How the financial system came to be

 

The goldsmiths tale

The short animation film Money As Debt explains how the financial system came to be. It is an interesting story. Once upon a time when gold was internationally accepted as money, goldsmiths fabricated gold coins of standardised weight and purity. They were a trusted source of these gold coins. They owned a safe where they stored their gold. Other people wanted to store their gold there too because those safes were well guarded.

goldsmithsafe
Money As Debt: guarded safe

And so some goldsmiths began to make a business out of renting safe storage. People storing their gold with the goldsmith received a voucher certifying the amount of gold they brought in. At first these vouchers could only be collected by the original depositor.

Later this restriction was lifted so that any holder of the voucher could collect the deposit. From then on people started to use these vouchers as money because paper money was more convenient than gold coin. Depositors rarely demanded their gold and it remained in the vaults of the goldsmiths.

goldsmithmoney
Money As Debt: gold smith paper money

Modern banking

Some goldsmiths also had another business, which was lending out their gold at interest. Because depositors rarely came in to collect their gold, they discovered that they could also lend out the gold of the depositors at interest. When the depositors found out about this, they demanded interest on their deposits too. At this point modern banking started to take off and paper money became known as bank notes.

Borrowers also preferred paper money to gold coin, so the goldsmiths, who had now become bankers, found out that they could lend out more money than there was gold in their vaults. Bankers started to create money out of thin air. This is fractional reserve banking because not all deposits were backed by gold reserves. The new money was spent on new businesses and that hired new people so the economy boomed.

When depositors found out that there were more bank notes circulating than there was gold in the vaults of the goldsmith’s bank, the scheme could run into trouble, but mostly it didn’t. Depositors received interest and this enticed them to keep their deposits in the bank. People trusted their bank as long as they believed that debtors had no trouble repaying their loans.

Bank runs

Sometimes people started to have doubts about their bank and worried depositors came to the bank to exchange their bank notes for gold. This is a bank run. The bank could run out of gold and close down because not all the gold was there. The bank’s bank notes could then become worthless, even when borrowers had no problems repaying their debts. The money that the bank had created out of thin air suddenly vanished. This was a financial crisis.

bankrun
Money As Debt: bank run

As a lot of money had suddenly disappeared people had less money to spend. This could hurt sales so that some businesses could go bankrupt. Those businesses could not repay their debts at other banks. Depositors at those banks could start to fear that their bank would go bankrupt too. This could cause more bank runs and more money disappearing, so that things would become even worse. This is an economic crisis. This is the way a financial crisis could trigger an economic crisis.

centralbank
Money As Debt: central bank

Regulations and central banks

Measures have been taken to forestall financial crises and to deal with them if they occur. Banks needed to have a minimum amount of gold available in order to pay depositors. Central banks were instituted to support banks by supplying additional gold if too many depositors came in to collect their gold. Central banks could still run out of gold but this was solved when the gold backing of currencies was ended. Nowadays central banks can print new dollars or euros to cope with a shortfall.

Regulations limit the amount of loans banks make and therefore the amount of money that exists. But everyone can lend to anyone. Alternative forms of financing circumvent the regulations imposed on banks. For example, corporations can issue bonds or use crowd funding. Human imagination is the only limit to the amount of debt that can exist. As long as people expect that those debts will be repaid, even if it is with new debts, there is trust in these debts. But the financial crisis of 2008 demonstrated that trust in these debts can suddenly disappear.

What is the use of banks?

Turning debt into money

The previous episode about money discussed some imaginary trades between you, a hatter, a lawyer, a barber and a fisherman. It is shown that if people promise to pay this might suffice for payment. So if the fisherman promises you to pay next week for the hat you just made, you could say to the lawyer that you expect the fisherman to pay in a week, and ask her if you can pay in a week too. The lawyer could then ask the same of the barber and the barber could ask the same of the fisherman. If all these debts cancel out then no cash is needed.

In most cases debts cannot be cancelled out so easily. A hat may cost € 50, legal advice € 60, a hairdo € 30, and the fish € 20. If you are the hatter, you could lend € 10 to the barber and the lawyer could lend € 20 to the fisherman. Perhaps the lawyer doesn’t trust the fisherman because he smells fishy. But if the lawyer trusts the barber and the barber trusts the fisherman then the lawyer could lend € 20 to the barber and the barber could lend € 20 to the fisherman.

That could become complicated quite easily. And this is where banks come in. Banks can lend money because they know the financial situation of their customers. The fisherman can borrow money from his bank to make payments because the bank knows that he has an unstable but good income and a vessel that can be sold for cash if needed.

If the fisherman borrows money to pay for the hat you made, this money ends up in your account. You can use it to pay the lawyer. And so the fisherman’s debt becomes the lawyer’s money until she uses it to pay the barber. People that have a deposit lend money to the bank and the bank is lending this money to those who have a loan, in this case the fisherman. Depositors trust the bank even though they do not know the people the bank is lending money to.

Most people think of money as coins and bank notes but more than 90% of the money just exists as bookkeeping entries in banks. When a fisherman borrows money from his bank, he can spend it on a hat. This means that the bank creates money and that this money is debt. Most of our money is debt so the value of money depends on the belief that debtors pay back their debts. This seems scary and it keeps quite a few people awake at night.

Some people argue that debts and banking are a fraud because they are based on a belief. But banks and debts help to boost trade and production by creating money that doesn’t exist to start businesses that don’t yet exist to make products which will be bought by the people those businesses will hire with this newly created money. Banking and debts are at the basis of the capitalist economy.

Banking as bookkeeping

Banking is more or less just bookkeeping and balance sheets. Balance sheets can be used to explain the magic trick banks do, which is creating money. Balance sheets are simple. There are no intimidating formulas, only additions and subtractions. The important thing to remember with balance sheets is that the total of the amounts on the left side must always equal those on the right side.

On the left is the value of your stuff and your money. On the right side is the value of your debts. Your net worth is what remains when you sell all your stuff and pay off your debts. It is on the right side too in order to make it equal to the left side. Your net worth can be a negative value. If that is the case, you might be bankrupt because you can’t repay your debts by selling your assets. The left side is named debit and the right side is called credit. Your balance sheet might look like this:

debit
credit
house
€ 100,000
mortgage
€ 80,000
other stuff
€ 50,000
other loans
€ 30,000
cash, bank deposits
€ 20,000
your net worth
€ 60,000
total
€ 170,000
total
€ 170,000

When you buy a car, you own more stuff, but also another loan or fewer bank deposits as you have to pay for the car. This is because debit always equals credit. When you drive the car, it goes down in value, as does your net worth, because debit always equals credit. If your salary comes in, your bank deposits as well as your net worth rise because debit always equals credit. If you pay down a loan, the amount in your bank account as well as the amount of your loan goes down because debit always equals credit. If debit doesn’t equal credit then you have made a calculation error.

Also for a bank the total of the amounts on the left side must always equal those on the right side, so that debit always equals credit. Your debt is on the debit side of the bank’s balance sheet. You have borrowed this money from your bank. The bank owns this loan. Your bank deposits are on the credit side of the bank’s balance sheet. The loans of the bank are paid for by deposits. Banks lend money to each other. This may happen when you make a payment to someone who has a bank account at another bank. Your bank may borrow this money from the other bank until a payment comes the other way. The balance sheet of a bank may look like this:

debit
credit
mortgages and loans
€ 70,000,000
deposits
€ 60,000,000
loans to other banks
€ 10,000,000
deposits from other banks
€ 20,000,000
cash, central bank deposits
€ 10,000,000
the bank’s net worth
€ 10,000,000
total
€ 90,000,000
total
€ 90,000,000

How banks create money

Banks create money. How do they do that? It is easy if you understand balance sheets. Assume that you, the hatter, the lawyer, the barber, and the fisherman all have € 10 in cash. Together you decide to start a bank. You all bring in the € 10 you own so that you all have a deposit of € 10 and the bank has € 40 in cash. The bank allows everyone to withdraw deposits in cash. This is no problem as long as the total of deposits equal the total amount of cash. After everyone has put in the deposit, the bank’s balance sheet looks as follows:

debit
credit
cash
€ 40
your deposit
€ 10
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 10
total
€ 40
total
€ 40

First, there was only € 40 in cash. Now there are € 40 in bank deposits too. You might think that the bank created money. Only, that isn’t true because the depositors can’t spend the cash unless they take out their deposits. In other words, the depositors don’t have more money at their disposal than before. If you look at the total, there is still € 40. This is bookkeeping. You have to write down the total twice as debit must equal credit.

But now things are going to get a bit wild. The fisherman comes to you and he wants to buy a hat. The hat costs € 50 but the fisherman has only € 10 in his account. To make the sale possible, the bank is going to do its magic. The fisherman calls the bank and asks if he can borrow some money. The bank grants him a loan of € 40 and puts the money in his deposit account so that he can spend it. And look:

debit
credit
cash
€ 40
your deposit
€ 10
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 50
total
€ 80
total
€ 80

Who says that miracles can’t happen? The amount of deposits miraculously increased from € 40 to € 80 so € 40 is created from thin air. There is still only € 40 in cash but the fisherman’s debt created new money. This is how banks create money. And that is only because bank deposits are money. This is all there is to it. So much for the mystery. The fisherman then pays € 50 for the hat. And so it becomes your money:

debit
credit
cash
€ 40
your deposit
€ 60
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 0
total
€ 80
total
€ 80

And now comes the dreadful part that keeps some people fretting. Everyone can take out his or her deposits in cash. There is € 80 in deposits and only € 40 in cash. If you go to the bank and demand your € 60 in cash, the bank would go bankrupt, even when the fisherman pays off his loan the next day. You could bankrupt the bank by buying € 50 in fish with cash. If you go to the bank to get € 50 in cash it would not be there so the bank would go bankrupt before the fisherman can pay off his loan with the same cash.

A bank could get into trouble in this way even when debtors repay their debts. Clever minds already figured out a solution. Central banks can print the needed cash. If the European Central Bank (ECB) prints € 20 on a piece of paper and lends this money to the bank, there would be enough cash to pay out your deposit. Banning the use of cash and only use bank deposits for payments would be another option. So, after the ECB deposited € 20 in cash, the bank’s balance sheet might look like this:

debit
credit
cash
€ 60
your deposit
€ 60
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 0
deposit ECB
€ 20
total
€ 100
total
€ 100

After you pay the fisherman, he can pay off his loan, and the bank will have enough cash to pay out all deposits. The bank can repay the central bank and everything is fine and dandy again. In this case the bank could not meet the demand for cash but the value of cash and loans wasn’t smaller than the deposits (the bank’s debt). After the fisherman pays back his loan and the bank pays back the ECB, the bank’s balance sheet might look like this:

debit
credit
cash
€ 40
your deposit
€ 10
loan fisherman
€ 0
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 10
deposit ECB
€ 0
total
€ 40
total
€ 40

If banks can’t create money, trade would be difficult. If the hat is € 50, the legal advice € 60, the hairdo € 30, and the fish € 20, and you, the lawyer, the barber and the fisherman all have only € 10, nothing can be bought or sold. If the bank lends € 40 to the fisherman, he can buy a hat from you, you can buy legal advice from the lawyer, the lawyer can buy a hairdo and the barber can buy fish. Debt is the basis of the capitalist economy. Nearly all money is debt, and without debt the economy would come to a standstill.

How much money can banks create?

The amount of money a bank can create is limited by the bank’s capital, which is the bank’s net worth. Regulations stipulate that banks should have a minimum amount of capital. This is the capital requirement. If the capital requirement is 10%, and the bank’s capital is € 10,000,000, it can lend € 100,000,000, provided that there are enough deposits. If the bank makes a loan, a new deposit is created. If the deposit leaves the bank, the bank must borrow it back from another bank or cut back its lending. That is because debit must always equal credit.

debit
credit
mortgages and loans
€ 70,000,000
deposits
€ 60,000,000
loans to other banks
€ 10,000,000
deposits from other banks
€ 20,000,000
cash, central bank deposits
€ 10,000,000
the bank’s net worth
€ 10,000,000
total
€ 90,000,000
total
€ 90,000,000

When a deposit leaves the bank, it ends up at another bank. The other bank can use it for lending, provided that it has sufficient capital. There may be a reserve requirement, which is a minimum of cash and central bank deposits the bank must hold. If the reserve requirement is 10%, the bank can lend out as much as ten times the amount of cash and central bank reserves it has available. In the past reserve requirements were important as people often used cash and could go to the bank to demand their deposits in cash. For that reason banks needed to hold a certain amount of cash.

Pictures:
– Deutsche Bank building CC BY-SA 4.0. Raimond Spekking. Wikimedia Commons. https://commons.wikimedia.org/w/index.php?curid=12171

Coin hoard

What is money?

Why do we have money?

Money was invented because trade would be difficult without it. For example, if you are a hatter in need of legal advice, then without money, you have to find a lawyer who craves for a hat. That is unlikely to happen. Maybe there is a fisherman dreaming of a hat, but he can’t give you legal advice. Maybe there is a lawyer in need of a hairdo instead of a hat. With money all these problems disappear like magic. You can buy the services of the lawyer so that she can go to the barber. After that the barber can buy some fish so that the fisherman can buy a hat from you.

Despite these mind-blowing advantages humans didn’t need money for a long time because they lived in small bands and villages where everyone depended on each other and everyone helped each other. This meant, for example, that when a fisherman needed a hat, you would make a hat for him, and if you needed anything, someone else would provide it to you. You did someone a favour so that he or she was obliged to do something back. Villagers produced most what they needed themselves. Trade with the outside world was limited and was done with barter.

Uses of money

Later cities, kingdoms and empires emerged. People living in cities, kingdoms and empires didn’t know each other so it became difficult to track whether or not everyone was contributing. Favours and obligations didn’t suffice. They were replaced by a formal system for making payments and tracking contributions and obligations. Commerce and tax collection needed a means of payment as well as administration. It is therefore not a coincidence that writing and money were invented around the same time in the same area. The earliest writings were bookkeeping entries. Money has the following uses:

  • buying and selling stuff (payment) so money is a medium of exchange
  • saying how much something is worth so money is a unit of account
  • keeping track of contributions and obligations (saving and borrowing) so money is a store of value.
catdog
Nickelodeon character CatDog

Money being a medium of exchange as well as a store of value is like your pet being a cat as well as a dog. The result is not really a success. The parts of the pet may often quarrel, for example because the dog part wants to play while cat part wants to sleep. If someone keeps money for a rainy day, and doesn’t spend it, others cannot use this money for buying stuff. And this really can be a big problem. A simple example can explain this.

Imagine that everyone decides to save all his or her money. Nothing would be bought or sold any more. All businesses would go bankrupt and everybody would be unemployed. All the money that has been saved would buy nothing because there isn’t anything to buy any more. This is a total economic collapse.

In reality it doesn’t get that bad as people always spend on basic necessities like tablets and mobile phones, and perhaps food. When people only spend money on necessities there is an economic depression, which is not as bad as a total economic collapse but still very bad. Saving can make you poorer, but only when there are too many savings already. Savings are used to invest in businesses and hire workers to make products and services. Only if there are more savings than investments, money remains unused.

The value of money

Money has no value when there isn’t any stuff to buy or when there aren’t any other people to trade with. Imagine that you get the offer to be dropped alone on a remote and uninhabited island in the Pacific with 10 million euros. Probably you would decline the deal, even if you can keep your mobile phone. It is other people and stuff that give money its value. But how? The answer is remarkably simple. The value of money is just a belief.

People are willing to work for money and sell their stuff for money. And because others do this, you do the same. For example, you may think that euro notes have an appalling design as well as an unpleasant odour, but nevertheless you desire to own them because other people want them too. The value of the euro is based on the belief that other people accept euros for payment.

This is just a belief as the following example demonstrates. Suppose that you wake up one day to hear on the news that the European Union has been dissolved overnight. Suddenly you may have second thoughts about your precious stockpile of foul smelling unstylishly decorated euro bank notes.

Lord of the Rings character Sméagol
Lord of the Rings character Sméagol

You may ask yourself in distress whether or not your precious bank notes still have any value. What is the value of the euro without the European Union? You may find yourself hurrying to the nearest phone shop in an effort to exchange this pile of bank notes for the latest model mobile phone.

And to prove this point even further, suppose that the phone shop gladly accepts your euros. Suddenly they become desirable again and you may start to have second thoughts about that latest model you are about to buy. It may not remain hip for much longer, so you may change your mind again and prefer to keep your precious euros because there may be a newer model next month. So, because the shop wants your euros, you wants them too.

Types of money

At first money was an item that people needed or desired. Grain was one of the earliest forms of money. Everybody needed food so it was easy to make people believe that others accept grain for payment. In prison camps during World War II cigarettes became money because they were in high demand. Even non-smokers accepted them because they knew that other people desired them very badly. For that reason cocaine can be money too.

Wares like grain, cigarettes and cocaine have disadvantages. They degrade over time so  they aren’t a very good store of value. This makes them a great medium of exchange because people won’t save them. An example can demonstrate this. Imagine that apples are money and you want to buy a house. A house costs 120,000 apples but your monthly salary is just 2,500 apples of which you can save 1,000. It takes 10 years of saving to buy a house. Soon you will discover that apples rot and that you will never be able to buy a house. Then you will spend all your apples right away.

Saving is difficult with apples. This is where gold and silver come in. Gold and silver have not much use, but humans were always attracted to shiny stuff. Gold is rare so a small amount of gold can have a lot of value because some people feel a strong desire for this shiny stuff. Gold and silver coins can be made of different sizes and purity so that they are suitable for payment and can be used as a unit of account.

More importantly, gold and silver do not deteriorate in quality like apples, grain or cigarettes. They do not even rust after 1,000 years. This makes gold and silver an excellent store of value. But this should make us suspicious. A perfect cat makes a lousy dog so a perfect store of value can fail the test for being a good medium of exchange. People can store gold and silver so that there is less money available for buying and selling stuff. And this can cause an economic depression as we have seen.

Governments create money too, for example by printing “10 euro” on a piece of paper. Governments require by law that this money should be used for payments and taxes. This makes people believe that others accept this money too. Government money is called fiat currency or simply currency. The authority of a government is limited to the area it controls so in the past government currencies had little value outside the country itself unless this money consisted of coins containing gold or silver.

In fact, another reason why gold and silver are attractive as money, is that the value of gold and silver does not depend on the authority of a government. This made gold and silver internationally accepted as money. In the 19th century most government currencies could be exchanged for a fixed amount of gold. This is the gold standard. The gold standard boosted trade because gold was internationally accepted as money.

Most money is debt

Debts can have value and so debts can be money too. This may seem strange or even outrageous, but money is just a belief. For example, money is the belief that you can exchange a hat for money and then exchange this money for legal advice. Hence, if you believe that the debtor is going to pay, you can accept his or her promise to pay as payment. And if others believe this too, you can use this promise to pay someone else.

So if the fisherman promises you to pay next week for the hat you just made, you could say to the lawyer that you expect the fisherman to pay in a week, and ask her if you can pay in a week too. The lawyer could then ask the same of the barber and the barber could ask the same of the fisherman. If all debts cancel out then there is no need for cash. Most money we currently use is debt. In most cases debts don’t cancel out and there are many more people involved so that it would be complicated to keep track of all debts and savings. That is where banks come in.

Featured image: Close up of coin hoard CC BY-SA 2.0. Portable Antiquities Scheme from London, England (2010). Wikimedia Commons.

Other images: Nickelodeon character CatDog, Sméagol character from The Lord of the Rings [copyright info]

parking licence

Events in my life related to 11 September

 

All these accidents
That happen
Follow the dot
Coincidence
Makes sense
Only with you

State of emergency
How beautiful to be
State of emergency
Is where I want to be

– Björk, Joga

Accidents, emergency, coincidence and connecting the dots. Behind it all could be some kind of love affair. Emergency and 11 September are closely linked to each other, not only because of the number 911 being the emergency services telephone number in the United States. Was someone destined to make sense of these coincidences? If there are messages hidden in pop-music then this could be true. In any case, there have been a few peculiar coincidences related to 11 September in my life.

Marcel is my brother in law and 11 September is his birthday. On 11 September 2001 he turned 33 years old. My sister Anne Marie had booked a trip to New York for them both as a birthday present. In the morning she told him that they were going to New York the next weekend. That afternoon the terrorist attacks took place. They had to cancel the trip. They went to a holiday park in the Netherlands instead.

On 11 September 2010, just after midnight, I turned around in my bed. Suddenly the bed collapsed, leaving me wondering on the ground. After standing up I saw that the time was 0:33. A few moments later I realised that it was 11 September and that Marcel had turned 33 on 11 September 2001. That was nine years before while nine is three times three. On the same day two plane incidents occurred at Eindhoven Airport.1 There have been several intriguing coincidences in my life referring to a particular lady. And she lives in a suburb of Eindhoven, a peculiar coincidence.

On 11 November 2009 (11/11/11 as 2 + 0 + 0 + 9 = 11) I went to the town hall to pick up my new parking licence. The number of the parking licence turned out to be 009011. It was valid until 27 November 2011. If you compress the numbers as numerlogists often do, then 27 November refers to 9/11 as 2 + 7 = 9 and November is the 11th month of the year. The years (20)09 and (20)11 also refer to 9/11. The remaining digits are 20 and 20 = 9 + 11.

The initials of my last name are KI. When translated into digits (A=1, B=2), you get: 11/9 or 11 September in European notation. My first name starts with B, which can be translated into 2. Hence, my initials consist of the numbers making up the emergency services number 911 and 112. Perhaps that is not impressive but the following will make you wonder. I was born on the Iepenstraat, which means Elm Street in English. The horror picture A Nightmare on Elm Street was released on 9 November 1984 (11/9 American notation) in the United States and on 11 September 1986 (9/11 American notation) in the Netherlands. Now that is peculiar.

In the spring of 2011 I saw a German car with licence plate KLE-KI-911 in Leeuwarden while biking to my work. This car passed by a few times around the same time near the same spot. The first time I only noticed the number 911 so seeing the car multiple times made me notice the extent of the coincidence. KLE are the first three letters of my last name, while KI are the initials of my last name. Dutch licence plates linking my name to 9/11 in this way do not exist. The car appeared in the Netherlands where I was going to my work some 200 kilometres from the home town of its owner.

In the spring of 2013 I put the apartment on the ground floor of our house up for rent. A young woman applied for it. She was born on 11 September 1990 it turned out, and so she had turned 11 years old when the attacks of 11 September 2001 took place. A few days later I called her to inform her that she could rent the apartment. When I called her, her father had just been hospitalised. He died a few days later.

Featured image: Plumes of smoke billow from the World Trade Center after the September 11 attacks. Michael Foran (11 September 2001). Public Domain.

1. Vliegtuig in problemen landt op vliegveld Eindhoven. Nu.nl (2010). [link]

The law of large numbers

Probability

Humans are good at attributing a cause but bad at guessing the likelihood of an event. A psychologist named Daniel Kahneman came up with an example. It is about a study of the incidence of kidney cancer in the 3,141 counties of the United States. The research revealed a remarkable pattern. The incidence of kidney cancer was the lowest in mostly rural, sparsely populated counties in traditionally Republican states in the Midwest, the South, and the West.1 So what do you make of that?

You probably came up with a few reasons why kidney cancer is less likely to occur in these counties, such as a healthy rural lifestyle or low pollution levels. But you probably didn’t think of randomness. Consider then the counties in which the incidence of kidney cancer is the highest. These counties were also mostly rural, sparsely populated, and located in traditionally Republican states in the Midwest, the South, and the West.1

The apparent contradiction can be explained by the fact that those counties all had small populations. And with smaller populations greater deviations from the average can be expected. Our intuition easily makes connections of causality but our reason doesn’t come into action to check whether or not it could just be randomness. We are inclined to think that some cause makes unusual things happen while these could just be random events.

In the summer of 1913 the ball fell on a black number twenty-six times in a row at the roulette wheel at the Casino de Monte-Carlo. Some people lost a fortune by betting that the ball would fall on a red number the next time. They didn’t realise that the chance of the ball falling on a red number never changed. The ball doesn’t remember where it fell the previous times. If we represent black with a B and red with an R, and assume for simplicity’s sake that there is no zero, it is possible to represent falling twenty-six times in a black number like this:

B B B B B B B B B B B B B B B B B B B B B B B B B B

The probability of the next twenty-six numbers being black is one in 67,108,864. That’s a long shot. What might surprise you is that the following combination of black and red numbers is exactly as likely to occur:

R B B R B R R B R B B R R B R R B R B B R R B B R B

You wouldn’t be thrilled if that happened unless you became a millionaire by betting on this particular sequence of twenty-six. And even then you didn’t think of the 67,108,863 sequences that didn’t materialise. We tend to consider only the things that did happen, but we rarely think of all the things that could have happened but didn’t. That might explain why events like the ball falling on a black number twenty-six times in a row impress us. And I am even more impressed because twenty-six happens to be my lucky number.

Try to imagine all what could have happened but didn’t happen. Imagine the probability of you sitting here and now reading this page, but as a prediction from 3,600 years ago. Imagine Joseph telling the Pharaoh: “I see (your name comes here) reading a pile of papyrus pages, not real papyrus pages, but images of papyrus pages appearing on something that looks like a clay tablet. It is named The Plan For The Future. But don’t be afraid, dear Pharaoh, for it will happen 3,600 years from now. But if we don’t set up this grain storage, it won’t happen at all, so we must do it. And by the way, Egypt will starve if we don’t.”

The odds for this prediction to come true weren’t one in 67,108,864, and also not one in 1,000,000,000,000,000,000,000 either. Even if you add considerably more zeroes to that number, the odds still remain far smaller. The probability is so close to zero that nobody can tell. Nevertheless you are sitting here reading this text. So how could this happen? The answer to this mystery is that so many things could have happened but didn’t happen, but something had to happen, and that’s what happened. It would have been impossible for Joseph to make this prediction unless the future is predetermined.

The licence plate on Franz Ferdinand’s car

So what to make of the reference to the end date of World War I on the licence plate number on Franz Ferdinand’s car? Franz Ferdinand was killed in his car and the assassination triggered the war. Some chance event helped the perpetrator. Franz Ferdinand’s chauffeur took the wrong turn after three conspirators had already failed. This gave him the opportunity to strike. He was hindered by the crowd surrounding him so he couldn’t aim very well. Nevertheless he managed to kill both the archduke and his wife with just two shots. This sequence of events was already remarkable.

The licence plate number makes it even more inconceivable. It might be possible to guess the end date of World War I by chance if you know when it starts. If you assume that the war wouldn’t take longer than twenty years, a random guess of the end date would be right one in 7,305 times. But something doesn’t add up here. The assassination succeeded after a series of mishaps, so if it were a prediction that accidentally turned out right, it would also imply a prediction of the assassination succeeding, Franz Ferdinand being killed in this car, and it being the trigger for the first world war.

That’s hard to do. And so Mike Dash in the Smithsonian noted: “This coincidence is so incredible that I initially suspected that it might be a hoax.”2 And because it isn’t a hoax, investigative minds should have probed other options. Conspiracy theorists didn’t take notice either, even though this incident fits into their schemes.

There is a story about a Freemason named Alfred Pike, who allegedly disclosed a secretive plan to bring about the New World Order and predicted both world wars with uncanny precision already in 1871. Alas, nobody ever heard of this plan before 1959. It is hoax. In the Netherlands they call it a monkey sandwich story. The licence plate number could have added some credibility to it. But then again, the truth is overrated. It matters more what people believe.

Seeing meaning when there isn’t any

“Everything is just random,” some pundits are eager to explain, “but because your mind is wired to see meaning, you see meaning. AIII 118 is just a random sequence of characters, but you attached meaning to it.” This book might be a random sequence of characters too, and yet you think it isn’t. Others might argue: “The language of Austria is German. Armistice in German is Waffenstillstand, so why doesn’t it read WIII 118, or even better, W 11 11 1918?”

If someone gives you a message, you don’t quibble about such details. If I say “hello” to you, you are not going to discuss with me why I didn’t say “hi” instead, unless you are a philosopher with a lot of time on your hands. Great Britain, the United States and France, which were all major participants in the war. These countries use the word armistice. It might be better to ask yourself how many sequences of characters with a length of six to eight are possible, and how many of them could refer to date of the armistice ending the war? That’s only a small portion for sure.

The law of small numbers

Everything is random and weird coincidences happen by chance. This is the law of large numbers. Pundits use the birthday problem to demonstrate that weird coincidences happen more often than we think. If you happen to share a birthday with another person in a small group, it might strike you as odd, but the chance of someone sharing a birthday with another person is already 50% in a group of 23. What they don’t tell you, is that the chance of you being one of those persons is a lot smaller. Weird coincidences are likely to happen, but less likely to happen to you. So if they happen to you all the time, it would be hard to explain as mere randomness.

And the law of large numbers may not apply to the licence plate number on Franz Ferdinand’s car. It applies to large numbers. How many historic events are out there that equal the importance of the assassination of Archduke Franz Ferdinand, the Armistice of 11 November 1918 or D-Day? The answer probably is: “Not many.” It is less likely that meaningful coincidences happen to such major historic events. To make it even harder to believe, the licence plate number coincidence not only implies a prediction of the end date of the war, but also the success of the assassination attempt, and this event being the trigger for the war.

Only a few historic events equal the importance of the assassination of Franz Ferdinand and the end of World War I. Perhaps this is just randomness like the incidence of kidney cancer varying wildly in small population samples. There are only a few historic events of similar importance. But D-Day is one of those few events, and the scheme surrounding D-Day is even more puzzling. This is a like four people out of a population of six suffering from kidney cancer and this population being the royal family of the country. Perhaps this is just randomness, but an experienced physician would consider that it runs in the family.

The fall of the Berlin Wall in 1989 was predicted. The coincidences surrounding the terrorist attacks of 11 September 2001 are truly dumbfounding. So if you are God, and you want your minions to notice, then what are your options? Framing the question like this makes the answer appear obvious. Indeed, there are countless other options, but asking why this particular path is chosen is as meaningless as asking why I said “hello” instead of “hi”. If you took a certain course of action to a certain aim, there are countless others you didn’t take. So if God wants us to take notice, we live in interesting times.

1. Thinking, Fast and Slow. Daniel Kahneman (2011). Penguin Books.
2. Curses! Archduke Franz Ferdinand and His Astounding Death Car. Mike Dash (2013). Smithsonian. [link]