00:00:03
we may think power resides with
00:00:06
presidents and prime ministers in
00:00:08
palaces and Parliament's not so in
00:00:12
today's world real power lies in the
00:00:15
hands of an elite group of unassuming
00:00:17
men in anonymous open-plan offices the
00:00:22
men who controlled the world's bond
00:00:23
market Bill Gross is the boss of PIMCO
00:00:32
the world's biggest bond trading
00:00:34
operation which manages a portfolio of
00:00:37
bonds worth 700 billion dollars gross is
00:00:41
widely regarded as the king of the bond
00:00:44
market just call him Mr Bond
00:00:48
[Music]
00:00:52
bonds are the magical link between the
00:00:55
world of high finance and the world of
00:00:57
political power governments will always
00:00:59
spend more than they raise in taxation
00:01:02
sometimes shed loads more and they make
00:01:04
up the difference by selling bonds that
00:01:06
pay interest but and here's the magic if
00:01:09
you want to get rid of a bond the
00:01:10
government doesn't have to give you the
00:01:12
cash back you just take it to a bond
00:01:14
market like the one here took your stock
00:01:16
exchange and sell it
00:01:21
after the rise of banks the birth of the
00:01:23
bond market was the next big revolution
00:01:25
in the history of finance it created a
00:01:28
whole new way for governments to borrow
00:01:31
money
00:01:32
the bond market funded the walls that
00:01:34
plagued northern Italy six hundred years
00:01:37
ago it dictated the outcome of the
00:01:43
Battle of Waterloo and created the
00:01:45
world's greatest financial dynasty it
00:01:49
ensured the defeat of the south in the
00:01:51
American Civil War and in modern times
00:01:54
the bond market has brought once wealthy
00:01:56
nations like Argentina crashing to their
00:01:59
knees today
00:02:02
governments and companies use bonds to
00:02:04
borrow on an unimaginably vast scale all
00:02:08
told there are bonds out there worth
00:02:10
around 85 trillion dollars the fortunes
00:02:16
of most of us whether we like it or not
00:02:18
are directly linked to the bond market
00:02:20
if the bond market tanks then down goes
00:02:24
the value of our pensions and that's a
00:02:27
huge part of our wealth as individuals
00:02:28
in the financial crisis that has gripped
00:02:31
the world since the summer of 2007 US
00:02:34
government bonds have been seen as a
00:02:36
safe haven for investors seeking shelter
00:02:38
from the storm of falling property and
00:02:41
share prices so if Bill Gross were to
00:02:44
lose faith in those bonds it would hit
00:02:46
the financial world like well a fundable
00:02:51
that's why this mr. bond has become so
00:02:54
much more powerful than the mr. bond
00:02:56
created by Ian Fleming and that's why
00:03:00
both kinds of bond have a license to
00:03:03
kill
00:03:03
[Music]
00:03:14
[Music]
00:03:28
war declared the ancient Greek
00:03:31
philosopher Heraclitus is the father of
00:03:34
all things it was certainly the father
00:03:37
of the bond market for much of the 14th
00:03:44
and 15th centuries the medieval
00:03:46
city-states of Tuscany Florence Pisa and
00:03:49
Siena were at war with each other
00:03:52
this was war waged as much by money as
00:03:55
by men in Peter vanderheiden's battle of
00:04:03
the moneybags and strong boxes piggy
00:04:05
banks treasure chests and barrels full
00:04:08
of coins lay into one another with
00:04:10
Lance's and swords in a chaotic
00:04:12
free-for-all the Dutch verses inscribed
00:04:14
at the bottom read it's all for money
00:04:17
and goods this fighting and quarreling
00:04:19
but what they might just as easily have
00:04:21
said is that war is impossible if you
00:04:23
don't have the money to pay for it and
00:04:30
the way to do that the ability to
00:04:33
finance war through the bond market was
00:04:36
like so much else an invention of the
00:04:38
Italian Renaissance
00:04:43
rather than require their own citizens
00:04:46
to do the dirty work of fighting each
00:04:48
city hard military contractors
00:04:51
condottieri who raised armies to annex
00:04:54
land and Luke treasure from the others
00:04:57
among the condottieri of the 13 60s and
00:05:00
13 70s one stood head and shoulders
00:05:03
above the others
00:05:07
this is his portrait in Florence's Duomo
00:05:10
earth thank you from a grateful public
00:05:15
unlikely though it may seem this master
00:05:18
mercenary was an Essex boy so skillfully
00:05:24
did he wage war that the Italians called
00:05:26
Sir John Hawkwood Giovanni Acuto John
00:05:30
the acute
00:05:33
this castle was one of many pieces of
00:05:36
prime real estate the Florentines gave
00:05:38
him as a reward for his services
00:05:44
but Hawkwood was a mercenary who was
00:05:46
willing to fight for anyone who'd pay
00:05:48
him
00:05:49
Milan Padua Pisa or the Pope
00:05:59
these dazzling frescoes in Florence's
00:06:02
palazzo vecchio show the armies of pisa
00:06:05
and florence clashing in 1364 at that
00:06:08
time hawkwood was fighting on the side
00:06:10
of pisa but 15 years later he'd switched
00:06:13
sides
00:06:14
why because florence was where the money
00:06:16
was the cost of these incessant wars
00:06:22
plunged Italy's city-states into crisis
00:06:25
expenditures even in years of peace were
00:06:28
running at double or more tax revenues
00:06:31
to pay the likes of Sir John Hawkwood
00:06:35
Florence was drowning in deficits this
00:06:44
wonderful document in the Florentine
00:06:45
State Archives shows how the city's debt
00:06:48
had exploded from around fifty thousand
00:06:51
florins at the beginning of the 14th
00:06:52
century to five million by 14:27 it was
00:06:56
quite literally a mountain of debt hence
00:06:58
the name the Monti communiy but from who
00:07:02
look at the Florentines possibly have
00:07:04
borrowed such a vast sum the answer is
00:07:07
right here from themselves
00:07:13
it was a revolutionary idea that would
00:07:16
change the world of money forever rather
00:07:19
than paying direct tax citizens were now
00:07:21
effectively obliged to lend money to
00:07:24
their own government
00:07:25
[Music]
00:07:32
in return for these forced loans they
00:07:35
received interest these debt instruments
00:07:42
simple lines in a ledger were the
00:07:45
original government bonds and the
00:07:47
wonderful thing about them was that if
00:07:48
you needed your money in a hurry you
00:07:49
could sell your bonds to other citizens
00:07:52
they were liquid assets what this record
00:07:55
tells us is how Florence turned its
00:07:58
citizens into its biggest investors this
00:08:06
what I'm expedient marked the birth of
00:08:08
the modern bond market everyone was a
00:08:10
winner bonds had saved the city-state
00:08:13
from bankruptcy the citizens were happy
00:08:16
earning their interest and the bond
00:08:18
market let them buy or sell as they saw
00:08:20
fit it seemed as if the problem of
00:08:23
public debt had been solved allowing the
00:08:26
citizens of Florence to turn their minds
00:08:28
to higher things but there was just one
00:08:32
problem
00:08:33
with this brilliant idea
00:08:41
there was a limit to how many more or
00:08:44
less unproductive walls could be waged
00:08:46
the larger the depths of the Italian
00:08:49
cities became the more bonds they had to
00:08:51
issue and the more bonds were issued the
00:08:54
less valuable they looked to investors
00:09:00
and that was exactly the sequence of
00:09:03
events in Venice
00:09:06
by the early 16th century the city had
00:09:09
suffered a series of military reverses
00:09:11
and a value of venetian bonds had taken
00:09:14
a hammering
00:09:21
at the nadir between 1509 and 15:29
00:09:25
Venetian Montaigne reverb bonds were
00:09:27
trading at just 10% of their face value
00:09:30
now if you buy a bond when war is raging
00:09:34
you're taking a risk the risk that the
00:09:37
city won't pay you back or pay your
00:09:38
interest on the other hand remember that
00:09:41
the interest is paid on the face value
00:09:43
of the bond so if you conveyor to just
00:09:45
10% of its face value you're earning a
00:09:48
handsome return of maybe 50% and that is
00:09:51
how the bond market works in a sense you
00:09:54
get returned for the risk you'll prepare
00:09:57
to take at the same time it's the bond
00:09:59
market that sets interest rates for the
00:10:01
economy as a whole if the state has in
00:10:03
effect to pay 50% then so do all the
00:10:06
other borrowers
00:10:11
the bond market had been invented to
00:10:13
help pay for it at his Wars but now it
00:10:16
was setting interest rates for everyone
00:10:19
its rise to par had begun over the next
00:10:24
two centuries bonds would come to rule
00:10:27
the world
00:10:37
[Music]
00:10:43
this house was built by the financial
00:10:46
dynasty that helped decide the Battle of
00:10:48
Waterloo the dynasty that produced the
00:10:52
man they called the Bonaparte of Finance
00:10:54
the Emperor of the 19th century bond
00:10:57
market he is master of unbounded wealth
00:11:02
he boasts that he is the arbiter of
00:11:05
peace and war and that the credit of
00:11:07
nations depends upon his nod ministers
00:11:11
of state are in his pay those words
00:11:19
spoken in 1828 by the radical Member of
00:11:23
Parliament Thomas Dunne scam were
00:11:25
describing Nathan Rothschild bond trader
00:11:28
extraordinaire and founder of the London
00:11:30
branch of what became the biggest bank
00:11:32
in the world
00:11:34
the bond market made the Rothschilds
00:11:37
stupendously rich so rich that they
00:11:40
could afford to build 41 stately homes
00:11:43
all over Europe this is number 29 pods
00:11:47
Dhin Manor in Buckinghamshire which has
00:11:49
been restored in all its gilded glory by
00:11:52
Jacob Rothschild Nathan's great-great
00:11:55
great-grandson well he was short fat
00:12:01
obsessive extremely clever highly
00:12:06
focused and I can't imagine he would be
00:12:10
a very pleasant person to her dealings
00:12:18
between around 1810 and 1836 the five
00:12:22
sons of Mayer Amschel Rothschild rose
00:12:25
from the obscurity of the Frankfurt
00:12:27
get'r to attain a position of unequaled
00:12:30
power in international finance it was
00:12:36
the third son Nathan who orchestrated
00:12:38
this family triumph from London
00:12:41
Evelyn de Rothschild is Nathan's
00:12:43
great-great grandson he recently retired
00:12:46
as chairman of Rothschilds the bank that
00:12:48
Nathan built he was very ambitious and
00:12:51
he moved to London and I think he was
00:12:53
determined I don't think he's half of
00:12:55
fools like him
00:12:56
maybe that's a family trait this is one
00:13:01
of the few surviving letters from Nathan
00:13:03
Rothschild to his brothers written as
00:13:05
always in udin Dodge
00:13:07
that was German transliterated into
00:13:09
Hebrew characters and it gives you an
00:13:11
idea what an extraordinary work ethic
00:13:12
the man had and how he tried to impose
00:13:15
it on his poor long-suffering brother's
00:13:17
just listen to this dear I'm sure I'm
00:13:21
writing you my opinion because it's my
00:13:23
damn duty to do so I read your letters
00:13:28
not once but often a hundred times
00:13:30
because you can well imagine that after
00:13:32
dinner I don't read books I don't play
00:13:35
cards I don't go to the theater my only
00:13:39
pleasure is my business
00:13:47
it was this phenomenal drive allied with
00:13:51
innate financial genius that propelled
00:13:54
Nathan from obscurity to mastery of the
00:13:57
London bond market once again however
00:14:01
the opportunity for a financial
00:14:03
breakthrough came from war on the
00:14:15
morning of June the 18th 1815 67
00:14:19
thousand British Dutch and German troops
00:14:21
under the Duke of Wellington's command
00:14:23
looked out across the fields of Waterloo
00:14:26
not far from Brussels towards an almost
00:14:28
equal number of French troops commanded
00:14:31
by the French Emperor Napoleon Bonaparte
00:14:36
the Battle of Waterloo was the
00:14:39
culmination of more than two decades of
00:14:41
intermittent conflict between Britain
00:14:43
and France but it was more than just a
00:14:45
battle between two armies it was also a
00:14:47
contest between rival financial systems
00:14:50
won the French based on plunder the
00:14:52
other the British based on debt to pay
00:14:57
for the war the British government had
00:14:59
sold an unprecedented amount of bonds
00:15:02
according to a long-standing legend the
00:15:05
Rothschild family made their first
00:15:07
millions by speculating on how the
00:15:09
outcome of the Battle of Waterloo would
00:15:11
affect the price of these bonds it was
00:15:17
this legend of Jewish profiteering that
00:15:19
a century later the Nazis did their best
00:15:22
to embroider in 1940 Joseph Goebbels
00:15:27
approved the release of this film dijo
00:15:29
chills it give us nathan is seen bribing
00:15:35
a french general to ensure that you have
00:15:37
Wellington's victory and then
00:15:39
deliberately misreporting the outcome of
00:15:41
the battle in London this triggers panic
00:15:44
selling of British bonds which Nathan
00:15:47
then snaps up at bargain basement prices
00:15:56
what happened here in 1815 was
00:15:59
altogether different far from making
00:16:03
money from Wellington's defeat of
00:16:04
Napoleon the Rothschilds were very
00:16:06
nearly ruined by us their fortune was
00:16:09
made not by Waterloo but despite it this
00:16:15
is how it really happened
00:16:17
selling bones to the public and raised
00:16:20
plenty of cash for the British
00:16:21
government
00:16:22
but neither bones nor banknotes were any
00:16:25
use to Wellington to provision his
00:16:27
troops and pay Britain's allies against
00:16:29
France he needed a currency that was
00:16:32
universally acceptable
00:16:35
Nathan Rothschild was given the job of
00:16:37
taking the money raised in the bond
00:16:39
market and delivering it to Wellington
00:16:41
as gold the success of this operation
00:16:47
would determine the fate of the warring
00:16:49
empires and of all Europe this letter
00:16:56
marks a turning point in the history of
00:16:57
both the Rothschild family and the
00:16:59
British government it's dated the 11th
00:17:02
of January 1814 and it's an order from
00:17:04
the Chancellor of the Exchequer to the
00:17:06
commissary in chief telling him to a
00:17:09
point Nathan Rothschild mr. Rothschild
00:17:11
as a British government agent
00:17:13
Nathan's job was to gather together as
00:17:15
much gold and silver as he could find on
00:17:18
the European continent and make sure
00:17:20
that it got to the Duke of Wellington in
00:17:21
his army who had just fought their way
00:17:23
out of Spain into the South of France it
00:17:26
was an operation that relied heavily on
00:17:28
the Rothschilds unique pan-european
00:17:30
credit network and also an Athens
00:17:32
ability to mobilize gold the way
00:17:35
Wellington could mobilize troops
00:17:38
[Music]
00:17:39
shifting such vast amounts of gold in
00:17:41
the middle of a war was hugely risky of
00:17:43
course yet from the Rothschilds point of
00:17:46
view the hefty Commission's they were
00:17:48
able to charge more than justified the
00:17:50
risks the Rothschilds soon became
00:17:56
indispensable to the British war effort
00:17:58
in the words of the British commissary
00:18:01
in chief Rothschild of this place has
00:18:03
executed the various services entrusted
00:18:06
to him in this line admirably well and
00:18:08
though a Jew we place a good deal of
00:18:10
confidence in him the Rothschilds were
00:18:15
so effective as war financiers because
00:18:18
they had a ready-made banking network
00:18:20
within the family
00:18:22
Nathan in London Amschel in Frankfurt
00:18:25
James in Paris Karl in Amsterdam and
00:18:29
Salomon roving wherever Nathan saw fit
00:18:36
if the price of gold was higher and say
00:18:39
Paris than in London James and Paris
00:18:42
would sell Nathan in London would buy I
00:18:50
think the edge
00:18:52
they were families like the bearings
00:18:54
with whom they were competing was that
00:18:56
they had their brothers in very
00:18:59
important financial centres and
00:19:01
countries now whether that was
00:19:03
premeditated whether they thought that
00:19:05
through as they got out together it's
00:19:07
not believed of them I just pass that
00:19:09
but that's what happened and once they
00:19:11
saw that it was an advantage right they
00:19:13
worked on that advantage in March 1815
00:19:17
Napoleon returned to Paris from exile in
00:19:20
Elba determined to revive his imperial
00:19:22
ambitions Rothschilds immediately ramped
00:19:28
up their gold operation buying up all
00:19:30
the bullion and coins they could lay
00:19:32
their hands on Nathan's reason for
00:19:35
buying this huge stock of gold was
00:19:37
simple he assumed that as with all
00:19:40
Napoleon's Wars
00:19:41
this would be a long one his gold would
00:19:44
be more and more sought-after and it
00:19:46
would rise in volume it proved to be a
00:19:49
near fatal miscalculation
00:19:55
wellington famously called the Battle of
00:19:57
Waterloo the nearest run thing you ever
00:19:59
saw in your life after a day of brutal
00:20:08
charges counter charges and heroic
00:20:10
defense the late arrival of the Prussian
00:20:12
army finally proved decisive
00:20:16
for Wellington it was a glorious victory
00:20:20
but not for the Rothschilds no doubt it
00:20:25
was gratifying to Nathan Rothschild to
00:20:27
be the first to hear the news of
00:20:29
Napoleon's defeat thanks to the
00:20:31
swiftness of the Rothschild couriers he
00:20:33
heard it fully 48 hours before major
00:20:36
Henry Percy delivered Wellington's
00:20:38
official dispatch to the British Cabinet
00:20:40
but no matter how early he heard it the
00:20:43
news from Waterloo was anything but good
00:20:45
from Nathan's point of view he had
00:20:47
bargained for something much more
00:20:49
protracted now he and his brothers were
00:20:52
sitting on top of a pile of cash that
00:20:54
nobody wanted to pay for a war that was
00:20:57
over with the coming of peace the great
00:21:01
armies that at fort napoleon could be
00:21:03
disbanded that meant no more gold for
00:21:06
soldiers wages and it meant the price of
00:21:08
gold which had soared during the war
00:21:10
would fall
00:21:19
Nathan was faced with heavy and growing
00:21:22
losses there was only one possible way
00:21:27
out Nathan could use the Rothschild gold
00:21:31
to make a massive and hugely risky bet
00:21:34
on the bond market July the 20th 1815
00:21:46
the evening edition of the London Korea
00:21:49
reported that Nathan had made great
00:21:51
purchases of stock meaning British
00:21:54
government bonds
00:21:55
Nathan's gamble was that the British
00:21:57
victory at Waterloo would send the price
00:21:59
of British bonds soaring upwards
00:22:05
Nathan bought and as the price of bonds
00:22:08
began to rise he kept on buying
00:22:13
despite his brother's desperate and
00:22:15
treaties to sell Nathan held his nerve
00:22:20
for another year
00:22:24
eventually in July 1817 with bond prices
00:22:28
up by 40%
00:22:30
he sold his holding his profits were
00:22:35
worth approximately six hundred million
00:22:37
pounds today
00:22:39
the Rothschilds had shown that bonds
00:22:42
were more than just a way for
00:22:43
governments to fund their Wars they
00:22:45
could also be bought and sold in a way
00:22:47
that generated serious money and with
00:22:51
money came power
00:22:56
myah Amschel Rothschild had repeatedly
00:22:58
admonished his five sons if you can't
00:23:00
make yourself loved make yourself feared
00:23:03
as they burst rode the mid 19th century
00:23:05
financial world as masters of the bond
00:23:08
market the Rothschilds were already more
00:23:10
feared than loved but now they had
00:23:14
become hated too
00:23:17
[Music]
00:23:23
the fact that the Rothschilds were
00:23:25
Jewish gave a new impetus to deep-rooted
00:23:28
anti-semitic prejudice just a few months
00:23:32
ago a colleague a man in my office who
00:23:35
collects posters found these rather this
00:23:40
particular rather extraordinary example
00:23:43
of anti-semitism in a stark form about
00:23:46
the rust Charles who have epitomized to
00:23:50
them and others at times are the most
00:23:53
extreme forms of undesirable kept
00:23:56
capitalism as practiced by Jews it was
00:24:01
above all the Rothschild seeming ability
00:24:03
to permit or prohibit Wars that aroused
00:24:06
the most indignation you might have
00:24:12
thought that the Rothschilds actually
00:24:14
needed war after all some of Nathan's
00:24:17
biggest deals had been produced by war
00:24:19
and if it hadn't been for war 19th
00:24:21
century states wouldn't have needed to
00:24:23
issue any bonds for the Rothschilds to
00:24:25
buy and sell but the trouble with war
00:24:28
and even more so with revolution was
00:24:30
that it increased the risk that a debt
00:24:32
estate might fail to meet its
00:24:34
commitments and that hid the price of
00:24:36
existing bonds but the mid 19th century
00:24:39
the Rothschilds were no longer mere
00:24:41
traders they were fund managers
00:24:43
carefully tending to a vast portfolio of
00:24:46
their own government bonds now they
00:24:49
stood to lose much more than to gain
00:24:51
from conflict
00:24:53
the Rothschilds had helped decide the
00:24:55
outcome of the Napoleonic Wars by
00:24:56
putting their financial weight behind
00:24:58
Britain now they would help decide the
00:25:00
outcome of the American Civil War by
00:25:04
choosing to sit on the sidelines once
00:25:09
again it was the Masters of the bond
00:25:11
market who would be the arbiters of war
00:25:15
[Music]
00:25:27
[Applause]
00:25:31
fifty years after the Battle of Waterloo
00:25:33
and on the other side of the world
00:25:35
another great war would be decided by
00:25:38
the power of the bond market but this
00:25:43
time it would be the vanquished who made
00:25:45
the big bet and lost
00:25:49
[Applause]
00:25:59
the traditional view is that the key
00:26:01
turning point in the American Civil War
00:26:04
came in June 1863 two years into the
00:26:07
conflicts that was the month when Union
00:26:10
forces captured Jackson the Mississippi
00:26:12
State Capitol and forced a Confederate
00:26:14
Army to retreat westward to Vicksburg
00:26:16
their backs to the Mississippi River
00:26:21
surrounded with Union gunboats
00:26:23
bombarding their positions from behind
00:26:25
the southerners held out for a month
00:26:27
before finally laying down their arms
00:26:33
after Vicksburg the Mississippi was
00:26:35
firmly in the hands of the north the
00:26:38
South was literally split in two yet
00:26:46
this military setback wasn't the
00:26:48
decisive factor in the South's
00:26:50
ultimate defeat the real turning point
00:26:52
came earlier and it was financial
00:27:00
200 miles downstream from Vicksburg
00:27:02
where the Mississippi joins the Gulf of
00:27:04
Mexico lies the Port of New Orleans
00:27:12
this is fort pike built after 1812 to
00:27:17
protect New Orleans from a future
00:27:19
British attack but 50 years later it
00:27:22
wasn't able to protect the south from a
00:27:24
northern attack when captain David
00:27:26
Farragut seized New Orleans on April the
00:27:29
28th 1862 it was a crucial moment in the
00:27:33
Civil War because New Orleans was the
00:27:35
principal outlet for the South's most
00:27:37
important export cotton without control
00:27:45
over the cotton trade the South's cause
00:27:47
was doomed because cotton had become the
00:27:51
essential ingredient in an ambitious
00:27:53
scheme to bring the bond market into the
00:27:56
war
00:27:59
[Music]
00:28:00
like the Italian city-states 500 years
00:28:03
before the Confederate Treasury had
00:28:05
initially raised money for the war by
00:28:07
selling bonds to its own citizens but
00:28:13
there was a finite amount of capital
00:28:14
available in the south to survive the
00:28:18
Confederacy looked to Europe in the hope
00:28:21
that the world's greatest financial
00:28:22
dynasty might help them beat the north
00:28:25
as they had helped Wellington beat
00:28:27
Napoleon
00:28:32
initially the confederacy had grounds
00:28:35
for optimism in new york the rothschilds
00:28:38
agent was sympathetic having opposed the
00:28:40
north leader Abraham Lincoln in the
00:28:42
presidential election of 1860 but still
00:28:52
the Rothschilds hesitated lending to the
00:28:56
British government to help defeat
00:28:57
Napoleon had been one thing but buying
00:29:00
bonds from a bunch of breakaway southern
00:29:02
slave states seemed a risk too far the
00:29:07
Rothschilds decided to stay out
00:29:15
yet despite this setback the Confederate
00:29:19
government had an ingenious trick up
00:29:20
their sleeves the trick like the sleeves
00:29:23
themselves was made of cotton the
00:29:31
South's idea was to use cotton as
00:29:33
collateral to back its bonds investors
00:29:36
would be comforted to know that even if
00:29:38
the interest payments dried up they
00:29:40
could still demand their cotton instead
00:29:45
the South's agents went to work selling
00:29:47
the bonds in the financial centers of
00:29:49
Europe
00:29:54
when the Confederacy tried to market
00:29:56
conventional bonds in European financial
00:29:59
centres like Amsterdam's investors
00:30:01
wouldn't touch them with a bargepole but
00:30:03
when an obscure French firm named Emil
00:30:06
airliner and company offered cotton
00:30:08
backed bonds it was a completely
00:30:10
different story the key to the success
00:30:12
of the airliner bonds was that they
00:30:14
could be converted into cotton at the
00:30:17
pre-war price of six pence a pound these
00:30:22
cotton bonds formed the basis of the
00:30:24
South's new financial strategy if they
00:30:27
could restrict the supply of cotton its
00:30:30
value and the value of the bonds would
00:30:32
increase at the same time the
00:30:35
Confederates set out to use cotton to
00:30:37
blackmail the most powerful country in
00:30:39
the world Britain
00:30:45
[Music]
00:30:55
in 1816 the Port of Liverpool was the
00:30:58
principal gateway for imports of cotton
00:31:01
to the British textile industry then the
00:31:03
mainstay of the Victorian industrial
00:31:05
economy more than 80 percent of the
00:31:07
cotton came from the southern United
00:31:09
States
00:31:10
now that gave the Confederate leadership
00:31:12
hope that they had the leverage to bring
00:31:14
in Britain on their side in the Civil
00:31:17
War to ratchet up the pressure they
00:31:19
decided to impose an embargo on all
00:31:21
shipments of cotton to Liverpool for a
00:31:28
while the South's strategy worked
00:31:29
brilliantly cotton prices soared so did
00:31:33
the value of the Confederates cotton
00:31:35
backed bonds and the cotton embargo
00:31:39
devastated the British economy mills
00:31:42
were forced to lay off workers
00:31:44
eventually in late 1862 production
00:31:48
orbits east
00:31:55
this cotton mill and style south of
00:31:58
Manchester employed around 400 workers
00:32:00
but that was just a fraction of the
00:32:02
500,000 people employed by king cotton
00:32:05
across Lancashire obviously with no
00:32:07
cotton there was nothing for people to
00:32:09
do by the end of 1862 half the entire
00:32:13
workforce of Lancashire had been laid
00:32:15
off a quarter of the population was on
00:32:17
poor relief they called it the cotton
00:32:20
famine but this really was a man-made
00:32:22
famine Britain was in the doldrums and
00:32:29
the South's cotton bombs were riding
00:32:31
high yet the South's ability to
00:32:34
manipulate the bond market depended on
00:32:37
one overriding condition that investors
00:32:40
could be sure of taking physical
00:32:42
possession of the cotton which
00:32:43
underpinned the bonds if the south
00:32:45
failed to make its interest payments
00:32:52
and that's why the fall of New Orleans
00:32:55
on April the 28th 1862 was the real
00:32:58
turning point in the American Civil War
00:33:01
now that the South's main port was in
00:33:03
Union hands any investor who wanted to
00:33:06
lay his hands on Southern cotton had to
00:33:08
run the union's formidable naval
00:33:11
blockade
00:33:14
[Music]
00:33:22
[Applause]
00:33:26
the Confederates had overplayed their
00:33:28
hand they had turned off the cotton tap
00:33:31
but then lost the ability to turn it
00:33:34
back on by 1863 the mills of Lancashire
00:33:38
had found new sources of cotton in China
00:33:40
Egypt and India and investors were
00:33:43
rapidly losing faith in the South's
00:33:45
cotton backbones the consequences for
00:33:48
the Confederate economy were disastrous
00:33:51
with its domestic bond market exhausted
00:33:54
and only to poultry foreign loans the
00:33:57
Confederacy really had no alternative
00:33:59
but to print paper dollars like these
00:34:02
ones here in the Louisiana State Museum
00:34:03
to pay for the war in all 1.7 billion
00:34:08
dollars worth now it's true that the
00:34:11
north also printed paper money but by
00:34:13
the end of the war its greenbacks was
00:34:15
still worth around fifty pre-war cents
00:34:17
whereas a southern gray back was down to
00:34:20
just one cent what's more with more and
00:34:22
more of this cash chasing fewer and
00:34:24
fewer goods inflation in the South
00:34:27
simply exploded by January 1865 the
00:34:30
price of some goods was up by a factor
00:34:33
of 90
00:34:36
the south had bet everything on
00:34:38
manipulating the bond market and had
00:34:40
lost it would not be the last time in
00:34:43
history that an attempt to do so would
00:34:45
end in ruinous inflation today the
00:34:59
global market for bonds is still bigger
00:35:01
than all the world stock markets put
00:35:04
together it's still a market that can
00:35:07
make or break governments does it
00:35:14
surprise you that its key player began
00:35:16
his money-making career in the casinos
00:35:19
of Las Vegas I was a blackjack player
00:35:23
I'm one of the first professional
00:35:25
blackjack players not to brag but in the
00:35:28
late 60s I went to Vegas and applied a
00:35:32
card counting system to to try and beat
00:35:35
Vegas
00:35:39
now this master of understatement is the
00:35:42
king of the bond market controller of
00:35:44
the biggest bond fund in the world so
00:35:47
what is this got to do with you and me
00:35:49
well when gross buyers or sells bonds it
00:35:53
doesn't just affect financial markets
00:35:54
and government policy it affects the
00:35:57
value of our pension funds and the
00:36:00
interest rates we pay on our mortgages
00:36:02
[Music]
00:36:04
there's only one thing that mr. bond is
00:36:07
afraid of and it's not Goldfinger rather
00:36:10
it's inflation the lethal danger that
00:36:15
inflation poses is that it undermines
00:36:17
the value of being paid a fixed rate of
00:36:20
interest in a bond if inflation goes up
00:36:24
to ten percent and the value of a fixed
00:36:28
rate interest is only five then that
00:36:30
basically means that the bond holder is
00:36:32
falling behind inflation by five
00:36:34
percents that's why at the first whiff
00:36:38
of higher inflation bond prices fall and
00:36:41
in some cases keep falling to see just
00:36:50
how bad things can get when the
00:36:52
inflation rate genie escapes from the
00:36:54
bottle you just have to look at the
00:36:56
example of Argentina
00:37:04
many Argentines date the steady decline
00:37:07
of their economic fortunes to a day in
00:37:09
February 1946 when the newly elected
00:37:12
President General Juan Domingo perón
00:37:14
came here to the central bank in Buenos
00:37:17
Aires
00:37:18
[Music]
00:37:22
he was astonished at what he saw there
00:37:25
is so much gold he marveled you could
00:37:28
hardly walk through the corridors
00:37:31
the very name Argentina suggests wealth
00:37:34
plenty it means
00:37:36
the land of silver the river flowing
00:37:38
past the capital is the Rio de la Plata
00:37:40
the silver River
00:37:46
[Music]
00:37:48
once upon a time there used to be two
00:37:50
Harrods in the world one in London
00:37:52
Knightsbridge and the other here avenida
00:37:54
florida in the heart of Buenos Aires
00:37:56
founded in 1912 this other Harrods is a
00:38:00
reminder that Argentina used to be a
00:38:02
rich country indeed at one time its per
00:38:05
capita income was just 18% less than
00:38:07
that of the United States investors who
00:38:10
flocked to buy Argentine bonds hope that
00:38:12
our gen Tina would become the United
00:38:15
States of South America while
00:38:19
Argentina's history since then is a
00:38:20
classic illustration that all the
00:38:22
resources and talent in the world can be
00:38:25
set at naught by chronic financial
00:38:27
mismanagement
00:38:29
[Music]
00:38:38
there have been many financial crises in
00:38:40
Argentine history but the crisis that
00:38:43
hit the country in 1989 was unparalleled
00:38:57
[Music]
00:39:01
at the beginning of February the country
00:39:03
was suffering one of the hottest summers
00:39:05
on record in Buenos Aires the
00:39:09
electricity system just couldn't cope
00:39:11
five-hour par cuts were commonplace
00:39:16
but these as it turned out were the
00:39:19
least of Argentina's problems as is
00:39:23
almost always the case there were
00:39:25
several well trodden steps to monetary
00:39:27
health it's that one the government
00:39:31
spends more much more than it can raise
00:39:33
in taxation usually but not always it's
00:39:36
because of a war in Argentina's case
00:39:39
there were two one a civil war between
00:39:41
generals on the left in the 1970s the
00:39:44
other a foreign war against Britain over
00:39:46
the Falkland Islands in 1982 by 1989 the
00:39:50
financial system was about ready to blow
00:39:54
by February inflation had already
00:39:57
reached 10 percent per month
00:40:02
banks were ordered to close as the
00:40:04
governor tried to lower interest rates
00:40:06
and prevent the currency's exchange rate
00:40:08
from collapsing
00:40:11
it didn't work in just a month the
00:40:15
Austral fell a hundred and forty percent
00:40:17
against the dollar
00:40:20
at the same time the World Bank froze
00:40:23
lending to Argentina saying that the
00:40:25
government had failed to tackle the root
00:40:27
cause of inflation a bloated public
00:40:29
sector deficit with no cheap loans
00:40:32
forthcoming from the World Bank the
00:40:34
government tried to finance its deficit
00:40:36
by selling bonds to the public but
00:40:39
investors were hardly likely to buy
00:40:40
bonds with the prospect that their real
00:40:42
value would be wiped out by inflation in
00:40:44
just a matter of days nobody was buying
00:40:47
the government was running out of
00:40:49
options
00:40:52
in April furious customers overturned
00:40:56
shopping trolleys after one supermarket
00:40:58
announced over the loudspeaker that
00:41:00
prices were being raised by 30 percent
00:41:02
immediately shops emptied of goods as
00:41:08
owners weren't making enough money to
00:41:09
buy a new stock
00:41:14
misuk muy Malo muy Malo
00:41:19
porque a la mañana tenía un precio
00:41:21
mediodía tenías Otranto si no podían
00:41:24
vender Corky la gente / dia los buenos
00:41:26
aires / da show Vindhya Lomond Abba lo
00:41:29
vendhya un precio Alicia GABA otro y la
00:41:32
continuo tres cuatro veces en el dia
00:41:34
tambi abba los precios government bond
00:41:38
prices plunged as fears rose dat the
00:41:40
central bank's reserves were running out
00:41:43
with no foreign loans and no one willing
00:41:46
to buy bonds there was only one thing
00:41:48
left for an increasingly desperate
00:41:49
government to do get the central bank
00:41:52
literally to print more money if they
00:41:54
couldn't even get back right
00:41:58
[Music]
00:42:01
on Friday April the 28th Argentina
00:42:04
literally ran out of money it's a
00:42:09
physical problem
00:42:10
the central bank vice president told a
00:42:12
news conference what he meant was that
00:42:16
Argentina's Mint had run out of paper to
00:42:19
print new notes and the printers had
00:42:22
gone on strike
00:42:22
[Music]
00:42:26
I don't know how we're going to do it
00:42:34
but the money has got to be there on
00:42:36
Monday he declared
00:42:42
yet the faster the printing presses
00:42:44
rolled the less the money was worth the
00:42:48
government was forced to print higher
00:42:49
and higher denominations of notes in May
00:42:53
the price of coffee went up by 50% in a
00:42:56
week
00:42:58
farmers stop bringing cattle to market
00:43:00
as the price for one cow was now the
00:43:02
same as for three pairs of shoes
00:43:16
by June 1989 inflation Argentina had
00:43:20
reached a monthly rate of 100 percent an
00:43:23
annual rate of roughly 12,000 percent to
00:43:26
put that into concrete terms if you
00:43:28
wanted to go out for dinner in Buenos
00:43:30
Aires in a Saturday night in May you'd
00:43:32
pay ten thousand Australia's bye dude
00:43:35
you'd have to pay twenty thousand for
00:43:38
the same meal and by the following month
00:43:41
it would take sixty thousand you've
00:43:44
heard of A Fistful of Dollars well you
00:43:45
needed a drawer full of Australia's just
00:43:48
to buy a square meal in June popular
00:43:58
frustration erupted in two days of
00:44:00
intense rioting and looting by hungry
00:44:02
mobs at least 14 people died
00:44:09
in a country were a steak and a bottle
00:44:11
of wine were on practically every table
00:44:13
every day thousands were eating in soup
00:44:16
kitchens or going hungry
00:44:19
[Music]
00:44:20
it's obvious enough who loses from
00:44:23
hyperinflation very rapidly rising
00:44:26
prices are bound to wipeout anybody
00:44:28
who's dependent on an income that's
00:44:29
fixed in cash terms groups like
00:44:32
academics and civil servants on
00:44:34
inflexible monthly salaries old-age
00:44:36
pensioners and particularly bondholders
00:44:39
living off the interest on their
00:44:41
investments when as IRAs is absolutely
00:44:44
full of antique shops like this one
00:44:46
Laden down with jewelry and watches and
00:44:49
cutlery all sold off by middle-class
00:44:51
families who just ran out of cash in the
00:44:56
1920s the great economist John Maynard
00:44:58
Keynes had predicted the euthanasia of
00:45:01
the bondholder anticipating that
00:45:03
inflation would eat up the paper wealth
00:45:05
of financial families like the
00:45:07
Rothschilds
00:45:08
[Music]
00:45:10
as inflation swept through the world in
00:45:13
the 1970s Keynes seemed to be proved
00:45:15
right in our time however we've seen a
00:45:21
miraculous resurrection of the
00:45:22
bondholder a comeback by Mr Bond
00:45:25
even in Argentina
00:45:29
the bond market is back terrifying
00:45:32
American officials as they try to fund a
00:45:35
massive financial bailout by you guessed
00:45:38
it selling billions of dollars of
00:45:40
freshly minted bonds the key to mr.
00:45:44
bonds revival has been a growth in the
00:45:47
number of bondholders which brings us
00:45:54
back to Italy for the bond market was
00:45:58
born 600 years ago
00:46:06
Italy is now a country with one of the
00:46:08
most rapidly ageing populations in
00:46:10
Europe in such a growing Society there's
00:46:15
a growing demand for fixed income
00:46:17
securities like bonds but there's also a
00:46:19
strong fear of inflation eating up the
00:46:22
real value of pensions and savings
00:46:24
central bankers suspected of being soft
00:46:27
on inflation have to answer to the
00:46:29
pensioners friend the bond market and
00:46:33
Treasury is planning to spend billions
00:46:35
to bail out banks that have gone bust in
00:46:37
the current credit crunch have to tread
00:46:39
warily too if they expect to raise the
00:46:42
money by selling yet more bonds in
00:46:47
modern Europe as in Renaissance Italy an
00:46:50
equilibrium has been struck between
00:46:52
political power and financial exposure
00:46:55
today as much as ever it seems it's the
00:46:59
bond market our old friend mr bond that
00:47:02
really rules the world
00:47:05
but what if rather than lending to
00:47:07
government's you prefer to use your
00:47:09
money to buy a share in a company would
00:47:13
that be more or less risky more or less
00:47:16
profitable in the next episode of the
00:47:20
ascent of money we'll discover why we
00:47:21
find it so hard to learn from financial
00:47:24
history despite nearly 300 years of
00:47:28
stock market bubbles and busts
00:47:31
[Music]
00:47:36
the next episode is next Monday from 8
00:47:39
here on channel 4 now next tonight a
00:47:42
brand new series and how lucky are we
00:47:44
our existence our very own human
00:47:46
survival all stems from catastrophes
00:47:49
that happened billions of years ago Tony
00:47:52
Robinson has the evidence
00:47:54
[Music]
