All language subtitles for The Ascent of Money - 2of6 - Human Bondage - Ch4 2009 DVDRip XviD AC3

HELICOPTER ROTORS THRUM

We may think power resides

with presidents and prime ministers
in palaces and parliaments. Not so.

ln today's world, real power lies in the
hands of an elite group of unassuming men

in anonymous, open-plan offices...

..the men who control
the world's bond market.

Bill Gross is the boss of PlMCO,

the world's biggest
bond-trading operation,

which manages a portfolio of bonds
worth $7 00 billion.

Gross is widely regarded
as the king of the bond market.

Just call him Mr Bond.

Bonds are the magical link
between the world of high finance

and the worId of poIiticaI power.

Governments wiII aIways spend more
than they raise in taxation -

sometimes shed-Ioads more -

and they make up the difference
by seIIing bonds that pay interest.

But - and here's the magic -
if you want to get rid of a bond,

the government doesn't have
to give you the cash back.

You just take it to a bond market,

Iike the one here at
Tokyo Stock Exchange, and seII it.

After the rise of banks,

the birth of the bond market was the next
big revolution in the history of finance.

lt created a whole new way
for governments to borrow money.

The bond market funded the wars

that plagued northern ltaly
600 years ago.

GUNSHOT ECHOES

lt dictated the outcome

of the Battle of Waterloo

and created the world's greatest
financial dynasty.

lt ensured the defeat of the South
in the American Civil War.

And in modern times, the bond market

has brought once wealthy nations,
like Argentina, crashing to their knees.

Today, governments and companies
use bonds to borrow

on an unimaginably vast scale.

All told,

there are bonds out there
worth around $85 trillion.

The fortunes of most of us,
whether we like it or not,

are directly linked to the bond market.

lf the bond market tanks,
then down goes the value of our pensions -

and that's a huge part
of our wealth as individuals.

ln the financial crisis that has gripped
the world since the summer of 2007,

US government bonds have been seen as
a safe haven for investors seeking shelter

from the storm
of falling property and share prices.

So if Bill Gross were to lose faith
in those bonds,

it would hit the financial world like...
well, a thunderball.

That's why this ''Mr Bond''

has become so much more powerful
than the Mr Bond created by lan Fleming.

And that's why both kinds of bond
have a licence to kill.

TRADERS SHOUT

HORN BLARES

''War, '' declared the ancient Greek
philosopher Heraclitus,

''is the father of all things. ''

lt was certainly the father
of the bond market.

For much of the 1 4th and 1 5th centuries,
the medieval city-states of Tuscany -

Florence, Pisa and Siena -
were at war with each other.

This was war waged
as much by money as by men.

In Pieter van der Heyden's BattIe
Of The Money-Bags And Strong-Boxes,

piggy banks, treasure chests
and barreIs fuII of coins

Iay into one another with Iances
and swords in a chaotic free-for-aII.

The Dutch verses
inscribed at the bottom read,

''It's aII for money and goods,
this fighting and quarreIIing.''

But what they might
just as easiIy have said

is that war is impossibIe
if you don't have the money to pay for it.

BELL TOLLS

And the way to do that -

the ability to finance war
through the bond market -

was, like so much else,
an invention of the ltalian Renaissance.

Rather than require their own citizens
to do the dirty work of fighting,

each city hired military contractors -
condottieri -

who raised armies to annex land
and loot treasure from the others.

Among the condottieri
of the 1 360s and 1 37 0s,

one stood head and shoulders
above the others.

This is his portrait in Florence's Duomo -
a thank-you from a grateful public.

Unlikely though it may seem,
this master mercenary was an Essex boy.

So skilfully did he wage war

that the ltalians called Sir John Hawkwood
Giovanni Acuto -

John the Acute.

This castle was one of many pieces
of prime real estate

the Florentines gave him
as a reward for his services.

But Hawkwood was a mercenary

who was willing to fight
for anyone who'd pay him -

Milan, Padua, Pisa or the Pope.

These dazzIing frescoes
in FIorence's PaIazzo Vecchio

show the armies of Pisa and FIorence
cIashing in 1364.

At that time, Hawkwood was fighting
on the side of Pisa.

But 15 years Iater, he'd switched sides.

Why? Because FIorence
was where the money was.

The cost of these incessant wars
plunged ltaly's city-states into crisis.

Expenditures, even in years of peace,
were running

at double or more tax revenues.

To pay the likes of Sir John Hawkwood,
Florence was drowning in deficits.

This wonderfuI document
in the FIorentine State Archive

shows how the city's debt had expIoded

from around 50,000 fIorins
at the beginning of the 1 4th century

to five miIIion by 1 427.

It was quite IiteraIIy a mountain of debt,
hence the name - the Monte Commune.

But from whom couId the FIorentines
possibIy have borrowed such a vast sum?

The answer is right here -
from themseIves.

lt was a revolutionary idea that would
change the world of money for ever.

Rather than paying direct tax,
citizens were now

effectively obliged to lend money
to their own government.

ln return for these forced loans,
they received interest.

These debt instruments -
simpIe Iines in a Iedger -

were the originaI government bonds.

And the wonderfuI thing about them was
that if you needed your money in a hurry,

you couId seII your bonds
to other citizens.

They were Iiquid assets.

What this record teIIs us

is how FIorence turned its citizens
into its biggest investors.

This wartime expedient marked the birth
of the modern bond market.

Everyone was a winner.

Bonds had saved the city-state
from bankruptcy.

The citizens were happy
earning their interest.

And the bond market let them
buy or sell as they saw fit.

lt seemed as if the problem

of public debt had been solved,
allowing the citizens of Florence

to turn their minds to higher things.

But there was just one problem
with this brilliant idea.

There was a limit to how many more or less
unproductive wars could be waged.

The larger the debts of the ltalian cities
became, the more bonds they had to issue,

and the more bonds were issued, the less
valuable they looked to investors.

And that was exactly
the sequence of events in Venice.

By the early 1 6th century,

the city had suffered
a series of military reverses,

and the value of Venetian bonds
had taken a hammering.

At their nadir between 1509 and 1529,

Venetian Monte Nuovo bonds were trading
at just 10% of their face vaIue.

Now, if you buy a bond when war is raging,
you're taking a risk -

the risk that the city won't pay you back
or pay your interest. On the other hand,

remember that the interest is paid
on the face vaIue of the bond,

so if you can buy it
at just 10% of its face vaIue,

you're earning a handsome return
of maybe 50%.

And that is how the bond market works.

In a sense, you get return
for the risk you're prepared to take.

At the same time, it's the bond market

that sets interest rates
for the economy as a whoIe.

If the state has in effect to pay 50%,
then so do aII the other borrowers.

The bond market had been invented
to help pay for ltaly's wars.

But now it was setting interest rates
for everyone.

lts rise to power had begun.

Over the next two centuries,
bonds would come to rule the world.

This house was built
by the financial dynasty

that helped decide
the Battle of Waterloo -

the dynasty that produced the man
they called the Bonaparte of finance,

the emperor
of the 1 9th-century bond market.

''He is master of unbounded wealth,

''he boasts that he is the arbiter
of peace and war,

''and that the credit of nations
depends upon his nod.

''Ministers of state are in his pay. ''

Those words, spoken in 1 828 by the Radical
Member of Parliament Thomas Duncombe,

were describing Nathan Rothschild,
bond trader extraordinaire

and founder of the London branch of what
became the biggest bank in the world.

The bond market made the Rothschilds
stupendously rich -

so rich that they could afford to build
41 stately homes all over Europe.

This is number 29 -
Waddesdon Manor in Buckinghamshire,

which has been restored
in all its gilded glory

by Jacob Rothschild,
Nathan's great-great-great-grandson.

WeII, he was short, fat,

obsessive, extremeIy cIever,

whoIIy focused.

I can't imagine he wouId have been a very
pIeasant person to have had deaIings with.

Between around 1 81 0 and 1 836, the five
sons of Mayer Amschel Rothschild

rose from the obscurity of
the Frankfurt ghetto to attain a position

of unequalled power
in international finance.

lt was the third son, Nathan,

who orchestrated
this family triumph from London.

Evelyn de Rothschild
is Nathan's great-great-grandson.

He recently retired
as chairman of Rothschild's -

the bank that Nathan built.

He was very ambitious

and he moved to London.

I think he was determined.
I don't think he suffered fooIs IightIy.

Maybe that's a famiIy trait.

This is one of the few surviving Ietters
from Nathan RothschiId to his brothers

written, as aIways, in Judendeutsch -

that was German transIiterated
into Hebrew characters -

and it gives you an idea of what
an extraordinary work ethic the man had

and how he tried to impose it on his poor,
Iong-suffering brothers.

Just Iisten to this.

''Dear AmscheI, I am writing you my opinion
because it's my damned duty to do so.

''I read your Ietters, not once,
but often 100 times,

''because you can weII imagine
that after dinner I don't read books,

''I don't pIay cards,
I don't go to the theatre.

''My onIy pIeasure is my business.''

PHONES RING

lt was this phenomenal drive,
allied with innate financial genius,

that propelled Nathan from obscurity
to mastery of the London bond market.

Once again, however,

the opportunity for
a financial breakthrough came from war.

On the morning of June 1 8th, 1 81 5,
67,000 British, Dutch and German troops

under the Duke of Wellington's command
looked out across the fields of Waterloo,

not far from Brussels, towards an almost
equal number of French troops

commanded by the French Emperor,
Napoleon Bonaparte.

The BattIe of WaterIoo was the cuImination
of more than two decades

of intermittent confIict
between Britain and France.

But it was more than just a battIe
between two armies.

It was aIso a contest
between rivaI financiaI systems.

One, the French, based on pIunder.
The other, the British, based on debt.

To pay for the war,

the British government had sold
an unprecedented amount of bonds.

According to a long-standing legend,

the Rothschild family
made their first millions

by speculating on how the outcome
of the Battle of Waterloo

would affect the price of these bonds.

lt was this legend
of Jewish profiteering

that, a century later,
the Nazis did their best to embroider.

ln 1 940 Josef Goebbels approved
the release of this film, Die Rothschilds.

HE SPEAKS GERMAN

Nathan is seen bribing a French general to
ensure the Duke of Wellington's victory,

and then deliberately misreporting
the outcome of the battle in London.

This triggers panic selling
of British bonds,

which Nathan then snaps up
at bargain-basement prices.

What happened here
in 1 81 5 was altogether different.

Far from making money
from WeIIington's defeat of NapoIeon,

the RothschiIds
were very nearIy ruined by it.

Their fortune was made
not by WaterIoo, but despite it.

This is how it really happened.

Selling bonds to the public had raised
plenty of cash for the British government.

But neither bonds nor bank notes
were any use to Wellington.

To provision his troops
and pay Britain's allies against France

he needed a currency
that was universally acceptable.

Nathan Rothschild was given the job of
taking the money raised on the bond market

and delivering it to Wellington -
as gold.

The success of this operation would
determine the fate of the warring empires

and of all Europe.

This Ietter marks a turning point in
the history of both the RothschiId famiIy,

and the British government.
It's dated the 1 1th of January 181 4,

and it's an order
from the ChanceIIor of the Exchequer

to the Commissary-in-Chief
teIIing him to appoint Nathan RothschiId -

Mr RothschiId -
as a British government agent.

Nathan's job was to gather together
as much goId and siIver as he couId find

on the European continent and make sure it
got to the Duke of WeIIington and his army

who had just fought their way out of Spain
into the South of France.

It was an operation that reIied heaviIy

on the RothschiIds' unique
pan-European credit network

and on Nathan's abiIity to mobiIise goId
the way WeIIington couId mobiIise troops.

Shifting such vast amounts of gold
in the middle of a war was hugely risky.

Yet, from the Rothschilds'point of view,

the hefty commissions they were able
to charge more than justified the risks.

The Rothschilds soon became indispensable
to the British war effort.

ln the words
of the British Commissary-in-Chief...

''Rothschild of this place has executed
the various services

''entrusted to him in this line
admirably well, and though a Jew,

''we place a good deal
of confidence in him. ''

The Rothschilds were so effective
as war financiers

because they had a ready-made
banking network within the family -

Nathan in London, Amschel in Frankfurt,

James in Paris, Carl in Amsterdam and
Salomon roving wherever Nathan saw fit.

lf the price of gold was higher in,
say, Paris than in London,

James in Paris would sell -
and Nathan in London would buy.

I think their edge over famiIies Iike the
Barings, with whom they were competing,

was that they had their brothers in very
important financiaI centres in countries.

Now whether that was pre-meditated,

whether they thought that through
as they got out of the ghetto,

it's hard to beIieve
that they went as far as that.

But that's what happened and once
they saw that it was an advantage,

they worked on that advantage.

ln March 1 81 5, Napoleon returned to Paris
from exile in Elba

determined to revive
his imperial ambitions.

The Rothschilds immediately
ramped up their gold operation,

buying up all the bullion and coins
they could lay their hands on.

Nathan's reason for buying this
huge stock of gold was simple.

He assumed that,
as with all Napoleon's wars,

this would be a long one.

His gold would be more and more
sought after and it would rise in value.

lt proved to be
a near-fatal miscalculation.

Wellington famously
called the Battle of Waterloo,

''The nearest-run thing
you ever saw in your life. ''

CROWS CAW

After a day of brutal charges,
counter charges and heroic defence,

the late arrival of the Prussian Army
finally proved decisive.

For Wellington, it was a glorious victory.

But not for the Rothschilds.

No doubt it was gratifying
to Nathan RothschiId

to be the first to hear the news
of NapoIeon's defeat.

Thanks to the swiftness
of the RothschiId couriers,

he heard it fuIIy 48 hours
before Major Henry Percy

deIivered WeIIington's officiaI despatch
to the British Cabinet.

But, no matter how early he heard it,

the news of Waterloo was anything
but good from Nathan's point of view.

He had bargained
for something much more protracted.

Now he and his brothers were sitting on
top of a piIe of cash that nobody wanted,

to pay for a war that was over.

With the coming of peace,

the great armies that had fought Napoleon
could be disbanded.

That meant no more gold for soldiers'
wages and it meant the price of gold,

which had soared during the war,
would fall.

Nathan was faced
with heavy and growing losses.

CAR HORNS HONK

There was only one possible way out.

Nathan could use the Rothschild gold
to make a massive and hugely risky bet...

on the bond market.

On July 20, 1 81 5, the evening edition
of the London Courier

reported that Nathan had made
''great purchases of stock'',

meaning British government bonds.

Nathan's gamble
was that the British victory at Waterloo

would send the price of British bonds
soaring upwards.

Nathan bought, and as the price of bonds
began to rise, he kept on buying.

Despite his brothers' desperate entreaties
to sell, Nathan held his nerve

for another year.

Eventually, in July 1 81 7,

with bond prices up by 40%,
he sold his holding.

His profits were worth approximately
�600 million today.

The Rothschilds had shown

that bonds were more than just a way
for governments to fund their wars.

They could be bought and sold in a way
that generated serious money.

And with money, came power.

Mayer Amschel Rothschild
had repeatedly admonished his five sons,

''lf you can't make yourself loved,
make yourself feared. ''

As they bestrode
the mid-1 9th century financial world

as masters of the bond market,

the Rothschilds were already
more feared than loved.

But now, they had become hated too.

The fact that the Rothschilds were Jewish

gave a new impetus
to deep-rooted anti-Semitic prejudice.

(RothschiId) Just a few months ago
a colleague of mine in my office,

who coIIects posters, found these...

WeII, this particuIar, rather
extraordinary exampIe of anti-Semitism

in a stark form, about the RothschiIds,
who were as it were epitomised,

to them and others at times,

the most extreme forms of undesirabIe
capitaIism as practised by Jews.

lt was, above all, the Rothschilds'
seeming ability to permit or prohibit wars

that aroused the most indignation.

You might have thought that
the RothschiIds actuaIIy needed war.

After aII, some of Nathan's biggest deaIs
had been produced by war.

If it hadn't been for war, 19th-century
states wouIdn't have needed to issue bonds

for the RothschiIds to buy and seII.

But the troubIe with war,
and even more so with revoIution,

was that increased the risk that a debtor
state might faiI to meet its commitments.

And that hit the price of existing bonds.

By the mid-19th century, the RothschiIds
were no Ionger mere traders,

they were fund managers,

carefuIIy tending to a vast portfoIio
of their own government bonds.

Now, they stood to Iose much more
than to gain from confIict.

The Rothschilds had helped decide
the outcome of the Napoleonic Wars

by putting their financial weight
behind Britain.

Now they would help decide the outcome
of the American Civil War -

by choosing to sit on the sidelines.

GUNSHOTS

Once again, it was the masters of the bond
market who would be the arbiters of war.

50 years after the Battle of Waterloo,
and on the other side of the world,

another great war would be decided
by the power of the bond market.

But this time, it would be the vanquished
who made the big bet and lost.

The traditional view is that the key
turning point in the American Civil War

came in June 1 863,
two years into the conflict.

That was the month
when Union forces captured Jackson,

the Mississippi state capital,

and forced a Confederate army
to retreat westward to Vicksburg,

their backs to the Mississippi River.

Surrounded, with Union gunboats
bombarding their positions from behind,

the Southerners held out for a month
before laying down their arms.

After Vicksburg, the Mississippi
was firmly in the hands of the North.

The South was literally split in two.

Yet this military setback
wasn't the decisive factor

in the South's ultimate defeat.
The real turning point came earlier.

And it was financial.

200 miles downstream from Vicksburg,

where the Mississippi joins the Gulf
of Mexico, lies the port of New Orleans.

This is Fort Pike,

buiIt after 1812 to protect New OrIeans
from a future British attack.

But 50 years Iater, it wasn't abIe to
protect the South from a Northern attack

when Captain David Farragut seized
New OrIeans on ApriI 28th, 1862.

It was a cruciaI moment in the CiviI War

as New OrIeans was the principaI outIet
for the South's most important export...

..cotton.

Without control over the cotton trade
the South's cause was doomed -

because cotton had become
the essential ingredient

in an ambitious scheme to bring
the bond market into the war.

Like the ltalian city states
500 years before,

the Confederate Treasury
had initially raised money for the war

by selling bonds to its own citizens.

But there was a finite amount of capital
available in the South.

To survive, the Confederacy
looked to Europe

in the hope that the world's greatest
financial dynasty might help them

beat the North as they had helped
Wellington beat Napoleon.

lnitially, the Confederacy
had grounds for optimism.

ln New York, the Rothschilds' agent
was sympathetic,

having opposed the North's leader,
Abraham Lincoln

in the presidential election of 1 860.

But still the Rothschilds hesitated.

Lending to the British government to help
defeat Napoleon had been one thing.

But buying bonds from a bunch of
breakaway Southern slave states

seemed a risk too far.

The Rothschilds decided to stay out.

Yet despite this setback,

the Confederate government
had an ingenious trick up their sleeves.

The trick, like the sleeves themselves,
was made of cotton.

The South's idea was to use cotton
as collateral to back its bonds.

lnvestors would be comforted to know
that if the interest payments dried up

they could still demand
their cotton instead.

The South's agents went to work

selling the bonds
in the financial centres of Europe.

When the Confederacy tried to market
conventional bonds

in European financial centres
like Amsterdam's,

investors wouldn't touch them
with a bargepole.

But when an obscure French firm
named EmiIe ErIanger and Company

offered cotton-backed bonds,
it was a compIeteIy different story.

The key to the success
of the ErIanger bonds

was that they couId be
converted into cotton

at the pre-war price of six pence a pound.

These cotton bonds formed the basis
of the South's new financial strategy.

lf they could restrict
the supply of cotton, its value,

and the value of the bonds,
would increase.

At the same time, the Confederates
set out to use cotton

to blackmail the most powerful country
in the world -

Britain.

(Tour guide) The routes
to the United States of America

provided Liverpool
with growing volumes of trade

and new docks opened on the Mersey
in quick succession during the 1 800s.

(Narrator) ln 1 860, the Port of Liverpool
was the principal gateway

for imports of cotton
to the British textile industry,

then the mainstay
of the Victorian industriaI economy.

More than 80% of the cotton
came from the Southern United States.

Now that gave
the Confederate Ieadership hope

that they had the Ieverage to bring
in Britain on their side in the CiviI War.

To ratchet up the pressure,
they decided to impose an embargo

on aII shipments of cotton to LiverpooI.

For a while, the South's strategy
worked brilliantly.

Cotton prices soared. So did the value
of the Confederates' cotton-backed bonds.

And the cotton embargo
devastated the British economy.

Mills were forced to lay off workers.

Eventually, in late 1 862,
production all but ceased.

This cotton miII in StyaI, south of
Manchester, empIoyed around 400 workers,

but that was just a fraction
of the 500,000 peopIe

empIoyed by King Cotton
across Lancashire.

ObviousIy, with no cotton
there was nothing for peopIe to do.

By the end of 1862,

haIf the entire workforce
of Lancashire had been Iaid off.

A quarter of the popuIation
was on poor reIief.

They caIIed it the ''Cotton Famine'',
but this reaIIy was a man-made famine.

Britain was in the doldrums.

And the South's cotton bonds
were riding high.

Yet the South's ability
to manipulate the bond market

depended on one over-riding condition -

that investors could be sure of taking
physical possession of the cotton

which underpinned the bonds if the South
failed to make its interest payments.

And that's why the fall of New Orleans
on April 28, 1 862,

was the real turning point
in the American Civil War.

Now that the South's main port
was in Union hands,

any investor who wanted to lay his hands
on Southern cotton

had to run the Union's
formidable naval blockade.

The Confederates
had overplayed their hand.

They had turned off the cotton tap, but
then lost the ability to turn it back on.

By 1 863, the mills of Lancashire
had found new sources of cotton

in China, Egypt, and lndia

and investors were rapidly losing faith
in the South's cotton-backed bonds.

The consequences for the Confederate
economy were disastrous.

With its domestic bond market exhausted
and onIy two paItry foreign Ioans,

the Confederacy reaIIy had no aIternative
but to print paper doIIars,

like these ones here in the Louisiana
State Museum, to pay for the war.

ln all, 1. 7 billion dollars' worth.

Now, it's true that the North
aIso printed paper money,

but by the end of the war its ''greenbacks''
were stiII worth around 50 pre-war cents,

whereas a Southern ''greyback''
was down to just one cent.

What's more, with more and more of
this cash chasing fewer and fewer goods,

infIation in the South simpIy expIoded.

By January 1865, the price of some goods
was up by a factor of 90.

The South had bet everything
on manipulating the bond market

and had lost.

lt would not be the last time in history
that an attempt to do so

would end in ruinous inflation.

Today the global market
for bonds is still bigger

than the all the world's
stock markets put together.

lt's still a market
that can make or break governments.

Does it surprise you that its key player

began his money-making career
in the casinos of Las Vegas?

I was a bIackjack pIayer.

One of the first professionaI
bIackjack pIayers, not to brag,

but in the Iate '60s, I went to Vegas

and appIied a card-counting system
to try and beat Vegas.

Now this master of understatement
is the King of the Bond Market,

controller of the biggest bond fund
in the world.

So what has this got to do
with you and me?

Well, when Gross buys or sells bonds,

it doesn't just affect financial markets
and government policy,

it affects the value of our pension funds

and the interest rates
we pay on our mortgages.

There's only one thing
that Mr Bond is afraid of

and it's not Goldfinger.

Rather, it's inflation.

The lethal danger that inflation poses

is that it undermines the value of being
paid a fixed rate of interest on a bond.

If infIation goes up to 10%

and the vaIue of a fixed-rate interest
is onIy five,

then that means that the bond hoIder
is faIIing behind infIation by 5%.

That's why, at the first whiff
of higher inflation, bond prices fall,

and in some cases, keep falling.

To see just how bad things can get
when the inflationary genie escapes

from the bottle you just have to look
at the example of Argentina.

Many Argentines date the steady
decline of their economic fortunes

to a day in February, 1 946,

when the newly elected President,
General Juan Domingo Peron

came here to the Central Bank
in Buenos Aires.

He was astonished at what he saw.

''There is so much gold, '' he marvelled,

''you can hardly walk
through the corridors. ''

The very name Argentina
suggests wealth and plenty -

it means ''The Land Of Silver''.

The river flowing past the capital is
the Rio de la Plata, ''The Silver River''.

Once upon a time, there used to be
two Harrods in the world.

One in London, in Knightsbridge, and
the other here, in the Avenida Florida,

in the heart of Buenos Aires.

Founded in 1912,

this other Harrods is a reminder
that Argentina used to be a rich country.

At one time, its per capita income was
18% Iess than that of the United States.

Investors who fIocked
to buy Argentine bonds

hoped that Argentina wouId become
the United States of South America.

Well, Argentina's history since then

is a classic illustration that all the
resources and talent in the world

can be set at nought
by chronic financial mismanagement.

MUTED CONVERSATION

There have been many financial crises
in Argentine history.

But the crisis
that hit the country in 1 989

was unparalleled.

At the beginning of February,

the country was suffering
one of the hottest summers on record.

ln Buenos Aires, the electricity system
just couldn't cope.

Five-hour power cuts were commonplace.

But these, as it turned out,
were the least of Argentina's problems.

As is almost always the case,

there were several well-trodden steps
to monetary hell.

In step one, the government
spends more, much more,

than it can raise in taxation.

UsuaIIy, but not aIways,
it's because of a war.

In Argentina's case, there were two.

One, a civiI war between GeneraIs
and the Left in the 1970s,

the other a foreign war against Britain
over the FaIkIand IsIands in 1982.

By 1989, the financiaI system
was about ready to bIow.

By February, inflation had already
reached 1 0% - per month.

Banks were ordered to close as the
government tried to lower interest rates

and stop the currency's
exchange rate from collapsing.

lt didn't work.

ln just a month,

the austral fell 1 40%
against the dollar.

At the same time, the World Bank
froze lending to Argentina,

saying that the government had failed
to tackle the root cause of inflation -

a bloated public-sector deficit.

With no cheap Ioans forthcoming
from the WorId Bank,

the government tried to finance its
deficit by seIIing bonds to the pubIic.

But investors were hardIy IikeIy
to buy bonds with the prospect

that their reaI vaIue wouId be wiped out
by infIation in just a matter of days.

Nobody was buying.

The government was running out of options.

ln April, furious customers
overturned shopping trolleys

after one supermarket announced
over the loudspeaker

that prices were being raised by 30%
immediately.

Shops emptied of goods as owners weren't
making enough money to buy new stock.

Government bond prices plunged

as fears rose that the Central Bank's
reserves were running out.

With no foreign Ioans
and no-one wiIIing to buy bonds,

there was onIy one thing Ieft for an
increasingIy desperate government to do -

get the CentraI Bank IiteraIIy
to print more money.

But they couIdn't even get that right.

On Friday April 28th,
Argentina literally ran out of money.

''lt's a physical problem, ''

the Central Bank Vice-President
told a news conference.

What he meant was that Argentina's mint
had run out of paper to print new notes,

and the printers had gone on strike.

''l don't know how we'll do it,

''but the money has got to be there
on Monday, '' he declared.

Yet the faster the printing presses
rolled, the less the money was worth.

The government was forced to print higher
and higher denominations of notes.

ln May, the price of coffee went up
by 50% in a week.

Farmers stopped bringing cattle to market
as the price for one cow

was now the same as for
three pairs of shoes.

By June 1989, infIation in Argentina
had reached a monthIy rate of 100%,

an annuaI rate of roughIy 12,000%.

To put that into concrete terms,

if you wanted to go out for dinner
in Buenos Aires on a Saturday night,

in May you'd pay 10,000 austraIes.

By June, you'd have to pay 20,000
for the same meaI.

And by the foIIowing month,
it wouId take 60,000.

You've heard of a fistfuI of doIIars.

WeII, you needed a drawer fuII
of austraIes just to buy a square meaI.

ln June, popular frustration erupted

in two days of intense rioting and looting
by hungry mobs.

At least 1 4 people died.

ln a country where a steak
and a bottle of wine

were on practically every table every day,

thousands were eating in soup kitchens
or going hungry.

CLOCK CHIMES

lt's obvious enough who loses
from hyperinflation.

Very rapidly rising prices are bound
to wipe out

anybody who's dependent on an income
that's fixed in cash terms.

Groups Iike academics and civiI servants
on infIexibIe monthIy saIaries,

oId-age pensioners and, particuIarIy,

bondhoIders Iiving off the interest
on their investments.

Buenos Aires is absoIuteIy fuII
of antique shops Iike this one,

Iaden down with jeweIIery and watches
and cutIery,

aII soId off by middIe-cIass famiIies
who just ran out of cash.

ln the 1 920s, the great economist
John Maynard Keynes had predicted

the euthanasia of the bondholder,

anticipating that inflation would eat up
the paper wealth

of financial families
like the Rothschilds.

As inflation swept through the world
in the 1 97 0s,

Keynes seemed to be proved right.

ln our time, however,

we've seen a miraculous resurrection
of the bondholder -

a comeback by Mr Bond...
even in Argentina.

The bond market is back,

terrifying American officials as they
try to fund a massive financial bailout

by - you guessed it - selling billions
of dollars of freshly minted bonds.

The key to Mr Bond's revival

has been a growth
in the number of bondholders...

..which brings us back to ltaly,

where the bond market was born
600 years ago.

ltaly is now a country with one of the
most rapidly ageing populations in Europe.

ln such a greying society,

there is a growing demand
for fixed-income securities like bonds.

But there's also a strong fear
of inflation eating up

the real value of pensions and savings.

Central bankers suspected of being
soft on inflation

have to answer to the pensioner's friend -
the bond market.

And treasuries planning to spend billions
to bail out banks that have gone bust

in the current credit crunch
have to tread warily, too,

if they expect to raise the money
by selling yet more bonds.

In modern Europe,
as in Renaissance ItaIy,

an equiIibrium has been struck between
poIiticaI power and financiaI exposure.

Today, as much as ever,

it seems it's the bond market,
our oId friend Mr Bond,

that reaIIy ruIes the worId.

But what if,
rather than lending to governments,

you prefer to use your money to buy
a share in a company?

Would that be more or less risky?

More or less profitable?

ln the next episode
of the Ascent Of Money,

we'll discover why we find it
so hard to learn from financial history,

despite nearly 300 years of stock market
bubbles and busts.