The Trouble with Currencies

There’s a story about William Tecumseh Sherman from his days stationed in San Francisco before the Civil War, and it involves him helping kick-start the California Gold Rush.

Back then, paper money was all over the place… including currencies issued by individual states, as well as promissory notes backed up by individual people.

For example, Cornelius Vanderbilt once paid another steamboat owner for his route on the Hudson with a promissory note. That steamboat owner could have then signed over the note as money to buy a new steamboat. Then the steamboat manufacturer could have turned it over to buy a bunch of material. That promissory note might literally have travelled around the country.

The problem with promissory notes is they were extremely volatile. For instance—although this was never an issue for Vanderbilt himself—when some of his peers would fall on hard times, their promissory notes would trade for 50 cents on the dollar.

Gold became stability.

Behind every dollar, there’s a government. Behind every promissory note, there’s a person. Behind every stock, there’s a company.

But, back to Gen. Sherman. In 1848, sitting in his office at what is now the Presidio in downtown San Francisco, a visitor walked in the door and dropped what some believe was a 2-pound gold nugget on his desk.

Just dropped it right there.

Naturally, Sherman was intrigued, and he was eventually able to convince the local military leadership to investigate what was at the time one of the first reported gold discoveries in California, along what is now the Sacramento River. He was there when some of the first nuggets were pulled out of the water.

Sherman wrote a letter to Washington sharing these findings, and within months the Gold Rush was on.

But that’s all ancient history.

Gold no longer backs up most currencies. The U.S. dollar is now viewed as the world’s backstop.

And it’s probably not a great idea…

The world of paper money could be completely different within five years.

For the longest time, oil has been paid for in dollars. If you want to buy oil, you have to transfer your currency into dollars first.

There’s a ton of dollars sitting in the Middle East right now for that reason—and there has been a longstanding worry that when the Middle East gets tired of America, they’re going to start only accepting payment in yuan or euros.

Will it happen? I have no idea.

Will cryptocurrencies like bitcoin become more widely accepted and trusted than the USD? No clue (though I have my suspicions).

Whatever happens, we’re seeing a massive shift in the ways currencies work in the world, and there will be a lot more change before things settle down again.

But enough of that, let’s talk trading. Think the carry trade died out years ago? Think again. I shared my modern take on the carry trade in a recent issue…