Economics · Stories

The Naughty – Sorry, The Nautical Origin Of Derivatives.

The timetable of a steamship line. Gamblers could wager as to whether a ship would dock early or late.
The timetable of a steamship line.
Gamblers could wager as to whether a ship would dock early or late.

A derivative is, at its most basic a contract between two people which reflects the movements of an agreed system. Usually this is a share price or an entire market, but they did not start off this way. Derivatives actually began when shipping lines began advertising timetables for their services across the Atlantic from Liverpool in the 1850s, yet owing to the vagaries of the weather, sometimes made port early or late. A sharp speculator made a wager with a friend of his that the steamer SS Thames would arrive on time, and would be paid an agreed amount per day should she be early (going “short”). The opposite was also true, and the friend stood to make money should the ship be late (going the “long way around” or simply long).

It was this need for accurate arrival times that led to the laying of the first trans-atlantic cable in the late 1850s and allowed the arrival times of ships to be received in a matter of hours. This allowed a refinement to the derivatives to the point of defining the arrival time to the nearest hour, not just morning or afternoon, or more commonly, before or after opening time.

Indeed the success of derivatives on the shipping timetables quickly led to other enterprising speculators to start drawing up contracts to reflect the new railway time tables, and led eventually to the well known races from London to Aberdeen in the 1880s where considerable sums of money would be placed in derivative contracts backing the various railway companies. An enterprising speculator, Thomas Turner arrived in New York on the Oceanic which arriving two days late, led to his making a fortune from the timetable derivatives he had placed the previous week on the sailing. It was he who pursuaded the rival railroad companies New York Central RR and Pennsylvania RR to set up competing express schedules to Chicago in order for speculators to be able to draw up derivative contracts on those much longer train journeys.

Cunard Lines became famous for their ocean going greyhounds of the early years of the 20th century, the RMS Lusitania and RMS Mauretania, both of which held the prized Blue Riband for many years. This was a prize given to vessels that a speculator had made their fortune on. Whilst shorting the White Star line became a favourite since they had slower vessels, and so the room for a vessel to be slower than their published timetables was the greater.

The owners of the derivatives weren't in the lifeboats, but they did sink.
The owners of the derivatives weren’t in the lifeboats, but they did sink.

However shorting the White Star line timetables came unstuck with the introduction of their newest liner the RMS Olympic in 1911. This vessel came in on time pretty well every day of her existence, and so all bets were off. The coup de grace for the Wall st. bankers came when the highly leveraged naked shorting of the April 1912 timetable of the sister ship Titanic sank when the ship itself struck an iceberg.

Stockmarket Derivatives.

Whilst these attempts were made with the railway and shipping timetables, stockmarkets came to the attention of several resident speculators in New York. It transpired that the stockmarkets were far more useful for derivatives because fixing them caused less problems, thus allowing a better guarantee on your investment. Fixing the 20th century limited had shortcomings because you might pick the day you needed to be in Chicago ten minutes early, but would mean a loss of several million if you had bet long that day. In those days, millions were an amount you could buy something useful with, like a railway line.

So it became the standard that speculators chose: the stockmarket. Yet even with less activity in timetable derivatives on the railroads, it was the de-railment of the Baltimore &Ohio RR “Shenandoah” service near Pittsburgh in early 1929 which triggered the Wall St. crash the same week.

Further Attempts At Gambling Derivatives.

Nothing else counts to a bank because it costs diddley-squat to run, and the profits are therefore enormous. No problem about emloyment laws, because you don’t employ anybody. Only the rich banker types who earn their keep by shorting the stock markets and don’t pay any taxes.

Naked bums, not naked derivatives! But the builders still managed some barefaced fraud.
Naked bums, not naked derivatives! But the builders still managed some barefaced fraud.

Whaddayamean? There isn’t a stockmarket? There must be a stockmarket, otherwise how would a banker speculate on the stockmarket? That just does not make sense. You need a stockmarket so that bankers can speculate on it. That is an economic necessity. Keynes said that the stockmarket was invented because nobody had anything to speculate with, and anyway, shorting the blackjack tables wasn’t making enough profit.

The naked derivatives of the blackjack tables didn’t work either because nobody could see them, anyway people had to walk out of a five-storey high window into the nakedly derived hall specially built by derived builders (who weren’t naked, though when bending over you could see their bottoms). That they had the cheek to ask for cash because they were working black to do this on the cheap. Not only that, they added injury to insult by employing imaginary labour too, the so-called ‘dead men’.

Who said bankers could have all the fun?

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