Chapter 8 - Money, Speculation & Gambling




If one were to lead a stranger through the streets of Amsterdam and ask him where he was, he would

answer 'Among speculators,' for there is no corner in the city where one does not talk shares.

        Joseph de la Vega, in Confusion de Confusiones, 16881


   

Today, as the bankruptcy of our current financial system becomes more and more apparent, a growing number of critics have attacked what they call the “transformation of our financial system into a casino economy.” Many counterpose the recent binge of financial speculation and the excesses of globalization to what they profess is the “normal” functioning of the financial markets and the economy. But they are wrong. The speculation, the economic looting, and the spread of slave labor are the nature of the Empire, and its modern representation in the British system of Free Trade.


    What makes people think we had a “normal economy” in the 1950s and 1960s, is that we had Franklin Roosevelt 20 years earlier. And it was Roosevelt’s revival of the anti-empire American System of Economics, and his regulatory measures such as the Glass-Steagall Act, which kept the Empire at bay until 1971. There is either the Empire or the American System. There is no “normal economy” at some vague location in-between.


    Originating in Venice, and aided by the works of the Salamancans, among others, during the 17th century, the oligarchy initiated a vast revolution in financial policy. We have already looked at a few of those institutional changes. Here we will look at some of the content, to get at the essence of the insane oligarchical view of what constitutes wealth. We have already touched on the creation of the radical notion of “property rights” and the invention of the insane magical notion of “money” as creations of the oligarchy. Here we will look at these matters a little bit further, and how they were used to create the functional institutions of the Empire.

Antwerp – the Laboratory


    The Antwerp Bourse opened in 1531. Initially, most of the financial contracts involved trading in hard commodities, like wool, in a manner not dissimilar to the earlier famous Champagne Fairs. But as time went on, the activity of the Bourse was shifted over to almost entirely purely speculative investments. This transformation included the invention of new financial instruments such as futures contracts and other forms of financial derivatives. Later, in Amsterdam, these Antwerp innovations would be taken much, much further.2

    One of the Antwerp innovations was that Bills of Exchanges, which had already existed in Venice, Genoa and other locations, were made transferable. This led the practice of discounting Bills, and the development of a speculative money market in short term paper. Two Imperial edicts gave legal protection on the negotiability of these notes.

    It was in Antwerp, also, that “futures trading” (a claim on the price of a commodity or security transaction to occur at some future date) became commonplace. A limited use of primitive futures contracts had already been used at the commercial fairs of the 15th and 16th centuries, but it was at Antwerp that speculation in futures became routine. It was at Antwerp, as well, that “option contracts” (the right to speculate on something you don’t actually own) were invented. Later, after 1600, options trading was to become a dominant practice of the Amsterdam market. This Antwerp/Amsterdam creation of options contracts was the mother of all of the purely financial derivatives trading that occurs today.

    By the 1570s, investments at the Antwerp Bourse were almost entirely centered in purely speculative financial contracts. Speculators also gambled on the rise and fall of currency exchange rates. A Bill of Exchange, drawn at Antwerp was the most common commercial currency in Europe.

    All of this activity was premised on an oligarchical-created notion that wealth is defined by money, and that the markets were a way of creating or stealing this wealth out of thin air. Money and other financial instruments, which somehow seemed to magically exist in a free marketplace, held the power to excite and enrich anyone clever enough to possess them. Completely absent of course, was the Commonwealth idea that real wealth stems from the deliberate fostering of the creative capabilities of the individual human members of society, and the power of those individuals to develop new inventions and discoveries which can transform and truly enrich man’s relationship with the universe.


Banking & Money


    Although the Antwerp Bourse was the testing ground for many of the financial practices later adopted in Amsterdam, it was also merely a financial exchange, located within the Hapsburg domains. Amsterdam, conversely, was destined to become the financial capital of a maritime empire, and the place where the true implications of the Venetian-inspired Anglo-Dutch model could be realized.

    Antwerp had the Bourse; Amsterdam had the Dutch East India Company, the Amsterdam Exchange, and the Bank of Amsterdam, and it was in Amsterdam that our current modern form of European Central Banking was created.


    From a technical standpoint, the single most important banking invention in Amsterdam was that of Central Bank Money,
3 which is often described as the foundation of modern central banking systems. This developed around the notion of a “unit of account,” establishing a relationship of bank money (the privately issued notes of the bank) to specie, with the value of the bank money eventually becoming the actual legal unit of account and the basis for the final settlement of all contracts and accounts. When the Wisselbank ended the right of specie withdrawal in the 1680s, the ascendancy of fiat bank money was complete. The financial paper of the Central Bank was legally, the official money of the realm, so to speak.


    What this did was was to institutionalize a system whereby the power of money replaced any concept of the Common Good as the governing principle of society. It also took the power over currency and credit out of the hands of the sovereign government. The issues involved are not technical; they are axiomatic. This concept of the pre-eminence of money is at the heart of the modern System of Central Banking. It is a system based on money, usury, and debt, where both the people, as well as the government, are controlled through the Central Bank’s power over money and debt. The purpose of the debt is not to finance physical economic development for the benefit of the Common Good, but to perpetuate the wealth and governing power of the financial oligarchy.


    By the second half of the 17th century, the Wisselbank had amassed an enormous concentration of financial power, which gave them the ability to expand the Empire and finance wars on a scale never before seen.


Speculating


    The center of the new Empire’s activity in financial speculation was the Amsterdam Bourse. The Bourse was a money market, a finance market, and a stock market. Practices included futures, options, margin loans, financial leverage, speculation in foreign securities, and trading in outright derivatives (known as ductions).

    Options trading did not become a widespread financial practice in Amsterdam until the 1630s, and its emergence was connected directly to the dividend policy of the VOC. From 1603 to 1620, the VOC only paid dividends to shareholders 3 times, but by 1635 they began paying yearly dividends, with annual returns ranging from 15 to 65 percent. These yearly dividends then became the basis for widespread betting (options) on what they would eventually be worth.

    To clarify matters, the difference between the three main types of contracts traded at the Amsterdam Bourse is as follows:
    By 1650, a 21st century-style market in options trading, including “puts” (prime a recevoir) and “calls” (prime a delivrer), was widespread. One historian has called it a “mature speculative market.” The Tulipmania of 1637-1638 was based almost entirely on futures and options trading, and by 1688, a full-blown derivatives market existed in Amsterdam. Many of these Dutch practices were later imported into London in the 1690s.

    In 1688 an eyewitness account of the Amsterdam speculative market was published under the title of Confusion de Confusiones. Written in Spanish, it was the work of Joseph de la Vega, a Sephardic Jew. The work is a series of four dialogues between a Merchant, a Philosopher, and a Speculator, and, in it, De la Vega describes in detail the various types of transactions on the Amsterdam market, including:
  1. Cash purchases and sales of real stock
  2. Margin sales, where the buyer puts up only 20 percent
  3. Futures contracts
  4. Options trading
  5. Duction Shares” - speculating on the performance of the market or individual shares, without actually owning anything. Duction shares were purely fictitious, gambling on the future course of the market.
    In De la Vega’s account, the philosophy of the Amsterdam market is given by the Speculator, in the first dialogue, where he says:

The best and most agreeable aspect of the new business is that one can become rich without
risk, indeed without endangering your capital.



    Fisher Black and Myron Scholes could not have said it better.4


Gambling


    In 1638, simultaneous with the creation of the Amsterdam speculative market, the first government-sponsored gambling casino in European history opened in Venice – the famous Ridotto.

    Not surprisingly, Venice had been the center of European gambling5 since at least the 13th century. In 1229, the election of a doge was determined by a throw of dice. Open gambling flourished during the Carnival season, which often lasted from October through March. During the 14th century the development of card games emerged first in Venice and spread from there to other cities. Venice also pioneered in the creation of private lotteries, which then were copied throughout Italy and in France and Flanders.

    But it was casino gambling that made Venice unique. Casino gambling was invented in Venice. In fact, the word - casino - first appears in Venice. By the mid-16th century numerous private gambling houses, known as ridotti, were operating throughout Venice. Towards the end of the century many of these ridotti had changed from places where individuals gambled against each other, to establishments where bettors played against the “house,” the method still in use in present-day Las Vegas.

    In 1638 the Venetian Grand Council voted to establish the first government-owned gambling house in Europe. Known simply as the Ridotto, it was housed at the San Moise Palace which was owned by the Venetian nobleman Marco Dandolo, a descendant of the leader of the fourth crusade. At the Ridotto, aristocrats, prostitutes, pimps, usurers, degenerate gamblers, and many foreign visitors rubbed shoulders. All wore masks to protect their identity. In addition to the gambling, a room called the “Chamber of Sighs” provided a place for sexual liaisons.

    More than a gambling hall, the Ridotto functioned as an ideal tool for the corruption and blackmail of foreign guests. Of the many thousands who frequented it’s gaming tables, perhaps the two most famous were the Venetian spy Giacomo Casanova, and the speculator John Law. In 1768 the Ridotto was enlarged, using money confiscated from religious convents. In 1774 the Venetian Senate voted to close the Ridotto, after a large number of the Venetian nobility had gambled themselves into poverty. However, this only led to a proliferation of private casinos.

    A great expansion of gambling took place in France during the reign of Louis XIV, when games like roulette, baccarat and blackjack became popular. During the Regency of Louis XV, when the finances of France were turned over to John Law, licensed gambling houses spread all over Paris, and of course, Law, himself, imported the gambling methods of the Ridotto into his manipulation of the finances of the French nation. Law spent his last years back in Venice, a regular at the gambling tables, and in 1729 he was buried in a plot of land adjacent to the Ridotto.


Theory


    It should be obvious, at this point in the story, that the gambling at Venice’s Ridotto and the financial speculation at the Amsterdam Bourse, are identical. They both rest on the idea that “wealth” is defined by that magical thing called money, and that the accumulation of wealth has no connection to any physical economic process. In methodology, they are also both based on the linear statistical mathematical methods introduced by Paolo Sarpi.

    One of the first modern writings on gambling theory was Sopra le Scoperte (Concerning an Investigation on Dice), written by Sarpi’s puppet Galileo Galilei. In this work, Galileo employs a method of statistical probability to attempt to determine the outcome (odds) of various combinations of a dice throw, using a set of three dice. During this formative period of the Anglo-Dutch financial system, two other major works on gambling theory also appeared. These were Girolamo Cardano’s Liber de Ludo Aleae (The Book on Games of Chance), and The Doctrine of Chances, written by Abraham de Moivre.

    These works, which have experienced a recent revival in popularity in our current era of unregulated hedge funds and derivatives trading, were all based on the idea that occurrences in the real world can be reduced to linear mathematical formulas. This methodology all comes from Sarpi, Galileo, and Descartes. Not only is it the basis for all of the “formulas” -- like the infamous Black-Scholes Formula -- used today in the speculative derivatives market, it also formed the basis for the oligarchical creation of modern insurance companies. And, of course it is the exact same method used today by professional card counters in Las Vegas and Atlantic City.6

    These writings on gambling, particularly those of De Moivre, were also the theoretical foundation for the creation of the modern insurance industry.7 One of the earliest works in this field was the aforementioned Value of Life Annuities in Proportion to Redeemable Bonds, by the Dutch leader Johann DeWitt. Additionally, between 1662 and 1724 a series of works were written by De Moivre, William Petty, Edmund Halley, and John Graunt. The mechanical-statistical method employed by all of these writers led into what we would call today modern probability theory.

    Statistical probability theory, which is the basis for all financial speculation, gambling and the actuarial tables of the insurance industry comes from Sarpi’s notion of empiricism and sense certainty. Sarpi says, that whether it be clamshells, dollar bills, or numbers, individual empirical data can be counted, and formulas can be devised to predict the outcome of any set of linear statistics. For Sarpi, this is the real world of the senses. This is the opposite of Johannes Kepler’s approach, that the real universe can only be understood through scientific investigation that leads towards discoveries of the actual non-linear underlying principles which bound the conduct of that universe.

    An example of the difference in the two approaches is the discovery of the calculus by Gottfried Leibniz, where he demonstrates that the calculus is a representation of a lawfully-ordered principle of creation, versus Isaac Newton’s fraudulent calculus, based on a statistical approach, not dissimilar to earlier, failed, linear attempts to square the circle. In the real world, the concrete outcome of Sarpi’s methodology, is the delusion that the financial markets can be used, predicted, and manipulated to amass more and more wealth (countable money), regardless of what is going on in the physical economy or the real state of the population. It is a gambling addict’s chimera.

    Of the figures mentioned in this chapter, two are worth saying a little more about, De Moivre and Petty. William Petty was wholly created by the Sarpi networks around Francis Bacon and the Mersenne Circle. Throughout the entirety of his career, Petty was supported by the Cavendish family. This included financial backing from William Cavendish, the First Duke of Newcastle, the same individual who helped to organize the Mersenne network in Paris, and political/scientific backing by William’s brother, the mathematician Charles Cavendish.

    Petty knew many members of the Mersenne circle personally, but his closest relation was with Thomas Hobbes. Through the Cavendish family, Petty also became a rabid supporter of Francis Bacon and became a founding member of the “Invisible College,” composed of Bacon’s acolytes. His works abound with praise for Bacon, particularly in the preface to his Anatomy of Ireland. Not surprisingly Petty was also an enthusiastic champion of free markets and usury.

    Abraham de Moivre, a Huguenot immigrant to England, was another project of the Cavendish family. After arriving in England, he was befriended by the William of Cavendish who was a leader of the 1688 plot to organize the takeover of England by William of Orange. Cavendish provided De Moivre with employment and introduced him to Isaac Newton. In 1697, through the sponsorship of Newton and Edmund Halley, De Moivre became a member of the British Royal Society. In 1712 both De Moivre and Halley would play despicable roles in the rigged Royal Society proceedings, which lyingly upheld Newton’s plagiarism charges against Leibniz on the authorship of the calculus.

    De Moivre’s writings, particularly the 1756 revised edition of The Doctrine of Chances, were very influential, and were later extensively discussed and referenced by a new generation of Sarpi’s descendent's, including Euler, Laplace, and others.

1 Confusion de Confusiones, by Joseph de la Vega (1688), the Kress Library, Harvard University, 1957

2 Amsterdam as the cradle of modern futures and options trading, by Oscar Gelderblom and Joost Jonker, Utrecht University

3 The Bank of Amsterdam and the Leap to Central Bank Money, by Stephen Quinn and William Roberds

4 For more on the Black-Scholes Model for modern derivatives trading, see Chapter 13

5 Roll the Bones: The History of Gambling, by David G. Schwartz, Gotham Books

6 See Yes! It Really is Gambling, by Robert Ingraham

7 From Commercial Arithmetic to Life Annuities: The Early History of Financial Economics, 1478-1776, by Geoffrey Poitras, Department of Economics and Statistics, National University of Singapore