Blog Archives

The History of Money

Money is not a natural construct, it is an invention, like fire a tool that we use to live in the modern world, money did not start with big corporations, and although we think of money as these “bills” that we carry around or as a numbers on a bank statement money has come in many different forms through the millennia, from cattle to seashells to coins gilded out of precious metal…. Money had rather humble beginnings. In one way you could look at the development of money as the ultimate in entrepreneurship.

Money

Money

From about 9000 to 6000 BC there wasn’t any money to exchange.  That doesn’t mean that there was not some form of markets where people traded different assets; it’s just that assets looked a lot different back then. People bartered what items they possessed in order to obtain those which they did not. This is actually used today to some extent. Of course, we cannot take a couple of watermelons to the bank and ask them to send a fax for us in exchange; but if I grow watermelons and you grow chickens I can still trade you a couple of watermelons for a couple dozen eggs. (Believe it or not this happens all the time in some parts of the country!)

There are many other ways that we still use bartering. Inside prisons inmates will tell you that their currency is cigarettes. It is not a strange thing for individuals to trade skills. A hairdresser may offer to cut a man’s hair in exchange for an oil change on their vehicle. These types of trades occur all the time; all without money.

Money is the root of finance. But until 1200 BC nothing that even closely resembled money existed. And then it was only cowry shells. These shells became the first type of money or exchange in China. They served as money or currency for many years even up until the 1900s. The closest thing to metal currency occurred in China in about 1000 BC when they made a mock cowry shell. However, since knives, spades and other tools were made out of metal they were also used as money. These were the first models of the coins that we carry in our pockets today. The interesting thing about the Chinese metal coins is that they each had a hole so that they could all be put together to make a sort of chain.

The first silver coins were made in about 500 BC. They looked similar to what we use today and they bore images of their gods and emperors. These imprints let everyone know the value of each coin. Lydia was the first to use these coins but then other countries such as Romania, Persia, Greece and Macedonia all used them and began to improve them. These coins were very different than the Chinese coins in that they were not made from base metals, but of scarce ones like bronze, silver and gold which already had a lot of value.

Paper money also has its roots in China. They began the practice of using leather currency. They were primarily used as bank notes and exchanged for goods. They then moved on to paper money in China in the 9th to 15th centuries. But in 1455 using currency was completely gone from China because they had too much of the currency and it caused serious inflation.

In the 1500s the North American Indians used gifts for currency before switching to clam shells called Wampum. This was a string of beads that was made all from clam shells. They used this as a type of currency.

Finally in 1816 England put a value on gold. This is when currency began to be attributed to certain set amounts of gold. This helped protect the economy from inflation. The depression the in the 1930s started a worldwide effort to end the connection of currency to gold. Now most nations do not have any ties between gold and their currencies. There are other ways to try to avoid or control inflation.

Presently, nations exchange currencies think of the recent changes to the $100 bill and the $20 bill. Even coins have changed recently. The next big step in the world of finance is certainly digital cash, or electronic money. This is a form of money which is already begun to be exchanged via the Internet.

Advertisements

What is a Hedge Fund?

Hedge Funds

Hedge Funds

Hedge Funds are types of partnership investment opportunities. Sometimes these are formed as a limited partnership or a limited liability company just in case the company goes under or bankrupt, creditors will not be able to try to get more money from the investors than the amounts they contributed to the hedge fund. These are a very risky type of investment which many shy away from while others flock to it. Some feel that the greater the risk the higher the return can be in the end. A hedge fund manager will use money that has been deposited with his company by investor and use it to invest in another company looking for a profitable return on the funds.

The main purpose of a hedge fund is to capitalize on the market and be able to make money whether the market is increasing or decreasing.  This type of private investing is a way to sort of outperform the market. This type of private investing is not like mutual funds which are run by large public corporations; therefore they are not regulated by entities such as the Securities and Exchange Commission (SEC). This lack of regulations is what makes them be so risky, but is also one thing that makes them more attractive to investors. This is just one type of private investing opportunities which companies such as Effi Enterprises helps locate for start up businesses or struggling companies.

What does a manager do?

Managers of a hedge fund get compensated by earning a percentage of the returns. This is more appealing to many investors since they do not get just a “fee” as a return on their investment. The managers stand to make a lot more profit since the compensation structure can yield a return that is above market value. Without the standard types of regulations, hedge funds can yield a very high return; even though much of the investment is based on speculative results initially. Managers are excellent at using derivatives, like futures contracts or options. These allow a manager to bring in a profit whether or not the stock market goes up or down. Many times they have the option of selling the stocks short which basically means they can use a small amount of money as leverage and remain in control of large quantities of commodities or stocks. And they can select a particular time frame in which they will pay out. This means that they can use timing along with leverage to make a huge return if they correctly predict if the market is going to rise or fall.

New Regulations on Hedge Funds

Recently, there were some new regulations put into place regarding hedge funds. If the hedge fund is valued over $150 million it must be registered with the SEC. The Dodd-Frank Wall Street Reform Act which was enacted in 2010 set up a Financial Stability Oversight Council which watches for this type of private investing that begins to grow too large. Once it is deemed that they are “too large to fail” the Council may recommend the regulating of these funds by the Federal Reserve. The Dodd-Frank Act also set limits for how much a bank can invest in a hedge fund. Hedge funds can only be used by banks on behalf of customers and not simply to boost the corporate profits of the bank.

What happens if the investment is lost?

The hedge fund is very risky for investors. If the investment pays off everyone gets paid, but what happens if the fund loses money? Does the manager still get paid? Absolutely not; they will not get paid if there is a loss. The manager is somewhat protected while it is the investor that stands to lose. However this type of investment is protected from fraudulent activity but many feel that there are not enough regulations in place that can help protect the private investor.