June seems like the perfect time to honour King Alyattes of Lydia as we are enjoying some Turkish weather. Although in 1,100 BC the Chinese started using cast bronze replicas of the goods they traded it wasn’t until 600 BC that Alyattes created the first coin.
Prior to the invention of coinage the human race existed by bartering goods which was very imperfect as trading vegetables for a chicken works as long as the agreement isn’t for half a chicken. The invention of coins therefore unleashed the ability to trade that led to an explosion in the creation of valuable goods and led eventually to the global system of trade we have today.
The genius of the metal coin system was that it was easily transported and traded. Around the same time the Yap islanders were carving huge stones as currency but their size and heft meant that they often stayed where they were carved and the ownership was oral and anecdotal. Story has it that one stone was lost to the ocean whilst being transported but was still used as currency as everyone agreed that it still existed even though no one could see it.
This is important today because our entire financial system has been based on this system for thousands of years but in the last few decades has started to change back to one closer to the Yap system. These days the money we use increasingly doesn’t exist in reality. Computers exchange nominal credits and each of us hold a value relative to everyone else. You can now pay in a shop, using your mobile phone and never see or touch the money that is being transferred.
The money we exchange electronically did in theory have a physical version that you could withdraw if the mood took you but it is now possible to pay in cryptocurrencies such as Bitcoin which is a line of code and has no physical equivalent.
In the investment world we happily trade large sums of money between computers and often invest in assets that aren’t real either. In recent years the growth of passive funds has meant that instead of a fund buying the shares underlying an index there wasn’t enough shares for the investor demand and so increasingly funds are buying contracts based on the performance of the shares in an index.
As investing becomes less ‘real’, it is important that you or the adviser that you use understands the implications of this as in particularly volatility can increase as prices are driven by demand more than underlying fundamentals.
Here’s to King Alyattes.