Amidst all the talk of an AI bubble, bonds are back in the news. The world’s two leading business newspapers, The Wall Street Journal and The Financial Times, both feature stories this weekend warning about bond ructions and surging yields. While these warnings might only interfere with the sleep of bond geeks, they are a good reminder of the centrality of the bond market to our prosperity.
For all their financial geekiness, Robin Wigglesworth knows that bonds matter. He edits Alphaville, the Financial Times’ splendidly geekish markets blog, and he’s the author of A Fabulous Debt, a new book that tells the “epic” story of how bonds built the modern world. The bond market matters, Wigglesworth reminds us, because when it breaks — as in 1873, 2008 and very nearly in 2020 — then the whole world suffers.
So what, exactly, is a bond? Wigglesworth explains that it’s a tradable loan which the Venetians accidentally invented in 1171 to pay for a war with Constantinople. In Venice, it became a forced levy on every citizen, sweetened by its annual 5% interest payments and by the right to sell its paper on the Rialto. From there it runs through Amsterdam with the Dutch East India Company to modern America, where Thomas Jefferson’s Louisiana Purchase was financed by bonds sold by the London merchant bank Baring Brothers — remarkably, while Britain was at war with the France it was paying, and earning Barings what may have been the largest banking fee in history. Then there’s the deliciously named Scottish adventurer Gregor MacGregor, a bond bad boy who invented an entire country, Poyais, and successfully sold its bonds in London.
In spite of the shady MacGregor, the moral of the bond story, Wigglesworth reassures us, is that transparency pays. Britain could borrow more cheaply than its rivals because parliament controlled the purse and published its accounts. Europe’s greatest banker, the London-based Nathan Mayer Rothschild, who brought Prussia, Spain, Russia and the new Latin American republics to the London market after Waterloo, thus cajoled other governments into opening their books to get the same rates. Accountability was, literally, cheaper. And so the modern world — with its leviathan state and the financial muscle to conduct global wars — was born.
Does Wigglesworth lose sleep about today’s bond ructions and surging yields? Not exactly. But he is a tad nervous about the fact that tech giants have issued over $500 billion of bonds this year to build data centers. So rather than the feared AI stock market bust, Wigglesworth does raise the more apocalyptic specter of a bond bust. Not an imminent fabulous crisis, he reassures. Not yet, anyway.
Five Takeaways
• Stock Bubbles Don’t Matter. Bond Bubbles Do. Wigglesworth’s opening move reverses the usual hierarchy. Stock market bubbles are mostly inconsequential and sometimes even welcome — we occasionally need people to dream rather than be careful, and to throw money at the hot new thing, because that is when big leaps happen. The dot-com bust is his proof: the American stock market lost half its value from peak to trough, and the recession that followed was among the shortest and shallowest in US history. Credit is the dangerous part. When the bond market breaks bad — 1873, 2008, and very nearly 2020 — it tends to be very painful for the world. The structural reason is asymmetry: a shareholder’s upside is unlimited and the downside is zero, so the stock market is the natural home of wild speculation; a bondholder’s best case is simply being repaid. That is why bonds work best when they are safe, or at least seen as safe — and why the rare occasions when bond speculation does run out of control have proved more destructive than tulips, the South Sea, or the dot-com boom.
• Venice, 1171. Credit is ancient — Mesopotamian clay tablets recorded loans four thousand years ago, some made out not to a named person but simply to a merchant, which suggests they were traded. But the bond in its proper form was invented by accident in Venice in 1171, to finance a war with Constantinople. The city was rich, but not rich enough to borrow from the bankers at their tables in the Rialto, so the government compelled every citizen to lend in proportion to their wealth — an involuntary war tax, softened two ways: 5% a year until victory, and a receipt you could sell. The Venetians hated it at first, and then discovered it was collateral, and de facto paper money before paper money existed in Europe. Milan, Pisa, Genoa and Rome copied it; it spread to France, Germany, Spain and finally the Netherlands, where the Dutch turned a handful of loans into an actual market — cities, states and the water boards that paid for the dykes — and, Wigglesworth argues, invented modern capitalism. The Dutch East India Company sold stock once. It financed its ships, armies and expeditions with bonds.
• The Man Who Invented a Country. The book’s great set piece. Gregor MacGregor, a Scottish mercenary who had fought beside Bolívar and married his cousin, returned to London as cacique of Poyais — a verdant land on the Honduran coast, he said, with gold, honey, fertile plains and a capital called Saint Joseph. He had songs written about it. He sold its bonds on the London Stock Exchange, raising hundreds of thousands of pounds, and persuaded Scottish families to sell up and sail. Poyais did not exist. It was a swampy hellhole with no capital and no settlement; some who arrived took their own lives, many died of famine and malaria, and only a handful got home. Why bonds rather than stock? Because that is where the money was: Britain had financed the Napoleonic wars with an enormous issue of consols, those who held them made fortunes when Britain won, and Nathan Mayer Rothschild was busy bringing Prussia, Spain, Russia and the new Latin American republics to the London market. In the middle of what we would now call an emerging market bond bubble, an invented country did not sound so outlandish.
• Transparency Pays. The argument with the widest reach. Britain’s advantage in the nineteenth century was not only naval: its bonds were issued by a parliament that controlled the purse and published financial numbers, rather than by a fickle royal family, and Dutch, German and French investors preferred them for exactly that reason. Cheaper borrowing made Britain stronger, and Rothschild then went round cajoling other governments to open their books and issue through their estates rather than their kings, because that is what British money now expected. Accountability, in other words, had a price advantage — a quiet feedback loop pushing governments towards openness. America’s version is Hamilton, who assumed the states’ defaulted war debts and turned them into federal bonds that circulated as money in a country desperately short of coin — a financial enema, as the musical has it. The Louisiana Purchase was financed entirely by bonds, arranged by the British bank Baring Brothers while Britain was at war with France. Wigglesworth calls it a win-win-win; Andrew notes the indigenou...
