The Wind Traders

"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it." —Henry Ford

Banks and governments are shrouded in mystery. Historically, they have a propensity for secrecy, cover-ups, and credit games that drive economic booms and busts. The period that most resembles today was the birth of our modern monetary system between 1689 and 1720. King William III and Queen Mary Stuart had just taken power in England. They signed the English Bill of Rights, establishing parliament, free elections, freedom of speech, civil liberties, and succession of the crown, which limited their monarchy. This Bill of Rights was remarkably similar to the Declaration of Independence in 1776. And both marked the beginning of a major war.

For America, it was the start of the American Revolution, and for England, it was the beginning of The Nine Years’ War (or the War of the Grand Alliance), a major European conflict. King Louis XIV (France) and William III (England) were in a power struggle for control of the world. France wanted to expand its territory to modern-day Belgium and Luxembourg, northwestern Italy, and Catalonia, and this led to a "Grand Alliance" of resistance (England, the Dutch Republic, the Holy Roman Empire, and Spain). Meanwhile, England's new Protestant King William III was also going head to head with supporters of the previous Catholic King James II who was overthrown. While hard to fathom, Protestantism created our modern monetary system and our democracy.

Like the many wars of the United States, The Nine Years’ War led to skyrocketing costs for the new Protestant King William, and a desperate need for financing. Being a Dutchman who immigrated to England, he applied "Dutch finance" techniques like annuities, lotteries, and tontines to the English economy. In 1694, King William and Queen Mary set up the Bank of England as a fundraiser. Basically, 1,268 individuals subscribed to buy £1,200,000 of war bonds (or gilts) yielding 8% interest, and that's how the modern-day bond market came into existence. They eventually issued banknotes backed by gold, but this didn't happen until the 1700s. If you recall, John Law borrowed this trick and took it to France where he created the Mississippi Bubble. Now, the U.S. is doing it again.

As debt grew for Protestant William's bond market, so did enthusiasm for the London stock market. By 1695, the London Stock Exchange had gone from less than 15 companies to 150, while prices and enthusiasm skyrocketed. The East Indian Company was paying out dividends equal to four times its nominal capital and some stocks went up 500% after they were listed! According to Devil Takes the Hindmost: A history of financial speculation by Edward Chancellor, the White Paper Company increased three-fold over four years and the Linen Company did even better. Unlike today, this kind of financial growth was met by lots of public skepticism in the form of comedy, ridiculing the boom and traders. Like today, however, the world has piled into the US Stock Exchange, ignoring all the warnings.

"Stockjobbers" didn't have the best of reputations back then. They congregated at coffee houses, acting as agents for people trading in markets. They were exceptionally good at "pumping and dumping" various different stocks for big gains. Daniel Defoe, author of Robinson Crusoe, declared bankruptcy after being fooled by them and went on to write about their deceitful tactics, specifically, how they exploited new and naive investors for their own greedy gain. Not surprisingly, in 1696, the stock market finally crashed and many sketchy companies vanished, never to be seen or heard from again. Many millionaires were born and ruined during this period. After the crash, King William's bond market (the Bank of England) ran out of funding. The Nine Years' War ended the next year, in 1697.

Still, the stock market kept on going, and in 1720, there were three gigantic bubbles in Paris, London, and the Dutch Republic (not the Tulip Mania, which was the world's first financial bubble in 1636). While France and England cleverly transferred their financing needs into tradable company shares like the Mississippi Bubble and the South Sea Bubble, the Dutch Republic had a wealthy upper class that financed its government. As such, it wasn't as desperate for financing as the other two countries were at the time. Nonetheless, bubbles are catchy and lots of new Dutch companies emerged with alternative business models, like insurance. When the IPO bubble finally popped, the only company that survived was ASR, which is still around today.

"Windhandel" is a Dutch term that came out of these financial crisis in 1719-20. It means "wind trade" and refers to the high-risk buying and selling of stocks and derivatives. Lessons learned from these greedy "wind traders" came in the form of a Dutch book published in 1720 about the rise, progress, and fall of these bubbles: Groote Tafereel der Dwaasheid (The Great Mirror of Folly). A great idea for someone to start writing today, when our modern-day wind traders lose everything, ignorant of history. What makes this book so unique and special are the 69 satirical prints about speculation and manias, not something that AI could likely produce today. For one, I don't think AI algorithms can imitate the satire of greed, fear, ignorance, and recklessness. Take a captivating journey through some of them...

England was the financial center of the world, until after WWII when the dollar became the world's most valuable currency backed by gold. Now, however, the U.S. dollar is fiat…U.S. war bonds and U.S. treasuries are one in the same. What’s more, after the Great Financial Crisis, the government's funding needs increased and Bitcoin and the anonymous but infamous Satoshi popped up out of nowhere. What followed were more than 25,000 cryptocurrencies and a huge bubble in all the financial markets and these unregulated crypto markets. Just as France and England cleverly expanded their financing needs into tradable company shares, maybe the U.S. government had the foresight to expand their financing needs to unregulated trading of bits. No matter, it's certainly convenient for the U.S. dollar, and its controllers.

As the Bank of England expanded its financing from bonds to banknotes, the United States has also found all sorts of new and creative ways to fund its debt. It has created a plethora of regulated centrally controlled bubbles, and quietly enabled at least one giant unregulated bubble, in its zest for a good life! All these bubbles, however, will eventually pop, if they haven't already, and hurt more people than any bubble ever before in the history of humanity. This will result in a plethora of tears and vast riches for the money controllers and the clever author who turns the story into a brand new book, and film. There will be valuable lessons to be learned on how to stay sane in a world trading wind and bits, and how to go against the wind with real valuable things that you can actually touch and hold. It's tiring to watch all these shenanigans and stockjobbers win, but the payoff for holding one's common sense or "cents" will be epic in the long run. That is, physical silver and gold.

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