Archived decisions

Appendix 3

The Sardine Saga

A Fishy Fairy Story

Once upon another world, sardines were the only food for the whole population. As the size of the catch fluctuated over the year (and there were no food technologists) in some months they had to rely on pickling some of the sardines, or keeping them on ice.

So it was a great breakthrough when somebody discovered, quite accidentally, how to make an airtight container out of glass. Soon after that an initially derided innovator invented the tin can. Life was immediately transformed. Not merely was it now possible to have a steady supply of sardines all the year round, but different sizes and qualities of fish could be packaged in a variety of ways and in a wide range of oils.

Immense financial opportunities also opened up. Fishermen still caught different amounts of sardines over the seasons, but the processors were prepared to pay for supplies ahead of canning them so as to be assured of their availability and the certainty of knowing their cost. In turn, this gave the fishermen a steady and reliable income.

In the same way those operating tin and copper mines could sell their materials ahead at a known price to the canners who thus had another element of their costs fixed.

As an export trade in sardines developed, the producers (who had by now learned how to sell their fish for future delivery for a price fixed today) had to face the trickier problem of insuring themselves against fluctuations in the value of their currency, Sardinias, against the money of their foreign customers. This gave rise to a flourishing foreign exchange market.

Initially, all these various transactions took place between the direct participants in the different branches of the sardine industry: fishermen and canners agreed the price of the fish; canners and mine owners the cost of metals; canners and retailers the domestic wholesale price; and canners and foreign importers the rate of exchange.

This pattern had the drawback that it could often happen that prices could not be agreed, or that one party wanted a different quantity or quality of fish or metal from those the other was able or willing to supply. This was dramatically altered by the arrival of the speculator on the stage.

He was prepared to buy and sell on a scale that ensured that there was always an effective market on which the principal actors could deal. But, increasingly, they began to operate on the basis of buying selling to create the opportunity of profiting from the margin between buying and selling rather than simply acting as intermediaries passing the goods or services from provider to user. This gave rise to an explosion of activity, and while competition normally ensured that prices did not fluctuate widely, it soon became clear that concerted heavy buying or selling could push them very sharply up or down, whereupon a profit could be ensured by simply `closing' the position without any goods actually changing hands. Soon the volume of business on the sardine exchanges reached levels vastly in excess of the number of all the sardines in all the seas.

This was rather like the development of banking. First the goldsmiths would, for a fee, look after your money and valuables while you were away crusading or on a business trip. Then they started lending out some of your money at interest. It became clear that it was usually pretty safe to lend out about 90% of all the `stock' as only about a tenth of depositor's would want to withdraw their money at any one time.

The real genius was the man who drew the logical conclusion that if, when you made a loan, you also created a deposit of the same amount in the borrower's name, you could lend out ten times you total deposits.

The final step was to create a whole range of `derivatives' which again multiplied many times over what could be turned into money. And just as anything that is believed to be money functions as really being money (as long as the belief, or credit, holds) so anything that people believed to be a sardine was effectively a sardine.

Back in the sardine world the point had already been passed where a supply of virtual sardines vastly surpassed the quantity needed for consumption as food. But a further escalation was to occur.

To the wide variety of tins of various size, containing sardines of a particular quality and canned in spring water, brine or a range of different oils, were now added `securitised' sardines. This enables buyers to pick and choose a whole new range of options; you could have a mixture of sizes and qualities of fish and any blend of oils. This was claimed to increase the value of the package. As the sardines were, by definition, not intended to be eaten, but only bought, sold and held as an investment, it was not necessary to open the tins to check the quality: that was established by the name on the label.

However, one day, in an incident which was never properly explained, a tin did break open, and was found to contain just one half of a very small sardine floating in plain water, whereas it purported to be full of the plumpest, largest and highest quality fish, meticulously steeped in the very best olive oil.

Immediate panic ensure. Trade came to a halt as nobody would risk buying even a single tin from anyone else, nor did they dare opening any of their own stock to check the contents. The deadlock was eventually resolved by the setting up of a statutory body, the Supreme Sardine Enhancement Channel which was empowered, over the vigorous opposition of the Sardine Futures Trading Association and other trade organisations, to buy up all supplies of sardines (other than the small proportion that were labelled as intended for consumption) at 50 per cent of their claimed market value. The Enhancement Channel made a loss of over 90 per cent on its expenditure when disposing of the stocks it acquired, and fears of an unsaleable glut of fish being dumped on the market and destroying the livelihood of the fishermen proved unfounded when it turned out that less than 5 per cent of tins contained any sardines at all, and very few were even half full. The many sardine traders nearly all soon found useful employment in the `real economy'.