Latest / Economy & Finance / The birth of the bond market _ The Story of Money

Transcript

The birth of the bond market _ The Story of Money · Economy & Finance

• 0:00
  Speaker 1: We're going to tackle the birth of the bond market.
• 0:03
  Speaker 1: It was actually born in medieval Italy, in Venice. Everything
• 0:06
  Speaker 1: that was going on in Venice at the time must
• 0:08
  Speaker 1: have been incredibly stressful. He makes a dash for it,
• 0:11
  Speaker 1: but it's caught on the streets of Venice and stabbed
• 0:14
  Speaker 1: to death. Wow.
• 0:15
  Speaker 2: Yeah.
• 0:15
  Speaker 1: There's no respect for financial innovators, is there, Gillian? But
• 0:18
  Speaker 1: they quickly regret how they treated the Doge. There's like
• 0:22
  Speaker 1: a lot of soul searching in the city. A bit
• 0:24
  Speaker 1: late for that.
• 0:24
  Speaker 3: Yeah.
• 0:30
  Speaker 2: Hello, and welcome to a live recording with an audience
• 0:34
  Speaker 2: of The Story of Money, the FT's financial history show,
• 0:38
  Speaker 2: with me, Gillian Tett.
• 0:40
  Speaker 1: And me, Robin Wigglesworth. We are here with you now
• 0:43
  Speaker 1: in New York City, and thank you all for being
• 0:45
  Speaker 1: here today.
• 0:46
  Speaker 2: And today, we're going to be talking about a topic
• 0:48
  Speaker 2: that matters to just about every single investor, and which
• 0:53
  Speaker 2: I'm very interested in, but actually, Robin is even more
• 0:57
  Speaker 2: excited about. And that topic is the birth of the bond.
• 1:02
  Speaker 1: Yes, I have never seen a fixed income instrument that
• 1:05
  Speaker 1: I didn't find a little bit fascinating and mostly very,
• 1:08
  Speaker 1: very interesting. Gillian sometimes teases me for being a massive
• 1:11
  Speaker 1: bond dork. Exactly.
• 1:12
  Speaker 2: In fact, you are the bond man, not quite 007,
• 1:15
  Speaker 2: but a different kind of bond. But it's great to
• 1:17
  Speaker 2: be here. And we're doing this because we're celebrating a
• 1:21
  Speaker 2: book that Robin's written, but precisely because he is so
• 1:23
  Speaker 2: obsessed with bonds called A Fabulous Debt. It's out this month.
• 1:29
  Speaker 2: Do go out and buy it and read it. And
• 1:31
  Speaker 2: it's all about the history of bonds and why they
• 1:34
  Speaker 2: are indeed the hidden force behind some of humanity's greatest
• 1:38
  Speaker 2: achievements and greatest financial disasters.
• 1:42
  Speaker 1: Yes. And, uh, It often makes sense to begin at
• 1:45
  Speaker 1: the beginning. So that's what we're going to do. We're
• 1:48
  Speaker 1: going to tackle the birth of the bond market. And
• 1:52
  Speaker 1: it wasn't invented by a bunch of financial engineering wonks
• 1:55
  Speaker 1: at a big bank. It was actually born in medieval Italy, Venice, precisely.
• 2:01
  Speaker 1: And it was really, it was birthed by calamity, by
• 2:05
  Speaker 1: a military disaster, the plague and murder.
• 2:09
  Speaker 2: So, in short, it's a pretty sexy story.
• 2:12
  Speaker 1: All bond stories are sexy, Julian.
• 2:14
  Speaker 2: Of course, yes, particularly if you are the bond man.
• 2:17
  Speaker 2: But right now, it's an incredibly good moment to be
• 2:21
  Speaker 2: talking about bonds this autumn because the bond markets are
• 2:24
  Speaker 2: indeed going pretty nuts. Lots of investors around the world
• 2:28
  Speaker 2: are pretty concerned about it or trying to work out
• 2:30
  Speaker 2: what's going on. But To talk about this, we have
• 2:33
  Speaker 2: to go back to the basics and say, ask the
• 2:36
  Speaker 2: one question that most investors are afraid to ask, what
• 2:39
  Speaker 2: the heck exactly is a bond?
• 2:41
  Speaker 3: Yes.
• 2:42
  Speaker 1: No, I mean, the bond market, the bond comes in
• 2:45
  Speaker 1: more flavors than even Baskin Robbins has. But broadly speaking,
• 2:48
  Speaker 1: it's a tradable loan. It's a loan with a fixed
• 2:51
  Speaker 1: interest rate that you can buy and sell just like
• 2:54
  Speaker 1: a stock, essentially. And that's why it'll pay a fixed
• 2:57
  Speaker 1: interest rate, the coupon. But the price going up and
• 2:59
  Speaker 1: down means that the interest rate you basically get, the yield,
• 3:03
  Speaker 1: can actually differ. So, if the price of it goes up,
• 3:06
  Speaker 1: the yield goes down. And if the price goes down,
• 3:09
  Speaker 1: the yield goes up. And that's why, you know, a
• 3:10
  Speaker 1: lot of people sometimes get a little bit confused and
• 3:12
  Speaker 1: maybe shy away from bonds. It seems more complex and difficult.
• 3:15
  Speaker 1: But really, it's fairly straightforward if you think of it
• 3:18
  Speaker 1: as a tradable loan, essentially.
• 3:20
  Speaker 2: Right. Well, that's why in the FT, we always keep
• 3:22
  Speaker 2: saying that the yield went up because the price went
• 3:25
  Speaker 2: down or vice versa.
• 3:32
  Speaker 4: What happens next in the story of money? Nuveen has
• 3:35
  Speaker 4: spent over 125 years helping clients answer this question. By
• 3:39
  Speaker 4: investing in the growth of businesses, real estate, infrastructure and
• 3:42
  Speaker 4: natural capital, we continue to deepen our expertise across income
• 3:46
  Speaker 4: and alternatives so investors can confidently write the next chapter
• 3:50
  Speaker 4: of their own portfolio stories.
• 3:52
  Speaker 1: Nuveen.
• 3:53
  Speaker 4: Invest like the future is watching. Visit nuveen.com slash future
• 3:57
  Speaker 4: to learn more. Investing involves risk. Principal loss is possible.
• 4:05
  Speaker 2: But listen, let's go back to basics again and say,
• 4:08
  Speaker 2: where did Bond start and why are we suddenly talking
• 4:11
  Speaker 2: about Venice?
• 4:13
  Speaker 1: Yes. Well, have you been there, Gillian?
• 4:16
  Speaker 2: Yeah, yeah. I've been to Venice quite a bit. In fact,
• 4:17
  Speaker 2: I was there just recently at a conference. It's a
• 4:21
  Speaker 2: beautiful place. It's the only place where you can land
• 4:23
  Speaker 2: in the airport and then get straight on a water
• 4:25
  Speaker 2: taxi to go to your hotel or anything else. It's wonderful. Okay.
• 4:29
  Speaker 1: Yeah, I haven't been there, but I took the train
• 4:31
  Speaker 1: there and I want to take one of those water
• 4:33
  Speaker 1: taxis now straight from the airport. That sounds amazing. Well,
• 4:36
  Speaker 1: it is. I mean, it's a beautiful place, as we
• 4:38
  Speaker 1: both know, maybe some people here also know. It's also
• 4:41
  Speaker 1: incredibly special because Venice was not founded by some royal
• 4:46
  Speaker 1: or some distant duke that needed to build a castle
• 4:51
  Speaker 1: or something like that. It was founded by refugees, refugees
• 4:55
  Speaker 1: fleeing the vandals. So these were the busy goths of
• 4:58
  Speaker 1: Germany that periodically would raid into northern Italy. And they
• 5:01
  Speaker 1: fled to Venice or that area that could have the
• 5:04
  Speaker 1: armpit of that Gulf because it was swampy and nobody
• 5:09
  Speaker 1: else wanted to live there. It had nothing of value whatsoever.
• 5:12
  Speaker 1: It had no good land. It had salt and that's
• 5:15
  Speaker 1: about it. So they built the city. by hammering stilts
• 5:19
  Speaker 1: into the seabed, essentially.
• 5:21
  Speaker 2: Which you can actually see when you take your water
• 5:23
  Speaker 2: taxi from the airport. You can see these original wooden logs.
• 5:26
  Speaker 2: And it's just amazing to think about how a grand
• 5:29
  Speaker 2: bunch of people did that in the Middle Ages. But
• 5:31
  Speaker 2: tell us really what then drove Venice.
• 5:34
  Speaker 1: Well, they had no natural resources. It had no serfs.
• 5:38
  Speaker 1: It was a republic in a time when Europe was
• 5:41
  Speaker 1: broadly feudal and despotic. and they had to live off something.
• 5:45
  Speaker 1: And this, I think, is fascinating. You see it many
• 5:47
  Speaker 1: times in history, but quite often if you have nothing
• 5:49
  Speaker 1: else to live off, like oil or gas or gold
• 5:52
  Speaker 1: or silver or iron, you have to live off your wits.
• 5:55
  Speaker 2: Just ask Singapore.
• 5:56
  Speaker 1: Yeah, exactly. Singapore is a great example of that.
• 5:59
  Speaker 2: Necessity is a mother of invention, all that.
• 6:01
  Speaker 1: So the Venetians were brilliant merchants. They were entrepreneurs in
• 6:07
  Speaker 1: the original French sense of they would be intermediaries between everything.
• 6:11
  Speaker 1: And they would trade with absolutely everybody, which drove everybody
• 6:15
  Speaker 1: insane as well, because they were technically ruled by Constantinople,
• 6:19
  Speaker 1: the capital of the Byzantine Empire at the point, because
• 6:23
  Speaker 1: basically Charles the Great, Charlemagne, had not managed to conquer Venice.
• 6:27
  Speaker 1: So that has stayed part of what was kind of
• 6:30
  Speaker 1: the Byzantine Empire, but they were a Catholic country, they
• 6:34
  Speaker 1: were part of Italy, so they also owed some fealty
• 6:36
  Speaker 1: to the Pope in Rome. But they basically ignored everybody,
• 6:39
  Speaker 1: driving everybody mad because they would trade with everybody. They
• 6:42
  Speaker 1: would trade with Christians. They would trade with Muslims. They
• 6:44
  Speaker 1: once even sold war material to Egypt in the 800s,
• 6:49
  Speaker 1: driving everybody. I mean, the Pope excommunicated them after that.
• 6:53
  Speaker 1: But they used it to smuggle the body or allegedly
• 6:56
  Speaker 1: the body of St. Mark of the Gospels in a
• 7:00
  Speaker 1: barrel of pork out of Egypt and to then it's
• 7:04
  Speaker 1: where it supposedly still sits. So we don't really know
• 7:06
  Speaker 1: if it's a real body.
• 7:07
  Speaker 2: So you have basically a bunch of freewheeling, independently-minded hustlers
• 7:12
  Speaker 2: living in what used to be a swamp with absolutely
• 7:15
  Speaker 2: no natural resources. And yet out of that, they decide
• 7:18
  Speaker 2: to build a city, which is now such a tourist destination.
• 7:22
  Speaker 2: And in that, they have the amazing Rialto. Tell us
• 7:26
  Speaker 2: what that was and why it matters so much to
• 7:28
  Speaker 2: our story.
• 7:29
  Speaker 1: Well, Rialto, I mean, that was famous for centuries. It
• 7:32
  Speaker 1: was basically the market of Venice. And it's not just
• 7:35
  Speaker 1: like any other market. It was so famous, even centuries later,
• 7:39
  Speaker 1: Shakespeare name-checked it.
• 7:40
  Speaker 2: And when are we exactly talking about? What period?
• 7:42
  Speaker 1: So Rialto was in some form or way around ever
• 7:48
  Speaker 1: since the city was founded. But by the 1100s, when
• 7:51
  Speaker 1: we care about, it's a colonnaded courtyard. It's vast. It
• 7:55
  Speaker 1: has a church at one end. There's a famous clock
• 7:58
  Speaker 1: there that is infamously inaccurate. It's still, it wasn't there
• 8:01
  Speaker 1: in the 1100s, but it came soon afterwards. There's an
• 8:04
  Speaker 1: inscription on the church that says, tells the merchants that
• 8:07
  Speaker 1: work in this space to treat people fairly. There were
• 8:11
  Speaker 1: benches that the city would rent out to the money lenders.
• 8:16
  Speaker 1: That's how the word bank, they were bunky.
• 8:19
  Speaker 2: Banker, they're benches that people sat on.
• 8:20
  Speaker 1: Yeah, and they were rented out to people to do
• 8:22
  Speaker 1: their business. So the city made a lot of money
• 8:25
  Speaker 1: from commerce. And because Venice was kind of perfectly situated
• 8:28
  Speaker 1: between East and West and controlled so much trade in
• 8:31
  Speaker 1: the Mediterranean, you'd get Levantine spices, silks, you'd have everything.
• 8:35
  Speaker 1: I mean, Marco Polo.
• 8:36
  Speaker 2: It was a key part of the Silk Road, wasn't it?
• 8:37
  Speaker 2: That's where Marco Polo came from. Yeah. But tell us,
• 8:40
  Speaker 2: so a thousand years ago, so we're talking about almost
• 8:43
  Speaker 2: a thousand years ago, which is amazing to think about.
• 8:46
  Speaker 2: There was a man in there, wasn't there, called Doge
• 8:48
  Speaker 2: Vitaly II Mikhail. I got that name right. I've been practicing.
• 8:52
  Speaker 1: Excellent.
• 8:53
  Speaker 4: All right.
• 8:53
  Speaker 2: Thank you. And he's very important to our story. What
• 8:56
  Speaker 2: kind of person was he?
• 8:57
  Speaker 1: Well, we don't really know, but we can from his
• 9:01
  Speaker 1: actions judge that he was a very cautious person. So
• 9:04
  Speaker 1: the Doge was at that time elected by the people.
• 9:07
  Speaker 1: That was pretty radical. He was hemmed in. Doge just
• 9:09
  Speaker 1: means basically leader, right?
• 9:12
  Speaker 2: And we should stress, by the way, it's a different
• 9:13
  Speaker 2: type of doge from Elon Musk's doge that's been smashing
• 9:16
  Speaker 2: out government in Washington. So this is the original Venetian
• 9:20
  Speaker 2: doge from a thousand years ago.
• 9:21
  Speaker 1: It's not even the dogecoin, the tradable cryptocurrency. No, so
• 9:28
  Speaker 1: he was, you know, we see there are some paintings
• 9:31
  Speaker 1: of him. He's got a goatee or a full beard.
• 9:34
  Speaker 1: He's got quite small pursed lips. Maybe this is me overreading,
• 9:37
  Speaker 1: but he looks very stressed in every painting I've seen
• 9:40
  Speaker 1: of him. And controlling Venice and everything that was going
• 9:44
  Speaker 1: on in Venice at the time must have been incredibly
• 9:47
  Speaker 1: stressful because it was such a unique city at that
• 9:49
  Speaker 1: juncture of history. It had so many different competing interests.
• 9:52
  Speaker 1: It was ruled by merchants. They kind of controlled it
• 9:55
  Speaker 1: and hemmed in the doge, those that are elected directly
• 9:58
  Speaker 1: by the people. it seems, you know, broadly speaking, he
• 10:02
  Speaker 1: was a wise, a very cautious ruler at the time.
• 10:04
  Speaker 2: So he was running this weird city of hustlers in
• 10:08
  Speaker 2: a swamp a thousand years ago called Venice. but it
• 10:12
  Speaker 2: was part of the Byzantine Empire as well. And as
• 10:16
  Speaker 2: far as I can tell, that was run by someone
• 10:18
  Speaker 2: called Emperor Manuel I Comenos, another difficult name. Tell us
• 10:23
  Speaker 2: about that emperor.
• 10:24
  Speaker 1: Well, Emperor Manny, we can call him if it makes
• 10:26
  Speaker 1: it easier.
• 10:27
  Speaker 2: Okay.
• 10:28
  Speaker 1: He was not a cautious man. He had grand ambitions.
• 10:33
  Speaker 1: So the Byzantines thought of themselves as the successors of
• 10:39
  Speaker 1: the Roman Empire. They were the real Romans, essentially. They
• 10:43
  Speaker 1: called themselves Romans. And he wanted to rebuild the Roman Empire.
• 10:47
  Speaker 1: So at one point, he tried and wanted to invade
• 10:52
  Speaker 1: southern Italy to take over that part. And Venice, which technically,
• 10:56
  Speaker 1: in theory, he ruled, refused to help him. And he
• 11:00
  Speaker 1: was mightily pissed off by this. And Venice actually had,
• 11:05
  Speaker 1: in the heart of Constantinople, a Venetian quarter that was
• 11:08
  Speaker 1: kind of like a, tax-free trading entrepot in the heart
• 11:12
  Speaker 1: of Constantinople was granted a few years earlier, something called
• 11:16
  Speaker 1: a golden ball, which was kind of a proclamation. And
• 11:19
  Speaker 1: this really annoyed him even more. In his own capital,
• 11:22
  Speaker 1: with this festering sore of annoying Venetians, uppity merchants that
• 11:26
  Speaker 1: didn't respect the emperor's rule. So he started granting some
• 11:33
  Speaker 1: of Venice's Italian rivals like Genoa and Pisa their own
• 11:38
  Speaker 1: tax-free trading entrepôts, colonies, quarters in Constantinople and started favoring them.
• 11:45
  Speaker 1: And that was when things really started to head towards
• 11:47
  Speaker 1: a rupture. And we don't know exactly what happened, but
• 11:51
  Speaker 1: we do know that the Genoese quarter was razed or attacked. Wow.
• 11:56
  Speaker 1: And people were murdered. And Komnenos or Mani, to friends
• 12:01
  Speaker 1: like us, he blamed the Venetians for this. We don't
• 12:04
  Speaker 1: know whether the Venetians actually did it. It could very
• 12:06
  Speaker 1: well be true. It could also be that Emperor Manuel
• 12:10
  Speaker 1: basically attacked it himself and used it as a ruse
• 12:14
  Speaker 1: to do what he wanted to do.
• 12:15
  Speaker 3: Right.
• 12:15
  Speaker 2: So it all sounds a bit like Game of Thrones
• 12:17
  Speaker 2: or something like that. So you've got the emperor who's
• 12:19
  Speaker 2: trying to exert his authority over Venice. You've got these
• 12:24
  Speaker 2: very anarchic, freewheeling, independent-minded Venetians who What does the doge,
• 12:29
  Speaker 2: the cautious, boring man in those portraits, do next?
• 12:33
  Speaker 1: Well, he sends an emissary to the emperor saying, oh,
• 12:37
  Speaker 1: we don't know what happened here, but, you know, we
• 12:40
  Speaker 1: want to investigate and find out. And Comnenos says, yes,
• 12:44
  Speaker 1: I'm not going to act rashly. It's OK. We're going
• 12:45
  Speaker 1: to investigate. But he lays a secret plan. And this
• 12:48
  Speaker 1: plan is kind of wild. So I think it's March 12th, 1171.
• 12:55
  Speaker 1: He sent out secret orders to all the heads of
• 12:58
  Speaker 1: police across the Byzantine Empire to arrest every single Venetian
• 13:03
  Speaker 1: in the entire empire. All of them? All of them.
• 13:06
  Speaker 1: Tens of thousands.
• 13:07
  Speaker 2: In the middle of the swamp?
• 13:09
  Speaker 1: Yes, but not in Venice, but all the ones living
• 13:12
  Speaker 1: in basically modern-day Turkey, Constantinople, and some of the lands
• 13:15
  Speaker 1: around that, that he controlled directly. incredibly, I mean, amazing OPSEC,
• 13:21
  Speaker 1: this did not leak out. And he was able to
• 13:23
  Speaker 1: instigate this incredible raid where they arrested, I think, over 20,000 Venetians, women, children, merchants, ships, shops, everything,
• 13:32
  Speaker 1: put them all in prison. In fact, they didn't have
• 13:34
  Speaker 1: enough place in the prisons. I was going to say,
• 13:35
  Speaker 1: where did they put them? Yeah, I mean, they had
• 13:36
  Speaker 1: to requisition monasteries to fit them all in. Yeah, it
• 13:39
  Speaker 1: was overflow. They had to build internment camps. And This was,
• 13:44
  Speaker 1: you know, this was his big move against Venice. He
• 13:47
  Speaker 1: was no longer going to tolerate money. He was no
• 13:50
  Speaker 1: longer going to tolerate these uppity merchants. So how did the.
• 13:52
  Speaker 2: You know, you've got half the population in internment camps
• 13:55
  Speaker 2: or the 12th century equivalent of internment camps. What are
• 13:58
  Speaker 2: the doge due next? And how on earth is this
• 14:00
  Speaker 2: going to be related to bond markets?
• 14:01
  Speaker 1: Yes. Well, we're getting there. I promise. The bond is
• 14:05
  Speaker 1: never far from my mind.
• 14:06
  Speaker 2: Portfolio discussions are never this exciting.
• 14:08
  Speaker 1: But yes, go on.
• 14:10
  Speaker 3: No, so.
• 14:12
  Speaker 1: And this is why I said, I think Doge Vitale
• 14:14
  Speaker 1: was a cautious man. Because again, his instinct is to prevaricate.
• 14:19
  Speaker 1: When word gets out and information travels slowly, when it
• 14:23
  Speaker 1: finally reaches Venice, they just can't believe it. It just
• 14:25
  Speaker 1: sounds so wild that this can't be true. So he
• 14:29
  Speaker 1: takes all his senior counselors, the heads of all the
• 14:32
  Speaker 1: big merchant families, well, royals, but generally the richest people
• 14:35
  Speaker 1: in Venice were the royals. to consult and they decide, okay, caution,
• 14:39
  Speaker 1: this can't be true. Let's send another emissary to Constantinople,
• 14:43
  Speaker 1: find out what's really going on. But after they've decided this,
• 14:47
  Speaker 1: a ship of people fleeing that managed to escape the
• 14:52
  Speaker 1: crackdown in Constantinople arrives in Venice at the worst possible time,
• 14:55
  Speaker 1: at least for the Doge, spreading these stories of how
• 14:59
  Speaker 1: these atrocities, and suddenly the Doge is hemmed in, because
• 15:04
  Speaker 1: it's a republic, People are infuriated. They want to take
• 15:08
  Speaker 1: Constantinople down. Don't forget, Venice is an incredibly rich city
• 15:11
  Speaker 1: at this point and quite powerful, and they want to
• 15:13
  Speaker 1: take Constantinople down.
• 15:14
  Speaker 2: So they declare war? Yes.
• 15:17
  Speaker 1: He has to go to war, essentially, against his own, basically,
• 15:22
  Speaker 1: settlement rule. He does not want to do it, but
• 15:24
  Speaker 1: he does.
• 15:26
  Speaker 2: So what does that mean in practice? I mean, how
• 15:29
  Speaker 2: do they actually get the means to go to war
• 15:31
  Speaker 2: and where do they get the money from? Yes. This
• 15:33
  Speaker 2: is where bonds are coming in.
• 15:34
  Speaker 1: This is where the bond finally comes in. Um, so
• 15:39
  Speaker 1: then this was very rich as a city, but this
• 15:41
  Speaker 1: city state itself, the government was not, they was kind
• 15:45
  Speaker 1: of hemmed in the, even the doge will not necessarily
• 15:47
  Speaker 1: like a wealthy man. He came from the, one of
• 15:49
  Speaker 1: the wealthy merchant families. Um, So what they periodically did,
• 15:53
  Speaker 1: there was this very low income. They taxed these merchants
• 15:58
  Speaker 1: in the Rialto and a few other things. But for
• 16:01
  Speaker 1: big costs, like a war against Genoa, big capex, they
• 16:06
  Speaker 1: had to borrow money. And they used to go down
• 16:08
  Speaker 1: to the bank, the men with their banki in the
• 16:10
  Speaker 1: Rialto borrow money, typically from some of the big royal families.
• 16:14
  Speaker 1: A few decades earlier, they'd hit some of the merchant
• 16:18
  Speaker 1: families up for, I think, 20, 30 ounces of silver.
• 16:21
  Speaker 1: for another little minor conflict. The scale of the money
• 16:25
  Speaker 1: they needed now was so great that they needed to
• 16:27
  Speaker 1: do something else. So he divided all of Venice into
• 16:30
  Speaker 1: six provinces. They assessed the wealth of everybody and taxed
• 16:36
  Speaker 1: them proportionately, a one-off war tax. But to make it
• 16:41
  Speaker 1: a little bit more palatable to everybody, they said, well,
• 16:45
  Speaker 1: we're just going to borrow the money.
• 16:47
  Speaker 2: You don't have to pay it.
• 16:48
  Speaker 1: You have no choice. But you have to pay 5%
• 16:51
  Speaker 1: a year until we basically kind of kick Constantinople's ass
• 16:57
  Speaker 1: and we obviously make money back and can pay you back.
• 17:01
  Speaker 1: And to soften the blow as well, we'll make the
• 17:03
  Speaker 1: receipts tradable.
• 17:05
  Speaker 2: And presumably that only happened because it was a democratic city,
• 17:08
  Speaker 2: a republic. And so they couldn't just order people. They
• 17:11
  Speaker 2: had to persuade them and tempting them by the idea
• 17:14
  Speaker 2: of it being a loan with some interest payments and things.
• 17:15
  Speaker 1: Well, this first loan was involuntary, but it was clearly
• 17:19
  Speaker 1: done with the blessing of the big royal founders who
• 17:21
  Speaker 1: really were ahead. It was a proportional tax. So the
• 17:23
  Speaker 1: poorest citizens were not forced to make this loan. It
• 17:27
  Speaker 1: was the wealthy ones. And since they acquiesced, it was semi-voluntary, semi-involuntary.
• 17:33
  Speaker 1: But right then it was basically a forced war tax. Right.
• 17:36
  Speaker 2: And the critical point is, and the reason why we're
• 17:38
  Speaker 2: going to start talking about bombs, is because those loans
• 17:43
  Speaker 2: didn't just pay interest, they could also be traded.
• 17:47
  Speaker 1: Exactly. So they knew that some people might need to
• 17:50
  Speaker 1: kind of raise cash. And so they made the receipts
• 17:53
  Speaker 1: of the loans tradable. There was a office off the
• 17:57
  Speaker 1: Rialto where if you sold your receipt to somebody else,
• 18:00
  Speaker 1: the new owner could be, that would get the right
• 18:02
  Speaker 1: to that 5% income stream. they could basically be registered
• 18:07
  Speaker 1: as a new owner. And this was incredibly valuable. So
• 18:10
  Speaker 1: this prestiti alone, it's plural of prestito.
• 18:13
  Speaker 2: That's your good Latin or Italian, yes.
• 18:17
  Speaker 1: And it became quite a good thing. And we don't
• 18:21
  Speaker 1: know how much they raised, but they were able to
• 18:22
  Speaker 1: raise a huge sum, enough to build 120 warships, galleys.
• 18:27
  Speaker 1: So the Arsenale, which is Venice's famed shipyard.
• 18:31
  Speaker 2: It's a great, great tourist destination. I've seen it several times.
• 18:34
  Speaker 1: Yeah, I did not get to go there, actually.
• 18:35
  Speaker 2: It's where actually a lot of conferences happen these days,
• 18:38
  Speaker 2: financial conferences. So if you're listening and you're a banker
• 18:40
  Speaker 2: and you want to have a historic place to talk
• 18:42
  Speaker 2: about bonds, go to the Arsenale.
• 18:44
  Speaker 1: Oh, fascinating. You know, it was one of Europe's biggest
• 18:46
  Speaker 1: industrial clusters for centuries. At this point, it hadn't quite
• 18:50
  Speaker 1: hit its peak. It could still churn out war galleys
• 18:53
  Speaker 1: and ships at an incredible speed.
• 18:55
  Speaker 2: But the critical thing about this, as you say, there
• 18:57
  Speaker 2: had been practice around lending for many, not just decades,
• 19:01
  Speaker 2: but centuries by then, by the 12th century. But what
• 19:05
  Speaker 2: made these instruments prestiti unusual was that you could trade them,
• 19:09
  Speaker 2: which is the definition in many ways of a bond.
• 19:12
  Speaker 2: But there was also a religious reason why they wanted
• 19:15
  Speaker 2: to introduce that novel twist about tradability, wasn't there?
• 19:20
  Speaker 1: What was that? Well, the Catholic Church still took a
• 19:23
  Speaker 1: very strict– due on interest or usury. So it wasn't
• 19:27
  Speaker 1: maybe quite as strict as Islam does, but it definitely
• 19:30
  Speaker 1: frowned on interest in general and lending. And certainly you
• 19:34
  Speaker 1: wanted to do something that would not anger the Catholic Church.
• 19:38
  Speaker 1: By then it had morphed into a kind of that
• 19:41
  Speaker 1: usury was exceptionally high interest. So it's kind of like,
• 19:44
  Speaker 1: where do you interpret that? How do you cut it off?
• 19:46
  Speaker 1: But the fact that it was permanent, it was a
• 19:48
  Speaker 1: perpetual loan, that would basically continue to go on until
• 19:52
  Speaker 1: it was repaid. And the fact that it was tradable
• 19:55
  Speaker 1: made it palatable to the church as well.
• 19:58
  Speaker 2: So in modern day financial parlance, it was a bit
• 20:01
  Speaker 2: of regulatory arbitrage. They were taking the letter of the law,
• 20:04
  Speaker 2: but getting around the spirit.
• 20:06
  Speaker 1: Yes, exactly. And just the fact that, you know, it
• 20:09
  Speaker 1: was like buying an income stream.
• 20:11
  Speaker 2: So anyone who says, I don't want to touch derivatives
• 20:13
  Speaker 2: because that's regulatory arbitrage, but I go and buy a
• 20:15
  Speaker 2: license of bond, doesn't know that, in fact, bonds started
• 20:18
  Speaker 2: as a form of regulatory arbitrage too.
• 20:21
  Speaker 1: Yeah. Well, I mean, to paraphrase the Wu-Tang Clan, as
• 20:23
  Speaker 1: I like to do, regulatory arbitrage rules everything around us.
• 20:27
  Speaker 2: Well, it drives a lot of financial innovation.
• 20:29
  Speaker 1: Yes, it's very true.
• 20:31
  Speaker 2: But so what we have is a situation where we've
• 20:33
  Speaker 2: got the doge, that seemingly cautious man who's forced to
• 20:37
  Speaker 2: be radical, who's living in the swamp. goes to his citizens,
• 20:43
  Speaker 2: raises all this money to fight a war with this
• 20:46
  Speaker 2: extraordinary innovation called the Bond that you love so much.
• 20:51
  Speaker 2: But I guess the key question is, does his military
• 20:53
  Speaker 2: campaign actually work? What happens to those 120 warships that
• 20:57
  Speaker 2: go to war with Byzantine?
• 20:59
  Speaker 1: It does not go well, Juliet.
• 21:01
  Speaker 2: Oh dear.
• 21:01
  Speaker 1: It does not go well whatsoever. So they have this
• 21:06
  Speaker 1: incredible fleet, an armada before the Spanish had it, I
• 21:11
  Speaker 1: don't know what an armada is in Italian, actually. But
• 21:15
  Speaker 1: they start sailing on some of the Greek islands, which
• 21:17
  Speaker 1: is kind of the outskirts of the Byzantine Empire. They
• 21:19
  Speaker 1: wage war. They do incredibly well. And the desperate governor
• 21:23
  Speaker 1: of one of these Greek islands, Chios, he offers, desperate,
• 21:29
  Speaker 1: please stop bombing and attacking us. I'll go to the
• 21:31
  Speaker 1: emperor and plead your case to get the Venetians freed.
• 21:35
  Speaker 1: Once again, the Doge is so cautious that even though
• 21:38
  Speaker 1: he has the upper hand then and could sail straight
• 21:40
  Speaker 1: to Constantinople, he says, yes, let's give peace a chance. Ouch.
• 21:44
  Speaker 2: So he does not have the killer instinct.
• 21:46
  Speaker 1: No, no. Unusually for Europe at that age where, you know,
• 21:49
  Speaker 1: caution was generally not the ruling trait that came to
• 21:53
  Speaker 1: the fore. So he takes his fleet to winter and waits.
• 21:58
  Speaker 1: Emissaries go back and forth. Komnenos realizes that playing for
• 22:03
  Speaker 1: time is the smart thing.
• 22:05
  Speaker 2: So what happens then?
• 22:07
  Speaker 1: Well, he sees emissaries. He doesn't see emissaries. He goes
• 22:10
  Speaker 1: back and forth. But then the fleet is hit by
• 22:14
  Speaker 1: the plague.
• 22:15
  Speaker 2: Oh, my goodness.
• 22:16
  Speaker 1: Wow.
• 22:16
  Speaker 2: Was that the Black Death or was that before that?
• 22:18
  Speaker 1: No, before that. This is some sort of pestilence. We
• 22:22
  Speaker 1: don't know. But it must have been quite horrific. They
• 22:24
  Speaker 1: kept and also they thought if we just go to
• 22:27
  Speaker 1: a different island. So they started island hopping, trying to
• 22:29
  Speaker 1: escape the plague. Lo and behold, they brought it with
• 22:32
  Speaker 1: them wherever they went. Right.
• 22:34
  Speaker 2: Definition of an unwelcome visitor.
• 22:36
  Speaker 1: Yes, exactly. So eventually the Doge, who's part of this
• 22:40
  Speaker 1: war fleet, what's left of it, they have to limp
• 22:45
  Speaker 1: back to Venice and admit defeat.
• 22:47
  Speaker 2: So that's what, 1172, just looking at my notes?
• 22:51
  Speaker 1: Yes, 1172. And Komnenos, you might be unsurprised to hear
• 22:56
  Speaker 1: that he was a gloating type. He sends a letter
• 22:58
  Speaker 1: to the Venetian doge saying, oh my God, you scoundrel,
• 23:03
  Speaker 1: you nouveau riche, uppity little piece of trash. How dare
• 23:06
  Speaker 1: you wage war on the Romans themselves? But yes, he
• 23:11
  Speaker 1: has to go back and face the music, basically.
• 23:13
  Speaker 2: And then the democratic crowd begins to flex their muscles,
• 23:19
  Speaker 2: don't they?
• 23:20
  Speaker 1: Yes. So not only had he, you know, borrowed money
• 23:24
  Speaker 1: or forcibly borrowed money from all the wealthy families and
• 23:26
  Speaker 1: some of the middle class families of Venice, and then
• 23:29
  Speaker 1: promptly lost the entire fleet, blew in his hand, he
• 23:33
  Speaker 1: brought the plague back to Venice. So people were, doubly
• 23:37
  Speaker 1: furious they were pretty unhappy let's say his approval ratings
• 23:40
  Speaker 1: were very low at that point right so but he
• 23:43
  Speaker 1: has to have an open meeting where everybody can come
• 23:46
  Speaker 1: in and complain and talk to him he's there with
• 23:49
  Speaker 1: all his advisors and people start getting more and more
• 23:53
  Speaker 1: irate you know how.
• 23:54
  Speaker 2: This is i see my notes may the 27th 11
• 23:57
  Speaker 2: 72 yes you've got this mob coming together or this
• 24:01
  Speaker 2: town hall if you like with the doge trying to
• 24:03
  Speaker 2: talk to the citizens explain why the hell everything has
• 24:05
  Speaker 2: gone wrong, including those bonds. And then what happens?
• 24:09
  Speaker 1: Well, it's kind of a listening. He just has to
• 24:10
  Speaker 1: sit there and listen to them complain. But as happens
• 24:12
  Speaker 1: with crowds, they whip each other up. The one person
• 24:15
  Speaker 1: is angry. The next person becomes even more angry. Eventually,
• 24:19
  Speaker 1: the Doge's advisors start tiptoeing towards the exits.
• 24:22
  Speaker 2: Ouch.
• 24:23
  Speaker 1: And he suddenly realizes, oh my God, I'm alone here.
• 24:26
  Speaker 1: He makes a dash for it, but he's caught on
• 24:28
  Speaker 1: the streets of Venice and stabbed to death. Wow. Okay. Yeah.
• 24:32
  Speaker 1: There's no respect for financial innovators, is there, Gillian?
• 24:35
  Speaker 2: No, I was going to say, this is not a
• 24:36
  Speaker 2: great start to the bond market.
• 24:37
  Speaker 1: No.
• 24:38
  Speaker 2: Right. Okay. Well, we're going to come back after the
• 24:42
  Speaker 2: break to see what happens next in this extraordinary story
• 24:46
  Speaker 2: about what really started the bond market, and it was
• 24:49
  Speaker 2: not an algorithm.
• 24:56
  Speaker 3: Investors today are most worried about three key factors– Interest rates,
• 25:01
  Speaker 3: the corporate credit cycle, and the impact of artificial intelligence.
• 25:05
  Speaker 3: Artificial intelligence is impacting the jobs market and corporate margins.
• 25:09
  Speaker 3: Interest rates are of concern because people are wondering when
• 25:12
  Speaker 3: will the Fed start to raise or lower interest rates again.
• 25:15
  Speaker 3: And finally, the corporate credit cycle. If the economy is
• 25:18
  Speaker 3: to weaken, what does that mean for the ability of
• 25:21
  Speaker 3: corporate credit to hold up? We are thinking about the
• 25:23
  Speaker 3: next generation and constantly adapting our portfolios to meet their needs.
• 25:34
  Speaker 2: OK, so, Robin, we're back now and we have this
• 25:37
  Speaker 2: really unfortunate turn of events. It's not the kind of
• 25:41
  Speaker 2: thing you get taught in any normal MBA course or
• 25:43
  Speaker 2: economic history class. But we've got a situation where the Doge,
• 25:48
  Speaker 2: the former ruler of Venice, is dead. However, he has
• 25:52
  Speaker 2: created this remarkable thing called the Bond. We've just had
• 25:57
  Speaker 2: a mob essentially exercising their mob rule, ugly forces to
• 26:02
  Speaker 2: murder the Doge. And we've also got a situation where
• 26:05
  Speaker 2: Venice itself is in a terrible state because it suddenly
• 26:09
  Speaker 2: had essentially plague sweep through the city. It's lost its
• 26:14
  Speaker 2: fleet to the Byzantine Empire. And also, of course, people
• 26:18
  Speaker 2: are wondering what on earth is going to happen to
• 26:20
  Speaker 2: all of those loans, all those bonds. So, Robin, what
• 26:23
  Speaker 2: happens next? Is this the end of the financial innovation wave?
• 26:28
  Speaker 1: No, and it's not even the end of Venice. And
• 26:30
  Speaker 1: this is why I think it's such a remarkable city
• 26:33
  Speaker 1: and a remarkable people. They also shut out from all
• 26:36
  Speaker 1: the Byzantine ports. So, you know, commercially also is a
• 26:39
  Speaker 1: disaster for them. But they quickly regret how they treated
• 26:45
  Speaker 1: the Doge. There's like a lot of soul searching in
• 26:47
  Speaker 1: the city. A bit late for that. A bit late
• 26:49
  Speaker 1: for Port Michel and Doge Vitale. But it is pretty
• 26:53
  Speaker 1: remarkable that they then regret. In fact, they execute the
• 26:56
  Speaker 1: man who hit the... howling blow as it were uh
• 27:01
  Speaker 1: they raise his house as a symbolic kind of oh
• 27:03
  Speaker 1: wow we really screwed up that one scapegoat yeah exactly
• 27:06
  Speaker 1: he was the scapegoat but they also realized oh my
• 27:08
  Speaker 1: god mob rule is probably not great so they actually
• 27:11
  Speaker 1: set up kind of a proto-parliament and i think it's
• 27:14
  Speaker 1: probably engineered by the wealthy families but something that basically
• 27:17
  Speaker 1: they will elect this little group a camera basically like
• 27:21
  Speaker 1: a group of people and they will elect the doge
• 27:23
  Speaker 1: So it's kind of almost like a proto-parliament.
• 27:25
  Speaker 2: So you have political reforms, a bit like introducing Athenian
• 27:27
  Speaker 2: democracy into Venice. And then what happens once that's installed?
• 27:32
  Speaker 2: I mean, they end up with what, an 11-person commission
• 27:35
  Speaker 2: to select future rulers. But then what happens?
• 27:39
  Speaker 1: Well, they can't pay back that bond, that prestiti. All
• 27:43
  Speaker 1: that debt. Yeah, all that debt is now unpayable. So
• 27:46
  Speaker 1: they set up like a procurator position, basically like a
• 27:51
  Speaker 1: finance minister that starts sending like sharing some financial detail.
• 27:56
  Speaker 2: You mean bond market transparency or fiscal transparency?
• 27:59
  Speaker 1: Well, suddenly they owed all the citizens a ton of money.
• 28:02
  Speaker 1: And again, annoyingly, we don't know how much, but it
• 28:04
  Speaker 1: must have been quite a bit. So they have to
• 28:06
  Speaker 1: show that we are going to pay this. We're going
• 28:08
  Speaker 1: to pay that 5%. So they tax the Rialto stalls.
• 28:11
  Speaker 1: They tax people a little bit more, but then they
• 28:14
  Speaker 1: pay that 5%. And people... And this is why I
• 28:16
  Speaker 1: think it's so delightful that this kind of almost this
• 28:20
  Speaker 1: annoying relic of Venice's lowest point becomes a testament to
• 28:25
  Speaker 1: their commercial genius. That that prestige is transformed into something
• 28:30
  Speaker 1: that's actually a valuable asset for them. That suddenly you
• 28:33
  Speaker 1: can buy something that pays you a 5% income stream.
• 28:37
  Speaker 1: And that is super valuable. You can endow a monastery.
• 28:40
  Speaker 1: You can add it to a dowry, for example. you
• 28:43
  Speaker 1: can use those little receipts as collateral for loans.
• 28:47
  Speaker 2: And this was quite different, wasn't it, from what was
• 28:49
  Speaker 2: happening elsewhere in Europe, where kings were just either seizing
• 28:54
  Speaker 2: money or grabbing loans or forcing people to give them loans.
• 28:59
  Speaker 2: And that was it. There was no sense of actually
• 29:01
  Speaker 2: being able to trade that loan or doing anything creative
• 29:04
  Speaker 2: with it, or even, dare I say, incorporate as part
• 29:07
  Speaker 2: of a financial planning scheme for a household.
• 29:09
  Speaker 1: Yeah, exactly. No, it's That's the transformational bit. Typically, most
• 29:15
  Speaker 1: people who are borrowing, it was kings or the royal families.
• 29:17
  Speaker 1: It wasn't a country. The country was the king or
• 29:20
  Speaker 1: the royal family at the time, but they would change
• 29:21
  Speaker 1: and they would occasionally chop the heads off their lenders.
• 29:24
  Speaker 1: In Venice, you were lending to the government itself and
• 29:26
  Speaker 1: people quite liked that. It was quite sought after the
• 29:29
  Speaker 1: right to be able to buy these loans, in fact.
• 29:31
  Speaker 1: And you have to get approval. If you're non-Venetian, you
• 29:34
  Speaker 1: have to get approval from the grand body, that 11-body
• 29:37
  Speaker 1: camera company. And it became a valuable bit that actually
• 29:45
  Speaker 1: Venice used to supercharge its economic recovery.
• 29:48
  Speaker 3: Right.
• 29:48
  Speaker 2: It's obviously fascinating because if you were a financial historian,
• 29:51
  Speaker 2: you'd say at this point, well, actually what's really going
• 29:53
  Speaker 2: on is that debt meets democracy. Yeah. in that suddenly
• 29:58
  Speaker 2: the people who are borrowing that money have to answer
• 30:01
  Speaker 2: to citizens rather than just bully them. And therefore, they're
• 30:04
  Speaker 2: forced to have some financial transparency, which, of course, nowadays
• 30:08
  Speaker 2: is very obvious. But in those days, it was really
• 30:10
  Speaker 2: quite radical, wasn't it?
• 30:11
  Speaker 1: Well, this is one of the things I did not
• 30:14
  Speaker 1: expect when I started writing A Fabulous Debt. And I
• 30:17
  Speaker 1: was just delighted to find it. Because you always You
• 30:19
  Speaker 1: just want the hero of your book. And in my book,
• 30:21
  Speaker 1: it's the Bond to kind of be a hero and
• 30:23
  Speaker 1: you want to see the best possible thing. But I
• 30:26
  Speaker 1: genuinely feel after having done oh so much research that
• 30:30
  Speaker 1: Bonds have actually helped usher in transparency and accountability in
• 30:36
  Speaker 1: the world.
• 30:37
  Speaker 2: Or you could say the creation of bonds reflected rising
• 30:39
  Speaker 2: levels of democracy and transparency and citizen power, but it
• 30:44
  Speaker 2: then reinforced it once it came in.
• 30:45
  Speaker 1: Yeah, because suddenly Venice, you know, its citizens were also
• 30:48
  Speaker 1: its creditors. They had a vested interest in the good
• 30:51
  Speaker 1: governance of its city. They kept people, they kept the
• 30:54
  Speaker 1: Doge and this camera, they kept them accountable. And that
• 30:58
  Speaker 1: helped the government be lean. It helped the government run
• 31:02
  Speaker 1: well because they knew they were accountable to citizens, not
• 31:04
  Speaker 1: just as voters, but as creditors.
• 31:06
  Speaker 2: And it's a really interesting message for anyone who goes
• 31:08
  Speaker 2: out and buys bonds in their portfolio today, which, by
• 31:11
  Speaker 2: the way, is just about anybody who has a pension
• 31:13
  Speaker 2: or any type of investment or 401k, that actually bonds
• 31:17
  Speaker 2: are part of a democratic system. sovereign bonds are, and
• 31:21
  Speaker 2: you as a citizen have a right to demand that
• 31:23
  Speaker 2: kind of accountability. But in those days, we're talking about
• 31:27
  Speaker 2: the 12th century and then the 13th century, when it
• 31:29
  Speaker 2: carried on into the next century, how did that sort
• 31:32
  Speaker 2: of trading system actually work? I mean, was it due
• 31:35
  Speaker 2: to peoples and households and the everyday fabric of Venetian life?
• 31:39
  Speaker 1: Well, it transformed it. So, the Rialto became the world's
• 31:43
  Speaker 1: first bond market. We don't have data on any numbers
• 31:47
  Speaker 1: on some of the first sort of, let's say, 50
• 31:51
  Speaker 1: or 100 years of trading. But we knew it was
• 31:53
  Speaker 1: quite vibrant. And from around the 1200s and 1300s, financial
• 31:58
  Speaker 1: historians have done God's work in piecing together. You know,
• 32:01
  Speaker 1: there was around 10% of the market would turn over
• 32:03
  Speaker 1: all the year. So Venice would pay down its debts gradually.
• 32:06
  Speaker 1: And then whenever there was a new war, and there
• 32:08
  Speaker 1: was always a new war in Europe around then, they
• 32:10
  Speaker 1: would fight constantly between the Italian city-states. You'd use mostly
• 32:14
  Speaker 1: German mercenaries led by a condottieri, the captain, and it
• 32:18
  Speaker 1: was quite expensive stuff. And then they'd just sell more Presiti.
• 32:22
  Speaker 1: And it would become a homogenous debt as well. So
• 32:25
  Speaker 1: they would have various debt swaps, but it became this
• 32:27
  Speaker 1: homogenous pool of debt that people could trade and buy.
• 32:31
  Speaker 1: And occasionally they might miss an interest payment, but then
• 32:34
  Speaker 1: you could trade... claims in almost bet make a prediction
• 32:38
  Speaker 1: like a bet when venice would start repaying the the
• 32:41
  Speaker 1: coupons so it became vibrant it became quite sophisticated and
• 32:46
  Speaker 1: it became the model frankly for all the other italian
• 32:49
  Speaker 1: cities they all copied and pasted they saw how this
• 32:52
  Speaker 1: was transforming venice so florence venice milan pisgah genoa they
• 32:57
  Speaker 1: all copied it and it started spreading across europe as
• 32:59
  Speaker 1: well and in many ways that rialto market that was
• 33:02
  Speaker 1: the world's first bond market with its columns, became kind
• 33:05
  Speaker 1: of almost the mental model for an exchange where you
• 33:09
  Speaker 1: traded financial securities. When the first exchanges cropped up in
• 33:13
  Speaker 1: Amsterdam specifically, it looks a lot like the Rialto.
• 33:17
  Speaker 2: That's really fascinating. Of course, the tragic element for this
• 33:21
  Speaker 2: is that perennial truth that war tends to also breed
• 33:25
  Speaker 2: a lot of innovation and creativity, doesn't it?
• 33:29
  Speaker 1: Yeah. No, it's the mother and father of all inventionists.
• 33:32
  Speaker 2: So you fast forward a few centuries, bonds are spreading
• 33:35
  Speaker 2: across the entire continent of Europe. People are looking at that.
• 33:41
  Speaker 2: And out of that starts to grow the modern fixed
• 33:44
  Speaker 2: income market that we all know. When you look at
• 33:47
  Speaker 2: where we are today and look back to these very
• 33:51
  Speaker 2: strange origins, I think very few people actually know and
• 33:53
  Speaker 2: understand the degree to which bonds did emerge out of one, democracy, two, desperation.
• 33:59
  Speaker 2: and three, a war. What do you think it tells
• 34:03
  Speaker 2: us about how we should look at bonds right now?
• 34:07
  Speaker 1: Well, I think the view of debt is something bad, schulde,
• 34:12
  Speaker 1: German guilt. It's very embedded. All the major world religions
• 34:17
  Speaker 1: have some injunctions against interest or usury. Finance, generally speaking,
• 34:22
  Speaker 1: is a day-two word. And yes, quite often, there are
• 34:26
  Speaker 1: mankind at our worst moments is when we make big
• 34:29
  Speaker 1: financial leaps. So I understand that. But what Doge Michelle, unfortunately,
• 34:33
  Speaker 1: did not live to see, but other people that followed him,
• 34:36
  Speaker 1: other great people that I have in my book, like
• 34:37
  Speaker 1: Alexander Hamilton, Sigmund Warburg, many other people realized that bonds
• 34:43
  Speaker 1: were a tool. They're actually an incredibly powerful tool. It's
• 34:46
  Speaker 1: like a financial technology that allows us to take individually
• 34:50
  Speaker 1: small streams of money and together make a gushing river.
• 34:56
  Speaker 1: And as mankind became more and more advanced and our
• 34:59
  Speaker 1: projects became bigger and bigger, It was an essential component
• 35:03
  Speaker 1: to doing these things and also helped bind us together.
• 35:06
  Speaker 1: They again gave us a vested interest. So this is
• 35:08
  Speaker 1: something Nathan Meyer Rothschild did in the UK in the
• 35:11
  Speaker 1: 19th century. He very deliberately said when other European countries
• 35:16
  Speaker 1: wanted to borrow in London, wanted to borrow from England,
• 35:19
  Speaker 1: that was the banker of the world, he said, well,
• 35:22
  Speaker 1: English investors expect some accountability. They expect some democracy, some transparency.
• 35:27
  Speaker 1: So if you want to borrow from British bondholders, investors,
• 35:30
  Speaker 1: you have to ideally do it in sterling, but we
• 35:33
  Speaker 1: can figure that out. But you have to do these things.
• 35:35
  Speaker 1: So you see it becoming a force actually for good,
• 35:39
  Speaker 1: despite often being born out of misery.
• 35:41
  Speaker 2: But you see, that's really interesting because in many ways,
• 35:44
  Speaker 2: you know, today bond markets are one of the few
• 35:48
  Speaker 2: markets tools out there in the political economy that can
• 35:53
  Speaker 2: actually be used by citizens and others to exert power
• 35:57
  Speaker 2: and control over governments. I mean, people talk about bond
• 35:59
  Speaker 2: market vigilantes. You had that famous James Carville quote that
• 36:03
  Speaker 2: when I come back, I want to be reincarnated as
• 36:05
  Speaker 2: a bond market because you get to terrify everyone.
• 36:07
  Speaker 1: Yeah, my favorite quote, obviously. Exactly.
• 36:09
  Speaker 2: Well, it's possible as we look at a country like
• 36:12
  Speaker 2: America today where the debt's now hitting $ 40 trillion and
• 36:15
  Speaker 2: keeps rising and people are going to say, is anything
• 36:17
  Speaker 2: ever going to stop it? The one thing that will
• 36:20
  Speaker 2: stop it will be bond investors.
• 36:22
  Speaker 1: I am more skeptical that, for example, we are now
• 36:25
  Speaker 1: obviously talking at a time where the bond market is
• 36:27
  Speaker 1: having one of its periodic pukes. to use a technical
• 36:31
  Speaker 1: term for it. I do think that could put pressure.
• 36:34
  Speaker 1: I think it was fascinating to see after Trump's so-called
• 36:38
  Speaker 1: liberation date, the big tariffs he unveiled in April 2025,
• 36:42
  Speaker 1: the stock market, people forget this, but people will talk
• 36:45
  Speaker 1: about how Trump cares so much about the stock market
• 36:48
  Speaker 1: and the stock market will be like the stock market vigilantes. Well,
• 36:51
  Speaker 1: he started first slapping tariffs on Mexico and Canada and
• 36:54
  Speaker 1: then the rest of the world. The stock market dropped
• 36:56
  Speaker 1: almost 20% and he was very much clear, stay the course,
• 37:00
  Speaker 1: I don't care. The bond market, the treasury market had
• 37:04
  Speaker 1: two or three queasy days. And he was like, time out, stop,
• 37:07
  Speaker 1: pause instantly. Literally, the evening before he put the pause,
• 37:11
  Speaker 1: he was telling some donors, no, no, we're going to
• 37:14
  Speaker 1: stay the course.
• 37:14
  Speaker 2: Well, the word going around the street back then during
• 37:16
  Speaker 2: the Liberation Day saga was that there was a 4.5% put,
• 37:20
  Speaker 2: which basically meant that if bond yields got above 4.5%,
• 37:23
  Speaker 2: The idea was that Scott Besson, the US Treasury Secretary,
• 37:26
  Speaker 2: would force President Trump or beg him to basically wind
• 37:30
  Speaker 2: back those tariffs, which kind of seems to be what happened.
• 37:33
  Speaker 1: Yeah.
• 37:34
  Speaker 2: Except, of course, now 10-year bond yields are heading around 5%.
• 37:38
  Speaker 1: Yes, and probably most likely heading higher. I think... how
• 37:44
  Speaker 1: much pressure that can put on on policy put the
• 37:47
  Speaker 1: body politic is going to be interesting in venice as
• 37:50
  Speaker 1: well we saw this periodically venice would occasionally like if
• 37:53
  Speaker 1: the bond is a technology that allows you to borrow
• 37:55
  Speaker 1: more money more efficiently well as we can probably guess
• 37:58
  Speaker 1: then we abuse that tool quite often as did venice
• 38:01
  Speaker 1: as well and periodically would have to restructure its debts
• 38:04
  Speaker 1: and people have to take losses and and typically that
• 38:07
  Speaker 1: would come with some sort of accountability mechanism or political
• 38:12
  Speaker 1: pressure that, okay, we'll restructure and we'll accept less money,
• 38:16
  Speaker 1: but then the government has to do X or Y.
• 38:18
  Speaker 1: For example, there was one in something called the Legato Pecunie,
• 38:22
  Speaker 1: where the Venetian citizens basically forced the government to pass
• 38:25
  Speaker 1: a law that said that you can have, I think,
• 38:30
  Speaker 1: a thousand ducats to pay for the city's administration. Then
• 38:35
  Speaker 1: everything beyond that, you have to pay creditors. And only
• 38:38
  Speaker 1: then can you pay military or the Navy. So creditors
• 38:42
  Speaker 1: rank themselves. After the very, very basic running of the government,
• 38:46
  Speaker 1: creditors rank more highly.
• 38:48
  Speaker 2: So again, that's a question of creating, in financial jargon,
• 38:51
  Speaker 2: the first waterfall structure whereby you create a queue of
• 38:54
  Speaker 2: people who you pay out if the proverbial hits the fan.
• 38:58
  Speaker 2: But again, that underscores the fact that citizens' rights... were
• 39:04
  Speaker 2: being put in prime place rather than just chucked to
• 39:08
  Speaker 2: the waste bin or into the waste bin behind everyone else. Yeah.
• 39:12
  Speaker 1: And I do worry, here in the US, I don't
• 39:14
  Speaker 1: think it's that, let's say bond, when yields are going up,
• 39:16
  Speaker 1: as we know, yields and prices move in verse, it
• 39:18
  Speaker 1: means that bond prices are going down. I think the
• 39:21
  Speaker 1: financial hit to people directly is not going to be
• 39:25
  Speaker 1: clear until people see the stock market. When bond yields
• 39:27
  Speaker 1: go so high that it affects the stock market, that's
• 39:29
  Speaker 1: when you're see some Americans start hurting. Also, the cost
• 39:33
  Speaker 1: of 30-year mortgage. Affordability is obviously a huge issue. And
• 39:36
  Speaker 1: the cost of the treasury market, for me, it represents
• 39:39
  Speaker 1: the cost of money to the global economy. Because annoyingly
• 39:42
  Speaker 1: as it is for me, even when I live in
• 39:44
  Speaker 1: Norway … When I borrow money from my bank, when
• 39:46
  Speaker 1: I get a mortgage, I'm basically indirectly competing with the
• 39:49
  Speaker 1: US Treasury.
• 39:49
  Speaker 2: Well, as they say, today, the US Treasury's market is
• 39:52
  Speaker 2: the dominant force in global financial markets. In a country
• 39:56
  Speaker 2: like UK, they joke that UK government bond markets is
• 40:00
  Speaker 2: tethered to the tail of a drunken dragon. A drunken
• 40:04
  Speaker 2: dragon being treasuries and the person in charge of America.
• 40:07
  Speaker 2: So there you go.
• 40:08
  Speaker 3: Yes.
• 40:08
  Speaker 1: No, that's quite cutting.
• 40:10
  Speaker 2: But I'm curious, a couple of questions I've got still
• 40:12
  Speaker 2: about where we are today and how it links back
• 40:14
  Speaker 2: to those days in Venice, 12th century Venice. I mean,
• 40:17
  Speaker 2: war continues to be something that drives up government debt levels,
• 40:21
  Speaker 2: doesn't it? And often drives up, you know, an issuance
• 40:25
  Speaker 2: of bonds. I mean, we saw that with, you know,
• 40:27
  Speaker 2: the First World War in America. There's a chapter in
• 40:29
  Speaker 2: your book about that as well. But, you know, it's
• 40:31
  Speaker 2: a fair bet that as we have military influence, conflicts
• 40:34
  Speaker 2: tragically erupting all over the world, once again, that's going
• 40:37
  Speaker 2: to be dovetailing with bond market issuance.
• 40:40
  Speaker 3: Yeah.
• 40:40
  Speaker 1: I mean, the bond has been, I mean, it has
• 40:42
  Speaker 1: primarily for a long time, for centuries, was used as
• 40:45
  Speaker 1: a wartime measure. It's like, you can't tax enough. You
• 40:47
  Speaker 1: want to borrow, you're going to fight a big war.
• 40:50
  Speaker 1: And then you hopefully win and you pay it back afterwards.
• 40:52
  Speaker 1: That's what Britain did many times. And the U.S. historically
• 40:55
  Speaker 1: has now. It's just a big blob of borrowing that
• 41:00
  Speaker 1: constantly happens, that the budget deficit was already big and
• 41:03
  Speaker 1: it's going to become bigger because, for example, the recent
• 41:05
  Speaker 1: war in Iran. It also will because it is pushing
• 41:08
  Speaker 1: up inflation. Oil and energy prices are higher. Gas prices
• 41:11
  Speaker 1: are higher. That hurts affordability, but it also flows directly
• 41:15
  Speaker 1: into the cost of a 30-year mortgage here. So maybe
• 41:18
  Speaker 1: that will eventually put pressure. It's clear that the U.S.
• 41:20
  Speaker 1: government now, as the Venetian government, is sensitive to the
• 41:24
  Speaker 1: cost of borrowing because of what it represents. Whether it's
• 41:28
  Speaker 1: enough to the point where it will force a change
• 41:33
  Speaker 1: of direction, I'm still skeptical. But Venice was at least
• 41:38
  Speaker 1: instructive in that it does get to the point. If
• 41:41
  Speaker 1: something's unsustainable, it will eventually stop, but it might take
• 41:45
  Speaker 1: longer than we think. Absolutely.
• 41:46
  Speaker 2: So just last question is, given that you are the
• 41:50
  Speaker 2: Bond man, given that Bond is your middle name, not
• 41:54
  Speaker 2: the 007 sort, but the financial sort, have you managed
• 41:58
  Speaker 2: to track down one of those original prestiti? Do you
• 42:01
  Speaker 2: have any framed at home in your bathroom or anything
• 42:05
  Speaker 2: like that? Or got a picture of the original Doge
• 42:07
  Speaker 2: who died because of his attempts to launch the war effort?
• 42:11
  Speaker 1: No, I mean, it's honestly, they have not asked me
• 42:14
  Speaker 1: to play the new bond either. I'm very hurt. So guys,
• 42:17
  Speaker 1: if you know, Barbara Broccoli, isn't it? If you want
• 42:20
  Speaker 1: to give me a call, then you know, I'm your man. No,
• 42:24
  Speaker 1: I have not. A lot of those bonds don't really exist.
• 42:28
  Speaker 1: So we know lots of the history, lots of Italian historians,
• 42:32
  Speaker 1: financial historians have done incredible work in piecing stuff together.
• 42:35
  Speaker 1: It's such a fascinating kind of tale from almost the
• 42:38
  Speaker 1: crucible of modern capitalism is born around this time in
• 42:41
  Speaker 1: Italy with banks and bonds. But no, I've not found
• 42:45
  Speaker 1: any sort of image or some of the coupons. So
• 42:49
  Speaker 1: some of the loan officers' ledgers from the reality, it
• 42:55
  Speaker 1: was not a bearer bond. It was a registered bond.
• 42:58
  Speaker 1: You have to register the new owners when one was
• 43:00
  Speaker 1: bought and sold, we have that. And I've seen pictures
• 43:03
  Speaker 1: of that, but that's only from, I think, the 1300s onwards.
• 43:06
  Speaker 2: My most memorable trip to Venice was actually during COVID,
• 43:10
  Speaker 2: when the Italians were presidents of the G20, and they
• 43:14
  Speaker 2: pulled me in to chair a finance minister's meeting, actually
• 43:17
  Speaker 2: in the Arsenale. And amongst other things, they were talking
• 43:20
  Speaker 2: a lot about debt issued to cope with pandemic strains,
• 43:24
  Speaker 2: And I now realize that we missed a trick. We
• 43:27
  Speaker 2: should have actually started off by talking about the Prestiti
• 43:31
  Speaker 2: and how that was the original foundation stone, if you like,
• 43:35
  Speaker 2: for the modern day bond market, not just in Italy
• 43:38
  Speaker 2: and Europe, but around the world. So thank you so much, Robin.
• 43:41
  Speaker 2: Really fascinating discussion. And if you enjoyed it, and I
• 43:46
  Speaker 2: hope you did, please remember to one, subscribe to the show. Two,
• 43:51
  Speaker 2: tell everyone else about it and urge them to listen
• 43:54
  Speaker 2: to it as well. And three, do please leave us
• 43:57
  Speaker 2: a review, hopefully with five stars and a thumbs up,
• 43:59
  Speaker 2: but whatever you feel like. And it really helps us
• 44:03
  Speaker 2: to spread the word. So I'm Gillian Tett.
• 44:06
  Speaker 1: And I'm Robin Wigglesworth. And remember, you can watch or
• 44:09
  Speaker 1: listen to this, even read it if you want the
• 44:11
  Speaker 1: transcript every single week. So join us on the story
• 44:14
  Speaker 1: of money next time. Bye.
• 44:27
  Speaker 3: Bye.