1 00:00:02,400 --> 00:00:05,676 HELICOPTER ROTORS THRUM 2 00:00:05,760 --> 00:00:07,955 We may think power resides 3 00:00:08,040 --> 00:00:13,353 with presidents and prime ministers in palaces and parliaments. Not so. 4 00:00:13,440 --> 00:00:18,912 ln today's world, real power lies in the hands of an elite group of unassuming men 5 00:00:19,000 --> 00:00:21,195 in anonymous, open-plan offices... 6 00:00:23,160 --> 00:00:25,833 ..the men who control the world's bond market. 7 00:00:32,160 --> 00:00:34,310 Bill Gross is the boss of PlMCO, 8 00:00:34,400 --> 00:00:37,437 the world's biggest bond-trading operation, 9 00:00:37,520 --> 00:00:41,479 which manages a portfolio of bonds worth $7 00 billion. 10 00:00:41,560 --> 00:00:46,475 Gross is widely regarded as the king of the bond market. 11 00:00:46,560 --> 00:00:49,028 Just call him Mr Bond. 12 00:00:54,200 --> 00:00:57,192 Bonds are the magical link between the world of high finance 13 00:00:57,280 --> 00:00:59,236 and the worId of poIiticaI power. 14 00:00:59,320 --> 00:01:03,711 Governments wiII aIways spend more than they raise in taxation - 15 00:01:03,800 --> 00:01:05,358 sometimes shed-Ioads more - 16 00:01:05,440 --> 00:01:08,989 and they make up the difference by seIIing bonds that pay interest. 17 00:01:09,080 --> 00:01:11,958 But - and here's the magic - if you want to get rid of a bond, 18 00:01:12,040 --> 00:01:14,429 the government doesn't have to give you the cash back. 19 00:01:14,520 --> 00:01:16,431 You just take it to a bond market, 20 00:01:16,520 --> 00:01:19,637 Iike the one here at Tokyo Stock Exchange, and seII it. 21 00:01:21,840 --> 00:01:24,195 After the rise of banks, 22 00:01:24,280 --> 00:01:28,751 the birth of the bond market was the next big revolution in the history of finance. 23 00:01:28,840 --> 00:01:33,311 lt created a whole new way for governments to borrow money. 24 00:01:33,400 --> 00:01:35,550 The bond market funded the wars 25 00:01:35,640 --> 00:01:38,757 that plagued northern ltaly 600 years ago. 26 00:01:40,320 --> 00:01:42,072 GUNSHOT ECHOES 27 00:01:42,160 --> 00:01:43,957 lt dictated the outcome 28 00:01:44,040 --> 00:01:46,270 of the Battle of Waterloo 29 00:01:46,360 --> 00:01:49,750 and created the world's greatest financial dynasty. 30 00:01:51,120 --> 00:01:54,715 lt ensured the defeat of the South in the American Civil War. 31 00:01:54,800 --> 00:01:57,075 And in modern times, the bond market 32 00:01:57,160 --> 00:02:02,234 has brought once wealthy nations, like Argentina, crashing to their knees. 33 00:02:02,320 --> 00:02:06,711 Today, governments and companies use bonds to borrow 34 00:02:06,800 --> 00:02:09,234 on an unimaginably vast scale. 35 00:02:09,320 --> 00:02:11,276 All told, 36 00:02:11,360 --> 00:02:15,672 there are bonds out there worth around $85 trillion. 37 00:02:15,760 --> 00:02:19,799 The fortunes of most of us, whether we like it or not, 38 00:02:19,880 --> 00:02:22,030 are directly linked to the bond market. 39 00:02:24,040 --> 00:02:28,477 lf the bond market tanks, then down goes the value of our pensions - 40 00:02:28,560 --> 00:02:30,915 and that's a huge part of our wealth as individuals. 41 00:02:31,000 --> 00:02:35,437 ln the financial crisis that has gripped the world since the summer of 2007, 42 00:02:35,520 --> 00:02:39,991 US government bonds have been seen as a safe haven for investors seeking shelter 43 00:02:40,080 --> 00:02:43,755 from the storm of falling property and share prices. 44 00:02:43,840 --> 00:02:47,310 So if Bill Gross were to lose faith in those bonds, 45 00:02:47,400 --> 00:02:51,837 it would hit the financial world like... well, a thunderball. 46 00:02:51,920 --> 00:02:53,911 That's why this ''Mr Bond'' 47 00:02:54,000 --> 00:02:59,836 has become so much more powerful than the Mr Bond created by lan Fleming. 48 00:02:59,920 --> 00:03:04,789 And that's why both kinds of bond have a licence to kill. 49 00:03:10,040 --> 00:03:12,474 TRADERS SHOUT 50 00:03:23,480 --> 00:03:25,152 HORN BLARES 51 00:03:30,760 --> 00:03:34,070 ''War, '' declared the ancient Greek philosopher Heraclitus, 52 00:03:34,160 --> 00:03:36,515 ''is the father of all things. '' 53 00:03:37,680 --> 00:03:40,797 lt was certainly the father of the bond market. 54 00:03:43,800 --> 00:03:48,555 For much of the 1 4th and 1 5th centuries, the medieval city-states of Tuscany - 55 00:03:48,640 --> 00:03:53,919 Florence, Pisa and Siena - were at war with each other. 56 00:03:54,000 --> 00:03:58,755 This was war waged as much by money as by men. 57 00:04:02,400 --> 00:04:06,279 In Pieter van der Heyden's BattIe Of The Money-Bags And Strong-Boxes, 58 00:04:06,360 --> 00:04:10,558 piggy banks, treasure chests and barreIs fuII of coins 59 00:04:10,640 --> 00:04:14,553 Iay into one another with Iances and swords in a chaotic free-for-aII. 60 00:04:14,640 --> 00:04:17,359 The Dutch verses inscribed at the bottom read, 61 00:04:17,440 --> 00:04:20,830 ''It's aII for money and goods, this fighting and quarreIIing.'' 62 00:04:20,920 --> 00:04:23,070 But what they might just as easiIy have said 63 00:04:23,160 --> 00:04:27,551 is that war is impossibIe if you don't have the money to pay for it. 64 00:04:27,640 --> 00:04:30,108 BELL TOLLS 65 00:04:31,800 --> 00:04:33,552 And the way to do that - 66 00:04:33,640 --> 00:04:37,599 the ability to finance war through the bond market - 67 00:04:37,680 --> 00:04:41,434 was, like so much else, an invention of the ltalian Renaissance. 68 00:04:44,720 --> 00:04:49,475 Rather than require their own citizens to do the dirty work of fighting, 69 00:04:49,560 --> 00:04:53,758 each city hired military contractors - condottieri - 70 00:04:53,840 --> 00:04:57,879 who raised armies to annex land and loot treasure from the others. 71 00:04:59,640 --> 00:05:03,269 Among the condottieri of the 1 360s and 1 37 0s, 72 00:05:03,360 --> 00:05:07,194 one stood head and shoulders above the others. 73 00:05:09,840 --> 00:05:14,868 This is his portrait in Florence's Duomo - a thank-you from a grateful public. 74 00:05:17,280 --> 00:05:22,274 Unlikely though it may seem, this master mercenary was an Essex boy. 75 00:05:24,880 --> 00:05:26,950 So skilfully did he wage war 76 00:05:27,040 --> 00:05:30,669 that the ltalians called Sir John Hawkwood Giovanni Acuto - 77 00:05:30,760 --> 00:05:32,751 John the Acute. 78 00:05:35,280 --> 00:05:38,875 This castle was one of many pieces of prime real estate 79 00:05:38,960 --> 00:05:41,872 the Florentines gave him as a reward for his services. 80 00:05:46,120 --> 00:05:47,997 But Hawkwood was a mercenary 81 00:05:48,080 --> 00:05:51,595 who was willing to fight for anyone who'd pay him - 82 00:05:51,680 --> 00:05:54,877 Milan, Padua, Pisa or the Pope. 83 00:06:02,320 --> 00:06:05,437 These dazzIing frescoes in FIorence's PaIazzo Vecchio 84 00:06:05,520 --> 00:06:09,149 show the armies of Pisa and FIorence cIashing in 1364. 85 00:06:09,240 --> 00:06:12,550 At that time, Hawkwood was fighting on the side of Pisa. 86 00:06:12,640 --> 00:06:15,108 But 15 years Iater, he'd switched sides. 87 00:06:15,200 --> 00:06:18,909 Why? Because FIorence was where the money was. 88 00:06:21,400 --> 00:06:25,996 The cost of these incessant wars plunged ltaly's city-states into crisis. 89 00:06:27,280 --> 00:06:30,556 Expenditures, even in years of peace, were running 90 00:06:30,640 --> 00:06:33,234 at double or more tax revenues. 91 00:06:34,040 --> 00:06:39,353 To pay the likes of Sir John Hawkwood, Florence was drowning in deficits. 92 00:06:44,000 --> 00:06:47,993 This wonderfuI document in the FIorentine State Archive 93 00:06:48,080 --> 00:06:50,514 shows how the city's debt had expIoded 94 00:06:50,600 --> 00:06:54,559 from around 50,000 fIorins at the beginning of the 1 4th century 95 00:06:54,640 --> 00:06:57,359 to five miIIion by 1 427. 96 00:06:57,440 --> 00:07:02,195 It was quite IiteraIIy a mountain of debt, hence the name - the Monte Commune. 97 00:07:02,280 --> 00:07:08,469 But from whom couId the FIorentines possibIy have borrowed such a vast sum? 98 00:07:08,560 --> 00:07:11,233 The answer is right here - from themseIves. 99 00:07:15,160 --> 00:07:19,836 lt was a revolutionary idea that would change the world of money for ever. 100 00:07:19,920 --> 00:07:23,356 Rather than paying direct tax, citizens were now 101 00:07:23,440 --> 00:07:27,319 effectively obliged to lend money to their own government. 102 00:07:34,600 --> 00:07:39,355 ln return for these forced loans, they received interest. 103 00:07:42,760 --> 00:07:45,638 These debt instruments - simpIe Iines in a Iedger - 104 00:07:45,720 --> 00:07:47,756 were the originaI government bonds. 105 00:07:47,840 --> 00:07:51,196 And the wonderfuI thing about them was that if you needed your money in a hurry, 106 00:07:51,280 --> 00:07:53,748 you couId seII your bonds to other citizens. 107 00:07:53,840 --> 00:07:55,592 They were Iiquid assets. 108 00:07:55,680 --> 00:07:57,511 What this record teIIs us 109 00:07:57,600 --> 00:08:02,355 is how FIorence turned its citizens into its biggest investors. 110 00:08:06,520 --> 00:08:11,071 This wartime expedient marked the birth of the modern bond market. 111 00:08:11,160 --> 00:08:12,798 Everyone was a winner. 112 00:08:12,880 --> 00:08:15,838 Bonds had saved the city-state from bankruptcy. 113 00:08:15,920 --> 00:08:18,832 The citizens were happy earning their interest. 114 00:08:18,920 --> 00:08:22,993 And the bond market let them buy or sell as they saw fit. 115 00:08:23,080 --> 00:08:24,911 lt seemed as if the problem 116 00:08:25,000 --> 00:08:28,834 of public debt had been solved, allowing the citizens of Florence 117 00:08:28,920 --> 00:08:32,595 to turn their minds to higher things. 118 00:08:32,680 --> 00:08:36,559 But there was just one problem with this brilliant idea. 119 00:08:43,440 --> 00:08:48,833 There was a limit to how many more or less unproductive wars could be waged. 120 00:08:48,920 --> 00:08:53,835 The larger the debts of the ltalian cities became, the more bonds they had to issue, 121 00:08:53,920 --> 00:08:58,675 and the more bonds were issued, the less valuable they looked to investors. 122 00:09:02,440 --> 00:09:06,956 And that was exactly the sequence of events in Venice. 123 00:09:07,040 --> 00:09:09,395 By the early 1 6th century, 124 00:09:09,480 --> 00:09:13,473 the city had suffered a series of military reverses, 125 00:09:13,560 --> 00:09:17,394 and the value of Venetian bonds had taken a hammering. 126 00:09:23,240 --> 00:09:26,710 At their nadir between 1509 and 1529, 127 00:09:26,800 --> 00:09:32,432 Venetian Monte Nuovo bonds were trading at just 10% of their face vaIue. 128 00:09:32,520 --> 00:09:37,036 Now, if you buy a bond when war is raging, you're taking a risk - 129 00:09:37,120 --> 00:09:41,671 the risk that the city won't pay you back or pay your interest. On the other hand, 130 00:09:41,760 --> 00:09:45,355 remember that the interest is paid on the face vaIue of the bond, 131 00:09:45,440 --> 00:09:48,352 so if you can buy it at just 10% of its face vaIue, 132 00:09:48,440 --> 00:09:52,274 you're earning a handsome return of maybe 50%. 133 00:09:52,360 --> 00:09:54,749 And that is how the bond market works. 134 00:09:54,840 --> 00:09:58,753 In a sense, you get return for the risk you're prepared to take. 135 00:09:58,840 --> 00:10:01,149 At the same time, it's the bond market 136 00:10:01,240 --> 00:10:03,993 that sets interest rates for the economy as a whoIe. 137 00:10:04,080 --> 00:10:09,359 If the state has in effect to pay 50%, then so do aII the other borrowers. 138 00:10:12,800 --> 00:10:16,429 The bond market had been invented to help pay for ltaly's wars. 139 00:10:16,520 --> 00:10:20,308 But now it was setting interest rates for everyone. 140 00:10:20,400 --> 00:10:23,597 lts rise to power had begun. 141 00:10:25,080 --> 00:10:30,029 Over the next two centuries, bonds would come to rule the world. 142 00:10:38,880 --> 00:10:41,678 This house was built by the financial dynasty 143 00:10:41,760 --> 00:10:44,513 that helped decide the Battle of Waterloo - 144 00:10:44,600 --> 00:10:49,196 the dynasty that produced the man they called the Bonaparte of finance, 145 00:10:49,280 --> 00:10:52,875 the emperor of the 1 9th-century bond market. 146 00:10:55,360 --> 00:10:57,794 ''He is master of unbounded wealth, 147 00:10:57,880 --> 00:11:01,236 ''he boasts that he is the arbiter of peace and war, 148 00:11:01,320 --> 00:11:04,756 ''and that the credit of nations depends upon his nod. 149 00:11:04,840 --> 00:11:07,559 ''Ministers of state are in his pay. '' 150 00:11:14,120 --> 00:11:19,399 Those words, spoken in 1 828 by the Radical Member of Parliament Thomas Duncombe, 151 00:11:19,480 --> 00:11:23,632 were describing Nathan Rothschild, bond trader extraordinaire 152 00:11:23,720 --> 00:11:27,918 and founder of the London branch of what became the biggest bank in the world. 153 00:11:29,040 --> 00:11:33,113 The bond market made the Rothschilds stupendously rich - 154 00:11:33,200 --> 00:11:39,036 so rich that they could afford to build 41 stately homes all over Europe. 155 00:11:39,120 --> 00:11:43,398 This is number 29 - Waddesdon Manor in Buckinghamshire, 156 00:11:43,480 --> 00:11:47,234 which has been restored in all its gilded glory 157 00:11:47,320 --> 00:11:51,677 by Jacob Rothschild, Nathan's great-great-great-grandson. 158 00:11:53,520 --> 00:11:56,318 WeII, he was short, fat, 159 00:11:56,400 --> 00:12:00,871 obsessive, extremeIy cIever, 160 00:12:00,960 --> 00:12:02,552 whoIIy focused. 161 00:12:02,640 --> 00:12:07,430 I can't imagine he wouId have been a very pIeasant person to have had deaIings with. 162 00:12:13,680 --> 00:12:18,834 Between around 1 81 0 and 1 836, the five sons of Mayer Amschel Rothschild 163 00:12:18,920 --> 00:12:23,789 rose from the obscurity of the Frankfurt ghetto to attain a position 164 00:12:23,880 --> 00:12:26,792 of unequalled power in international finance. 165 00:12:30,280 --> 00:12:32,191 lt was the third son, Nathan, 166 00:12:32,280 --> 00:12:36,193 who orchestrated this family triumph from London. 167 00:12:36,280 --> 00:12:39,397 Evelyn de Rothschild is Nathan's great-great-grandson. 168 00:12:39,480 --> 00:12:42,517 He recently retired as chairman of Rothschild's - 169 00:12:42,600 --> 00:12:44,352 the bank that Nathan built. 170 00:12:44,440 --> 00:12:46,032 He was very ambitious 171 00:12:46,120 --> 00:12:47,519 and he moved to London. 172 00:12:47,600 --> 00:12:50,990 I think he was determined. I don't think he suffered fooIs IightIy. 173 00:12:51,080 --> 00:12:52,479 Maybe that's a famiIy trait. 174 00:12:55,080 --> 00:12:59,073 This is one of the few surviving Ietters from Nathan RothschiId to his brothers 175 00:12:59,160 --> 00:13:01,594 written, as aIways, in Judendeutsch - 176 00:13:01,680 --> 00:13:04,638 that was German transIiterated into Hebrew characters - 177 00:13:04,720 --> 00:13:08,474 and it gives you an idea of what an extraordinary work ethic the man had 178 00:13:08,560 --> 00:13:12,235 and how he tried to impose it on his poor, Iong-suffering brothers. 179 00:13:12,320 --> 00:13:13,958 Just Iisten to this. 180 00:13:14,040 --> 00:13:19,910 ''Dear AmscheI, I am writing you my opinion because it's my damned duty to do so. 181 00:13:21,880 --> 00:13:25,395 ''I read your Ietters, not once, but often 100 times, 182 00:13:25,480 --> 00:13:29,837 ''because you can weII imagine that after dinner I don't read books, 183 00:13:29,920 --> 00:13:33,037 ''I don't pIay cards, I don't go to the theatre. 184 00:13:33,120 --> 00:13:35,873 ''My onIy pIeasure is my business.'' 185 00:13:39,720 --> 00:13:41,551 PHONES RING 186 00:13:42,720 --> 00:13:48,158 lt was this phenomenal drive, allied with innate financial genius, 187 00:13:48,240 --> 00:13:54,190 that propelled Nathan from obscurity to mastery of the London bond market. 188 00:13:54,280 --> 00:13:56,236 Once again, however, 189 00:13:56,320 --> 00:14:00,518 the opportunity for a financial breakthrough came from war. 190 00:14:10,080 --> 00:14:16,713 On the morning of June 1 8th, 1 81 5, 67,000 British, Dutch and German troops 191 00:14:16,800 --> 00:14:21,351 under the Duke of Wellington's command looked out across the fields of Waterloo, 192 00:14:21,440 --> 00:14:25,353 not far from Brussels, towards an almost equal number of French troops 193 00:14:25,440 --> 00:14:29,513 commanded by the French Emperor, Napoleon Bonaparte. 194 00:14:32,280 --> 00:14:35,716 The BattIe of WaterIoo was the cuImination of more than two decades 195 00:14:35,800 --> 00:14:38,633 of intermittent confIict between Britain and France. 196 00:14:38,720 --> 00:14:41,996 But it was more than just a battIe between two armies. 197 00:14:42,080 --> 00:14:45,117 It was aIso a contest between rivaI financiaI systems. 198 00:14:45,200 --> 00:14:49,478 One, the French, based on pIunder. The other, the British, based on debt. 199 00:14:51,320 --> 00:14:52,514 To pay for the war, 200 00:14:52,600 --> 00:14:57,196 the British government had sold an unprecedented amount of bonds. 201 00:14:57,280 --> 00:15:00,113 According to a long-standing legend, 202 00:15:00,200 --> 00:15:02,714 the Rothschild family made their first millions 203 00:15:02,800 --> 00:15:06,076 by speculating on how the outcome of the Battle of Waterloo 204 00:15:06,160 --> 00:15:08,799 would affect the price of these bonds. 205 00:15:11,600 --> 00:15:14,353 lt was this legend of Jewish profiteering 206 00:15:14,440 --> 00:15:18,035 that, a century later, the Nazis did their best to embroider. 207 00:15:19,960 --> 00:15:25,432 ln 1 940 Josef Goebbels approved the release of this film, Die Rothschilds. 208 00:15:25,520 --> 00:15:29,354 HE SPEAKS GERMAN 209 00:15:29,440 --> 00:15:33,797 Nathan is seen bribing a French general to ensure the Duke of Wellington's victory, 210 00:15:33,880 --> 00:15:37,839 and then deliberately misreporting the outcome of the battle in London. 211 00:15:37,920 --> 00:15:40,878 This triggers panic selling of British bonds, 212 00:15:40,960 --> 00:15:44,919 which Nathan then snaps up at bargain-basement prices. 213 00:15:52,000 --> 00:15:55,037 What happened here in 1 81 5 was altogether different. 214 00:15:56,840 --> 00:16:00,150 Far from making money from WeIIington's defeat of NapoIeon, 215 00:16:00,240 --> 00:16:03,152 the RothschiIds were very nearIy ruined by it. 216 00:16:03,240 --> 00:16:08,314 Their fortune was made not by WaterIoo, but despite it. 217 00:16:08,400 --> 00:16:12,313 This is how it really happened. 218 00:16:12,400 --> 00:16:17,838 Selling bonds to the public had raised plenty of cash for the British government. 219 00:16:17,920 --> 00:16:21,629 But neither bonds nor bank notes were any use to Wellington. 220 00:16:21,720 --> 00:16:24,837 To provision his troops and pay Britain's allies against France 221 00:16:24,920 --> 00:16:28,799 he needed a currency that was universally acceptable. 222 00:16:28,880 --> 00:16:34,318 Nathan Rothschild was given the job of taking the money raised on the bond market 223 00:16:34,400 --> 00:16:38,279 and delivering it to Wellington - as gold. 224 00:16:40,600 --> 00:16:44,878 The success of this operation would determine the fate of the warring empires 225 00:16:44,960 --> 00:16:47,633 and of all Europe. 226 00:16:50,200 --> 00:16:54,239 This Ietter marks a turning point in the history of both the RothschiId famiIy, 227 00:16:54,320 --> 00:16:57,915 and the British government. It's dated the 1 1th of January 181 4, 228 00:16:58,000 --> 00:17:01,037 and it's an order from the ChanceIIor of the Exchequer 229 00:17:01,120 --> 00:17:05,352 to the Commissary-in-Chief teIIing him to appoint Nathan RothschiId - 230 00:17:05,440 --> 00:17:08,113 Mr RothschiId - as a British government agent. 231 00:17:08,200 --> 00:17:12,512 Nathan's job was to gather together as much goId and siIver as he couId find 232 00:17:12,600 --> 00:17:16,798 on the European continent and make sure it got to the Duke of WeIIington and his army 233 00:17:16,880 --> 00:17:20,429 who had just fought their way out of Spain into the South of France. 234 00:17:20,520 --> 00:17:23,114 It was an operation that reIied heaviIy 235 00:17:23,200 --> 00:17:26,351 on the RothschiIds' unique pan-European credit network 236 00:17:26,440 --> 00:17:31,673 and on Nathan's abiIity to mobiIise goId the way WeIIington couId mobiIise troops. 237 00:17:34,000 --> 00:17:38,551 Shifting such vast amounts of gold in the middle of a war was hugely risky. 238 00:17:38,640 --> 00:17:41,518 Yet, from the Rothschilds'point of view, 239 00:17:41,600 --> 00:17:45,593 the hefty commissions they were able to charge more than justified the risks. 240 00:17:49,760 --> 00:17:53,469 The Rothschilds soon became indispensable to the British war effort. 241 00:17:53,560 --> 00:17:56,358 ln the words of the British Commissary-in-Chief... 242 00:17:56,440 --> 00:18:00,149 ''Rothschild of this place has executed the various services 243 00:18:00,240 --> 00:18:03,994 ''entrusted to him in this line admirably well, and though a Jew, 244 00:18:04,080 --> 00:18:06,310 ''we place a good deal of confidence in him. '' 245 00:18:09,520 --> 00:18:12,751 The Rothschilds were so effective as war financiers 246 00:18:12,840 --> 00:18:16,958 because they had a ready-made banking network within the family - 247 00:18:17,040 --> 00:18:20,555 Nathan in London, Amschel in Frankfurt, 248 00:18:20,640 --> 00:18:27,716 James in Paris, Carl in Amsterdam and Salomon roving wherever Nathan saw fit. 249 00:18:33,040 --> 00:18:36,271 lf the price of gold was higher in, say, Paris than in London, 250 00:18:36,360 --> 00:18:43,118 James in Paris would sell - and Nathan in London would buy. 251 00:18:46,680 --> 00:18:50,798 I think their edge over famiIies Iike the Barings, with whom they were competing, 252 00:18:50,880 --> 00:18:55,715 was that they had their brothers in very important financiaI centres in countries. 253 00:18:55,800 --> 00:18:57,791 Now whether that was pre-meditated, 254 00:18:57,880 --> 00:19:01,190 whether they thought that through as they got out of the ghetto, 255 00:19:01,280 --> 00:19:04,078 it's hard to beIieve that they went as far as that. 256 00:19:04,160 --> 00:19:07,550 But that's what happened and once they saw that it was an advantage, 257 00:19:07,640 --> 00:19:09,198 they worked on that advantage. 258 00:19:10,760 --> 00:19:15,151 ln March 1 81 5, Napoleon returned to Paris from exile in Elba 259 00:19:15,240 --> 00:19:19,074 determined to revive his imperial ambitions. 260 00:19:20,680 --> 00:19:24,389 The Rothschilds immediately ramped up their gold operation, 261 00:19:24,480 --> 00:19:27,790 buying up all the bullion and coins they could lay their hands on. 262 00:19:27,880 --> 00:19:32,715 Nathan's reason for buying this huge stock of gold was simple. 263 00:19:32,800 --> 00:19:36,031 He assumed that, as with all Napoleon's wars, 264 00:19:36,120 --> 00:19:38,190 this would be a long one. 265 00:19:38,280 --> 00:19:42,512 His gold would be more and more sought after and it would rise in value. 266 00:19:43,920 --> 00:19:47,310 lt proved to be a near-fatal miscalculation. 267 00:19:49,960 --> 00:19:52,758 Wellington famously called the Battle of Waterloo, 268 00:19:52,840 --> 00:19:55,718 ''The nearest-run thing you ever saw in your life. '' 269 00:19:57,280 --> 00:20:00,511 CROWS CAW 270 00:20:00,600 --> 00:20:05,754 After a day of brutal charges, counter charges and heroic defence, 271 00:20:05,840 --> 00:20:09,389 the late arrival of the Prussian Army finally proved decisive. 272 00:20:11,160 --> 00:20:14,072 For Wellington, it was a glorious victory. 273 00:20:15,200 --> 00:20:17,270 But not for the Rothschilds. 274 00:20:19,360 --> 00:20:22,511 No doubt it was gratifying to Nathan RothschiId 275 00:20:22,600 --> 00:20:25,433 to be the first to hear the news of NapoIeon's defeat. 276 00:20:25,520 --> 00:20:28,239 Thanks to the swiftness of the RothschiId couriers, 277 00:20:28,320 --> 00:20:31,596 he heard it fuIIy 48 hours before Major Henry Percy 278 00:20:31,680 --> 00:20:35,150 deIivered WeIIington's officiaI despatch to the British Cabinet. 279 00:20:35,240 --> 00:20:37,834 But, no matter how early he heard it, 280 00:20:37,920 --> 00:20:41,959 the news of Waterloo was anything but good from Nathan's point of view. 281 00:20:42,040 --> 00:20:45,112 He had bargained for something much more protracted. 282 00:20:45,200 --> 00:20:50,194 Now he and his brothers were sitting on top of a piIe of cash that nobody wanted, 283 00:20:50,280 --> 00:20:52,475 to pay for a war that was over. 284 00:20:53,240 --> 00:20:54,719 With the coming of peace, 285 00:20:54,800 --> 00:20:58,554 the great armies that had fought Napoleon could be disbanded. 286 00:20:58,640 --> 00:21:02,872 That meant no more gold for soldiers' wages and it meant the price of gold, 287 00:21:02,960 --> 00:21:05,997 which had soared during the war, would fall. 288 00:21:14,760 --> 00:21:17,433 Nathan was faced with heavy and growing losses. 289 00:21:17,520 --> 00:21:20,239 CAR HORNS HONK 290 00:21:20,320 --> 00:21:23,869 There was only one possible way out. 291 00:21:23,960 --> 00:21:29,876 Nathan could use the Rothschild gold to make a massive and hugely risky bet... 292 00:21:29,960 --> 00:21:31,598 on the bond market. 293 00:21:39,840 --> 00:21:43,150 On July 20, 1 81 5, the evening edition of the London Courier 294 00:21:43,240 --> 00:21:47,472 reported that Nathan had made ''great purchases of stock'', 295 00:21:47,560 --> 00:21:49,755 meaning British government bonds. 296 00:21:49,840 --> 00:21:53,594 Nathan's gamble was that the British victory at Waterloo 297 00:21:53,680 --> 00:21:57,559 would send the price of British bonds soaring upwards. 298 00:22:00,760 --> 00:22:05,834 Nathan bought, and as the price of bonds began to rise, he kept on buying. 299 00:22:07,960 --> 00:22:14,229 Despite his brothers' desperate entreaties to sell, Nathan held his nerve 300 00:22:14,320 --> 00:22:16,390 for another year. 301 00:22:20,200 --> 00:22:22,395 Eventually, in July 1 81 7, 302 00:22:22,480 --> 00:22:27,395 with bond prices up by 40%, he sold his holding. 303 00:22:27,480 --> 00:22:32,873 His profits were worth approximately £600 million today. 304 00:22:32,960 --> 00:22:36,350 The Rothschilds had shown 305 00:22:36,440 --> 00:22:40,069 that bonds were more than just a way for governments to fund their wars. 306 00:22:40,160 --> 00:22:44,676 They could be bought and sold in a way that generated serious money. 307 00:22:44,760 --> 00:22:47,638 And with money, came power. 308 00:22:50,800 --> 00:22:54,952 Mayer Amschel Rothschild had repeatedly admonished his five sons, 309 00:22:55,040 --> 00:22:58,715 ''lf you can't make yourself loved, make yourself feared. '' 310 00:22:58,800 --> 00:23:01,792 As they bestrode the mid-1 9th century financial world 311 00:23:01,880 --> 00:23:03,711 as masters of the bond market, 312 00:23:03,800 --> 00:23:06,633 the Rothschilds were already more feared than loved. 313 00:23:07,920 --> 00:23:11,117 But now, they had become hated too. 314 00:23:18,600 --> 00:23:20,875 The fact that the Rothschilds were Jewish 315 00:23:20,960 --> 00:23:24,316 gave a new impetus to deep-rooted anti-Semitic prejudice. 316 00:23:26,240 --> 00:23:29,471 (RothschiId) Just a few months ago a colleague of mine in my office, 317 00:23:29,600 --> 00:23:33,957 who coIIects posters, found these... 318 00:23:34,040 --> 00:23:39,194 WeII, this particuIar, rather extraordinary exampIe of anti-Semitism 319 00:23:39,280 --> 00:23:43,398 in a stark form, about the RothschiIds, who were as it were epitomised, 320 00:23:43,480 --> 00:23:46,790 to them and others at times, 321 00:23:46,880 --> 00:23:52,955 the most extreme forms of undesirabIe capitaIism as practised by Jews. 322 00:23:53,040 --> 00:24:00,355 lt was, above all, the Rothschilds' seeming ability to permit or prohibit wars 323 00:24:00,440 --> 00:24:02,510 that aroused the most indignation. 324 00:24:07,120 --> 00:24:10,476 You might have thought that the RothschiIds actuaIIy needed war. 325 00:24:10,560 --> 00:24:14,678 After aII, some of Nathan's biggest deaIs had been produced by war. 326 00:24:14,760 --> 00:24:19,276 If it hadn't been for war, 19th-century states wouIdn't have needed to issue bonds 327 00:24:19,360 --> 00:24:21,396 for the RothschiIds to buy and seII. 328 00:24:21,480 --> 00:24:25,268 But the troubIe with war, and even more so with revoIution, 329 00:24:25,360 --> 00:24:30,070 was that increased the risk that a debtor state might faiI to meet its commitments. 330 00:24:30,160 --> 00:24:33,152 And that hit the price of existing bonds. 331 00:24:33,240 --> 00:24:36,789 By the mid-19th century, the RothschiIds were no Ionger mere traders, 332 00:24:36,880 --> 00:24:38,472 they were fund managers, 333 00:24:38,560 --> 00:24:42,678 carefuIIy tending to a vast portfoIio of their own government bonds. 334 00:24:42,760 --> 00:24:46,912 Now, they stood to Iose much more than to gain from confIict. 335 00:24:48,000 --> 00:24:51,390 The Rothschilds had helped decide the outcome of the Napoleonic Wars 336 00:24:51,480 --> 00:24:54,199 by putting their financial weight behind Britain. 337 00:24:54,280 --> 00:24:57,636 Now they would help decide the outcome of the American Civil War - 338 00:24:57,720 --> 00:25:01,156 by choosing to sit on the sidelines. 339 00:25:01,240 --> 00:25:03,754 GUNSHOTS 340 00:25:03,840 --> 00:25:08,516 Once again, it was the masters of the bond market who would be the arbiters of war. 341 00:25:20,800 --> 00:25:25,828 50 years after the Battle of Waterloo, and on the other side of the world, 342 00:25:25,920 --> 00:25:29,708 another great war would be decided by the power of the bond market. 343 00:25:32,520 --> 00:25:37,150 But this time, it would be the vanquished who made the big bet and lost. 344 00:25:49,240 --> 00:25:53,518 The traditional view is that the key turning point in the American Civil War 345 00:25:53,600 --> 00:25:57,912 came in June 1 863, two years into the conflict. 346 00:25:58,000 --> 00:26:01,515 That was the month when Union forces captured Jackson, 347 00:26:01,600 --> 00:26:03,397 the Mississippi state capital, 348 00:26:03,480 --> 00:26:07,155 and forced a Confederate army to retreat westward to Vicksburg, 349 00:26:07,240 --> 00:26:09,470 their backs to the Mississippi River. 350 00:26:11,480 --> 00:26:15,917 Surrounded, with Union gunboats bombarding their positions from behind, 351 00:26:16,000 --> 00:26:20,471 the Southerners held out for a month before laying down their arms. 352 00:26:23,760 --> 00:26:27,389 After Vicksburg, the Mississippi was firmly in the hands of the North. 353 00:26:27,480 --> 00:26:30,870 The South was literally split in two. 354 00:26:34,960 --> 00:26:39,158 Yet this military setback wasn't the decisive factor 355 00:26:39,240 --> 00:26:43,870 in the South's ultimate defeat. The real turning point came earlier. 356 00:26:43,960 --> 00:26:45,996 And it was financial. 357 00:26:50,120 --> 00:26:53,192 200 miles downstream from Vicksburg, 358 00:26:53,280 --> 00:26:57,637 where the Mississippi joins the Gulf of Mexico, lies the port of New Orleans. 359 00:27:03,120 --> 00:27:05,554 This is Fort Pike, 360 00:27:05,640 --> 00:27:10,589 buiIt after 1812 to protect New OrIeans from a future British attack. 361 00:27:10,680 --> 00:27:15,800 But 50 years Iater, it wasn't abIe to protect the South from a Northern attack 362 00:27:15,880 --> 00:27:21,477 when Captain David Farragut seized New OrIeans on ApriI 28th, 1862. 363 00:27:21,560 --> 00:27:24,120 It was a cruciaI moment in the CiviI War 364 00:27:24,200 --> 00:27:29,433 as New OrIeans was the principaI outIet for the South's most important export... 365 00:27:32,320 --> 00:27:34,038 ..cotton. 366 00:27:34,120 --> 00:27:38,830 Without control over the cotton trade the South's cause was doomed - 367 00:27:38,920 --> 00:27:42,549 because cotton had become the essential ingredient 368 00:27:42,640 --> 00:27:46,349 in an ambitious scheme to bring the bond market into the war. 369 00:27:50,560 --> 00:27:54,519 Like the ltalian city states 500 years before, 370 00:27:54,600 --> 00:27:57,876 the Confederate Treasury had initially raised money for the war 371 00:27:57,960 --> 00:27:59,996 by selling bonds to its own citizens. 372 00:28:02,200 --> 00:28:06,239 But there was a finite amount of capital available in the South. 373 00:28:06,320 --> 00:28:10,279 To survive, the Confederacy looked to Europe 374 00:28:10,360 --> 00:28:14,353 in the hope that the world's greatest financial dynasty might help them 375 00:28:14,440 --> 00:28:17,876 beat the North as they had helped Wellington beat Napoleon. 376 00:28:21,560 --> 00:28:26,759 lnitially, the Confederacy had grounds for optimism. 377 00:28:26,840 --> 00:28:30,150 ln New York, the Rothschilds' agent was sympathetic, 378 00:28:30,240 --> 00:28:33,232 having opposed the North's leader, Abraham Lincoln 379 00:28:33,320 --> 00:28:35,390 in the presidential election of 1 860. 380 00:28:41,440 --> 00:28:44,193 But still the Rothschilds hesitated. 381 00:28:44,280 --> 00:28:49,479 Lending to the British government to help defeat Napoleon had been one thing. 382 00:28:49,560 --> 00:28:54,429 But buying bonds from a bunch of breakaway Southern slave states 383 00:28:54,520 --> 00:28:55,748 seemed a risk too far. 384 00:28:56,680 --> 00:28:59,513 The Rothschilds decided to stay out. 385 00:29:05,560 --> 00:29:08,279 Yet despite this setback, 386 00:29:08,360 --> 00:29:12,433 the Confederate government had an ingenious trick up their sleeves. 387 00:29:12,520 --> 00:29:16,593 The trick, like the sleeves themselves, was made of cotton. 388 00:29:19,520 --> 00:29:25,311 The South's idea was to use cotton as collateral to back its bonds. 389 00:29:25,400 --> 00:29:30,155 lnvestors would be comforted to know that if the interest payments dried up 390 00:29:30,240 --> 00:29:33,949 they could still demand their cotton instead. 391 00:29:35,240 --> 00:29:37,196 The South's agents went to work 392 00:29:37,280 --> 00:29:40,272 selling the bonds in the financial centres of Europe. 393 00:29:43,560 --> 00:29:46,757 When the Confederacy tried to market conventional bonds 394 00:29:46,840 --> 00:29:50,196 in European financial centres like Amsterdam's, 395 00:29:50,280 --> 00:29:52,794 investors wouldn't touch them with a bargepole. 396 00:29:52,880 --> 00:29:57,431 But when an obscure French firm named EmiIe ErIanger and Company 397 00:29:57,520 --> 00:30:01,354 offered cotton-backed bonds, it was a compIeteIy different story. 398 00:30:01,440 --> 00:30:04,079 The key to the success of the ErIanger bonds 399 00:30:04,160 --> 00:30:06,674 was that they couId be converted into cotton 400 00:30:06,760 --> 00:30:09,957 at the pre-war price of six pence a pound. 401 00:30:12,160 --> 00:30:16,438 These cotton bonds formed the basis of the South's new financial strategy. 402 00:30:16,520 --> 00:30:20,559 lf they could restrict the supply of cotton, its value, 403 00:30:20,640 --> 00:30:23,108 and the value of the bonds, would increase. 404 00:30:23,200 --> 00:30:27,113 At the same time, the Confederates set out to use cotton 405 00:30:27,200 --> 00:30:29,873 to blackmail the most powerful country in the world - 406 00:30:29,960 --> 00:30:31,712 Britain. 407 00:30:34,760 --> 00:30:37,672 (Tour guide) The routes to the United States of America 408 00:30:37,760 --> 00:30:40,479 provided Liverpool with growing volumes of trade 409 00:30:40,560 --> 00:30:44,473 and new docks opened on the Mersey in quick succession during the 1 800s. 410 00:30:46,080 --> 00:30:49,834 (Narrator) ln 1 860, the Port of Liverpool was the principal gateway 411 00:30:49,920 --> 00:30:52,798 for imports of cotton to the British textile industry, 412 00:30:52,880 --> 00:30:56,429 then the mainstay of the Victorian industriaI economy. 413 00:30:56,520 --> 00:31:00,308 More than 80% of the cotton came from the Southern United States. 414 00:31:00,400 --> 00:31:02,789 Now that gave the Confederate Ieadership hope 415 00:31:02,880 --> 00:31:07,590 that they had the Ieverage to bring in Britain on their side in the CiviI War. 416 00:31:07,680 --> 00:31:11,275 To ratchet up the pressure, they decided to impose an embargo 417 00:31:11,360 --> 00:31:13,715 on aII shipments of cotton to LiverpooI. 418 00:31:17,880 --> 00:31:20,838 For a while, the South's strategy worked brilliantly. 419 00:31:20,920 --> 00:31:26,392 Cotton prices soared. So did the value of the Confederates' cotton-backed bonds. 420 00:31:26,480 --> 00:31:31,235 And the cotton embargo devastated the British economy. 421 00:31:31,320 --> 00:31:34,471 Mills were forced to lay off workers. 422 00:31:34,560 --> 00:31:38,712 Eventually, in late 1 862, production all but ceased. 423 00:31:45,440 --> 00:31:50,958 This cotton miII in StyaI, south of Manchester, empIoyed around 400 workers, 424 00:31:51,040 --> 00:31:54,032 but that was just a fraction of the 500,000 peopIe 425 00:31:54,120 --> 00:31:56,998 empIoyed by King Cotton across Lancashire. 426 00:31:57,080 --> 00:32:00,117 ObviousIy, with no cotton there was nothing for peopIe to do. 427 00:32:00,200 --> 00:32:02,270 By the end of 1862, 428 00:32:02,360 --> 00:32:05,557 haIf the entire workforce of Lancashire had been Iaid off. 429 00:32:05,640 --> 00:32:08,552 A quarter of the popuIation was on poor reIief. 430 00:32:08,640 --> 00:32:14,192 They caIIed it the ''Cotton Famine'', but this reaIIy was a man-made famine. 431 00:32:17,120 --> 00:32:19,076 Britain was in the doldrums. 432 00:32:19,160 --> 00:32:22,118 And the South's cotton bonds were riding high. 433 00:32:22,200 --> 00:32:26,398 Yet the South's ability to manipulate the bond market 434 00:32:26,480 --> 00:32:28,869 depended on one over-riding condition - 435 00:32:28,960 --> 00:32:33,238 that investors could be sure of taking physical possession of the cotton 436 00:32:33,320 --> 00:32:37,711 which underpinned the bonds if the South failed to make its interest payments. 437 00:32:41,920 --> 00:32:47,790 And that's why the fall of New Orleans on April 28, 1 862, 438 00:32:47,880 --> 00:32:51,589 was the real turning point in the American Civil War. 439 00:32:51,680 --> 00:32:54,990 Now that the South's main port was in Union hands, 440 00:32:55,080 --> 00:32:58,152 any investor who wanted to lay his hands on Southern cotton 441 00:32:58,240 --> 00:33:01,676 had to run the Union's formidable naval blockade. 442 00:33:16,960 --> 00:33:19,554 The Confederates had overplayed their hand. 443 00:33:19,640 --> 00:33:24,873 They had turned off the cotton tap, but then lost the ability to turn it back on. 444 00:33:24,960 --> 00:33:29,750 By 1 863, the mills of Lancashire had found new sources of cotton 445 00:33:29,840 --> 00:33:31,796 in China, Egypt, and lndia 446 00:33:31,880 --> 00:33:37,238 and investors were rapidly losing faith in the South's cotton-backed bonds. 447 00:33:37,320 --> 00:33:40,995 The consequences for the Confederate economy were disastrous. 448 00:33:42,240 --> 00:33:47,268 With its domestic bond market exhausted and onIy two paItry foreign Ioans, 449 00:33:47,360 --> 00:33:51,353 the Confederacy reaIIy had no aIternative but to print paper doIIars, 450 00:33:51,440 --> 00:33:56,036 like these ones here in the Louisiana State Museum, to pay for the war. 451 00:33:56,120 --> 00:33:59,908 ln all, 1. 7 billion dollars' worth. 452 00:34:00,000 --> 00:34:02,912 Now, it's true that the North aIso printed paper money, 453 00:34:03,000 --> 00:34:07,949 but by the end of the war its ''greenbacks'' were stiII worth around 50 pre-war cents, 454 00:34:08,040 --> 00:34:11,350 whereas a Southern ''greyback'' was down to just one cent. 455 00:34:11,440 --> 00:34:15,797 What's more, with more and more of this cash chasing fewer and fewer goods, 456 00:34:15,880 --> 00:34:18,474 infIation in the South simpIy expIoded. 457 00:34:18,560 --> 00:34:23,953 By January 1865, the price of some goods was up by a factor of 90. 458 00:34:26,640 --> 00:34:30,110 The South had bet everything on manipulating the bond market 459 00:34:30,200 --> 00:34:31,838 and had lost. 460 00:34:31,920 --> 00:34:35,037 lt would not be the last time in history that an attempt to do so 461 00:34:35,120 --> 00:34:37,315 would end in ruinous inflation. 462 00:34:43,560 --> 00:34:47,678 Today the global market for bonds is still bigger 463 00:34:47,760 --> 00:34:50,479 than the all the world's stock markets put together. 464 00:34:51,560 --> 00:34:55,758 lt's still a market that can make or break governments. 465 00:34:59,560 --> 00:35:01,755 Does it surprise you that its key player 466 00:35:01,840 --> 00:35:05,594 began his money-making career in the casinos of Las Vegas? 467 00:35:08,200 --> 00:35:09,872 I was a bIackjack pIayer. 468 00:35:09,960 --> 00:35:14,112 One of the first professionaI bIackjack pIayers, not to brag, 469 00:35:14,200 --> 00:35:16,668 but in the Iate '60s, I went to Vegas 470 00:35:16,760 --> 00:35:22,630 and appIied a card-counting system to try and beat Vegas. 471 00:35:25,560 --> 00:35:29,997 Now this master of understatement is the King of the Bond Market, 472 00:35:30,080 --> 00:35:32,548 controller of the biggest bond fund in the world. 473 00:35:32,640 --> 00:35:36,394 So what has this got to do with you and me? 474 00:35:36,480 --> 00:35:38,596 Well, when Gross buys or sells bonds, 475 00:35:38,680 --> 00:35:42,958 it doesn't just affect financial markets and government policy, 476 00:35:43,040 --> 00:35:45,508 it affects the value of our pension funds 477 00:35:45,600 --> 00:35:47,989 and the interest rates we pay on our mortgages. 478 00:35:49,480 --> 00:35:53,234 There's only one thing that Mr Bond is afraid of 479 00:35:53,320 --> 00:35:55,151 and it's not Goldfinger. 480 00:35:56,360 --> 00:35:58,191 Rather, it's inflation. 481 00:35:59,800 --> 00:36:02,394 The lethal danger that inflation poses 482 00:36:02,480 --> 00:36:07,349 is that it undermines the value of being paid a fixed rate of interest on a bond. 483 00:36:07,440 --> 00:36:11,399 If infIation goes up to 10% 484 00:36:11,480 --> 00:36:16,031 and the vaIue of a fixed-rate interest is onIy five, 485 00:36:16,120 --> 00:36:21,035 then that means that the bond hoIder is faIIing behind infIation by 5%. 486 00:36:23,120 --> 00:36:27,352 That's why, at the first whiff of higher inflation, bond prices fall, 487 00:36:27,440 --> 00:36:29,032 and in some cases, keep falling. 488 00:36:35,800 --> 00:36:39,509 To see just how bad things can get when the inflationary genie escapes 489 00:36:39,600 --> 00:36:44,390 from the bottle you just have to look at the example of Argentina. 490 00:36:50,120 --> 00:36:54,113 Many Argentines date the steady decline of their economic fortunes 491 00:36:54,200 --> 00:36:56,475 to a day in February, 1 946, 492 00:36:56,560 --> 00:37:00,314 when the newly elected President, General Juan Domingo Peron 493 00:37:00,400 --> 00:37:04,188 came here to the Central Bank in Buenos Aires. 494 00:37:07,680 --> 00:37:10,433 He was astonished at what he saw. 495 00:37:10,520 --> 00:37:13,034 ''There is so much gold, '' he marvelled, 496 00:37:13,120 --> 00:37:15,509 ''you can hardly walk through the corridors. '' 497 00:37:17,600 --> 00:37:21,479 The very name Argentina suggests wealth and plenty - 498 00:37:21,560 --> 00:37:23,152 it means ''The Land Of Silver''. 499 00:37:23,240 --> 00:37:28,030 The river flowing past the capital is the Rio de la Plata, ''The Silver River''. 500 00:37:33,120 --> 00:37:36,999 Once upon a time, there used to be two Harrods in the world. 501 00:37:37,080 --> 00:37:41,039 One in London, in Knightsbridge, and the other here, in the Avenida Florida, 502 00:37:41,120 --> 00:37:42,678 in the heart of Buenos Aires. 503 00:37:42,760 --> 00:37:44,751 Founded in 1912, 504 00:37:44,840 --> 00:37:49,391 this other Harrods is a reminder that Argentina used to be a rich country. 505 00:37:49,480 --> 00:37:54,952 At one time, its per capita income was 18% Iess than that of the United States. 506 00:37:55,040 --> 00:37:58,077 Investors who fIocked to buy Argentine bonds 507 00:37:58,160 --> 00:38:01,948 hoped that Argentina wouId become the United States of South America. 508 00:38:04,120 --> 00:38:06,270 Well, Argentina's history since then 509 00:38:06,360 --> 00:38:10,876 is a classic illustration that all the resources and talent in the world 510 00:38:10,960 --> 00:38:14,430 can be set at nought by chronic financial mismanagement. 511 00:38:19,280 --> 00:38:21,430 MUTED CONVERSATION 512 00:38:23,520 --> 00:38:27,672 There have been many financial crises in Argentine history. 513 00:38:27,760 --> 00:38:31,309 But the crisis that hit the country in 1 989 514 00:38:31,400 --> 00:38:32,958 was unparalleled. 515 00:38:47,880 --> 00:38:48,949 At the beginning of February, 516 00:38:49,040 --> 00:38:53,079 the country was suffering one of the hottest summers on record. 517 00:38:53,160 --> 00:38:56,550 ln Buenos Aires, the electricity system just couldn't cope. 518 00:38:56,640 --> 00:39:00,076 Five-hour power cuts were commonplace. 519 00:39:02,160 --> 00:39:07,393 But these, as it turned out, were the least of Argentina's problems. 520 00:39:07,480 --> 00:39:10,870 As is almost always the case, 521 00:39:10,960 --> 00:39:14,157 there were several well-trodden steps to monetary hell. 522 00:39:15,280 --> 00:39:19,034 In step one, the government spends more, much more, 523 00:39:19,120 --> 00:39:20,473 than it can raise in taxation. 524 00:39:20,560 --> 00:39:24,030 UsuaIIy, but not aIways, it's because of a war. 525 00:39:24,120 --> 00:39:25,758 In Argentina's case, there were two. 526 00:39:25,840 --> 00:39:29,753 One, a civiI war between GeneraIs and the Left in the 1970s, 527 00:39:29,840 --> 00:39:34,550 the other a foreign war against Britain over the FaIkIand IsIands in 1982. 528 00:39:34,640 --> 00:39:38,792 By 1989, the financiaI system was about ready to bIow. 529 00:39:41,400 --> 00:39:45,757 By February, inflation had already reached 1 0% - per month. 530 00:39:48,680 --> 00:39:52,753 Banks were ordered to close as the government tried to lower interest rates 531 00:39:52,840 --> 00:39:55,718 and stop the currency's exchange rate from collapsing. 532 00:39:56,800 --> 00:39:58,870 lt didn't work. 533 00:39:58,960 --> 00:40:00,473 ln just a month, 534 00:40:00,560 --> 00:40:03,996 the austral fell 1 40% against the dollar. 535 00:40:06,640 --> 00:40:10,315 At the same time, the World Bank froze lending to Argentina, 536 00:40:10,400 --> 00:40:14,279 saying that the government had failed to tackle the root cause of inflation - 537 00:40:14,360 --> 00:40:16,669 a bloated public-sector deficit. 538 00:40:16,760 --> 00:40:20,389 With no cheap Ioans forthcoming from the WorId Bank, 539 00:40:20,480 --> 00:40:24,553 the government tried to finance its deficit by seIIing bonds to the pubIic. 540 00:40:24,640 --> 00:40:27,950 But investors were hardIy IikeIy to buy bonds with the prospect 541 00:40:28,040 --> 00:40:32,591 that their reaI vaIue wouId be wiped out by infIation in just a matter of days. 542 00:40:32,680 --> 00:40:33,999 Nobody was buying. 543 00:40:34,080 --> 00:40:36,548 The government was running out of options. 544 00:40:38,920 --> 00:40:42,230 ln April, furious customers overturned shopping trolleys 545 00:40:42,320 --> 00:40:46,233 after one supermarket announced over the loudspeaker 546 00:40:46,320 --> 00:40:50,233 that prices were being raised by 30% immediately. 547 00:40:51,800 --> 00:40:57,193 Shops emptied of goods as owners weren't making enough money to buy new stock. 548 00:41:23,400 --> 00:41:25,630 Government bond prices plunged 549 00:41:25,720 --> 00:41:29,952 as fears rose that the Central Bank's reserves were running out. 550 00:41:30,040 --> 00:41:33,032 With no foreign Ioans and no-one wiIIing to buy bonds, 551 00:41:33,120 --> 00:41:37,352 there was onIy one thing Ieft for an increasingIy desperate government to do - 552 00:41:37,440 --> 00:41:40,113 get the CentraI Bank IiteraIIy to print more money. 553 00:41:40,200 --> 00:41:42,191 But they couIdn't even get that right. 554 00:41:47,520 --> 00:41:52,435 On Friday April 28th, Argentina literally ran out of money. 555 00:41:54,280 --> 00:41:55,998 ''lt's a physical problem, '' 556 00:41:56,080 --> 00:41:59,709 the Central Bank Vice-President told a news conference. 557 00:42:02,040 --> 00:42:06,352 What he meant was that Argentina's mint had run out of paper to print new notes, 558 00:42:06,440 --> 00:42:08,795 and the printers had gone on strike. 559 00:42:18,720 --> 00:42:20,756 ''l don't know how we'll do it, 560 00:42:20,840 --> 00:42:24,958 ''but the money has got to be there on Monday, '' he declared. 561 00:42:28,880 --> 00:42:33,032 Yet the faster the printing presses rolled, the less the money was worth. 562 00:42:33,120 --> 00:42:37,671 The government was forced to print higher and higher denominations of notes. 563 00:42:37,760 --> 00:42:42,038 ln May, the price of coffee went up by 50% in a week. 564 00:42:43,720 --> 00:42:47,759 Farmers stopped bringing cattle to market as the price for one cow 565 00:42:47,840 --> 00:42:50,513 was now the same as for three pairs of shoes. 566 00:43:02,240 --> 00:43:08,793 By June 1989, infIation in Argentina had reached a monthIy rate of 100%, 567 00:43:08,880 --> 00:43:11,792 an annuaI rate of roughIy 12,000%. 568 00:43:11,880 --> 00:43:14,030 To put that into concrete terms, 569 00:43:14,120 --> 00:43:17,954 if you wanted to go out for dinner in Buenos Aires on a Saturday night, 570 00:43:18,040 --> 00:43:20,315 in May you'd pay 10,000 austraIes. 571 00:43:20,400 --> 00:43:24,837 By June, you'd have to pay 20,000 for the same meaI. 572 00:43:24,920 --> 00:43:29,550 And by the foIIowing month, it wouId take 60,000. 573 00:43:29,640 --> 00:43:31,631 You've heard of a fistfuI of doIIars. 574 00:43:31,720 --> 00:43:35,315 WeII, you needed a drawer fuII of austraIes just to buy a square meaI. 575 00:43:42,080 --> 00:43:45,311 ln June, popular frustration erupted 576 00:43:45,400 --> 00:43:49,678 in two days of intense rioting and looting by hungry mobs. 577 00:43:49,760 --> 00:43:51,557 At least 1 4 people died. 578 00:43:55,400 --> 00:43:58,119 ln a country where a steak and a bottle of wine 579 00:43:58,200 --> 00:44:00,589 were on practically every table every day, 580 00:44:00,680 --> 00:44:04,878 thousands were eating in soup kitchens or going hungry. 581 00:44:04,960 --> 00:44:06,996 CLOCK CHIMES 582 00:44:07,080 --> 00:44:11,073 lt's obvious enough who loses from hyperinflation. 583 00:44:11,160 --> 00:44:13,833 Very rapidly rising prices are bound to wipe out 584 00:44:13,920 --> 00:44:17,230 anybody who's dependent on an income that's fixed in cash terms. 585 00:44:17,320 --> 00:44:22,075 Groups Iike academics and civiI servants on infIexibIe monthIy saIaries, 586 00:44:22,160 --> 00:44:24,515 oId-age pensioners and, particuIarIy, 587 00:44:24,600 --> 00:44:28,388 bondhoIders Iiving off the interest on their investments. 588 00:44:28,480 --> 00:44:32,678 Buenos Aires is absoIuteIy fuII of antique shops Iike this one, 589 00:44:32,760 --> 00:44:36,150 Iaden down with jeweIIery and watches and cutIery, 590 00:44:36,240 --> 00:44:39,915 aII soId off by middIe-cIass famiIies who just ran out of cash. 591 00:44:41,320 --> 00:44:45,711 ln the 1 920s, the great economist John Maynard Keynes had predicted 592 00:44:45,800 --> 00:44:47,711 the euthanasia of the bondholder, 593 00:44:47,800 --> 00:44:51,713 anticipating that inflation would eat up the paper wealth 594 00:44:51,800 --> 00:44:54,633 of financial families like the Rothschilds. 595 00:44:56,680 --> 00:45:00,832 As inflation swept through the world in the 1 97 0s, 596 00:45:00,920 --> 00:45:02,990 Keynes seemed to be proved right. 597 00:45:04,240 --> 00:45:05,434 ln our time, however, 598 00:45:05,520 --> 00:45:09,877 we've seen a miraculous resurrection of the bondholder - 599 00:45:09,960 --> 00:45:13,191 a comeback by Mr Bond... even in Argentina. 600 00:45:15,360 --> 00:45:17,590 The bond market is back, 601 00:45:17,680 --> 00:45:22,117 terrifying American officials as they try to fund a massive financial bailout 602 00:45:22,200 --> 00:45:27,911 by - you guessed it - selling billions of dollars of freshly minted bonds. 603 00:45:29,200 --> 00:45:31,998 The key to Mr Bond's revival 604 00:45:32,080 --> 00:45:36,437 has been a growth in the number of bondholders... 605 00:45:39,160 --> 00:45:42,311 ..which brings us back to ltaly, 606 00:45:42,400 --> 00:45:46,279 where the bond market was born 600 years ago. 607 00:45:51,840 --> 00:45:57,312 ltaly is now a country with one of the most rapidly ageing populations in Europe. 608 00:45:58,520 --> 00:46:00,431 ln such a greying society, 609 00:46:00,520 --> 00:46:04,308 there is a growing demand for fixed-income securities like bonds. 610 00:46:04,400 --> 00:46:07,915 But there's also a strong fear of inflation eating up 611 00:46:08,000 --> 00:46:10,753 the real value of pensions and savings. 612 00:46:10,840 --> 00:46:14,116 Central bankers suspected of being soft on inflation 613 00:46:14,200 --> 00:46:17,909 have to answer to the pensioner's friend - the bond market. 614 00:46:19,160 --> 00:46:23,312 And treasuries planning to spend billions to bail out banks that have gone bust 615 00:46:23,400 --> 00:46:26,790 in the current credit crunch have to tread warily, too, 616 00:46:26,880 --> 00:46:30,350 if they expect to raise the money by selling yet more bonds. 617 00:46:33,520 --> 00:46:36,193 In modern Europe, as in Renaissance ItaIy, 618 00:46:36,280 --> 00:46:41,434 an equiIibrium has been struck between poIiticaI power and financiaI exposure. 619 00:46:41,520 --> 00:46:43,511 Today, as much as ever, 620 00:46:43,600 --> 00:46:47,275 it seems it's the bond market, our oId friend Mr Bond, 621 00:46:47,360 --> 00:46:49,715 that reaIIy ruIes the worId. 622 00:46:52,000 --> 00:46:54,560 But what if, rather than lending to governments, 623 00:46:54,640 --> 00:46:58,349 you prefer to use your money to buy a share in a company? 624 00:46:58,440 --> 00:47:01,159 Would that be more or less risky? 625 00:47:01,240 --> 00:47:04,232 More or less profitable? 626 00:47:04,320 --> 00:47:06,390 ln the next episode of the Ascent Of Money, 627 00:47:06,480 --> 00:47:11,713 we'll discover why we find it so hard to learn from financial history, 628 00:47:11,800 --> 00:47:17,272 despite nearly 300 years of stock market bubbles and busts.