The Euthanasia of the Rentier (part I)

The fate of those who lost their shirts on Confederate bonds was not especially unusual in the nineteenth century. The Confederacy was far from the only state in the Americas to end up disappointing its bondholders; it was merely the northernmost delinquent. South of the Rio Grande, debt defaults and currency depreciations verged on the commonplace. The experience of Latin America in the nineteenth century in many ways foreshadowed problems that would become almost universal in the middle of the twentieth century. Partly this was because the social class that was most likely to invest in bonds - and therefore to have an interest in prompt interest payment in a sound currency - was weaker there than elsewhere. Partly it was because Latin American republics were among the first to discover that it was relatively painless to default when a substantial proportion of bondholders were foreign. It was no mere accident that the first great Latin American debt crisis happened as early as 1826-9, when Peru, Colombia, Chile, Mexico, Guatemala and Argentina all defaulted on loans issued in London just a few years before.

Driving Dixie Down (II)

In i860 the port of Liverpool was the main artery for the supply of imported cotton to the British textile industry, then the mainstay of the Victorian industrial economy. More than 80 per cent of these imports came from the southern United States. The Confederate leaders believed this gave them the leverage to bring Britain into the war on their side. To ratchet up the pressure, they decided to impose an embargo on all cotton exports to Liverpool. The effects were devastating. Cotton prices soared from 6%d per pound to 27%d. Imports from the South slumped from 2.6 million bales in 1860 to less than 72,000 in 1862. A typical English cotton mill like the one that has been preserved at Styal, south of Manchester, employed around 400 workers, but that was just a fraction of the 300,000 people employed by King Cotton across Lancashire as a whole. Without cotton there was literally nothing for those workers to do. By late 1862 half the workforce had been laid off; around a quarter of the entire population of Lancashire was on poor relief. They called it the cotton famine. This, however, was a man-made famine. And the men who made it seemed to be achieving their goal. Not only did the embargo cause unemployment, hunger and riots in the north of England; the shortage of cotton also drove up the price and hence the value of the South's cotton-backed bonds, making them an irresistibly attractive investment for key members of the British political elite. The future Prime Minister, William Ewart Gladstone, bought some, as did the editor of The Times, John Delane.

Driving Dixie Down (I)

In May 1863, two years into the American Civil War, Major-General Ulysses S. Grant captured Jackson, the Mississippi state capital, and forced the Confederate army under Lieutenant-General John C. Pemberton to retreat westward to Vicksburg on the banks of the Mississippi River. Surrounded, with Union gunboats bombarding their positions from behind, Pemberton's army repulsed two Union assaults but they were finally starved into submission by a grinding siege. On 4 July, Independence Day, Pemberton surrendered. From now on, the Mississippi was firmly in the hands of the North. The South was literally split in two.

The fall of Vicksburg is always seen as one of the great turning points in the war. And yet, from a financial point of view, it was really not the decisive one. The key event had happened more than a year before, two hundred miles downstream from Vicksburg, where the Mississippi joins the Gulf of Mexico. On 29 April 1862 Flag Officer David Farragut had run the guns of Fort Jackson and Fort St Philip to seize control of New Orleans. This was a far less bloody and protracted clash than the siege of Vicksburg, but equally disastrous for the Southern cause.

Rothschild - The Bonaparte of Finance (part IV)

Meanwhile, Radicals on the Left bemoaned the rise of a new power in the realm of politics, which wielded a veto power over government finance and hence over most policy. Following the success of Rothschild bond issues for Austria, Prussia and Russia, Nathan was caricatured as the insurance broker to the 'Hollow Alliance', helping to protect Europe against liberal political fires.

In 1821 he even received a death threat because of 'his connexion with foreign powers, and particularly the assistance rendered to Austria, on account of the designs of that government against the liberties of Europe'. The liberal historian Jules Michelet noted in his journal in 1842: 'M. Rothschild knows Europe prince by prince, and the bourse courtier by courtier. He has all their accounts in his head, that of the courtiers and that of the kings; he talks to them without even consulting his books. To one such he says: "Your account will go into the red if you appoint such a minister." ' Predictably, the fact that the Rothschilds were Jewish gave a new impetus to deep-rooted anti-Semitic prejudices. No sooner had the Rothschilds appeared on the American scene in the 1830s than the governor of Mississippi was denouncing 'Baron Rothschild' for having 'the blood of Judas and Shylock flow[ing] in his veins, and . . . unit[ing] the qualities of both his countrymen.' Later in the century, the Populist writer 'Coin' Harvey would depict the Rothschild bank as a vast, black octopus stretching its tentacles around the world.

Rothschild - The Bonaparte of Finance (part III)

To an extent that even today remains astonishing, the Rothschilds went on to dominate international finance in the half century after Waterloo. So extraordinary did this achievement seem to contemporaries that they often sought to explain it in mystical terms. According to one account dating from the 1830s, the Rothschilds owed their fortune to the possession of a mysterious 'Hebrew talisman' that enabled Nathan Rothschild, the founder of the London house, to become 'the leviathan of the money markets of Europe'. Similar stories were being told in the Pale of Settlement, to which Russian Jews were confined, as late as the 1890s. As we have seen, the Nazis preferred to attribute the rise of the Rothschilds to the manipulation of stock market news and other sharp practice. Such myths are current even today. According to Song Hongbing's best-selling book Currency Wars, published in China in 2007, the Rothschilds continue to control the global monetary system through their alleged influence over the Federal Reserve System.

The more prosaic reality was that the Rothschilds were able to build on their successes during the final phase of the Napoleonic Wars to establish themselves as the dominant players in an increasingly international London bond market. They did this by establishing a capital base and an information network that were soon far superior to those of their nearest rivals, the Barings.

Rothschild - The Bonaparte of Finance (part II)

Mobilizing such vast amounts of gold even at the tail end of a war was risky, no doubt. Yet from the Rothschilds' point of view, the hefty commissions they were able to charge more than justified the risks. What made them so well suited to the task was that the brothers had a ready-made banking network within the family - Nathan in London, Amschel in Frankfurt, James (the youngest) in Paris, Carl in Amsterdam and Salomon roving wherever Nathan saw fit. Spread out around Europe, the five Rothschilds were uniquely positioned to exploit price and exchange rate differences between markets, the process known as arbitrage.
If the price of gold was higher in, say, Paris than in London, James in Paris would sell gold for bills of exchange, then send these to London, where Nathan would use them to buy a larger quantity of gold. The fact that their own transactions on Herries's behalf were big enough to affect such price differentials only added to the profitability of the business. In addition, the Rothschilds also handled some of the large subsidies paid to Britain's continental allies. By June 1814, Herries calculated that they had effected payments of this sort to a value of 12.6 million francs. 'Mr Rothschild', remarked the Prime Minister, Lord Liverpool, had become 'a very useful friend'. As he told the Foreign Secretary Lord Castlereagh, 'I do not know what we should have done without him . . .'. By now his brothers had taken to calling Nathan the master of the Stock Exchange.

Rothschild - The Bonaparte of Finance (part I)

Nathan Mayer Rothschild

Master of unbounded wealth, he boasts that he is the arbiter of peace and war, and that the credit of nations depends upon his nod; his correspondents are innumerable; his couriers outrun those of sovereign princes, and absolute sovereigns; ministers of state are in his pay. Paramount in the cabinets of continental Europe, he aspires to the domination of our own.

Those words were spoken in 1828 by the Radical MP Thomas Dunscombe. The man he was referring to was Nathan Mayer Rothschild, founder of the London branch of what was, for most of the nineteenth century, the biggest bank in the world. It was the bond market that made the Rothschild family rich - rich enough to build forty-one stately homes all over Europe, among them Waddesdon Manor in Buckinghamshire, which has been restored in all its gilded glory by the 4th Lord Rothschild, Nathan's great-great-great-grandson. His illustrious forebear, according to Lord Rothschild, was 'short, fat, obsessive, extremely clever, wholly focused . . . I can't imagine he would have been a very pleasant person to have dealings with. 'His cousin Evelyn de Rothschild takes a similar view. 'I think he was very ambitious,' he says, contemplating Nathan Rothschild's portrait in the boardroom at the offices of N. M. Rothschild in London's St Swithin's Lane, 'and I think he was very determined. I don't think he suffered fools lightly.'

Though the Rothschilds were compulsive correspondents, relatively few of Nathan's letters to his brothers have survived. There is one page, however, that clearly conveys the kind of man he was. Written, like all their letters, in almost indecipherable Judendeutsch (German transliterated into Hebrew characters), it epitomizes what might be called his Jewish work ethic and his impatience with his less mercurial brothers:

I am writing to you giving my opinion, as it is my damned duty to write to you . . . I am reading through your letters not just once but maybe a hundred times. You can well imagine that yourself. After dinner I usually have nothing to do. I do not read books, I do not play cards, I do not go to the theatre, my only pleasure is my business and in this way I read Amschel's, Salomon's, James's and Carl's letters . . . As far as Carl's letter [about buying a bigger house in Frankfurt] is concerned . . . all this is a lot of nonsense because as long as we have good business and are rich everybody will flatter us and those who have no interest in obtaining revenues through us begrudge us for it all. Our Salomon is too good and agreeable to anything and anybody and if a parasite whispers something into his ear he thinks that all human beings are noble minded[;] the truth is that all they are after is their own interest.

Small wonder his brothers called Nathan 'the general in chief. 'All you ever write', complained Salomon wearily in 1815 , 'is pay this, pay that, send this, send that.' It was this phenomenal drive, allied to innate financial genius, that propelled Nathan from the obscurity of the Frankfurt Judengasse to mastery of the London bond market. Once again, however, the opportunity for financial innovation was provided by war.

Mountains of Debt (part II)

It was not only the Italian city-states that contributed to the rise of the bond market. In Northern Europe, too, urban polities grappled with the problem of financing their deficits without falling foul of the Church. Here a somewhat different solution was arrived at. Though they prohibited the charging of interest on a loan (mutuum), the usury laws did not apply to the medieval contract known as the census, which allowed one party to buy a stream of annual payments from another. In the thirteenth century, such annuities started to be issued by northern French towns like Douai and Calais and Flemish towns like Ghent. They took one of two forms: rentes heritables or erfelijkrenten, perpetual revenue streams which the purchaser could bequeath to his heirs, or rentes viagères or lijfrenten, which ended with the purchaser's death. The seller, but not the buyer, had the right to redeem the rente by repaying the principal. By the mid sixteenth century, the sale of annuities was raising roughly 7 per cent of the revenues of the province of Holland.

Both the French and Spanish crowns sought to raise money in the same way, but they had to use towns as intermediaries. In the French case, funds were raised on behalf of the monarch by the Paris hôtel de ville-, in the Spanish case, royal juros had to be marketed through Genoa's Casa di San Giorgio (a private syndicate that purchased the right to collect the city's taxes) and Antwerp's heurs, a forerunner of the modern stock market. Yet investors in royal debt had to be wary. Whereas towns, with their oligarchical forms of rule and locally held debts, had incentives not to default, the same was not true of absolute rulers. As we saw, the Spanish crown became a serial defaulter in the late sixteenth and seventeenth centuries, wholly or partially suspending payments to creditors in 1557, 1560, 1575 , 1596, 1607, 1627, 1647, 1652 and 1662.

Mountains of Debt (part I)

'War', declared the ancient Greek philosopher Heraclitus, 'is the father of all things.' It was certainly the father of the bond market. In Pieter van der Heyden's extraordinary engraving, The Battle about Money, piggy banks, money bags, barrels of coins, and treasure chests - most of them heavily armed with swords, knives and lances - attack each other in a chaotic free-for-all. The Dutch verses below the engraving say: 'It's all for money and goods, this fighting and quarrelling.' But what the inscription could equally well have said is: 'This fighting is possible only if you can raise the money to pay for it.' The ability to finance war through a market for government debt was, like so much else in financial history, an invention of the Italian Renaissance.

Of Human Financial Bondage

Early in Bill Clinton's first hundred days as president, his campaign manager James Carville made a remark that has since become famous. "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter," he told the Wall Street Journal. "But now I want to come back as the bond market. You can intimidate everybody." Rather to his surprise, bond prices had risen in the wake of the previous November's election, a movement that had actually preceded a speech by the president in which he pledged to reduce the federal deficit. 'That investment market, they're a tough crowd,' observed Treasury Secretary Lloyd Bentsen. 'Is this a credible effort [by the president] ? Is the administration going to hang in there pushing it? They have so judged it.' If bond prices continued to rally, said Federal Reserve Chairman Alan Greenspan, it would be 'by far the most potent [economic] stimulus that I can imagine.'1 What could make public officials talk with such reverence, even awe, about a mere market for the buying and selling of government IOUs?

Bankrupt Nation (II)

Before we can answer these questions properly, we need to introduce the other key components of the financial system: the bond market, the stock market, the insurance market, the real estate market and the extraordinary globalization of all these markets that has taken place over the past twenty years. The root cause, however, must lie in the evolution of money and the banks whose liabilities are its key component. The inescapable reality seems to be that breaking the link between money creation and a metallic anchor has led to an unprecedented monetary expansion - and with it a credit boom the like of which the world has never seen. Measuring liquidity as the ratio of broad money to output* over the past hundred years, it is very clear that the trend since the 1970s has been for that ratio to rise - in the case of broad money in the major developed economies from around 70 per cent before the closing of the gold window to more than 100 per cent by 2005.

 (NB* A ratio known to economists as Marshallian k after the economist Alfred Marshall. Strictly speaking, k is the ratio of the monetary base to nominal GDP.)

In the eurozone, the increase has been especially steep, from just over 60 per cent as recently as 1990 to just under 90 per cent today. At the same time, the capital adequacy of banks in the developed world has been slowly but steadily declining. In Europe bank capital is now equivalent to less than 10 per cent of assets, compared with around 25 per cent at the beginning of the twentieth century. In other words, banks are not only taking in more deposits; they are lending out a greater proportion of them, and minimizing their capital base.

Bankrupt Nation (I)

Memphis, Tennessee, is famous for blue suede shoes, barbecues and bankruptcies. If you want to understand how today's bankers - the successors to the Medici - deal with the problem of credit risk created by unreliable borrowers, Memphis surely is the place to be.

On average, there are between one and two million bankruptcy cases every year in the United States, nearly all of them involving individuals who elect to go bust rather than meet unmanageable obligations. A strikingly large proportion of them happen in Tennessee. The remarkable thing is how relatively painless this process seems to be - compared, that is, with what went on in sixteenth-century Venice or, for that matter, some parts of present-day Glasgow. Most borrowers who run into difficulties in Memphis can escape or at least reduce their debts, stigma-free and physically unharmed. One of the great puzzles is that the world's most successful capitalist economy seems to be built on a foundation of easy economic failure.

The Evolution of Banking (II)

In this process an especially important role was played by the new savings banks that proliferated at the turn of the century. By 1913 British savings bank deposits amounted to £256 million, roughly a quarter of all UK deposits. The assets of German savings banks were more than two and a half times greater than those of the better known 'great banks' like Darmstàdter, Deutsche, Dresdner and the Disconto-Gesellschaft. All told, by the eve of the First World War, residents' deposits in British banks totalled nearly £ 1.2 billion, compared with a total banknote circulation of just £45.5 million. Money was now primarily inside banks, out of sight, even if never out of mind.

Although there was variation, most advanced economies essentially followed the British lead when it came to regulation through a monopolistic central bank operating the gold standard, and concentration of deposit-taking in a relatively few large institutions. The Banque de France was established in 1800, the German Reichsbank in 1875, the Bank of Japan in 1882 and the Swiss National Bank in 1907. In Britain, as on the Continent, there were marked tendencies towards concentration, exemplified by the decline in the number of country banks from a peak of 755 in 1809 to just seventeen in 1913.

The Evolution of Banking (I)

Financial historians disagree as to how far the growth of banking after the seventeenth century can be credited with the acceleration of economic growth that began in Britain in the late eighteenth century and then spread to Western Europe and Europe's offshoots of large-scale settlement in North America and Australasia. There is no question, certainly, that the financial revolution preceded the industrial revolution. True, the decisive breakthroughs in textile manufacturing and iron production, which were the spearheads of the industrial revolution, did not rely very heavily on banks for their financing. But banks played a more important role in continental European industrialization than they did in England's. It may in fact be futile to seek a simplistic causal relationship (more sophisticated financial institutions caused growth or growth spurred on financial development). It seems perfectly plausible that the two processes were interdependent and self-reinforcing. Both processes also exhibited a distinctly evolutionary character, with recurrent mutation (technical innovation), speciation (the creation of new kinds of firm) and punctuated equilibrium (crises that would determine which firms would survive and which would die out).

The Birth of Banking (IV) - Practice of Fractional Reserve

To understand the power of these three innovations, first-year MBA students at Harvard Business School play a simplified money game. It begins with a notional central bank paying the professor $100 on behalf of the government, for which he has done some not very lucrative consulting. The professor takes the banknotes to a bank notionally operated by one of his students and deposits them there, receiving a deposit slip. Assuming, for the sake of simplicity, that this bank operates a 10 per cent reserve ratio (that is, it wishes to maintain the ratio of its reserves to its total liabilities at 10 per cent), it deposits $ 10 with the central bank and lends the other $90 to one of its clients. While the client decides what to do with his loan, he deposits the money in another bank. This bank also has a 10 per cent reserve rule, so it deposit $9 at the central bank and lends out the remaining $81 to another of its clients. After several more rounds, the professor asks the class to compute the increase in the supply of money. This allows him to introduce two of the core definitions of modern monetary theory: M0 (also known as the monetary base or high-powered money), which is equal to the total liabilities of the central bank, that is, cash plus the reserves of private sector banks on deposit at the central bank; and M1 (also known as narrow money), which is equal to cash in circulation plus demand or 'sight' deposits. By the time money has been deposited at three different student banks, M0 is equal to $100 but M1 is equal to $ 271 ($100 + $90 + $81), neatly illustrating, albeit in a highly simplified way, how modern fractional reserve banking allows the creation of credit and hence of money.

The Birth of Banking (III)

The subjugation of the Florentine republic to the power of one super-rich banking family inevitably aroused opposition. Between October 1433 and September 1434 Cosimo and many of his supporters were exiled from Florence to Venice. In 1478 Lorenzo's brother Giuliano was murdered in the Pazzi family's brutal attempt to end Medici rule. The bank itself suffered as a result of Lorenzo's neglect of business in favour of politics. Branch managers like Francesco Sassetti of Avignon or Tommaso Portinari of Bruges became more powerful and less closely supervised. Increasingly, the bank depended on attracting deposits; its earnings from trade and foreign exchange grew more volatile.

Expensive mistakes began to be made, like the loans made by the Bruges branch to Charles the Bold, the Duke of Burgundy, or by the London branch to King Edward IV, which were never wholly repaid. To keep the firm afloat, Lorenzo was driven to raid the municipal Monte delle Dote (a kind of mutual fund for the payment of daughters' dowries). Finally, in 1494, amid the chaos of a French invasion, the family was expelled and all its property confiscated and liquidated. Blaming the Medici for the town's misfortunes, the Dominican preacher Girolamo Savonarola called for a purgative 'Bonfire of the Vanities', a call answered when a mob invaded the Medici palace and burned most of the bank's records. (Black scorch marks are still visible on the papers that survived.) As Lorenzo himself had put it in a song he composed in the 1470s: Tf you would be happy, be so. There is no certainty about tomorrow.

The Birth of Banking (II)

Of particular importance in the Medici's early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank's books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money.

The libro segreto - literally the secret book* - of Giovanni di Bicci de' Medici sheds fascinating light on the family's rise.

(NB * The term was used for books which recorded income and profits as well as specific agreements or contracts of importance. The other books kept by the Medici were the libro di entrata e uscita (book of income and expenditures) and the libro dei debitori e creditori (book of debtors and creditors)). 

The Birth of Banking (I)

Shylock was far from the only moneylender to discover the inherent weakness of the creditor, especially when the creditor is a foreigner. In the early fourteenth century, finance in Italy had been dominated by the three Florentine houses of Bardi, Peruzzi and Acciaiuoli. All three were wiped out in the 1340s as a result of defaults by two of their principal clients, King Edward III of England and King Robert of Naples. But if that illustrates the potential weakness of moneylenders, the rise of the Medici illustrates the very opposite: their potential power.

Perhaps no other family left such an imprint on an age as the Medici left on the Renaissance. Two Medici became popes (Leo X and Clement VII); two became queens of France (Catherine and Marie); three became dukes (of Florence, Nemours and Tuscany). Appropriately, it was that supreme theorist of political power, Niccolô Machiavelli, who wrote their history. Their patronage of the arts and sciences ran the gamut of genius from Michelangelo to Galileo. And their dazzling architectural legacy still surrounds the modern-day visitor to Florence. Only look at the villa of Cafaggiolo, the monastery of San Marco, the basilica of San Lorenzo and the spectacular palaces occupied by Duke Cosimo de' Medici in the mid sixteenth century: the former Pitti Palace, the redecorated Palazzo Vecchio and the new city offices (Uffizi) with their courtyard running down to the River Arno.

But what were the origins of all this splendour? Where did the money come from that paid for masterpieces like Sandro Botticelli's radiant Birth of Venus? The simple answer is that the Medici were foreign exchange dealers: members of the Arte de Cambio (the Moneychangers' Guild). They came to be known as bankers (banchieri) because, like the Jews of Venice, they did their business literally seated at benches behind tables in the street. The original Medici bank (stall would be a better description) was located near the Cavalcanti palace, at the corner of the present-day via dia Porta Rossa and the Via dell' Arte della Lana, a short walk from the main Florentine wool market.

Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than for high finance. Between 1343 and 1360 no fewer than five Medici were sentenced to death for capital crimes. Then came Giovanni di Bicci de' Medici. It was his aim to make the Medici legitimate. And through hard work, sober living and careful calculation, he succeeded.

In 1385 Giovanni became manager of the Roman branch of the bank run by his relation Vieri di Cambio de' Medici, a moneylender in Florence. In Rome, Giovanni built up his reputation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican's coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another.

But Giovanni clearly saw even greater opportunities in his native Florence, whence he returned in 1397. By the time he passed on the business to his eldest son Cosimo in 1420, he had established a branch of the bank in Venice as well as Rome; branches were later added in Geneva, Pisa, London and A vignon. Giovanni had
also acquired interests in two Florence wool factories.

to be continued...

Loan Sharks (III)

Though fictional, the story of Shylock is therefore not entirely removed from Venetian reality. Indeed, Shakespeare's play quite accurately illustrates three important points about early modern money-lending: the power of lenders to charge extortionate interest rates when credit markets are in their infancy; the importance
of law courts in resolving financial disputes without recourse to violence; but above all the vulnerability of minority creditors to a backlash by hostile debtors who belong to the ethnic majority. For in the end, of course, Shylock is thwarted. Although the court recognizes his right to insist on his bond - to claim his pound of flesh - the law also prohibits him from shedding Antonio's blood. And, because he is an alien, the law requires the loss of his goods and life for plotting the death of a Christian. He escapes only by submitting to baptism. Everyone lives happily ever after - except Shylock.

The Merchant of Venice raises profound questions about economics as well as anti-Semitism. Why don't debtors always default on their creditors - especially when the creditors belong to unpopular ethnic minorities? Why don't the Shylocks always lose out?

Loan Sharks (II)

That is precisely why anyone who lends money to a merchant, if only for the duration of an ocean voyage, needs to be compensated. We usually call the compensation interest: the amount paid to the lender over and above the sum lent, or the principal. Overseas trade of the sort that Venice depended on could not have happened if its financiers had not been rewarded in some way for risking their money on mere boards and men.

But why does Shylock turn out to be such a villain, demanding literally a pound of flesh - in effect Antonio's death - if he cannot fulfil his obligations? The answer is of course that Shylock is one of the many moneylenders in history to have belonged to an ethnic minority. By Shakespeare's time, Jews had been providing commercial credit in Venice for nearly a century. They did their business in front of the building once known as the Banco Rosso, sitting behind their tables - their tavule - and on their benches, their band. But the Banco Rosso was located in a cramped ghetto some distance away from the centre of the city.

There was a good reason why Venetian merchants had to come to the Jewish ghetto if they wanted to borrow money. For Christians, lending money at interest was a sin. Usurers, people who lent money at interest, had been excommunicated by the Third Lateran Council in n 79. Even arguing that usury was not a sin had been condemned as heresy by the Council of Vienna in 1311-12 . Christian usurers had to make restitution to the Church before they could be buried on hallowed ground. They were especially detested by the Franciscan and Dominican orders, founded in 1206 and 1216 (just after the publication of Fibonacci's
Liber Abaci). The power of this taboo should not be underestimated, though it had certainly weakened by Shakespeare's time.

Loan Sharks (I)

Northern Italy in the early thirteenth century was a land subdivided into multiple feuding city-states. Among the many remnants of the defunct Roman Empire was a numerical system (i, ii, iii, iv . . . ) singularly ill-suited to complex mathematical calculation, let alone the needs of commerce. Nowhere was this more of a problem than in Pisa, where merchants also had to contend with seven different forms of coinage in circulation. By comparison, economic life in the Eastern world - in the Abassid caliphate or in Sung China - was far more advanced, just as it had been in the time of Charlemagne. To discover modern finance, Europe needed to import it. In this, a crucial role was played by a young mathematician called Leonardo of Pisa, or Fibonacci. The son of a Pisan customs official based in what is now Bejaia in Algeria, the young Fibonacci had immersed himself in what he called the 'Indian method' of mathematics, a combination of Indian and Arab insights. His introduction of these ideas was to revolutionize the way Europeans counted. Nowadays he is best remembered for the Fibonacci sequence of numbers (o, i , i , 2, 3, 5, 8, 1 3 , 21 . . .), in which each successive number is the sum of the previous two, and the ratio between a number and its immediate antecedent tends towards a 'golden mean' (around 1.618). It is a pattern that mirrors some of the repeating properties to be found in the natural world (for example in the fractal geometry of ferns and sea shells).*

(NB * The Fibonacci sequence appears in The Da Vinci Code, which is probably why most people have heard of it. However, the sequence first appeared, under the name mâtrâmeru (mountain of cadence), in the work of the Sanskrit scholar Pingala.)

The Money Mountain (V)

The central relationship that money crystallizes is between lender and borrower. Look again at those Mesopotamian clay tablets. In each case, the transactions recorded on them were repayments of commodities that had been loaned; the tablets were evidently drawn up and retained by the lender (often in a sealed clay container) to record the amount due and the date of repayment. The lending system of ancient Babylon was evidently quite sophisticated. Debts were transferable, hence 'pay the bearer' rather than a named creditor. Clay receipts or drafts were issued to those who deposited grain or other commodities at royal palaces or temples. Borrowers were expected to pay interest (a concept which was probably derived from the natural increase of a herd of livestock), at rates that were often as high as 20 per cent. Mathematical exercises from the reign of Hammurabi (1792 - 1750 BC) suggest that something like compound interest could be charged on long-term loans. But the foundation on which all of this rested was the underlying credibility of a borrower's promise to repay. (It is no coincidence that in English the root of 'credit' is credo, the Latin for 'I believe'.) Debtors might periodically be relieved - indeed the Laws of Hammurabi prescribed debt forgiveness every three years - but this does not appear to have deterred private as well as public lenders from doing business in the reasonable expectation of getting their money back. On the contrary, the long-term trend in ancient Mesopotamia was for private finance to expand. By the sixth century BC, families like the Babylonian Egibi had emerged as powerful landowners and lenders, with commercial interests as far afield as Uruk over a hundred miles to the south and Persia to the east. The thousands of clay tablets that survive from that period testify to the number of people who at one time or another were in debt to the Egibi. The fact that the family thrived for five generations suggests that they generally collected their debts.

The Money Mountain (IV)

There was in fact no reason other than historical happenstance that money was for so long equated in the Western mind with metal. In ancient Mesopotamia, beginning around five thousand years ago, people used clay tokens to record transactions involving agricultural produce like barley or wool, or metals such as silver. Rings, blocks or sheets made of silver certainly served as ready money (as did grain), but the clay tablets were just as important, and probably more so. A great many have survived, reminders that when human beings first began to produce written records of their activities they did so not to write history, poetry or philosophy, but to do business. It is impossible to pick up such ancient financial instruments without a feeling of awe.

The Money Mountain (III)

The Roman system of coinage outlived the Roman Empire itself. Prices were still being quoted in terms of silver denarii in the time of Charlemagne, king of the Franks from 768 to 814. The difficulty was that by the time Charlemagne was crowned Imperator Augustus in 800, there was a chronic shortage of silver in Western Europe. Demand for money was greater in the much more developed commercial centres of the Islamic Empire that dominated the southern Mediterranean and the Near East, so that precious metal tended to drain away from backward Europe. So rare was the denarius in Charlemagne's time that twenty-four of them sufficed to buy a Carolingian cow. In some parts of Europe, peppers and squirrel skins served as substitutes for currency; in others pecunia came to mean land rather than money. This was a problem that Europeans sought to overcome in one of two ways. They could export labour and goods, exchanging slaves and timber for silver in Baghdad or for African gold in Cordoba and Cairo. Or they could plunder precious metal by making war on the Muslim world. The Crusades, like the conquests that followed, were as much about overcoming Europe's monetary shortage as about converting heathens to Christianity.

Crusading was an expensive affair and the net returns were modest. To compound their monetary difficulties, medieval and early modern governments failed to find a solution to what economists have called the big problem of small change: the difficulty of establishing stable relationships between coins made of different kinds of metal, which meant that smaller denomination coins were subject to recurrent shortages, yet also to
depreciations and debasements. At Potosi, and the other places in the New World where they found plentiful silver (notably Zacatecas in Mexico), the Spanish conquistadors therefore appeared to have broken a centuries-old constraint. The initial beneficiary was, of course, the Castilian monarchy that had sponsored
the conquests. The convoys of ships - up to a hundred at a time - which transported 170 tons of silver a year across the Atlantic, docked at Seville. A fifth of all that was produced was reserved to the crown, accounting for 44 per cent of total royal expenditure at the peak in the late sixteenth century. But the way the money was spent ensured that Spain's newfound wealth provided the entire continent with a monetary stimulus. The Spanish 'piece of eight', which was based on the German thaler (hence, later, the 'dollar'), became the world's first truly global currency, financing not only the protracted wars Spain fought in Europe, but also the rapidly expanding trade of Europe with Asia.

The Money Mountain (II)

To work the mines, the Spaniards at first relied on paying wages to the inhabitants of nearby villages. But conditions were so harsh that from the late sixteenth century a system of forced labour (la mita) had to be introduced, whereby men aged between 18 and 50 from the sixteen highland provinces were conscripted for seventeen weeks a year.1 1 Mortality among the miners was horrendous, not least because of constant exposure to the mercury fumes generated by the patio process of refinement, whereby ground-up silver ore was trampled into an amalgam with mercury, washed and then heated to burn off the mercury. The air
down the mineshafts was (and remains) noxious and miners had to descend seven-hundred-foot shafts on the most primitive of steps, clambering back up after long hours of digging with sacks of ore tied to their backs. Rock falls killed and maimed hundreds. The new silver-rush city of Potosi was, declared Domingo de Santo Tomâs, 'a mouth of hell, into which a great mass of people enter every year and are sacrificed by the greed of the Spaniards to their "god".' Rodrigo de Loaisa called the mines 'infernal pits', noting that 'if twenty healthy Indians enter on Monday, half may emerge crippled on Saturday'. In the words of the Augustinian
monk Fray Antonio de la Calancha, writing in 1638: 'Every peso coin minted in Potosi has cost the life of ten Indians who have died in the depths of the mines.' As the indigenous workforce was depleted, thousands of African slaves were imported to take their places as 'human mules'. Even today there is still something hellish about the stifling shafts and tunnels of the Cerro Rico.

The Money Mountain (I)

More sophisticated societies than the Nukak have functioned without money, it is true. Five hundred years ago, the most sophisticated society in South America, the Inca Empire, was also moneyless. The Incas appreciated the aesthetic qualities of rare metals. Gold was the 'sweat of the sun', silver the 'tears of the moon'. Labour was the unit of value in the Inca Empire, just as it was later supposed to be in a Communist society. And, as under Communism, the economy depended on often harsh central planning and forced labour. In 1532 , however, the Inca Empire was brought low by a man who, like Christopher Columbus, had come to the New World expressly to search for and monetize precious metal.*

(NB * The conquistadors came looking for both gold and silver. Columbus's first settlement, La Isabela in Hispaniola (now the Dominican Republic), was established to exploit local deposits of gold. He also believed he had found silver, but the only traces have subsequently been shown to have been in the sample ores Columbus and his men had brought from Spain.)

Dreams of Avarice

Imagine a world with no money. For over a hundred years, Communists and anarchists - not to mention some extreme reactionaries, religious fundamentalists and hippies - have dreamt of just that. According to Friedrich Engels and Karl Marx, money was merely an instrument of capitalist exploitation, replacing all human relationships, even those within the family, with the callous 'cash nexus'. As Marx later sought to demonstrate in Capital, money was commoditized labour, the surplus generated by honest toil, appropriated and then 'reified' in order to satisfy the capitalist class's insatiable lust for accumulation. Such notions die hard. As recently as the 1970s, some European Communists were still yearning for a moneyless world, as in this Utopian effusion from the Socialist Standard:

Money will disappear . . . Gold can be reserved in accordance with Lenin's wish, for the construction of public lavatories . . . In communist societies goods will be freely available and free of charge. The organisation of society to its very foundations will be without money . . . The frantic and neurotic desire to consume and hoard will disappear. It will be absurd to want to accumulate things: there will no longer be money to be pocketed nor wage-earners to be hired . . . The new people will resemble their hunting and gathering ancestors who trusted in a nature which supplied them freely and often abundantly with what they needed to live, and who had no worry for the morrow ...

Yet no Communist state - not even North Korea - has found it practical to dispense with money. And even a passing acquaintance with real hunter-gatherer societies suggests there are considerable
disadvantages to the cash-free life.

Money. Money? Money! (V)

In trying to cover the history of finance from ancient Mesopotamia to modem microfinance, I have set myself an impossible task, no doubt. Much must be omitted in the interests of brevity and simplicity. Yet the attempt seems worth making if it can bring the modern financial system into sharper focus in the mind's eye
of the general reader.

I myself have learned a great deal in writing these articles, but three insights in particular stand out. The first is that poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channelled from the idle rich to the industrious poor. This point applies not just to the poor countries of the world. It can also be said of the poorest neighbourhoods in supposedly developed countries - the 'Africas within' - like the housing estates of my birthplace, Glasgow, where some people are scraping by on just £6 a day, for everything from toothpaste to transport, but where the interest rates charged by local loan sharks can be over eleven million per cent a year.

Money. Money? Money! (IV)

Anyone who can read a post like the preceding one without feeling anxious does not know enough financial history. One purpose of these articles, then, is to educate. It is a wellestablished fact, after all, that a substantial proportion of the general public in the English-speaking world is ignorant of finance. According to one 2007 survey, four in ten American credit card holders do not pay the full amount due every month on the card they use most often, despite the punitively high interest rates charged by credit card companies. Nearly a third (29 per cent) said they had no idea what the interest rate on their card was. Another 30 per cent claimed that it was below 10 per cent, when in reality the overwhelming majority of card companies charge substantially in excess of 10 per cent. More than half of the respondents said they had learned 'not too much' or 'nothing at all' about financial issues at school. A 2008 survey revealed that two thirds of Americans did not understand how compound interest worked. In one survey conducted by researchers at the University of Buffalo's School of Management, a typical group of high school seniors scored just 52 per cent in response to a set of questions about personal finance and economics. Only 14 per cent understood that stocks would
tend to generate a higher return over eighteen years than a US government bond. Less than 23 per cent knew that income tax is charged on the interest earned from a savings account if the account holder's income is high enough. Fully 59 per cent did not know the difference between a company pension, Social Security and a 401 (k) plan.*

(NB *  40i(k) plans were introduced in 1980 as a form of defined contribution retirement plan. Employees can elect to have a portion of their wages or salaries paid or 'deferred' into a 401 (k) account. They are then offered choices as to how the money should be invested. With a few exceptions, no tax is paid on the money until it is withdrawn.)

Nor is this a uniquely American phenomenon. In 2006, the British Financial Services Authority carried out a survey of public financial literacy which revealed that one person in five had no idea what the effect would be on the purchasing power of their savings of an inflation rate of 5 per cent and an interest rate of 3 per cent. One in ten did not know which was the better discount for a television originally priced at £250: £30 or 10 per cent. As that example makes clear, the questions posed in these surveys were of the most basic nature. It seems reasonable to assume that only a handful of those polled would have been able to explain the difference between a 'put' and a 'call' option, for example, much less the difference between a CDO and a CDS.

Money. Money? Money! (III)

The financial crisis that struck the Western world in the summer of 2007 provided a timely reminder of one of the perennial truths of financial history. Sooner or later every bubble bursts. Sooner or later the bearish sellers outnumber the bullish buyers. Sooner or later greed turns to fear. As I completed my research for this book in the early months of 2008, it was already a distinct possibility that the US economy might suffer a recession.

Was this because American companies had got worse at designing new products? Had the pace of technological innovation suddenly slackened? No. The proximate cause of the economic uncertainty of 2008 was financial: to be precise, a spasm in the credit markets caused by mounting defaults on a species of debt known euphemistically as subprime mortgages. So intricate has our global financial system become, that relatively poor families in states from Alabama to Wisconsin had been able to buy or remortgage their homes with often complex loans that (unbeknown to them) were then bundled together with other, similar loans, repackaged as collateralized debt obligations (CDOs) and sold by banks in New York and London to (among others) German regional banks and Norwegian municipal authorities, who thereby became the effective mortgage lenders. These CDOs had been so sliced and diced that it was possible to claim that a tier of the interest payments from the original borrowers was as dependable a stream of income as the interest on a ten-year US Treasury bond, and therefore worthy of a coveted triple-A rating. This took financial alchemy to a new level of sophistication, apparently turning lead into gold.

Money. Money? Money! (II)

At times, the ascent of money has seemed inexorable. In 2006 the measured economic output of the entire world was around $47 trillion. The total market capitalization of the world's stock markets was $ 5 1 trillion, 10 per cent larger. The total value of domestic and international bonds was $68 trillion, 50 per cent larger. The amount of derivatives outstanding was $473 trillion, more than ten times larger. Planet Finance is beginning to dwarf Planet Earth. And Planet Finance seems to spin faster too. Every day two trillion dollars change hands on foreign exchange markets. Every month seven trillion dollars change hands on global stock markets. Every minute of every hour of every day of every week, someone, somewhere, is trading. And all the time new financial life forms are evolving. In 2006, for example, the volume of leveraged buyouts (takeovers of firms financed by borrowing) surged to $753 billion. An explosion of 'securitization', whereby individual debts like mortgages are 'tranched' then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations above $3 trillion. The volume of derivatives - contracts derived from securities, such as interest rate swaps or credit default swaps (CDS) - has grown even faster, so that by the end of 2007 the notional value of all 'over-the-counter' derivatives (excluding those traded on public exchanges) was just under $600 trillion. Before the 1980s, such things were virtually unknown. New institutions, too, have proliferated. The first hedge fund was set up in the 1940s and, as recently as 1990, there were just 610 of them, with $38 billion under management. There are now over seven thousand, with $1.9 trillion under management. Private equity partnerships have also multiplied, as well as a veritable shadow banking system of 'conduits' and 'structured investment vehicles' (SIVs), designed to keep risky assets off bank balance sheets. If the last four millennia witnessed the ascent of man the thinker, we now seem to be living through the ascent of man the banker.

Money. Money? Money! (I)

Bread, cash, dosh, dough, loot, lucre, moolah, readies, the wherewithal: call it what you like, money matters. To Christians, the love of it is the root of all evil. To generals, it is the sinews of war; to revolutionaries, the shackles of labour. But what exactly is money? Is it a mountain of silver, as the Spanish conquistadors thought? Or will mere clay tablets and printed paper suffice? How did we come to live in a world where most money is invisible, little more than numbers on a computer screen? Where did money come from? And where did it all go?

In 2007 the income of the average American (just under $34,000) went up by at most 5 per cent.1 But the cost of living rose by 4.1 per cent. So in real terms Mr Average actually became just 0.9 per cent better off. Allowing for inflation, the income of the median household in the United States has in fact scarcely changed since 1990, increasing by just 7 per cent in eighteen years.2 Now compare Mr Average's situation with that
of Lloyd Blankfein, chief executive officer at Goldman Sachs, the investment bank. In 2007 he received $68.5 million in salary, bonus and stock awards, an increase of 25 per cent on the previous year, and roughly two thousand times more than Joe Public earned. That same year, Goldman Sachs's net revenues of $46 billion exceeded the entire gross domestic product (GDP) of more than a hundred countries, including Croatia, Serbia and Slovenia; Bolivia, Ecuador and Guatemala; Angola, Syria and Tunisia. The bank's total assets for the first time passed the $I trillion mark.3 Yet Lloyd Blankfein is far from being the financial world's highest earner. The veteran hedge fund manager George Soros made $2.9 billion. Ken Griffin of Citadel, like the founders of two other leading hedge funds, took home more than $2 billion. Meanwhile nearly a billion people around the world struggle to get by on just $ 1 a day.