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Money in Pre Industrial Societies
Most people think of pirates as lawless drunks chasing gold across the Caribbean. The reality is stranger and, frankly, more interesting. Many of the most successful “pirates” in history were not criminals at all. They were government contractors.
Privateering was the practice of a sovereign nation issuing a letter of marque to a private ship captain, authorizing him to attack and plunder enemy vessels. In exchange, the privateer kept a share of whatever he seized. The crown got a cut, the investors got a cut, and the captain got rich or died trying. If that sounds like a venture capital deal with cannons, that is because it basically was one.
The Letter of Marque: History’s First Term Sheet
A letter of marque was a legal document issued by a government granting a private citizen the right to wage war at sea on its behalf. It turned piracy into a licensed business. Without it, you were a criminal. With it, you were an entrepreneur serving the national interest.
The distinction mattered enormously. A pirate captured by the Royal Navy could expect a short trial and a long rope. A privateer captured in the same circumstances could demand treatment as a prisoner of war. One piece of paper was the difference between a business lunch and a death sentence.
What made these letters fascinating from a financial perspective was their structure. They were not salaries. They were not contracts for services rendered. They were closer to equity stakes in an uncertain outcome. The government invested nothing. It simply granted permission and legal cover. The privateer raised the capital, outfitted the ship, hired the crew, and assumed all the risk. If the venture failed, the crown lost nothing. If it succeeded, the crown collected its percentage.
This is, in its bones, the same logic behind modern private equity. A general partner raises funds, deploys capital into risky ventures, and splits the returns with limited partners who provided backing but took on less operational risk. The only difference is that in the 1600s, the “deal flow” involved intercepting Spanish galleons rather than acquiring software companies.
Crew Compensation: The Original Carried Interest
One of the more surprising aspects of privateer ships was how they handled pay. Crews did not receive wages. They received shares of the total haul. Every man aboard, from the captain to the cook, was allocated a predetermined fraction of whatever the voyage produced. This was codified in written articles that every crew member signed before departure.
These articles were remarkably detailed. They specified how the loot would be divided, what compensation a man would receive for losing a limb in battle, and what behavior would result in forfeiture of shares. A lost arm might be worth 600 pieces of eight. A lost eye, somewhat less. It was workers compensation written by people who genuinely expected to need it.
The structure created powerful alignment of incentives. Every crew member had skin in the game. There was no free riding. If the voyage captured nothing, everyone went home empty handed. If the voyage struck gold, everyone benefited in proportion to their role and risk.
This is the same principle that modern finance rediscovered centuries later and now calls “carried interest” or “performance fees.” Hedge fund managers take 20 percent of profits. Privateer captains took a larger share than ordinary sailors, but the underlying logic was identical. You eat what you kill.
What is counterintuitive here is that these supposedly barbaric seafarers had designed a compensation system more equitable and performance driven than most modern corporations. A 17th century privateer crew had better incentive alignment than the average Fortune 500 company, where executives collect bonuses regardless of whether the stock goes up or down.
Risk Management on the Open Sea
Privateering voyages were funded much like early joint stock ventures. A group of investors would pool capital to outfit a ship or a small fleet. They would appoint a captain, agree on the division of spoils, and then wait months or even years to learn whether their investment had paid off.
The risk profile was extreme. Ships sank in storms. Crews mutinied. Targets fought back. Disease killed more sailors than combat ever did. And even a successful voyage could be rendered worthless by political shifts. If your country signed a peace treaty while you were at sea, your letter of marque became toilet paper and your cargo became stolen property.
Investors managed this risk the same way modern portfolio managers do: diversification. Wealthy backers rarely funded a single ship. They spread their capital across multiple voyages, knowing that most would produce mediocre returns, some would be total losses, and a few would generate extraordinary windfalls. The math was simple. One spectacular capture could pay for a dozen failed expeditions.
This is the venture capital model before venture capital existed. The power law distribution that governs modern startup investing, where a small number of massive winners compensate for a large number of losers, was already operating in the harbors of Elizabethan England. Sir Francis Drake’s circumnavigation of the globe returned an estimated 4,700 percent profit to his investors. Queen Elizabeth I was among them. That single voyage generated enough wealth to fund a significant portion of England’s national debt repayment.
The Governance Problem
Privateer ships faced a governance challenge that modern corporations would recognize immediately. How do you prevent the agent (the captain) from acting against the interests of the principals (the investors and the crown)?
The answer was imperfect. Captains routinely underreported their captures, hid valuable cargo, or diverted to friendly ports where they could sell goods without oversight. The information asymmetry was enormous. Investors sitting in London had no way to verify what happened on the other side of the Atlantic. They relied on the captain’s honesty, which is roughly as reliable a strategy as it sounds.
Some governments attempted audits. Prize courts were established to assess captured cargo and ensure proper distribution of proceeds. But these courts were slow, corrupt, and easily manipulated. A well connected captain could navigate the legal system as skillfully as he navigated the seas.
This principal agent problem has not gone away. It has just moved indoors. Modern investors face the same fundamental challenge: how do you know the people managing your money are telling you the truth? The mechanisms have improved. We have auditors, regulators, and quarterly reporting. But the underlying tension between those who deploy capital and those who control it remains as alive today as it was when captains were stuffing emeralds into their boots.
When the License Expires
One of the most revealing aspects of privateering is what happened when it ended. Throughout the 17th and 18th centuries, nations periodically signed peace treaties that made privateering unnecessary. When that happened, thousands of skilled, armed, risk tolerant sailors suddenly found themselves unemployed.
Many of them became actual pirates.
This transition from licensed privateer to outlaw pirate was not a moral collapse. It was an economic inevitability. These men had no other marketable skills. They knew how to sail, fight, and seize cargo. The only thing that had changed was their legal status. The work was identical. The paperwork was different.
There is a parallel here to what happens in modern financial markets during deregulation or market shifts. When a profitable niche disappears, the people who operated in it do not simply retrain and become accountants. They take their skills and apply them wherever they can, sometimes in gray areas, sometimes in outright illegal ones. The line between aggressive trader and market manipulator has always been thinner than the industry likes to admit.
The State as Silent Partner
Perhaps the most instructive lesson from privateering is the role of the state. Governments did not privateer because they believed in free enterprise. They did it because they could not afford navies. Building and maintaining warships was staggeringly expensive. Privateering allowed a nation to project naval power without bearing the cost. It was military outsourcing.
England, France, and the Dutch Republic all used privateers extensively during periods when their official navies were underfunded. The arrangement worked well enough during wartime. Private ships supplemented state forces, disrupted enemy trade, and generated revenue for the treasury. Everyone benefited.
But the arrangement also revealed something uncomfortable about the relationship between states and markets. The government was not regulating privateering from a position of moral authority. It was participating in it for profit. The crown was not the referee. The crown was a shareholder.
This dynamic resurfaces throughout financial history. Governments simultaneously regulate and benefit from the industries they oversee. Central banks set interest rates while holding massive bond portfolios. Tax authorities write the rules while governments issue the debt. The state is never a neutral observer of capital markets. It is always a player, sometimes the largest one at the table.
What the Pirates Got Right
Privateering eventually died out. The major powers signed treaties banning the practice in the mid 1800s. Professional navies replaced private ones. The era of licensed plunder came to an end.
But the financial innovations that emerged from those wooden decks did not disappear. They evolved. Performance based compensation, risk pooling, joint ventures, agency governance, and the uneasy partnership between public authority and private capital are all features of modern finance that trace their lineage back to the age of sail.
The privateers were not sophisticated financial theorists. They were practical people solving practical problems under conditions of extreme uncertainty. They needed to fund expensive voyages, motivate crews, manage risk, and divide profits. They invented structures to do all of that, and those structures worked well enough to fund empires.
The next time someone presents carried interest or performance fees as a modern innovation, it is worth remembering that a one eyed sailor in 1680 would have understood the concept perfectly. He just would have called it his fair share of the plunder.
And honestly, that is a more accurate name for it.
