A certain nobleman went into a far country to receive for himself a kingdom, and to return.
And he called his ten servants, and delivered them ten pounds, and said unto them, Occupy till I come.
And it came to pass, that when he was returned, having received the kingdom, then he commanded these servants to be called unto him, …that he might know how much every man had gained by trading.
Then came the first, saying, Lord, thy pound hath gained ten pounds. And he said unto him, Well, thou good servant: because thou hast been faithful in a very little, have thou authority over ten cities.
And the second came, saying, Lord, thy pound hath gained five pounds. And he said likewise to him, Be thou also over five cities.
And another came, saying, Lord, behold, here is thy pound, which I have kept laid up in a napkin….
And He saith unto him, out of thine own mouth will I judge thee, thou wicked servant. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?
And he said unto them that stood by, Take from him the pound, and give it to him that hath ten pounds.
For I say unto you, that unto every one which hath shall be given; and from him that hath not, even that he hath shall be taken away from him. Luke 19: 12-26.
Kind of sums up the ‘90s, don’t you think? After all, trading — in stocks, bonds, options, and currencies — has become trendy, glamorous, easy, perhaps almost compulsory. Yet, until the late 1990s, wisdom conventionally held that it should be reserved for the lucky few who didn’t need the money they risked. Part of the reason is that a long period of relative peace and prosperity have fundamentally changed attitudes toward risk.
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The Bretton Woods agreement was abandoned in 1973, allowing currency values to float freely against one another.
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That long period of peace and prosperity began 50 years ago, after nearly 20 years of Depression and war. Risk was very real then, and not at all desirable. The world’s much-scarred put together a number of agreements to reduce political, military, and economic risks. As a result we now have the UN and NATO, and also such economic organizations as the World Bank and International Monetary Fund (IMF). Both the World Bank and the IMF were products of the 1946 Bretton Woods agreement, whose main goal was to prevent the sort of currency imbalances that had contributed to the worldwide spread of the Depression. They were formed to help rebuild war-torn countries and, later, to help develop poorer nations as part of an effort to reduce the instability caused by deprivation (though some say they now promote deprivation by imposing fiscal conduct requirements on countries that can ill afford it).
The Bretton Woods agreement provided for fixed international currency exchange rates pegged to a gold-based US dollar. The arrangement unraveled in the 1960s when the US financed the Vietnam War with debt instead of taxes, using higher interest rates to attract investors and upsetting the balance between the currencies. By then, devastated European and Japanese economies had recovered and smaller, less-powerful nations felt that they deserved to share the wealth that their raw materials had helped build.
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As a result, pegging everything to the US dollar was much less necessary. The currency portion of the agreement was abandoned in 1973, leaving the value of each country’s currency floating against every other currency (except for those countries, most notably the Communist bloc, which opted out) and none had any relationship to anything with intrinsic value, such as gold. This was the financial equivalent of Einstein’s Theory of Relativity displacing Newtonian physics.
The development of international currency trading paved the way for the striking entry of small investors into financial markets. The movement of capital hither and yon in search of minor movements in the relative value of currencies, or in exchange rates, meant that governments were competing against each other for lenders. Interest rates zoomed. Downstream from the major financial players, individuals learned that there was more to saving money than their local bank — there were also money market funds sponsored by mutual fund companies (such as Vanguard, FMR, and T. Rowe Price) and brokerages (most notably Merrill Lynch and the predecessor firms of Smith Barney and Dean Witter). Brokerage companies were no longer mysterious entities patronized only by the rich.
Currency trading internationalized money, in a sense. When the interest frenzy subsided, investors accustomed to rich returns pursued high-growth investments worldwide. And because there’s no greater growth than the step between zero and one, they sought out less developed countries in Latin America and Asia. (In the developed world, particularly the US, industrial realignment and the growth of the computer and electronics industries produced a similar from-nothing-to-something development curve.)
Back at the ranch, once small investors got used to the high returns that came with double-digit interest rates in money market accounts, they were reluctant to go back to their passbook accounts. From the 1970s to the 1990s they progressed from money market mutual funds to stock mutual funds to stocks. Exemplified by the swashbuckling daytrader, individuals — aided by the proliferation of computers, the Internet, and a growing cult of investment — changed the rules of investing. Increasingly, trading decisions — even decisions by those saving for retirement — are based not on studying companies, but rather on data (formerly expensive and difficult to get) about small price movements.
The result is greater overall volatility, as stock trading, like currency trading, loses its link to something that possesses some intrinsic market value. Money has always really been about confidence, but the severing of the link to inherent value is a step into the unknown, and this lack of certainty has become a fixture of modern life.
Volatility is not limited to the stock market. It influences corporate governance (as management attempts to please investors who are increasingly indifferent to companies’ actual health), employment (keeping the workforce lean and mean, or at least crabby), and labor conditions (more overtime for fewer workers and a general feeling of hurriedness). The only thing that really keeps it all going is the belief that, somehow, the good times will continue.
The postwar evolution is complete. The move from near total risk aversion after WWII to today's fiscal thrill seeking (as long as the downside remains purely theoretical) means that economic life is now, more than ever, a confidence game.
Barbara Spain is an editor for Hoover's Finance and Healthcare team.
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