Original subtitles

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.