Reflection on History
History is the greatest of all teachers. They let us learn from our ancestor’s successes and failures and help us do better. While past articles were mostly about defining various fundamentals of money, today I’d like to bring in a few instances in history that will help me establish those fundamentals.
Let me begin from the Napoleonic wars between Britain and France during 1793 – 1815 where English bonds were a bigger instrument than their military power that determined their victory. While both France and Britain needed to pay their troops, the Britons were in a better position to do so because they had ample number of state bonds issued across Europe to meet their finances. Moreover, to address the challenges of inflation, Britain further purchased gold from the bond money and used that to pay the troops. What is further interesting to note is that this created a scarcity for gold all across Europe and financial guru of all times, Nathan Mayer Rothschild, had invested all his money in gold to capitalize on this increasing demand thus increasing the price of gold. However, defeat of France immediately reduced this demand as there was no war to fund then, and Rothschild was immediately in a panic. What was most remarkable for this moment was that Rothschild immediately shifted his investments to British bonds. British victory meant market’s trust in it got higher and the bond prices went on a steady hike. Rothschild held on to his bonds for over a year before he sold them. This one deal (an epic financial success story) earned Rothschild over GBP 800 Million (Nepali Rupees 110 Billion).
Anyone interested in investments and money must be interested in the stories of the Rothschild family, George Soros, Carlos Slim Helu and Warren Buffet. Wikipedia could be your friend at finding more about these other personalities and also about the Rothschilds.
American Civil War of 1861-1865 is another such event that marks a ‘lesson learnt’ moment for the world and is currently very much applicable to Nepal as well. More popularly remembered in American history as the “Union Blockade”, the finance world would remember it as the downfall of the ‘Cotton King’. The south Confederate economy had great success with their cotton backed bonds across Europe and helped fund their war very well. And in order to increase the demand for cotton, the Confederates blundered with an embargo on cotton that not only increased demand for cotton, but its shortage also led to a lot of textile factories in England to shut down and to employees being laid off. While the Union capitalized the moment to block all southern ports and further prevent export of cotton from the south, Europe was looking for alternative supply of cotton and found havens in India, China Guatemala and various other countries. They also tried distributing their “greyback” notes, but oversupply out of not being able to sell their cotton got them trapped within inflation and soon their currency lost its value. The Confederates ended up selling only 10% of their stock, running extremely short on money, food and other supplies, and eventually lost the war. This is a classic example of when a product’s scarcity meant heavy loss for the stockiest.
From a business’s point of view (example II), the challenge is to create enough demand to keep the prices high, but also to keep it within limits to keep buyers from looking for alternative markets. From an investor’s point of view (example I), decrease in demand for something in some place is always compensated by increase in demand for something else (or the same thing?) in a different place. It is up to you to be wary of such increases in demand and make the right choices at the right times.