Red-Blooded Risk: The Secret History of Wall Street

Money, New and Improved

Futures contracts, and derivatives more generally, improve on paper money. Instead of an interest rate and exchange rate for every bank, we have an interest rate and exchange rate for every commodity and everything else of economic interest. Moreover, it's not a single interest rate; there is a different rate for every future delivery time: a rate from January to March, a different rate from March to June, and so on. Now the market has a far more nuanced way to signal economic activity. Precious metal money provides a price for everything available for sale in one place and time. It has no financing component. Paper money allows transactions between present and future goods and offers a choice of future promises based on money issued by different banks with different loan portfolios. The ability to borrow against future goods and services provides financing to innovators without precious metal capital.

The key to derivative money is the spread trade. Buy March wheat in Chicago and sell March wheat in Kansas City? You've just lent transportation services from Chicago to Kansas City, assuming the price is higher in Kansas City (if the price is higher in Chicago, you've just borrowed transportation services). Buy #1 wheat and sell #2 wheat? You've just borrowed wheat cleaning services. You don't borrow money; you borrow whatever precise future goods and services you need. And you don't repay in money; you repay in whatever future goods and services you can ...