clergy in Scotland sought to improve upon a system that provided only one year of support for the wives and children of priests who died unexpectedly. They found this period insufficient. As a result, they invented actuarial calculations to literally calculate the number of contributors necessary for the system to cover its costs, depending on the number of priests who died prematurely.

They developed these calculations to create a model where each priest would pay a set amount, and in the event of his death, the insurance would cover the costs of supporting his wife and children until they became self-sufficient. The "Scottish Widows" company popularized and deployed this system.

Insurance is a key development in the history of financial technology. This leads to the concept of the welfare state, which arose from a fundamental problem in private insurance: adverse selection. In a voluntary system, healthy individuals may see little reason to pay premiums, thinking, "I am healthy, I will not get sick". Conversely, individuals who know they are sick have a strong incentive to subscribe.

This creates an imbalance where the risk pool is dominated by the sick, with insufficient healthy participants to offset the costs. From an actuarial perspective, the model would become unsustainable. In economics, this problem is known as adverse selection.

One proposed solution is to make insurance compulsory. If everyone is required to contribute, the risk pool is rebalanced. Both healthy and unhealthy individuals participate, distributing risk across the entire population.

Following this logic, many states have assumed this role, arguing that a single, centralized entity is the most efficient way to manage it. This reasoning has been applied to other forms of insurance, such as unemployment insurance. The perceived benefits of simplification and optimization favor a single administrative body.

And that, right there, is the story. The centralization of these insurance functions under state authority ultimately led to the birth of the modern welfare state as we know it. Financial concepts that began as private initiatives to meet market needs and distribute risk were thus subsumed by the state, a logical response to the problem of adverse selection and the drive for systemic optimization.

Ultimately, some countries, like Canada, have developed state monopolies for several types of insurance, including health and unemployment.

An alternative model exists in Switzerland. There, private mutual insurance companies and private hospitals allow individuals to choose their insurer and their specific coverage plan. This system still delivers relatively universal services, even though a large part of it remains private. This demonstrates that a privately operated system is also feasible.

My point here is not to argue that one system is better than another. Rather, it is to show how my study of financial history revealed why Western states, particularly France and Canada, sought to take control of these financial principles.

Essentially, insurance is an evolution of finance, and as governments often do, they have attempted to seize control of it, just as they have with money, for several reasons.

One such reason is the concept of the lender of last resort. The idea is that a large, backstopping institution can distribute risk more broadly. The initial intent behind this concept was for an institution to selectively support strong financial entities, preventing their collapse by lending them money.

However, what ultimately emerged was a system of universal bailouts. The "too big to fail" principle initially intended for a few, was applied broadly to nearly all banks and major corporations due to financial centralization. This is a concept applied "at large" by the state, much like the insurance model previously described.

Ultimately, the state assumed responsibility for these functions, transforming a financial technology created in Scotland to solve a specific problem into the vast welfare state we know today. It uses actuarial financial principles to provide services to its population; however, it is widely acknowledged that the monopolies arising from this system create significant problems, as seen in countries like Canada and France. Fortunately, alternative models exist, such as the one in Switzerland.

Recognizing that the welfare state concept originates in finance allows us to explore avenues other alternatives to state monopolies. This same reasoning could be applied to the concept of central banks as lenders of last resort—but that is a subject for another time.