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Welcome to the world of money,

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bread, cash, dosh,

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dough, loot, lucre, moolah,

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the readies, the wherewithal.

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Call it what you like,
money can break us or it can make us.

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ln the past year, it's certainly broken

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more than a few of the biggest names
on Wall Street

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and in the City of London.

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And while former masters of the universe
crash and burn,

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the rest of us are left worrying if our
savings would be safer in a mattress

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than in a bank.

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The great financiaI crisis that began
in the summer of 2007

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has most of us utterIy baffIed.

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How on earth
couId a IittIe IocaI difficuIty

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with sub-prime mortgages
in the United States

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unIeash an economic tsunami big enough

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to obIiterate some of WaII Street's
most iIIustrious names,

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to force nationaIisations of banks
on both sides of the AtIantic

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and to bring the entire worId economy
to the very brink of recession,

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if not downright depression?

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ShouIdn't this series be caIIed
The Descent Of Money?

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WeII, I want to expIain to you
just how money rose

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to pIay such a terrifyingIy dominant roIe
in aII our Iives.

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What's more,
l want to reveal financial history

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as the essential back story
behind all history.

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Banks financed the Renaissance
while the bond market decided wars.

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Stock markets built empires...

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..and monetary meltdowns made revolutions.

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From Ancient Mesopotamia
right down to present day London,

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the ascent of money has been an
indispensable part of the ascent of man.

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But money's rise has never been
a smooth, upward ride.

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As we'II see, financiaI history
has repeatedIy been interrupted

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by gut-wrenching crises
of which today's is just the Iatest.

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From the fluctuating prices
of the homes we own

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to the high-speed industrialisation
of China,

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the power of finance is everywhere we look
and it affects all of our lives.

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SEAGULLS CRY

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But are you in on the secret?
Do you know what causes a bank run

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or a monetary meItdown
or a stock market crash?

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Can you teII the difference
between a sub-prime Ioan and a prime Ioan?

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WeII, I think these financiaI
technicaIities onIy reaIIy make sense

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once you know where they came from.

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And that's why financiaI history
is of more than mereIy academic interest.

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Not knowing this stuff can seriousIy
damage your weaIth.

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Crisis or no crisis, the amount of money
sloshing around planet finance

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still boggles the mind.

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By one measure, the US stock of money
is now $8, 7 00,000,000,000,

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up 1 2% since last year.

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And some people are still pocketing
a huge share of that cash.

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Last year, despite the onset
of the biggest financial crisis

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since the Depression, his hedge fund paid
George Soros a cool $2.4 billion.

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That's roughly 41,000 times more than
the average American family earned.

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As they say on Wall Street,
''Way to gol''.

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Now, however,
imagine a world with no money.

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500 years ago, the most powerful society
in South America,

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the lnca Empire,
had no real concept of money.

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The lncas appreciated the aesthetic
qualities of rare metals -

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gold was the sweat of the sun,
silver the tears of the moon -

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labour was the unit of value
in the lnca Empire,

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just as it was later supposed to be
in a communist society.

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But in 1 532, the lncas ran into a man

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whose hunger for money
had led him across an ocean.

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Francisco Pizarro and his fellow
Conquistadores had come from Spain

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to what they called Upper Peru
inspired by the legend of El Dorado,

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the realm of the gold-covered king.

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After defeating the lnca army
at the Battle of Cajamarca

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their quest began in earnest.

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At Potosi, in what is now Bolivia,

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the Spaniards struck it rich.

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They discovered the Cerro Rico,
literally the Rich Hill.

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Towering nearly 1 6,000 feet
above sea level,

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it was a money mountain.

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In their 250 years of Spanish ruIe,
more than two biIIion ounces of siIver

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were extracted from mines Iike this one,
1 4,000 feet up in the Andes.

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What the Incas couIdn't grasp was why
the Europeans had such an insatiabIe Iust

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for goId and siIver.

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They couIdn't understand that to Pizarro
and the Conquistadores,

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siIver was much more
than just shiny metaI.

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It couId be made into money...

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..a store of vaIue, a unit of account,
portabIe power.

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I must say,
I find this pIace pretty harrowing.

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The Spaniards
had a system of forced Iabour

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which meant that every abIe-bodied maIe
in the native popuIation

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had to do a stint down these mines.

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And you can see why one in eight of them
didn't survive the ordeaI.

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Today, 500 years later,

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conditions for miners in the Cerro Rico
haven't improved much.

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But at least they get paid
for the work they do.

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ln those days, it was a way of making
money that verged on genocide.

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The silver ore was ground up,
refined with mercury

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and then shipped to Europe
as bars and coins.

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Empire, it seemed, had made the Spanish
crown rich beyond the dreams of avarice.

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And yet, aII the siIver
in the mines of Potosi

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couIdn't haIt the inexorabIe economic
and poIiticaI decIine of Spain's empire.

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Why was that, when Pizarro seemed to have
struck it so incredibIy rich?

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The answer is that the Spaniards
had dug up so much siIver

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to finance their wars of conquest,

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that the metaI itseIf suffered
an extraordinary decIine in vaIue.

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More siIver coins
didn't make Spain richer.

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They simpIy made prices higher
as an increased quantity of money

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chased the same amount of goods.

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What the Spaniards didn't get

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was that money is onIy worth what
other peopIe wiII give in exchange for it.

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And, whether money
takes the form of silver coins,

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seashells, bars of gold or bank notes,

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that's been true from ancient times
right down to the present day.

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Even lumps of clay
can work better than silver coins,

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if people have enough confidence in them.

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In Ancient Mesopotamia,
nearIy 4,000 years ago,

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peopIe used cIay tabIets Iike these ones

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to commit themseIves to particuIar
financiaI transactions.

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For exampIe, this one,
found a IittIe south-west of Baghdad,

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specifies that a debtor wiII repay
a Iender 330 measures of grain

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on the harvest day.
But this one's even more fascinating,

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because what is says is that
a debt of four measures of barIey

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shouId be repaid
to the bearer of the cIay tabIet

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and it's that idea of repayment
to the bearer that reaIIy fascinates me.

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lf the phrase sounds familiar,
then it should.

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Just take a look at a £20 note.

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Bank notes have next
to no intrinsic worth.

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They're simply promises to pay,

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just like the clay tablets of
ancient Babylon four millennia ago.

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On the back of the $1 0 bill
it says, ''ln God We Trust''.

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But it's not really God
you're trusting in.

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By swapping your goods or your Iabour
for a fistfuI of these things,

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you're trusting the US Treasury Secretary
not to repeat Spain's mistake

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and produce so many of the damn things
that by the time you come to spend them,

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they're worth even Iess
than the paper they're printed on.

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Today we're quite happy with paper money.

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Even more amazingly, we're happy
with money we can't even see.

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Millions of dollars pass through
this woman's hands every day...

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..or rather, across her computer screen.

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She's a foreign exchange dealer,

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whose business is literally
buying and selling money.

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Each day around $3 trillion changes hands

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in transactions like these
around the world.

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And it's all built on trust. lt has to be
when you can't even touch the stuff.

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That's what the Conquistadores got wrong.

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They failed to see that money
is about trust - even faith.

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Trust in the person paying you the money,

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trust in the centraI bank
issuing the money,

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trust in the commerciaI bank
that honours the cheque.

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Money isn't metaI. It's trust inscribed.

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And it doesn't much matter what
it's inscribed on - paper, siIver, cIay,

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or a screen -
provided the recipient beIieves in it.

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There was one huge possibility created

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by the emergence of money
as a system of mutual trust -

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a possibility that would
revolutionise world history.

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lt was the idea that you could rely on
people to borrow money from you

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and pay it back at some future date.

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That's why the root of ''credit''
is ''credo'', the Latin for ''I beIieve''.

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Without the invention of credit,

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the entire economic history of our world
would have been impossible.

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Because we take it for granted,

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we tend to underestimate the extent to
which our entire civiIisation is based on

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the borrowing and Iending of money. No, it
doesn't IiteraIIy make the worId go round.

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But it does makes vast quantities
of peopIe, goods and services

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go around the worId
from BabyIon to BoIivia.

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The puzzle is that the early moneylenders
got so little thanks for their services.

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On the contrary,
they were widely reviled as pariahs.

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Why was that?

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Welcome to Northern ltaly
in the year 1 200AD.

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A land divided into multiple
feuding city states.

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A land where trust
was in rather short supply.

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Among the many remnants of the defunct
Roman Empire was a numerical system

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singularly ill-suited to complex
mathematical calculation,

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let alone the needs of commerce.

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Nowhere was this more of a handicap
than in Pisa,

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where merchants struggled to do business

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with seven different forms of coinage
in circulation.

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Even the simplest transaction could be a
headache, requiring the use of an abacus.

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By comparison, economic life
in the Eastern world -

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in the Muslim caliphate or the Sung
Chinese Empire - was far more advanced.

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To discover modern finance,
backward Europe needed to import it.

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Enter a young mathematician called
Leonardo of Pisa or Fibonacci.

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The son of a Pisan customs official
based in what is now Algeria,

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Fibonacci is best remembered today

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for his sequence of numbers
that mimic the properties of nature.

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But the famous sequence was onIy one
of many Eastern mathematicaI ideas

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that Fibonacci introduced to Europe with
his path-breaking book the Liber Abaci -

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The Book of Calculation.

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Even more important was his demonstration
of the superiority of Arabic numerals

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over Roman numerals.

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And crucially, nearly all Fibonacci's
examples related to business.

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Since Roman times,

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Europeans had been struggling to do
simple arithmetic with these...

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The Hindu or Arabic numerals
made all kinds of calculation easier.

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ln particular, Fibonacci showed how
the new methods of calculation

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could be applied to commercial
bookkeeping, to currency conversions

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and, crucially,
to the computation of interest.

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Just imagine trying to work out
percentages in Roman numerals.

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Fibonacci's Liber Abaci
made it child's play.

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This was to be the appIication
of mathematics to making money.

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The most fertile soil
for such financial seeds

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proved to be the ltalian city states.

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Fibonacci's home town of Pisa was one.

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But it was above all Venice -

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more exposed than any of the others
to Oriental influences -

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that became the great money-lending
laboratory...

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..and the home of literature's
most notorious moneylender -

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Shylock, in William Shakespeare's
The Merchant of Venice.

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00:16:43,040 --> 00:16:46,794
May you stead me? WiII you pIeasure me?

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ShaII I know your answer?

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CruciaIIy, ShyIock's onIy prepared to Iend
the money if Bassanio's friend,

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the merchant Antonio,
is providing the security.

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Three thousand ducats for three months
and Antonio bound.

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Your answer to that.

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Antonio is a good man.

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By ''good'', ShyIock doesn't mean virtuous,

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he means ''good'' for the money
he's about to Iend Bassanio.

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In other words, creditworthy.

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Have you heard any imputation
to the contrary?

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00:17:24,680 --> 00:17:29,231
Oh, no, no, no, no. My reason
in saying that he's a good man

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is to have you understand me
that he is sufficient.

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(ShyIock) Three thousand ducats.
I think I may take his bond.

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With any loan, things can go wrong.

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Ships can sink. And that is precisely why
anyone who lends money to a merchant -

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if only for the duration of an ocean
voyage - needs to be compensated.

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We usually call the compensation
''interest'' -

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the amount paid to the lender over
and above the sum lent or ''principal''.

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00:18:09,520 --> 00:18:11,875
Overseas trade of the sort
that Venice depended on

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couldn't operate
without such transactions.

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And they remain the foundation
of international trade to this day.

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00:18:28,440 --> 00:18:31,955
But why does Shylock
turn out to be such a villain,

225
00:18:32,040 --> 00:18:36,989
demanding literally ''a pound of flesh'' -
in effect Antonio's death -

226
00:18:37,080 --> 00:18:43,474
if he can't fulfil his obligations? Why is
Shakespeare's moneylender so heartless -

227
00:18:43,560 --> 00:18:46,472
the original
of that bloodsucking financier

228
00:18:46,560 --> 00:18:50,075
who recurs time and again
in Western literature?

229
00:18:56,720 --> 00:19:02,033
One clue is that Shylock is one of the
many Jewish moneylenders in history.

230
00:19:02,120 --> 00:19:05,430
Jews who stayed in Venice
for more than two weeks

231
00:19:05,520 --> 00:19:10,594
were supposed to wear a yellow ''O''
on their backs or a yellow hat.

232
00:19:10,680 --> 00:19:14,958
And they were confined to a special area
which became known as the Ghetto Nuovo.

233
00:19:18,120 --> 00:19:22,716
This is the entrance to the Jewish ghetto
in Venice where Jews were obIiged to Iive

234
00:19:22,800 --> 00:19:27,828
and indeed confined at night. Jews were
toIerated in Venice, but for a reason.

235
00:19:30,400 --> 00:19:34,916
The key was that Jews could provide
a service that Christian merchants

236
00:19:35,000 --> 00:19:39,357
were forbidden to do - they could charge
interest on their loans.

237
00:19:39,440 --> 00:19:42,876
Fibonacci might have figured out
the mathematics of lending,

238
00:19:42,960 --> 00:19:46,794
but it took Shylock to do the deal.

239
00:19:49,400 --> 00:19:52,358
This is where the Venetian Jews
used to do business.

240
00:19:52,440 --> 00:19:54,556
This buiIding here was the oId Banco Rosso

241
00:19:54,640 --> 00:19:59,395
and it was outside here that they used to
sit behind their tabIes - their tavoIe -

242
00:19:59,480 --> 00:20:04,918
on their benches - their banchi,
the root of the ItaIian word for banks.

243
00:20:05,000 --> 00:20:09,073
Now, there was good reason why merchants
came here to the Jewish ghetto

244
00:20:09,160 --> 00:20:12,550
to borrow money. For Christians,
what the Jews were doing,

245
00:20:12,640 --> 00:20:15,757
Iending money at interest, was a sin.

246
00:20:21,000 --> 00:20:25,551
The medieval Church's laws against usury -
charging interest on loans -

247
00:20:25,640 --> 00:20:29,599
were a major obstacle to the development
of finance in Europe.

248
00:20:29,680 --> 00:20:33,229
After all, what God-fearing
Christian merchant

249
00:20:33,320 --> 00:20:35,754
wished to risk the torments of Hell?

250
00:20:35,840 --> 00:20:39,469
This astonishing vision
of eternaI damnation

251
00:20:39,560 --> 00:20:42,791
was painted by Giorgio Vasari
and Federico Zuccari

252
00:20:42,880 --> 00:20:46,998
on the inside of the great dome
of FIorence's CathedraI, the Duomo.

253
00:20:47,080 --> 00:20:52,313
And beIow there's another fresco
by Domenico di MicheIino

254
00:20:52,400 --> 00:20:55,790
of FIorence's greatest poet,
Dante AIighieri,

255
00:20:55,880 --> 00:20:58,474
hoIding his masterwork,
the Divine Comedy.

256
00:20:58,560 --> 00:21:02,599
According to Dante, there was a speciaI
part of the seventh circIe of HeII

257
00:21:02,680 --> 00:21:07,276
that was excIusiveIy set aside
for usurers.

258
00:21:15,520 --> 00:21:20,799
There the moneylenders were eternally
tortured with scorching earth

259
00:21:20,880 --> 00:21:25,192
and freezing snow, their necks
weighed down with bulging purses.

260
00:21:27,760 --> 00:21:30,832
Jews, too, weren't supposed
to Iend at interest.

261
00:21:30,920 --> 00:21:32,638
But there was a convenient
get-out cIause

262
00:21:32,720 --> 00:21:36,918
in the OId Testament book of Deuteronomy,
chapter 23,

263
00:21:37,000 --> 00:21:41,437
you weren't supposed to Iend to your
brother at interest, but to a stranger?

264
00:21:41,520 --> 00:21:46,036
WeII, that was a different matter. In
other words, a Jew couIdn't Iend to a Jew,

265
00:21:46,120 --> 00:21:48,554
but he couId Iend to a Christian.

266
00:21:51,920 --> 00:21:56,948
The price the Jews paid for performing
this service was social exclusion.

267
00:21:57,040 --> 00:21:59,554
Hence the ghetto.

268
00:21:59,640 --> 00:22:04,953
And hence the centuries-long association
between Jews and finance,

269
00:22:05,040 --> 00:22:10,239
one of the few forms of economic activity
from which Jews were not once excluded.

270
00:22:13,240 --> 00:22:16,198
ln the end, of course,
Shylock is thwarted.

271
00:22:16,280 --> 00:22:20,273
For although the court recognises
his right to a pound of flesh,

272
00:22:20,360 --> 00:22:23,909
the law also prohibits him
from shedding Antonio's blood.

273
00:22:24,000 --> 00:22:28,835
And, because he's a Jew, the law also
requires the loss of his goods and life

274
00:22:28,920 --> 00:22:31,434
for so much as plotting
the death of a Christian.

275
00:22:31,520 --> 00:22:34,830
He only escapes
by submitting to baptism.

276
00:22:36,200 --> 00:22:39,875
lt turns out to be a risky business
to be a moneylender.

277
00:22:41,800 --> 00:22:44,997
The Merchant of Venice
raises profound questions

278
00:22:45,080 --> 00:22:47,514
about both economics and anti-Semitism.

279
00:22:47,600 --> 00:22:50,956
Why don't debtors
aIways defauIt on their debts -

280
00:22:51,040 --> 00:22:54,191
especiaIIy when the creditors
beIong to unpopuIar ethnic minorities?

281
00:22:54,280 --> 00:22:58,398
Why don't the ShyIocks aIways Iose out?

282
00:23:03,920 --> 00:23:07,435
To get a better idea of how
primitive moneyIending works,

283
00:23:07,520 --> 00:23:09,829
you don't need to
traveI back in time.

284
00:23:09,920 --> 00:23:14,072
There are pIenty of modern-day ShyIocks
remarkabIy cIose to home.

285
00:23:14,160 --> 00:23:19,075
And they don't need to be Jewish
to suffer a simiIar fate to ShyIock.

286
00:23:35,920 --> 00:23:39,515
This is ShettIeston
in the East End of GIasgow.

287
00:23:39,600 --> 00:23:42,239
It's actuaIIy where my grandmother
used to Iive.

288
00:23:42,320 --> 00:23:45,630
And I think with its distinctive
steeI shuttering,

289
00:23:45,720 --> 00:23:48,996
it's one of the grimmest pIaces
in the whoIe of Western Europe.

290
00:23:49,080 --> 00:23:52,959
In fact, average maIe Iife expectancy
here is just 64,

291
00:23:53,040 --> 00:23:55,110
which is sIightIy worse than BangIadesh.

292
00:23:55,200 --> 00:23:59,193
That means that the average ShettIestonian
doesn't actuaIIy Iive Iong enough

293
00:23:59,280 --> 00:24:00,952
to coIIect his state pension.

294
00:24:01,040 --> 00:24:03,349
You might think nobody wouId be mad enough

295
00:24:03,440 --> 00:24:07,752
to try and provide financiaI services
here. But someone does.

296
00:24:14,880 --> 00:24:17,075
That someone is a loan shark.

297
00:24:17,160 --> 00:24:21,278
You give him your benefit card as security
and he gives you a loan.

298
00:24:21,360 --> 00:24:24,875
On the day your benefit arrives,
he gives you back the card

299
00:24:24,960 --> 00:24:27,076
and you go to the post office
to get your money,

300
00:24:27,160 --> 00:24:32,553
repaying him the interest. lt's a modern
version of Shylock's business model.

301
00:24:32,640 --> 00:24:37,236
Usury is alive and well
and living in Scotland.

302
00:24:38,600 --> 00:24:41,876
These are some pages from the Ioan book
of a GIasgow Ioan shark.

303
00:24:41,960 --> 00:24:44,713
And it's kind of interesting to see how
the business modeI works.

304
00:24:44,800 --> 00:24:46,995
You Iend out maybe £10 to someone

305
00:24:47,080 --> 00:24:51,153
and you expect to be paid back £12.50
at the end of the week.

306
00:24:51,240 --> 00:24:56,314
Now that's 25% a week,
but if you work that out at an annuaI rate

307
00:24:56,400 --> 00:24:59,358
it comes to 1 1 miIIion per cent.

308
00:25:06,400 --> 00:25:10,791
So why do people scraping by
on just £5.90 a day

309
00:25:10,880 --> 00:25:13,553
pay such horrendous interest on loans?

310
00:25:13,640 --> 00:25:18,873
These, surely, are loans
you'd be mad not to default on.

311
00:25:18,960 --> 00:25:23,829
But here in Glasgow, defaulting on
your loan is highly inadvisable.

312
00:25:23,920 --> 00:25:27,435
You won't literally lose a pound of flesh,

313
00:25:27,520 --> 00:25:31,149
but grievous bodily harm
isn't an unknown consequence

314
00:25:31,240 --> 00:25:34,152
of letting down the loan shark.

315
00:25:35,280 --> 00:25:40,434
Quite simply, individual loan sharks
have to be rapacious and ruthless

316
00:25:40,520 --> 00:25:46,072
because the costs to them
of even a single defaulter are so high.

317
00:25:48,240 --> 00:25:52,916
And that explains why,
from Renaissance ltaly to modern Scotland,

318
00:25:53,000 --> 00:25:56,276
the moneylender
is so often a hated figure.

319
00:25:56,360 --> 00:26:01,275
He's providing a service,
but at a socially unacceptable price.

320
00:26:05,280 --> 00:26:08,511
So how did Ienders Iearn to overcome
this fundamentaI probIem?

321
00:26:08,600 --> 00:26:11,672
If they were too generous,
they didn't make any money,

322
00:26:11,760 --> 00:26:15,435
but if they were too hard-nosed,
borrowers wouId eventuaIIy defauIt.

323
00:26:15,520 --> 00:26:22,198
The answer was to get bigger and more
powerfuI. It was time to invent banks.

324
00:26:27,600 --> 00:26:32,833
ln 1 5th century ltaly, the key financial
service of providing credit

325
00:26:32,920 --> 00:26:37,835
moved out of the ghetto to become
the legitimate preserve of banks.

326
00:26:37,920 --> 00:26:44,359
This transition was symbolised
by the rise of one family - the Medici.

327
00:26:47,480 --> 00:26:51,951
With their ascent, credit came of age.

328
00:26:52,040 --> 00:26:54,508
Moneylending ceased to be disreputable.

329
00:26:54,600 --> 00:26:58,798
lt became glorious - and the foundation
of a new kind of power.

330
00:27:02,680 --> 00:27:05,478
The dazzling legacy
of the Medici family's power

331
00:27:05,560 --> 00:27:07,551
still surrounds you in Florence today.

332
00:27:10,200 --> 00:27:14,432
In the space of 400 years,
two Medici became Queens of France,

333
00:27:14,520 --> 00:27:15,714
three became Pope.

334
00:27:16,840 --> 00:27:21,231
AppropriateIy, it was MachiaveIIi,
the supreme theorist of power,

335
00:27:21,320 --> 00:27:23,072
who wrote their history.

336
00:27:25,720 --> 00:27:29,110
Perhaps no other family
left such an imprint on an age

337
00:27:29,200 --> 00:27:31,714
as the Medici left on the Renaissance.

338
00:27:31,800 --> 00:27:35,076
You might even say that they paid
for the Renaissance,

339
00:27:35,160 --> 00:27:40,393
their patronage running the gamut of
genius from Michelangelo to Galileo.

340
00:27:47,160 --> 00:27:51,836
And this, in the Uffizi GaIIery,
is the Medici's private art coIIection,

341
00:27:51,920 --> 00:27:54,514
one of the most spectacuIar
ever assembIed.

342
00:28:02,600 --> 00:28:07,390
What the millions of tourists
who flock here generally forget to ask

343
00:28:07,480 --> 00:28:10,358
is how the Medici paid for all this.

344
00:28:11,640 --> 00:28:15,076
The simpIe answer is that they were
foreign exchange deaIers,

345
00:28:15,160 --> 00:28:20,280
members of the Arte de Cambio - the
money changers' guiId - who made it big.

346
00:28:20,360 --> 00:28:25,036
They were known as banchieri or tavoIieri
because, Iike the Jews of Venice,

347
00:28:25,120 --> 00:28:29,238
they IiteraIIy did their business
sitting on benches behind tabIes.

348
00:28:29,320 --> 00:28:32,312
Indeed, the originaI Medici bank -
or bench -

349
00:28:32,400 --> 00:28:36,712
was Iocated right here in the Via
deII'Arte deIIa Lana - WooI GuiId Street.

350
00:28:45,440 --> 00:28:50,798
Prior to the 1 390s, the Medici were
Florence's answer to the Sopranos -

351
00:28:50,880 --> 00:28:56,557
a small-time clan notable more
for low violence than for high finance.

352
00:28:58,880 --> 00:29:03,078
ln a 1 7-year period, no fewer than
five Medici were sentenced to death

353
00:29:03,160 --> 00:29:06,118
by the criminal courts for capital crimes.

354
00:29:09,440 --> 00:29:12,671
Then came Giovanni di Bicci de' Medici.

355
00:29:12,760 --> 00:29:16,548
lt was his aim to make the Medici
totally legitimate.

356
00:29:16,640 --> 00:29:21,953
Part of the secret of his success was
an ingenious bit of creative accounting

357
00:29:22,040 --> 00:29:26,158
that got the Medici off the hook
of the anti-usury laws.

358
00:29:31,240 --> 00:29:34,391
These Iedgers of the Medici bank
make it cIear

359
00:29:34,480 --> 00:29:38,519
how important commerciaI biIIs for
financing foreign trade were to the bank.

360
00:29:38,600 --> 00:29:42,798
True, the Church prohibited
the coIIection of interest on Ioans.

361
00:29:42,880 --> 00:29:45,030
But there was nothing to prevent
a shrewd trader

362
00:29:45,120 --> 00:29:49,113
from making money on transactions Iike
these, which invoIved muItipIe currencies.

363
00:29:52,520 --> 00:29:55,034
There was no interest,
and therefore no sin,

364
00:29:55,120 --> 00:29:59,989
simply a commission deducted for the
conversion of one currency into another.

365
00:30:04,680 --> 00:30:08,593
lf money was advanced to a particular
trader for any length of time,

366
00:30:08,680 --> 00:30:11,114
the commission was that bit larger.

367
00:30:15,600 --> 00:30:19,798
ln the same way, depositors
who put their money in the Medici bank

368
00:30:19,880 --> 00:30:24,032
were given 'discrezione' to compensate
them for risking their money.

369
00:30:24,120 --> 00:30:26,315
This was credit, in other words,

370
00:30:26,400 --> 00:30:30,075
but with the interest payments
discreetly concealed.

371
00:30:30,160 --> 00:30:35,871
Now, for the first time,
moneylending had evolved into banking.

372
00:30:41,320 --> 00:30:44,596
The reaI story of the success
of the Medici bank

373
00:30:44,680 --> 00:30:48,275
can be found here in the Libro Segreto -
the Secret Book -

374
00:30:48,360 --> 00:30:54,117
of Giovanni di Bicci de' Medici. The key
was not so much size as diversification.

375
00:30:54,200 --> 00:30:57,192
EarIier ItaIian banks had been monoIithic

376
00:30:57,280 --> 00:31:00,590
and very vuInerabIe to defauIt
by a singIe bad borrower.

377
00:31:00,680 --> 00:31:05,071
But the Medici bank was made up
of muItipIe interIocking partnerships,

378
00:31:05,160 --> 00:31:07,720
each in some measure independent
of the rest.

379
00:31:07,800 --> 00:31:12,351
It was this decentraIisation that was
the key to their astonishing profits.

380
00:31:15,840 --> 00:31:17,478
Under Giovanni's guidance,

381
00:31:17,560 --> 00:31:23,317
the Medici banking network extended
from Florence, to Venice, to Rome.

382
00:31:23,400 --> 00:31:27,188
The scale and diversity
of the Medici's operations

383
00:31:27,280 --> 00:31:30,078
was the key to reducing the risks
of moneylending,

384
00:31:30,160 --> 00:31:33,197
and therefore also the costs to borrowers.

385
00:31:33,280 --> 00:31:37,717
That's the essential difference
between loan sharks and banks -

386
00:31:37,800 --> 00:31:40,473
between Shylock and the Medici.

387
00:31:44,080 --> 00:31:45,991
And here's the proof that it worked.

388
00:31:46,080 --> 00:31:52,155
Page after page of Giovanni's assets,
decIared for tax purposes

389
00:31:52,240 --> 00:31:59,032
and cuIminating in the grand totaI
of 91 ,089 fIorins. In those days

390
00:31:59,120 --> 00:32:01,680
that was serious money.

391
00:32:06,200 --> 00:32:08,156
When Giovanni died in 1 429,

392
00:32:08,240 --> 00:32:11,994
his last words were an exhortation
to his heirs

393
00:32:12,080 --> 00:32:15,436
to maintain his standards
of financial acumen.

394
00:32:15,520 --> 00:32:19,513
His funeral was attended by 26 men
of the name Medici,

395
00:32:19,600 --> 00:32:24,355
all paying homage to the man who had made
the business of banking respectable -

396
00:32:24,440 --> 00:32:27,910
and profitable -
as it had never been before.

397
00:32:32,000 --> 00:32:36,312
For his son Cosimo, the accumulation
of wealth combined seamlessly

398
00:32:36,400 --> 00:32:38,516
with the accumulation of power.

399
00:32:38,600 --> 00:32:41,160
Within 20 years of his father's death,

400
00:32:41,240 --> 00:32:44,550
Cosimo de' Medici
was the Florentine State.

401
00:32:47,200 --> 00:32:52,149
As the Pope himself put it - ''Political
questions are settled at his house.

402
00:32:52,240 --> 00:32:54,629
''The man he chooses holds office.

403
00:32:54,720 --> 00:32:58,918
''He it is who decides peace and war
and controls the laws.

404
00:32:59,000 --> 00:33:02,515
''He is King in everything but name. ''

405
00:33:04,600 --> 00:33:08,434
This BotticeIIi is mainIy famous
for the beauty of its young subject.

406
00:33:08,520 --> 00:33:13,435
But it's actuaIIy intended as a tribute
to a dead banker, Cosimo de' Medici.

407
00:33:13,520 --> 00:33:15,238
That's him there on the medaIIion,

408
00:33:15,320 --> 00:33:18,312
and you can just make out the inscription
Pater Patriae -

409
00:33:18,400 --> 00:33:20,595
the father of his country.

410
00:33:26,360 --> 00:33:32,469
ln 1 50 years, the Medici had transformed
themselves from backstreet moneylenders

411
00:33:32,560 --> 00:33:35,438
to the most powerful financial force
in Europe.

412
00:33:40,000 --> 00:33:45,518
But it's this painting,
BotticeIIi's Adorazione dei Magi,

413
00:33:45,600 --> 00:33:49,832
which more than any other captures
the transfiguration of finance

414
00:33:49,920 --> 00:33:51,831
the Medici had achieved.

415
00:33:51,920 --> 00:33:56,152
On cIose inspection, the three wise men
are Cosimo de' Medici,

416
00:33:56,240 --> 00:34:01,030
washing the feet of Christ,
and his sons Piero and Giovanni.

417
00:34:01,120 --> 00:34:03,793
The young man on the Ieft is Lorenzo.

418
00:34:03,880 --> 00:34:06,952
The painting had been commissioned
by the head of the Bankers' GuiId

419
00:34:07,040 --> 00:34:09,110
as a tribute to the famiIy.

420
00:34:09,200 --> 00:34:12,909
Perhaps it shouId reaIIy have been caIIed
The Adoration of the Medici.

421
00:34:13,000 --> 00:34:18,597
Having once been damned,
bankers were now cIose to divinity.

422
00:34:20,600 --> 00:34:24,559
Nothing could better illustrate
the extraordinary ascent of money.

423
00:34:24,640 --> 00:34:27,234
For what the Medici had achieved

424
00:34:27,320 --> 00:34:30,756
was nothing less than
the birth of modern banking.

425
00:34:31,880 --> 00:34:33,313
Others had tried before,

426
00:34:33,400 --> 00:34:37,916
but the Medici were the first bankers
to hit the poIiticaI big time.

427
00:34:38,000 --> 00:34:40,798
And they did it
by Iearning one cruciaI Iesson -

428
00:34:40,880 --> 00:34:44,236
in finance, smaII is seIdom beautifuI.

429
00:34:44,320 --> 00:34:48,199
By making their bank bigger
and more diversified,

430
00:34:48,280 --> 00:34:51,556
the Medici had found a way
of spreading their risks.

431
00:34:51,640 --> 00:34:54,916
And by focusing on currency trading
rather than just Iending,

432
00:34:55,000 --> 00:34:58,675
they'd reduced their exposure
to defauIts by borrowers.

433
00:34:58,760 --> 00:35:04,118
For Cosimo and his famiIy,
it was a truIy beautifuI business modeI.

434
00:35:06,840 --> 00:35:09,991
Yet not even the Medici
were invulnerable.

435
00:35:10,080 --> 00:35:12,913
The bank suffered heavy losses

436
00:35:13,000 --> 00:35:16,436
as a result of over-generous loans
to blue-blooded debtors

437
00:35:16,520 --> 00:35:20,274
who felt no compunction
about defaulting on their obligations

438
00:35:20,360 --> 00:35:23,079
and telling the bankers to get lost.

439
00:35:26,960 --> 00:35:30,873
Bad debts - money owed by borrowers
who go bust -

440
00:35:30,960 --> 00:35:33,428
are the perennial problem
that any bank confronts.

441
00:35:35,840 --> 00:35:41,597
Yet for a time, it seemed as if modern
bankers had solved this age-old problem.

442
00:35:41,680 --> 00:35:46,356
They really thought
they were smarter than the Medici.

443
00:35:54,200 --> 00:35:57,670
Memphis, Tennessee
is a long way from Florence.

444
00:35:57,760 --> 00:36:03,278
And the world economy has come a long way
since the Renaissance.

445
00:36:03,360 --> 00:36:06,113
A crucial part in that transformation

446
00:36:06,200 --> 00:36:10,637
has been played by the spread of
modern banking from its ltalian birthplace

447
00:36:10,720 --> 00:36:15,475
to a country where money has increasingly
taken the form of easy credit.

448
00:36:16,600 --> 00:36:20,149
The United States
has been built on borrowed money.

449
00:36:23,000 --> 00:36:26,834
But whereas the Medici tended to lend
only to the relatively well off,

450
00:36:26,920 --> 00:36:31,198
until the present credit crunch at least,
American banks seemed willing to give

451
00:36:31,280 --> 00:36:32,793
just about anyone a loan.

452
00:36:34,920 --> 00:36:41,712
Memphis is famous for blue suede shoes,
barbecued ribs and bankruptcies.

453
00:36:42,840 --> 00:36:48,312
You can tell people here are a little...
How shall l say it? ..a little sub-prime.

454
00:36:48,400 --> 00:36:53,110
You onIy need to Iook at the shopping maII
for the seriousIy poor.

455
00:36:53,200 --> 00:36:56,431
And the ubiquitous no-friIIs eatery.

456
00:36:56,520 --> 00:37:02,356
Then there's a tax advisor who can teII
you how to cIaim your Iow-income credits.

457
00:37:05,320 --> 00:37:09,996
A shop where you can borrow money
on the equity you own in your car.

458
00:37:10,080 --> 00:37:15,154
And a pIace where they'II give you
an advance on next week's pay cheque...

459
00:37:17,280 --> 00:37:21,034
..not to mention a pawn shop
the size of a department store.

460
00:37:24,040 --> 00:37:27,715
And finaIIy, when you've no possessions
Ieft to pawn or to seII,

461
00:37:27,800 --> 00:37:29,870
there's just one option Ieft.

462
00:37:29,960 --> 00:37:32,872
And that's to head on down to ZLB PIasma

463
00:37:32,960 --> 00:37:36,794
where you can seII your own bIood
for $25 doIIars a pop.

464
00:37:36,880 --> 00:37:39,633
TaIk about being ''bIed dry''.
It's amazing reaIIy -

465
00:37:39,720 --> 00:37:43,918
an entire economic sector
based on peopIe who are broke.

466
00:37:50,800 --> 00:37:54,190
ln some ways, it rather reminds me
of the East End of Glasgow.

467
00:37:54,280 --> 00:37:57,955
Yet there's a world of difference
between this world

468
00:37:58,040 --> 00:38:01,749
and the world where loan sharks extract
their pounds of flesh

469
00:38:01,840 --> 00:38:03,558
from petty defaulters.

470
00:38:05,400 --> 00:38:09,598
Here in sub-prime America,
defaulting on your debts is easy.

471
00:38:09,680 --> 00:38:11,477
Well, pretty easy.

472
00:38:19,600 --> 00:38:23,798
This is Richie.
He's in the repo business -

473
00:38:23,880 --> 00:38:26,838
snatching cars
from under their owners' noses

474
00:38:26,920 --> 00:38:28,797
when they haven't made their payments.

475
00:38:28,880 --> 00:38:35,433
He grabbed that boIt action, he went
''chh'' and I watched the rifIe sheII

476
00:38:35,520 --> 00:38:42,358
go in the barreI and he Iunged it
towards me and hit me right here

477
00:38:42,440 --> 00:38:44,749
and aImost knocked me down.

478
00:38:44,840 --> 00:38:48,355
He said, ''Either you drop the truck
or I'm dropping you.''

479
00:38:48,440 --> 00:38:51,273
And I said, ''Yes, sir,''
and I dropped the truck.

480
00:38:51,360 --> 00:38:56,639
You know, you make it sound so attractive,
maybe I... I shouId switch jobs!

481
00:38:56,720 --> 00:38:59,598
I teII you what, it's interesting.

482
00:39:03,640 --> 00:39:09,033
ln the bankruptcy capital of America,
repossessing cars is a routine matter.

483
00:39:14,000 --> 00:39:16,673
BUZZ OF AUCTION ROOM

484
00:39:25,840 --> 00:39:28,957
$16,000...

485
00:39:29,040 --> 00:39:31,429
It's got the Ieather, the top...

486
00:39:31,520 --> 00:39:36,640
Each week, United Auto Recoveries
sells 500 repossessed cars.

487
00:39:36,720 --> 00:39:41,316
The cars are auctioned off to the trade,
ending up in the same car lots,

488
00:39:41,400 --> 00:39:43,391
to be sold to much the same people

489
00:39:43,480 --> 00:39:45,948
and, when they can't keep up
with their monthly payments,

490
00:39:46,040 --> 00:39:49,350
repo'd and recycled once again.

491
00:39:50,480 --> 00:39:55,156
TechnicaIIy the Memphis repo men
are simpIy doing what debt coIIectors do

492
00:39:55,240 --> 00:39:56,389
the worId over.

493
00:39:56,480 --> 00:40:00,075
The difference, apart from the sheer
mind-boggIing scaIe of the thing,

494
00:40:00,160 --> 00:40:03,232
is the reIative ease
with which the bad debts are wound up

495
00:40:03,320 --> 00:40:06,118
and the coIIateraI is soId off.
For the debtors,

496
00:40:06,200 --> 00:40:10,352
there's virtuaIIy no sociaI stigma
and nobody seems to be getting hurt.

497
00:40:10,440 --> 00:40:14,797
The big mystery is why the worId's
most successfuI capitaIist economy

498
00:40:14,880 --> 00:40:19,078
is based on a foundation of more or Iess
painIess economic faiIure.

499
00:40:25,880 --> 00:40:29,714
Here in Tennessee,
when the house has been stripped bare

500
00:40:29,800 --> 00:40:31,870
and the repo man has taken your car,

501
00:40:31,960 --> 00:40:35,748
you end up in the hands of one
of Memphis's bankruptcy lawyers,

502
00:40:35,840 --> 00:40:37,956
along with around 1 3,000 other people

503
00:40:38,040 --> 00:40:40,759
who filed for bankruptcy here
in the past year.

504
00:40:40,840 --> 00:40:46,278
Of course that's one thing that's making
you... Bumping your payments up so high.

505
00:40:46,360 --> 00:40:50,353
Every week, bankrupts gather
here with their lawyers

506
00:40:50,440 --> 00:40:54,319
to hammer out deals with their creditors.
There's even a fast track lane.

507
00:41:00,200 --> 00:41:07,515
In this case it's a mortgage
and it's a car, or two cars.

508
00:41:07,600 --> 00:41:11,718
I can't see anything eIse in there
that they're...they're having to pay off.

509
00:41:11,800 --> 00:41:15,588
- ActuaIIy there are three cars.
- Three cars?

510
00:41:15,680 --> 00:41:19,434
The third car is...
the neighbourhood titIe Ioans,

511
00:41:19,520 --> 00:41:23,877
has a... has a Iien on the car,
they are hoIding the titIe.

512
00:41:23,960 --> 00:41:26,474
(NiaII) So putting this reaIIy simpIy,

513
00:41:26,560 --> 00:41:30,553
what were they supposed to be paying
and what are they now paying?

514
00:41:30,640 --> 00:41:35,350
WeII, that payment was reduced
from 241 . 1 1 ...

515
00:41:35,440 --> 00:41:37,749
- down to 107.
- OK.

516
00:41:37,840 --> 00:41:38,909
Quite an improvement.

517
00:41:39,000 --> 00:41:40,069
Cutting their monthIy obIigations
by more than haIf.

518
00:41:49,480 --> 00:41:57,068
From 1 996 to 2006 there were between one
and two million bankruptcy cases a year

519
00:41:57,160 --> 00:42:00,516
in the United States,
nearly all of them involving individuals

520
00:42:00,600 --> 00:42:04,036
who elected to go bust
rather than meet their obligations.

521
00:42:07,120 --> 00:42:11,272
ln medieval ltaly - or in the Glasgow
of my youth, for that matter -

522
00:42:11,360 --> 00:42:15,114
bankruptcy was seen as a disaster.
But not here.

523
00:42:16,680 --> 00:42:21,800
In fact, this abiIity to waIk away
unscathed from unsustainabIe debt

524
00:42:21,880 --> 00:42:26,351
and start again has been a defining
characteristic of American capitaIism.

525
00:42:26,440 --> 00:42:29,796
There were no debtors' prisons here
in the earIy 1800s,

526
00:42:29,880 --> 00:42:35,477
at a time when EngIish debtors couId
Ianguish in jaiI for years. Since 1898,

527
00:42:35,560 --> 00:42:39,792
every American has been entitIed
to fiIe for Chapter 7 - Iiquidation,

528
00:42:39,880 --> 00:42:43,589
or Chapter 13 -
voIuntary personaI reorganisation.

529
00:42:43,680 --> 00:42:45,318
For rich and poor aIike,

530
00:42:45,400 --> 00:42:48,710
bankruptcy has become
as much of an inaIienabIe right

531
00:42:48,800 --> 00:42:52,156
as ''Iife, Iiberty
and the pursuit of happiness''.

532
00:42:56,040 --> 00:43:00,079
The theory is that American law exists
to encourage entrepreneurship -

533
00:43:00,160 --> 00:43:03,436
to facilitate
the creation of new businesses.

534
00:43:03,520 --> 00:43:08,514
And that means giving people a break
when things don't work out the first time,

535
00:43:08,600 --> 00:43:10,318
or even the second time.

536
00:43:10,400 --> 00:43:15,315
The born risk-takers don't get wiped out
as they learn through trial and error

537
00:43:15,400 --> 00:43:17,550
how to make that first million,

538
00:43:17,640 --> 00:43:22,270
because today's bankrupt
might be tomorrow's billionaire.

539
00:43:24,160 --> 00:43:26,116
lt's a theory that seems to work.

540
00:43:26,200 --> 00:43:30,432
Many of America's greatest successes
failed in their early endeavours,

541
00:43:30,520 --> 00:43:35,958
including the author Mark Twain,

542
00:43:36,040 --> 00:43:40,989
the comedian Buster Keaton,

543
00:43:41,080 --> 00:43:45,517
and none other than the great
industrialist Henry Ford himself.

544
00:43:48,080 --> 00:43:50,036
All of these men eventually flourished

545
00:43:50,120 --> 00:43:54,910
not least because they were given a chance
to try, fail and start over.

546
00:43:55,000 --> 00:43:57,992
For their part, the banks simply assume

547
00:43:58,080 --> 00:44:00,310
that a proportion of the loans
they make will go bad.

548
00:44:00,400 --> 00:44:05,633
After all, most people going bankrupt
owe relatively trivial sums.

549
00:44:05,720 --> 00:44:10,635
A Chapter 1 3 doesn't wipe their debts out,
it just reschedules them.

550
00:44:17,880 --> 00:44:21,589
So it's a mistake to think,
as Shakespeare's Antonio did,

551
00:44:21,680 --> 00:44:24,240
of moneylenders as mere leeches,

552
00:44:24,320 --> 00:44:27,312
sucking the life's blood
out of unfortunate debtors.

553
00:44:32,480 --> 00:44:36,234
Credit and debt are the building blocks
of economic development.

554
00:44:36,320 --> 00:44:38,993
But it takes banks to elevate
that relationship

555
00:44:39,080 --> 00:44:42,993
beyond the tie between
a loan shark and his hapless victim.

556
00:44:49,400 --> 00:44:53,279
It's onIy when borrowers Iike the ones
on this GIasgow housing estate

557
00:44:53,360 --> 00:44:55,669
have access to efficient credit markets

558
00:44:55,760 --> 00:44:59,594
that they can escape the cIutches
of the ShyIocks and the Ioan sharks.

559
00:44:59,680 --> 00:45:02,956
It's onIy when savers can put
their money in dependabIe banks

560
00:45:03,040 --> 00:45:06,430
that it can be channeIIed
from the idIe to the industrious.

561
00:45:09,360 --> 00:45:13,990
But wait, l hear you ask,
if banks are the answer,

562
00:45:14,080 --> 00:45:18,073
how could so many have collapsed
so spectacularly in the past year,

563
00:45:18,160 --> 00:45:21,038
throwing the financial world
into turmoil?

564
00:45:23,280 --> 00:45:26,636
To understand why bad debts
in places like Memphis

565
00:45:26,720 --> 00:45:29,154
could cause such chaos,
you need to understand

566
00:45:29,240 --> 00:45:32,949
how the relationship between
banks and borrowers broke down

567
00:45:33,040 --> 00:45:39,832
as loans came to be ''securitised''
and sold on to unwary investors.

568
00:45:44,280 --> 00:45:47,909
Once upon a time, being a banker
was reaIIy rather boring.

569
00:45:48,000 --> 00:45:51,072
You Iived by the 3-6-3 ruIe,

570
00:45:51,160 --> 00:45:55,711
which meant you paid 3% on deposits,
coIIected 6% on Ioans

571
00:45:55,800 --> 00:45:58,268
and were on the goIf course by 3 o'cIock.

572
00:45:58,360 --> 00:46:02,433
But in our time, banking became
reaIIy rather too interesting.

573
00:46:02,520 --> 00:46:05,034
A whoIe series of financiaI innovations

574
00:46:05,120 --> 00:46:07,873
made it possibIe for
common or garden Ioans

575
00:46:07,960 --> 00:46:10,076
to poor foIks in pIaces Iike Memphis

576
00:46:10,160 --> 00:46:13,277
to metamorphose
into weird and wonderfuI things

577
00:46:13,360 --> 00:46:16,477
with names Iike
''coIIateraIised debt obIigations''.

578
00:46:16,560 --> 00:46:20,439
WeII, this financiaI aIchemy -
turning Iead into goId

579
00:46:20,520 --> 00:46:23,273
or toxic waste
into giIt-edged securities -

580
00:46:23,360 --> 00:46:26,477
was onIy possibIe
because the ascent of banks

581
00:46:26,560 --> 00:46:29,632
was foIIowed by the ascent
of the second great piIIar

582
00:46:29,720 --> 00:46:33,315
of the modern financiaI system -
the bond market.

583
00:46:37,760 --> 00:46:43,915
And for an expIanation of how that came
about, we'II turn to Mr Bond himseIf.