There are a plethora of ways in which someone can save and make money. And frankly, there are many things one would want to save up for. Whether it is through stocks and dividends, or simply saving in banks, nothing can be of safer investment than into the bond market. It is partly due to that reason that the total value of internationally traded bonds roughly equated to $18 trillion. In this short paper, I aim to discuss the mere power and historic tale of the mighty bond.
Regarding its power, it is important to note that the bond market affects everyone, in two ways. Firstly, consider the fact that a large part of all money set aside for the future, ends up invested in the bond market. Secondly, due to its large-scale operations, and given that government are seen as the most reliable borrowers, the bond market is what sets long term-interest rates. As we learn in economics, when the price of bonds fall, banks become more protective of their positions, and therefore interest rates skyrocket.
So where can we see it’s power shown in history?
In an engraving, by Pieter van de Heyden, the ‘Battle about Money’, he has tried to show that without money and funding, a war is simply a “chaotic free for all”The ideology of funding war by the mechanism of the bond market was, in fact, the cause of the Italian Renaissance. During the 15thand 16thcentury, the states of Florence, Pisa and Siena were at war. But why did Florence flourish in such times of turmoil? Simply put, they found an effective way of borrowing. They had wealthier citizens oblige to lend to their own city, and in return, they received interest. In effect, Florence turned citizens into major investors and at one point; two-thirds of the households were funding the public debt.
Nevertheless, when the bond market is heard, the first name that comes to mind is Nathan Rothschild. This is not due to the fact that the Rothschilds go down in and amongst the richest of British history, but wholly his involvement with the bond market, making shy of $600 million, during times of conflict against Bonaparte. An experienced gold smuggler, Rothschild had built up the connections to raise and transport gold, at a moment the British needed to transport it throughout Europe to fund their war against Bonaparte. He raised 1.2 Million GBP by 1814 and got a good commission for it. The biggest bet he made was at the moment Napoleon escaped from Elba. Rothschild bought all the gold he could find in the assumption it would be needed in another long war. But Napoleon’s quick defeat in Waterloo meant the gold price was bound to fall. This was when he had his eureka moment. He realised that after the victory of Britain, government borrowing was likely to fall, meaning that bond prices ought to rise. And they did. After buying bonds relentlessly via all his gold, Nathan Rothschild realised profits roughly equating to $600 million, allowing the Rothschilds to dominate the international for half a century after Waterloo.
The examples of Florence and Nathan Rothschild have proven the bond market to be a powerful yet beneficial financial resource. With the First World War, this changed. Governments had to rapidly increase their supply of bonds to cope with the towering fiscal deficit. In my opinion, this seemed to be their only viable option, and the past successes of such endeavours into the bond market would have fuelled their confidence. Especially Germany and its allies did not have access to the world’s bond market and found it increasingly difficult to raise money. After their defeat, a weak authority and great spending lead to a surge in, between 1913 and 1923 prices rose by 1.3 trillion per cent.
Either way, my zeal for discussing the power of the bond market has shown to be justified. As far as I can see, the manipulation of the bond market can have tremendous benefits and catches, for both the manipulator and the greater public.
It was James Carville, the adviser to President Bill Clinton, that once said if he were reincarnated, he “would choose to return as the bond market. He could then intimidate anyone”.
Economics Relate 