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I wandered past the stacks of drying wood, thinking about how many great skills the world had lost, how many things of value had passed without any of us even noticing. The old men with their chisels and handsaws would have once been the most highly paid members of their community and what had we put in their place? Financial engineers and young currency traders.

The entrepreneur who is reckoning in terms of a currency with a stable value is unable to compete with the entrepreneur who is prepared to make a quasi-gift of part of his capital to his customers. In 1920 and 1921, Dutch traders who had sold commodities to Austria could buy them back again after a while much cheaper than they had originally sold them, because the Austrian traders completely failed to see that they were selling them for less than they had cost.

Making money in the markets is tough. The brilliant trader and investor Bernard Baruch put it well when he said, “If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy—if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.” In retrospect, the mistakes that led to my crash seemed embarrassingly obvious. First, I had been wildly overconfident and had let my emotions get the better of me. I learned (again) that no matter how much I knew and how hard I worked, I could never be certain enough to proclaim things like what I’d said on Wall $ treet Week: “There’ll be no soft landing. I can say that with absolute certainty, because I know how markets work.” I am still shocked and embarrassed by how arrogant I was. Second, I again saw the value of studying history. What had happened, after all, was “another one of those.” I should have realized that debts denominated in one’s own currency can be successfully restructured with the government’s help, and that when central banks simultaneously provide stimulus (as they did in March 1932, at the low point of the Great Depression, and as they did again in 1982), inflation and deflation can be balanced against each other. As in 1971, I had failed to recognize the lessons of history. Realizing that led me to try to make sense of all movements in all major economies and markets going back a hundred years and to come up with carefully tested decision-making principles that are timeless and universal. Third, I was reminded of how difficult it is to time markets. My long-term estimates of equilibrium levels were not reliable enough to bet on; too many things could happen between the time I placed my bets and the time (if ever) that my estimates were reached. Staring at these failings, I realized that if I was going to move forward without a high likelihood of getting whacked again, I would have to look at myself objectively and change—starting by learning a better way of handling the natural aggressiveness I’ve always shown in going after what I wanted. Imagine that in order to have a great life you have to cross a dangerous jungle. You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life. How would you approach that choice? Take a moment to think about it because it is the sort of choice that, in one form or another, we all have to make.

And I’m not kidding when I say “craziness.” The University of St. Gallen, Switzerland, has come out with a study that compares traders with psychopaths. The study reviewed the results from an existing study comparing 24 psychopaths in German high-security hospitals with a control group of 27 “normal” people. The funny thing is, this control group of “normal” people turned out to be traders. Stock guys, currency and commodity traders, and derivative types happened to be the normal control group that was stacked up against the high-security, barbed-wire-enclosed psychopaths. In the end, the performance of the trading group was actually worse than that of the psychopaths. The study indicated that traders, “Have a penchant for immense destruction,” and that their mindset would lead them to the logical conclusion of “beating one of the neighbor’s expensive cars with a baseball bat with the sole objective of owning the most beautiful car in the neighborhood.” In other words, traders are nuts. Indeed if you look up the textbook definition of a psychopath, here are some of the tidbits you’ll uncover: antisocial behavior, poor judgment and failure to learn from experience, inability to see oneself as others do, inexplicable impulsiveness … sounds like a typical trader who is struggling against the market and can’t figure out why.

centuries-long debate over the nature of money can be reduced to two sides. One school sees money as merely a commodity, a preexisting thing, with its own inherent value. This group believes that societies chose certain commodities to become mutually recognized units of exchange in order to overcome the cumbersome business of barter. Exchanging sheep for bread was imprecise, so in our agrarian past traders agreed that a certain commodity, be it shells or rocks or gold, could be a stand-in for everything else. This “metallism” viewpoint, as it is known, encourages the notion that a currency should itself be, or at least be backed by, some tangible material. This orthodox view of currency is embraced by many gold bugs and hard-money advocates from the so-called Austrian school of economics, a group that has enjoyed a renaissance in the wake of the financial crisis with its critiques of expansionist central-bank policies and inflationary fiat currencies. They blame the asset bubble that led to the crisis on reckless monetary expansion by unfettered central banks. The other side of the argument belongs to the “chartalist” school, a group that looks past the thing of currency and focuses instead on the credit and trust relationships between the individual and society at large that currency embodies. This view, the one we subscribe to and which informs

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One of the standard arguments used in the 1990s to justify the introduction of a common European currency was that exchange-rate instability would disrupt trade in the common market. A monetary union between Canada and the US, however, has never been seriously considered even though the trading relationship between these two countries is the largest bilateral trading relationship in the world, see the preceding section. The fact that Canadian and US traders continue to operate, apparently with success, using their own currencies shows that the argument about currency swings dampening inter-state trade is far from convincing. Trade is also booming between Canada, Mexico and the US, the three members of NAFTA, in spite of the coexistence of three national currencies (Vega Cànovas 2010).

Sparta’s new currency was made from iron and coated with vinegar, making it frail and worthless to foreign traders.

One of the reasons I was so bullish on the Deutsche mark was a radical currency theory proposed by George Soros in his book, The Alchemy of Finance. His theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tight monetary policy, the country’s currency would actually rise.

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