The Birth of the Bond Market
Niall Ferguson’s book, The Ascent of Money , has a fascinating account on how bonds (those pieces of paper that give a fixed interest) came into existence. It started off in the city states of Italy – Venice, Florence, Genoa, Pisa etc – which were at constant war with each other. But of course: “This fighting is possible only if you can pay for it.” Collecting taxes wasn’t a reliable way for these Italian cities. Why not? Because, with the taxation model, if more money was needed, one would have to increase taxes (upon which the common man might revolt, and you didn’t want an internal rebellion while fighting an external enemy), and then spend effort collecting it (that takes time, which you don’t have during war time). Ergo, they came up with a new system to raise money: the state would issue bonds. And expect demand that the rich families buy these “forced bonds”. After all, they had the most at stake, the most to lose if the city fell to the enemy, surely they...