This has been sitting in my drafts for almost a year. I remembered I still needed to publish this when I got caught up in a conversation about crypto with a relative who was warning me to stay well away. I reassured him that I’ve done my research, I’m only investing in projects I understand and people were just as suspicious of paper money as they are of crypto. But is that true? You can be the judge, here’s my take on the major inflection points in the story of money over the ages…
If you missed part one, I cover the use of coins, the emergence of markets and the start of paper currency in part one.
Stage 4: Hedging
When people started banking and insurance in markets, humanity quickly leapt forward into a more speculative financial realm. The future markets. Round the 15th century, international trade took off and, buyers and sellers entered into “futures contracts” where wheat, coffee, oils and other commodities were arranged to be delivered at some agreed date in the future.
By the 16th century, whalers in the Netherlands started entering into futures contracts before they set off on their voyages. This gave them money for the voyage, and also allowed them to speculate a little and negotiate better prices to make the trips more worthwhile.
Futures contracts gave simplicity and certainty to buyers, and protection from fluctuation to sellers. Imagine you set off on a 3 month voyage with £100 worth of wheat, sold it for £110 on arrival, only to visit the local tavern and hear that wheat back home have now quadrupled in price due to flooding and your wheat is worth at least 5x the price you just sold it for. How would you feel? What if you expected £100 of grain, waited 3 months and were excited to have more to sell at market and to feed your family with… only for the ship to arrive and you missed it. Then when you hit the tavern looking for the merchant, he’s heard some news that’s led him to raise the price right up to £600. How would you feel? If you imagine all the frustrations inherent in waiting for ships of goods to arrive, it’s easy to understand how futures markets emerged.
Certainty of price benefits buyers and sellers alike. But there’s more to it.
Some traders got the idea that commitments in the cash market could be offset by opposite commitments in the futures markets. These traders were soon referred to as hedgers. Hedging initially started as a type of insurance. Imagine our wheat buyer also sells a futures contract for that same quantity of wheat. If the price goes up, he’s protected from price changes as he’ll make it back on his futures contract and he still has the same amount of wheat he needed to begin with.
Cash market and futures markets soon split. The cash market was either a spot market (based on immediate delivery of a specified commodity) or a forward market (where that commodity is delivered at a later date.) On the other hand, futures markets were focused on protecting against the hypothetical future.
Futures markets had to protect hedge sellers from being cornered into a bad position by speculatory buyers who may insist on the delivery of a particular grade of commodity with low supply (sound familiar? I’ll get there...) So many different rules developed and eventually two camps emerged: long hedgers and short hedgers.
Short hedgers buy commodities in the spot market and sell the same amount in less in the futures markets. Holding inventory means that short hedgers can wait for an opportunity to sell. Long hedgers are both merchants and processors, people who’ve made the commitment to hedge against the risk of a price rise in the raw material between the time of making the forward contract and getting the raw materials needed to fulfill that forward contract.
Much hedge betting of both kinds was based around the harvest season and predictions of grain. Today society may look very different to the 16th century, but the names of these tools, and many of the rules, have remained the same.
These new financial instruments were more abstract than any other approaches to finance in human history. This led to much philosophical debate. Eventually two types of futures trading schools of thought became established. In Keynesian thought, Hedgers paid a risk premium to speculators who assumed the risk, and everyone was fine. From the Holbrook Working viewpoint, hedging involves an expectation of profit from a favourable change in the relation between spot prices and futures contracts, it also makes business decisions easier (as explained above) and so hedge betters also speculate and assume risk. Who is right? Depends on who you ask. That debate, like so many in the murky world of economics and finance, remains unsettled.
As we saw above, short selling and long selling both had various benefits to all parties. It’s interesting to see how these financial tools have evolved to the point where brokers can use them to crash companies and capitalise on the wreckage. Today self organised groups on Reddit can challenge these crashes and thus overturn the perceived safety of shorting stocks…
Stage 5: The 17th Century Bank of America
As stock markets grew and developed, and an increase in literacy and easy of printing lead to more and more philosophical texts being created on political and economic freedom, Europe changed dramatically.
Round the time that US colonies gained independence, the French did away with their monarchy. The emergence of new nations, combined with new ways of creating and defining national wealth, changed everything.
When the first US President George Washington appointed Alexander Hamilton as the first United States Secretary of the Treasury in 1789, he had some major financial problems to settle in their new nation.
Luckily Hamilton was equipped for the job; he’d been retreating and reading every treatise on the shelf since before the Revolutionary War, you see.
To Hamilton, the proper handling of government debt would also allow America to borrow at affordable interest rates to stimulate the economy. He divided the debt into national and state debt and the national debt into domestic and foreign debt. This allowed him to settle the problem of war veterans who had sold their national bonds to speculators at low prices because they didn’t think they’d win the war and saw no value in the dollar.
This approach turned out to be super complex and eventually led to a National Bank being formed. The American bank was based on the work of theorists like Adam Smith and looked to the Bank of England for inspiration.
The new Bank of America set to work minting a US dollar and fractional coins. For the first time they began using decimals to replace the gold Spanish peso and its system of eighths that was the most popular at the time.
As well as the birth of the dollar, silver ten cents coins and copper cent and half cent pieces were minted to get the public used to handling money more regularly. This was especially important for the poorer in society who were more used to barter and trade than the use of money. These ideas led to the Coinage Act of 1792, and the gold 10 dollar coin, silver 1 dollar coin and cents, half cents, 10 cents and 50 cent coins were all created by 1795, and, initially, it went pretty well.
The central bank held gold backing for at least half of its demand notes and trust in the dollar seemed impossible to shake.
In PART 3 I'll cover: The Great Depression and the end of the Gold Standard; international economic law; Fintech, Blockchain & $BTC. Will try to edit the final bit of this exploration a bit faster this time!