This is a guest post from Chett Daniel, who writes about improving your life through personal fitness and personal finance at 5k5k.org. Last year, Chett shared what fourth-graders “know” about money.
What role do financial professionals have in our personal finance lives today and in the future? Are they still the gateway to understanding financial info that's too difficult for the common person to grasp? Or have they created a profit-producing “need” that is slowly slipping through their fingers?
I asked myself these questions recently while listening to a recent Planet Money podcast episode called “When Cinnamon Moved Markets”. The podcast had nothing to do with financial professionals or their current need; it discussed a time when spices were currency, and the Arabs controlled the spice trade to much of the known world — and the knowldge about exactly how to get the spices.
Here's a synopsis of what I learned:
He who controls the spice…
In the ancient world, the Arabs controlled most of the spice trade. They ran secret trade routes from the Indies and other eastern countries. The spices they gathered were then sold and traded for extremely high prices to the Greeks and Romans in Alexandria, the Wall Street of its time. The Europeans knew many of the spices came from the Indies, but they weren't exactly sure where the Indies were and how to find the actual spices. This allowed the Arab traders to capitalize on the lack of information.
According to Herodotus in some of his fifth-century B.C. writings, the Arabs led the Greeks and Romans to believe gathering cinnamon was a matter of life or death. The story was told that Arab traders and merchants had to dress in full body suits of ox-hide to protect themselves from terrible winged creatures. They would have to leave a sacrificial cow to lure the winged monster bird off of its nest made of, wait for it…cinnamon. As the Arabs told the story, the winged creature would inevitably knock portions of their nest on the earth below as it flew to claim its offering. The merchants would then risk their life to grab the few pieces of cinnamon stick nests they could gather before the winged creature attacked them.
Herodotus also recorded stories of the Arabs regarding frankincense and ginger. According to the legends, frankincense grew in the tops of trees and was guarded by flying snakes. Arab traders would then cheat death by driving the flying snakes from the treetops while other merchants would quickly gather the frankincense they could. Ginger supposedly washed from the Garden of Eden.
…Controls the universe
What was the purpose of these ridiculous fantasies? Not only did the Arabs control the supply, they also manipulated the perceived value of their product and services by controlling all of the information of their origins. But the barriers of information in the spice trade began to fall around 120 B.C.
According to Tom Standage, business editor at The Economist, here's how it went down: In 120 B.C., a ship wrecked in the Red Sea. One survivor was found and taken to the court in Alexandria. He told them he was on a ship traveling between India and the Red Sea and it went off course and wrecked. The court sat speechless because as far as they knew, there was no direct route from the known western world to India. (Common belief at the time was that to reach India, ships would have to hug the shore, sail all the way around the Arabian Peninsula, up the Persian Gulf, and back down towards India, past Persia and Pakistan.) The stranded Indian trader bargained to show the Alexandrian court this “secret” direct route if they give him a ride home.
Within a few years the new, shorter routes are known to all of the Europe, and the fantasy stories were found to be nothing but myths used to inflate prices and scare away those who may want to find the spices themselves. In time, the Romans industrialized the spice trade and flooded the market with spices. This changed peppercorn from a spice you could pay a month's rent with, to something that is given away free is small paper packets in fast food restaurants today.
Is this a metaphor?
As I listened to this story, my mind drifted back to a little over a decade ago when most stock trades had to go through brokers who earned hefty commissions on each transaction. Today, those same transactions cost less than $5 on most websites, and can be executed with the click of a mouse. Investors who used to receive most of their information about the value of an investment from an “expert”, can now research for themselves which investment choice is right for them. Companies like Vanguard have reduced their fees and made their prospectuses so user-friendly that even a financial novice like me can select an investment choice that works for my goals.
In this Information Age, does the financial industry look anything like the Arab spice traders? Are the markets (and the products sold on the markets) really as complicated as they've been made out to be? Or have they simply been constructed to funnel money into the coffers of the brokers and advisers? Has the financial industry profited from a system that looks strangely similar to the secrets of the Arab traders? And what do you think the role of the financial professional will be in the future?
Spice photo by Sudhamsu. Market board photo by Katrina Tuliao.