Long-Term Mortgages

Mortgages are loans to purchase a property. The word derives from the French “mort” and meant death pledge with the obligation ending when the loan was paid off or the property repossessed.


The Dutch have the earliest mortgages. Originally in the Netherlands, people saved money and purchased their house for cash. However, starting in the 1800s, people would borrow money from one another. These peer-to-peer lending schemes functioned well and increased homeownership.

Eventually, the Netherlands came to view homeownership as good public policy and established specialized mortgage banks. In the 1850s, Dutch mortgage banks financed the purchase of homes by selling bonds. They’d then lend the funds at .75% above the bond face value as a “servicing fee” for collecting payments remitted to investors. This model eventually evolved into securitization.

The Netherlands continued to expand its mortgage banks. Other countries adopted various lending schemes. In Prussia, credit co-ops called Landschaften arranged for loans though typically to royals. Landschaften were interesting because they were non-profit.

In the US and UK land ownership was for the wealthy who rented on oftentimes terrible terms. The infamous English “Star Chamber” – known for its brutality hearing heresy cases – was primarily a landlord/tenant court. Russian Vladimir Lenin worked as a legal assistant and, some historians believe, focused on landlord-tenant issues. These cases radicalized him, transforming him into the Founding Father of Soviet communism.

Towards Home Ownership

Towards the later 1800s and into the early 1900s mortgage lending in the US and UK became more common. However, in the US most loans were five-year interest-only payment schemes with the full balance due at the end of the loan. Usually, people would refinance to another five-year loan, sometimes paying down more principal if they managed to save. While this system was an improvement over terrible landlords, it was far from optimal.

American mortgages became a serious problem during the Great Depression when home values plummeted. Borrowers were unable to refinance their loans and foreclosures (repossessions) became rampant. As additional repossessed homes were auctioned, and the economy worsened, the price of houses further decreased creating further foreclosures. American house prices entered a death spiral plunging countless people into homelessness.

Long-Term Mortgages

In 1934, the US government created the Federal Housing Administration to rescue the housing market. The agency guaranteed mortgages under certain terms, encouraging banks to start lending again. One of the terms is that mortgages last the life of the loan. That is, mandatory refinancing was prohibited.

Over time, these long-term mortgages because of the standard in the western world. Asian countries also evolved from cash-only to partial mortgages to western-style mortgage loans. Today, in many Asian countries, long-term mortgages are no longer unusual.


The Jukebox is an automated coin-operated music player which plays individual songs. The differentiating factor of the Jukebox from a simple coin-operated record player is the ability of an automated machine to replace live music in a restaurant or bar.


Louis Glass and William Arnold modified Edison’s record players to operate by coins. These contained multiple listening stations before the introduction of the loudspeaker. Eventually, these record players evolved but, until the 1930s, they were not for widespread use. You couldn’t dance to the early Edison phonographs.

Literature often confused and co-mingles the Jukeboxe and the Nickelodeon. However, they’re entirely separate.

However, player pianos existed since the late 1880s, including coin-operated models. By 1896, the Wurlitzer company was selling coin-operated player pianos. In 1924, de Forest’s electric tube amplifier enabled amplified music and the Jukeboxes that followed.

Golden Years of Jukeboxes

In the early 1930s, Americans lacked both money and fun. The Great Depression and prohibition of alcohol put a damper on the fun. Phonographs were not expensive but were not free, and neither were the recordings.

In response, various inventors created the modern Jukebox. It is a machine that plays 45rpm single-song recordings over a loudspeaker, one after another, for an affordable price.

Two groups found the jukebox controversial. First were Americans who believed that jukeboxes encouraged immorality and crime. Organized crime did control jukeboxes in New York City, reinforcing this negative impression.


However, organized crime also controlled the low-cost speakeasy’s the jukeboxes originally played in until the repeal of prohibition in 1933. Realistically, these people didn’t like the influence of the music, especially on young people. Jukeboxes often played jazz and, later, rhythm and blues and later rock and roll. This music was tied to African Americans and the “concerns” certain people are little more than thinly-veiled racism.

Another group with a more substantive concern were musicians. Before jukeboxes, musicians routinely played in bars and pubs throughout the US and Europe. Live music was the norm, not the exception. However, whereas a bar owner paid musicians the jukeboxes produced revenue. Even if mobsters ran the jukeboxes, they still cost the bar owner nothing, unlike live musicians.

Jukeboxes created a cultural convention that people could have the music they wanted when they wanted it for a reasonable price. While the machines eventually faded away, the demand for individualized music did not.

Blue Ocean Strategy & Finance: Margin Lending

Margin lending refers to the process of using borrowed money for investing. For example, a traditional investor may purchase 100 shares of a business for $10, spending $1,000. However, using margin, that same person may purchase 150 shares, spending the same $1,000 and borrowing another $500. If the stock price goes up, they pay the loan costs and keep the gains. However, if the price declines, they are forced to sell the stock to pay off the loan. Margin lending is an example of the use of blue ocean strategy in finance.

Early History

Building early railroads was an expensive undertaking and Americans were short liquid capital in the mid-1800s. To finance businesses in the early 1800s, people typically turned to broker Nicholas Biddle of Philadelphia who marketed sterling bonds from the UK. This funding mechanism dried-up with the failure of the Bank of the United States of Pennsylvania in 1841. State Street, in Boston, took over and became the primary financier for railroads. In 1847, a severe recession caused a liquidity crunch that left the bank standing but unable to finance large projects.

Subsequently, lenders turned to New York-based merchants, bankers, and brokers who typically had more capital to make loans. Funds flowed from Wall Street to build railroads in the Southern and Western states.

Brokers considered early railroad bonds low-risk, and they competed to sell bonds. Therefore, they offered to partially finance bond purchases. A person who wished to purchase, say, $500 of railroad bonds could use $250 cash and borrow another $250 with the bond as collateral. This type of funding mechanism, encouraged by the government because it helped build infrastructure, was referred to as a “call loan.”

Margin Lending

Over time the US flourished. Eventually, the stock market became more popular. Brokers and eventually ordinary people used a similar type of call loan. Brokerage houses lent funds to buy stock secured by the stocks as collateral. For example, a person who wished to buy $1,000 of stock might pay for $500 of stock and finance another $500, with the loan secured by the initial $500 block of stock.

Margin loans worked great when stocks went up in value. Using the example above, if the stock price increased by 25% then the stock would be worth $1,250. The person could then sell the stock, use the proceeds to pay off the $500 loan, and realize $250 profit. Without the margin loan, our hypothetical stock buyer could have only purchased $500 of stock that would have increased in value by $125. Margin lending doubled their profits.

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Margin Mania

By 1929 the US stock market was booming, and everybody was buying stocks. Margin lending requirements were extremely weak; everybody was buying stocks on margin and making lots of money. In the winter of 1928, financier Joseph Kennedy, father of the late President, famously quipped “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”

By this time some brokers were leveraged 10:1. That is, they’d pay $100 and borrow $900 for $1,000 of stock.

When stocks began to drop in price, the underlying collateral securing the margin loans was no longer enough. Subsequently, brokerages made “margin calls.” They demanded margin borrowers sell the underlying stocks to pay down or pay off the loans. This forced selling caused the price of the stock to drop further, setting off further margin calls.

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As the overall market dropped, cascading margin calls and the forced selling caused the market to drop even further. By late October 1929, the stock market all but collapsed with forced and panic selling. A four-day run was the worst percentage decline in US history before or since. WWI cost less than those four days.

Great Depression

Both banks and their customers heavily invested in stocks. Banks also received margin calls. They then used reserve funds (customer deposits) to cover the margin calls. Eventually, the banks ran out of money.

During this era, deposits were uninsured. When a bank went bankrupt depositors lost their money. Therefore, when people heard their bank was in trouble they’d line up to take their funds out before the bank ran out of money, a bank run. As banks paid deposits in cash they’d have fewer reserves necessitating more margin calls, shuttering countless banks.

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It wasn’t until June 1933, the US government intervened by creating the Federal Deposit Insurance Corporation to guarantee certain bank funds would be available even in the case a bank failed.

Stock losses, margin calls, and bank runs caused people to withdraw their money and save it. Americans stopped spending for anything besides the most vital goods. This caused retailers to fail, leaving their workforce unemployed and their creditors with unrecoverable debt.

With the economy in dire shape, the US decided to sharply restrict world trade, putting up protectionist barriers. Europe retaliated with their own trade barriers and export markets for US products froze, causing crop prices to drop. Farmers could not repay loans and lost their properties to widespread foreclosures.

Additionally, in an attempt to grow more crops farmers over-farmed their land resulting in widespread erosion and dust storms that destroyed vast amounts of farmland.

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The margin lending, bank runs, lack of spending, trade war, and environmental mess led to the Great Depression.

Central Banks


The first central bank was Swedish Riksbank. The Swedish government chartered it to act as a clearinghouse for commerce. In 1694, the Bank of England was founded. It’s primary purpose was to purchase government debt. Napoleon chartered the Banque de France to stabilize currency after the French Revolution.

Early central banks, and their modern counterparts have many functions. One of the best-known is they issue currency and hold a monopoly over money. They also enable non-central banks to operate, issue other banks loans, purchase state debt, create money, and manage inflation.

Controversially, central government-chartered banks can become a lender of last resort during financial crises.

Purpose of central banks

One often misunderstood component is that central banks are private institutions, not unlike other banks. The difference is they enjoy monopoly powers other banks do not – including and especially the ability to issue currency – and their only customers are other banks. Their original customers are other banks. Their only product is short overnight loans. However, most notably during the Financial Crisis of 2007-2008, the US Federal Reserve loaned money directly to bail out banks and private businesses.

While central banks issue currency, most tied their currencies to gold. While the gold standard was abandoned during the 20th century, many central banks still have vast amount of gold. The US Federal Reserve has over 400 tons of gold in the vault under its bank in New York City.

Nevertheless, many central banks print currency tied to nothing, called fiat currency. Other central banks tie their currencies to other fiat currencies or a combination of fiat currencies.

Countries have gone without central banks, but it usually does not end well. The US had an 80-year period with no central bank: states made their own banks which issued their own currency. There were bank runs, massive fraud, and payments took forever to clear as the various individual banks worried about fraud. A financial crisis in 1907 convinced the US government of the need for one central bank and, in 1913, the Federal Reserve was created.

Modern central banks

During the 20th century, central banks added overall economic health to their focus. Before then, their primary goal was to make sure the money supply was stable and ensure payments between banks. They evolved and, today, central banks also try to reduce unemployment and prevent recessions.

The heads of most central banks are economists.