the-ascent-of-money

Welcome to the world of money. Bread, cash, dosh, dough, loot, looker, mullah, the breaddies, the wherewithal. Call it what you like. Money can break us or it can make us. In the past year, it certainly broke in more than a few of the biggest names on Wall Street and in the city of London. I'm a former master of the universe, Crash and Barn. The rest of us are left worrying if our savings would be safer in a mattress than in a bank. The great financial crisis that began in the summer of 2007 has most of us utterly baffled. How could a little local difficulty with subprime mortgages in the United States? Unleash an economic tsunami big enough to obliterate some of Wall Street's most illustrious names to force nationalisations of banks on both sides of the Atlantic and to bring the entire world economy to the very brink of recession if not downright depression. Shouldn't the series be called the Decent of Money? Well, I want to explain to you just how money rose to play such a terrifiably donut roll in all our lives. What's more, I want to reveal financial history as the essential backstory behind all history. Banks finance the Renaissance for the bombardment decided wars. Stock markets built empires and monetary meltdowns made revolutions. From ancient Mesopotamia right down to present day London, the Ascent of Money has been an indispensable part of the Ascent of Land. But money's rise has never been a swooth upward right. As we'll see, financial history has repeatedly been interrupted by gut wrenching crises, of which today is just the latest. From the fluctuating prices of the homes we own to the high speed industrialisation of China, the power of finances everywhere we look and it affects all of our lives. But are you in on the secret? Do you know what causes a bank round or a monetary meltdown or a stock market crash? Can you tell the difference between a subprime loan and a prime loan? I think these financial techniques only really make sense once you know where they came from. And that's why financial history is of more than merely academic interest, not knowing this stuff, can seriously damage your wealth. The amount of money sloshing around planet finance still boggles the mind. By one measure, the US stock of money is now $8.7 trillion, up to 12% since last year. And some people are still pocketing a huge share of that cash. Last year, despite the onset of the biggest financial crisis since the Depression, his hedge fund paved George Soros a cool 2.4 billion dollars. That's roughly 41,000 times more than the average American family earned. As they say on Wall Street, way to go. Now, however, imagine a world with no money. 500 years ago, the most powerful society in South America, the Inca Empire, had no real concept of money. The Inca's appreciated the aesthetic qualities of rare metals. Gold was the sweat of the sun, silver, the tears of the moon. Labour was the unit of value in the Inca Empire, just as it was later supposed to be in a communist society. But in 1532, the Inca's ran into a man whose hunger from money had led him across an ocean. Francisco Pizarro and his fellow conquistadoras had come from Spain to what they called upper Peru, inspired by the legend of Eldorado, the realm of the gold-covered king. After defeating the Inca army at the Battle of Kaka-Marka, their quest began in earnest. At Puttersy, in what is no Bolivia, the Spaniards struck it rich. They discovered the Cerro Rico, literally the Rich Hill. Towering nearly 16,000 feet above sea level, it was a money mountain. In that 250 years of Spanish rule, more than 2 billion ounces of silver were extracted from mines like this one, 14,000 feet up in the Andes. What the Inca's couldn't grasp was why the Europeans had such an insatiable lust for gold and silver. They couldn't understand that Pizarro and the Conquistadoras silver was much more than just shiny metal. It could be made into money, a store of value, a unit of account, portable power. I found this place pretty harrowing. The Spaniards under system of forced labor, which meant that every able-bodied male in the native population had to do a stint down these mines. And you can see why one in eight of them didn't survive the Ordeal. Today 500 years later, conditions for miners in the Cerro Rico haven't improved much, but at least they get paid for the work they do. In those days, it was a way of making money that furched on genocide. The silver always ground up, refile with mercury, and then ship to Europe as bars and coins. Empar had made the Spanish crown rich beyond the dreams of Everest. And yet all the silver and the minds of pottercy couldn't halt the inexorable economic and political decline of Spain's empire. Why was that when Pizarro seemed to have struck it so incredibly rich? The answer is that the Spaniards had dug up so much silver to finance their wars of conquest, that the metal itself suffered an extraordinary decline in value. Most of the coins didn't make Spain richer. They simply made prices higher as an increased quantity of money chased the same amount of goods. What the Spaniards didn't get was that money is only worth what other people will give an exchange for it. And whether money takes the form of silver coins, sea shells, bars of gold or banknotes, that's been true from ancient times right down to the present day. Even lumps of clay can work better than silver coins if people have enough confidence in them. In ancient Mesopotamia nearly 4,000 years ago, people used clay tablets like these ones to commit themselves to particular financial transactions. For example, this one found a little southwest of Baghdad, specifies that a debtor will repay a lender 330 measures of grain on the harvest day. But this one's even more fascinating because what it says is that a debt or four measures of barley should be repaid to the bearer of the clay tablet. And it's that idea of repayment to the bearer that really fascinates me. If the phrase sounds familiar, then it should. Just take a look at a 20 pound note. Banknotes of nicks to know intrinsic worth. They're simply promises to pay just like the clay tablets in ancient Babylon for millennia ago. On the back of the $10 bill, it says, in God we trust. But it's not really God you're trusting in. By swapping your goods or your labor for a fistful of these things, you're trusting the U.S. Treasury Secretary not to repeat Spain's mistake and produce so many of the damn things that by the time you come to spend them the worth even less than the paper they printed on. Today we're quite happy with paper money. Even more amazingly, we're happy with money we can't even see. Millions of dollars pass through this woman's hands every day. Or rather, a crosser computer screen. She's a foreign exchange dealer whose business is literally buying and selling money. Each day around $3 trillion changes hands in transactions like these around the world. And it's all built on trust. It has to be when you can't even touch the stuff. That's what the conquistadores got wrong. They feel to see that money is about trust even faith. Trust in the person paying you the money. Trust in the central bank issuing the money. Trust in the commercial bank that honors the check. Money isn't metal. It's trust inscribed and it doesn't much matter what it's inscribed on. Paper, silver, clay or a screen provided the recipient believes in it. There was one huge possibility created by the emergence of money as a system of mutual trust. A possibility that would revolutionize world history. It was the idea that you could rely on people to borrow money from you and pay it back at some future date. That's why the root of credit is credo. The Latin for I believe. Without the invention of credit, the entire economic history of our world would have been impossible. The world is not a problem. Because we take it for granted, we tend to underestimate the extent to which our entire civilization is based on the borrowing and lending of money. No, it doesn't literally make the world go round. But it does make vast quantities of people, goods and services go around the world from Babylon to Bolivia. The puzzle is that the early money lenders got so little thanks for their services. On the contrary, they were widely revealed as pariahs. Why was that? The puzzle is not a problem. Welcome to Northern Italy in the year 1280. A land divided into multiple few things city states. A land where trust was in rather short supply. Among the many remnants of the defunct Roman Empire was a numerical system singularly ill-suited to complex mathematical calculation, let alone the needs of commerce. No were was this more of a handicap than in peace. We're much and struggle to do business with seven different forms of coinage in circulation. Even the simplest transaction could be a headache, requiring the use of an abacus. By comparison, economic life in the eastern world in the Muslim caliphate or the Tsung Chinese Empire was far more advanced. To discover modern finance, backward Europe needed to import it. Enter a young mathematician called Leonardo of Pisa or Fibonacci. The son of a piece and customs official based in what is now Algeria. Fibonacci is best remembered today for his sequence of numbers that mimic the properties of nature. But the famous sequence was only one of many eastern mathematical ideas that Fibonacci introduced to Europe with his path-breaking book, the Libre Abaki, the book of calculation. Even more important was his demonstration of the superiority of Arabic numerals over Roman numerals. And crucially nearly all Fibonacci's examples related to business. Since Roman times, Europeans had been struggling to do simple arithmetic with these. The Hindu or Arabic numerals made all kinds of calculation easier. In particular, Fibonacci showed her the new methods of calculation could be applied to commercial bookkeeping, to currency conversions, and crucially to the computation of interest. Just imagine trying to work out percentages in Roman numerals. Fibonacci's Libre Abaki made it child's blame. This was to be the application of mathematics to making money. The most fertile soil for such financial seeds proved to be the Italian city states. Fibonacci's hometown of Pisa was one, but it was above all Venice more exposed than any of the others to oriental influences that became the great money lending laboratory. And the home of literature's most notorious money lender, Shilok, in William Shakespeare's The Motion to Venice. May you stead me, will you pledge on me? Shilok, I know you're answer. Crucially, Charlotte's only prepared to lend the money if Pisa and I was friend, the merchant Antonio, is providing the security. Three thousand buckets for three months. And Antonio, bow. Your answer to that. Antonio is a good man. By good, Charlotte doesn't mean virtuous. He means good for the money he's about to lend Pisa near in our words. Creditworthy. Have you heard any imputation to the contrary? No, no, no, no. My reasoning saying that he's a good man is to have you understand me that he is sufficient. Three thousand buckets. I think I may take his bond. With any loan, things can go wrong. Ships can sink. And that is precisely why anyone who learns money to a merchant, if only for the duration of a notion voyage, needs to be compensated. We usually call the compensation interest. The amount paid to the lender over and above the sum lent or principle. Oversies trade of the sought that Venice depended on couldn't operate without such transactions. And they remain the foundation of international trade to this day. But why does Shilok turn out to be such a villain demanding literally a pound of flesh in effect Antonio's death if he can't fulfill his obligations? Why is Shakespeare's money lender so heartless? The original of that blood sucking financier who records time at again in Western literature. One clue is that Shilok is one of the many Jewish money lenders in history. Jews who stayed in Venice for more than two weeks were supposed to wear a yellow o on their backs or a yellow hat. And they were confined to a special area which became known as the Geton River. This is the entrance to the Jewish Geto in Venice where Jews were obliged to live and indeed confined at night. Jews were tolerated in Venice but for a reason. The key was that Jews could provide a service that Christian merchants were forbidden to do. They could charge interest on their loans. Fibonacci might have figured out the mathematics of lending. But it took Shilok to do the deal. This is where the Venetian Jews used to do business. This building here was the old bank of Rosso and it was outside here that they used to sit behind their tables. They're towering on their benches. They're banky. The roots of the Italian word for banks. Now there was a good reason why merchants came here to the Jewish Geto to borrow money. For Christians what the Jews were doing lending money at interest was a sin. The medieval churches laws against Usory, charging interest on loans were a major obstacle to the development of finance in Europe. After all, what God fear in Christian merchant wished to risk the torments of hell? This astonishing vision of eternal damnation was painted by Georgia of Asare and Federico Zuckerey on the inside of the Great Dome of Florence's Cathedral, the Domeau. Don't below there's a mother fresco, but Dominico de Michelino of Florence's greatest poet, Dante Allegieri, holding his masterwork, the Divine Comedy. According to Dante there was a special part of the seventh circle of hell that was exclusively set aside for usurers. Their the money lenders were eternally tortured with scorching earth and freezing snow. Their next way down with bulging pulses. Jews too weren't supposed to lend an interest, but there was a convenient get-out clause in the Old Testament book of Juteronomy, chapter 23. Once opposed to lend to your brother at interest, but to a stranger well that was a different matter. In other words a Jew couldn't lend to a Jew, but he could lend to a Christian. The price the Jews paid for performing this service was social exclusion, hence the ghetto, and hence the centuries-long association between Jews and finance, one of the few forms of economic activity from which Jews were not once excluded. In the end of course, Shilewack has thwarted, for although the court recognises his rights to opponent flesh, the law also prohibits him from shedding Antonio's blood. And because he's a Jew, the law also requires the loss of his goods and life for so much as plotting the death of a Christian. He only escapes by submitting to baptism. It turns out to be a risky business to be a money lender. The merchant of Venice raises profound questions about both economics and antisemitism. Why don't debtors always default on their debts, especially when the creditors belong to unpopular ethnic minorities? Why don't the Shilox always lose out? To get a better idea of how primitive money lending works, you don't need to travel back in time. There are plenty of modern day Shilox remarkably close to home, and they don't need to be Jewish to suffer a similar fate to Shilox. This is Shettleston in the east end of Glasgow. It's actually where my grandmother used to live. And I think with its distinctive steel shattering, it's one of the grimace places in the whole of Western Europe. In fact, average bill life expectancy here is just 64, which is like they were St. Bangladesh. That means that the average Shettleston in doesn't actually live long enough to collect a state pension. You might think nobody would be mad enough to try and provide financial services here, but someone does. That someone is a loan shark. You give him your benefit card or security, and he gives you a loan. On the day your benefit arrives, he gives you back the card, and you go to the post office to get your money repaying him the interest. It's a modern version of Shilox business model. Usury is alive and well, and living in Scotland. These are some pages from the loan book of Glasgow loan shark, but it's kind of interesting to see how the business model works. You lend out maybe 10 pounds to someone, and you expect to be paid back 12 pounds 50 at the end of the week. Now that's 25% a week, but if you work that out as an annual rate, it comes to 11 million percent. So why do people scraping by on just £5.90 a day pay such horrendous interest on loans? These surely on loans you'd be mad not to default on. Here in Glasgow, defaulting on your loan is highly in advisable. You won't literally lose a pound of flesh, but grievous bodily harm isn't an unknown consequence of letting down the loan shark. Quite simply, individual loan sharks have to be repatious and ruthless, because the costs to them are even a single deflame. Even a single deflame are so high. And that explains why, from Renaissance italator modern Scotland, the money lender is so often a heated figure. He's providing a service, but at a socially unacceptable price. So how would lenders learn to overcome this fundamental problem? If they were too generous, they didn't make any money, but if they were too hard-nosed, borrowers would eventually default. The answer was to get bigger and more powerful. It was time to invent banks. In 15th century Italy, the key financial service of providing credit moved out of the ghetto to become the legitimate preserve of banks. This transition was symbolized by the rise of one family, the Medici. With their assent, credit came of age. Money lending ceased to be disreputable. It became glorious, and a foundation of a new kind of power. The dazzling legacy of the Medici family's power still surrounds you in Florence today. In the space of 400 years, two Medici became Queens of France, three became Pope. Appropriately, it was Machiavelli, the supreme theorist of power, who wrote their history. Perhaps no other family left such an imprint on an age as the Medici left of the Renaissance. You might even say that they paid for the Renaissance. Their patronage running the gamut of genius from Michelangelo to Galileo. This in the Eiffizi Gallery is the Medici's private art collection. One of the most spectacular ever assembled. What the millions of tourists who flock here generally forget to ask is how the Medici paid for all this. The simple answer is that they were foreign exchange dealers, members of the Artini Cambio, the Money Changes Guild, who made it big. They were known as Banquieri, or Tavallieri, because like the Jews of Venice, they literally did their business sitting on benches behind tables. Indeed, the original Medici Bank or Bench was located right here in the Via del Arti de la Lana, will go street. Prior to the 1390s, the Medici were Florence's answer to the sopranos. A small time clan notable more for low violence than for high finance. In a 17-year period, no fewer than five Medici were sentenced to death by the criminal courts for capital crimes. Then came Giovanni de Bici de Medici. It was his aim to make the Medici totally legitimate. Part of the secret of his success was an ingenious bit of creative accounting that got the Medici off the hook of the anti-usery laws. These ledgers of the Medici Bank make it clear how important commercial bills for financing foreign trade were to the bank. True, the church prohibited the collection of interest on loans, but there was nothing to prevent a true trader from making money on transactions like these, which involve multiple currencies. There was no interest and therefore no sin. Simply a commission deducted for the conversion of one currency into another. If money was advanced to a particular trader for any length of time, the commission was that bit larger. In the same way, depositors who put their money in the Medici Bank were given discretion to compensate them for risking their money. This was credit in other words, but with the interest payments discreetly concealed. Now for the first time money lending had evolved into banking. The real story of the success of the Medici Bank can be found here in the Librosagrato, the secret book of Giovanni de Beachy de Medici. The key was not so much size as diversification. Earlier Italian banks had been monolithic and very vulnerable to default by a single bad borrower. But the Medici Bank was made up of multiple interlocking partnerships, each and some measure independent of the rest. It was this decentralization that was the key to the rest on its profits. Under Giovanni's guidance, the Medici Banking network extended from Florence to Venice to Rome. The scale and diversity of the Medici's operations was the key to reducing the risks of money lending, and therefore also the costs to borrow us. That's the essential difference between loan sharks and banks between Sherlock and the Medici. And here's the proof that it worked. Page after page of Giovanni's assets declared for tax purposes, and culminating in the grand total of 91,089 Florence. In those days, there was serious money. When Giovanni died in 1429, his last words were an exhortation to his ears to maintain his standards of financial acumen. His funeral was attended by 26 men of the name Medici, all paying homage to the man who had made the business of banking respectable and profitable, as it had never been before. For his son Cosimo, the accumulation of wealth combined seamlessly with the accumulation of power. Within 20 years of his father's death, Cosimo de Medici was the Flodantine State. As the Pope himself put it, political questions are settled at his house. The man he chooses holds office. He is who decides peace and war and controls the laws. He is king in everything but name. This body shell is mainly famous for the beauty of its young subject, but it's actually intended as a tribute to a dead banker Cosimo de Medici. At him day on the Medallion, you can just make out the inscription, Part of Patriai, the father of his country. In 150 years, the Medici had transformed themselves from back street money lenders to the most powerful financial force in Europe. But it's this painting. The bottle shell is Adorazione de Magi, which more than any other captures the transfiguration of finance the Medici had achieved. On close inspection, the three wise men are Cosimo de Medici, what in the feet of Christ and his son's pierle and Giovanni. The young man on the left is Lorenzo. The painting had been commissioned by the head of the banker's guild as a tribute to the family. Perhaps it should really have been called the adoration of the Medici, having once been damned. Bankers were no close to divinity. Nothing could better illustrate the extraordinary scent of money. For what the Medici had achieved was nothing less than the birth of modern banking. Others had tried before, but the Medici were the first bankers to hit the political big time, and they did it by learning one crucial lesson. In finance, small is seldom beautiful. By making their bank bigger and more diversified, the Medici had found a way of spreading their risks. And by focusing on currency trading rather than just lending, they'd reduced their exposure to defaults by borrowers. For Cosimo and his family, it was a truly beautiful business model. Yet not even the Medici were invulnerable. The bank suffered heavy losses as a result of over-genuous loans to blue-blooded debtors who felt no compulsion about defaulting on their obligations, and telling the bankers to get losses. Bad debts, money owed by borrowers who go bust are the perennial problem that any bank confronts. Yet for a time, it seemed as if modern bankers had solved this age-old problem. They really thought they were smarter than the Medici. Their great responsibility to keep real public commerce sustainable items.わ Poda forehandingcing all these in the middle of the71z family investing in property of collector commodity. Medici contacted us from the refrigerator and that members of St Ashley health accountant retracted the Internet's papers, That transformation has been played by the spread of modern banking from its Italian birthplace to a country where money has increasingly taken the form of easy credit. The United States has been built on borrowed money. But whereas the Medici attended to land only to the relatively well off, until the present credit crunch at least, American banks seem willing to give just about anyone alone. Memphis's famous for blue-sway shoes, barbecued ribs, and that wraps us. You can tell people here are a little, how should I say this? A little subprime. You only need to look at the shopping mall for the seriously poor. And the ubiquitous no-frills eatery. Then there's a tax advisor who can tell you how to claim your low income credits. A shop where you can borrow money on the equity you own your car. And a place where they'll give you an advance on next week's paycheck. Not to mention a pawn shop, the size of a department store. And finally, when you've no possessions left to pawn or to sell, there's just one option left. And that's to head on down to ZLB plasma where you can sell your own blood for $25 a pop. Talk about being blood dry. It's amazing, really, an entire economic sector based on people who are broke. In some ways, it rather reminds me of the East End of Glasgow. Yet there's a world of difference between this world and the world where loan sharks extract their pounds of flesh from petty defaultors. Here in subprime America, defaulting on your debts is easy. Well, pretty easy. This is Richie. He's in the repo business, snatching cars from under their own noses when they haven't made their payments. He grabbed a bolt to actually make a change and I watched the rifle sail go into the barrel. And he lunged it towards me and hit me right here. And almost knocked me down. He said, either you dropped the truck or I'm dropping you. And I said, yes sir, and I dropped the truck. Here we can make it so attractive, maybe I should switch jobs. I'll tell you one, it's interesting. In the bankruptcy capital of America, repossessing cars is a routine matter. Each week, United auto recovery sells 500 repossessed cars. The cars are auctioned off to the trade, ending up in the same car lots to be sold to much the same people. And when they can't keep up with their monthly payments, repode and recycled once again. Technically, the Memphis repo man are simply doing what debt collectors do the world over. The difference apart from the sheer mind boggling scale of the thing is the relative ease with which the bad debts are wound up and the collateral is sold off. For the debtors, there's actually no social stigma. And nobody seems to be getting hurt. The big mystery is why the world's most successful capitalist economy is based on a foundation of or a less painless economic failure. Here in Tennessee, when the house has been stripped bare and the repo man has taken your car, you end up in the hands of one of Memphis's bankruptcy lawyers, along with around 13,000 other people who filed for bankruptcy here in the past year. Every week, bankrupts gather here with their lawyers to hammer out deals with their creditors. There's even a fast track lane. In this case, it's a mortgage and it's a car or two cars. Can't see anything else in there that they're having to pay off. Actually, there are three cars. Three cars. Yeah, third cars is the neighborhood. The title loans has a line on that car. They are holding the title. So putting this really simply over this supposed to be pay. And what do they now pay? So that payment was reduced from to 41-11 down to 107. Okay. Why didn't improve it? I think you're monthly obligations by $1,000. Oh, I'm so scared. From 1996 to 2006, there were between one and two million bankruptcy cases a year in the United States. Nearly all of them involving individuals who are elected to go bust rather than meet their obligations. In medieval Italy, or in the Glasgow of my youth for that matter, bankruptcy was seen as a disaster. But not here. In fact, this ability to walk away on skate from unsustainable debt and start all over again has been a defining characteristic of American capitalism. The word no debtors prisons here in the early 1800s had a time when English debtors could languish in jail for years. Since 1898, every American has been entitled to file for chapter 7, liquidation, or chapter 13, voluntary personal reorganization. For rich and poor alike, bankruptcy has become as much of an inelianable right as life, liberty, and the pursuit of happiness. The theory is that American law exists to encourage entrepreneurship to facilitate the creation of new businesses. And that means giving people a break when things don't work out the first time or even the second time. The born risk takers don't get wiped out as they learn through trial and error, how to make that first million. Because today's bankrupt might be tomorrow's billionaire. It's a theory that seems to work. Many of America's greatest successes failed in their early endeavors. Including the author Mark Twain. The comedian, Master Keaton, and none other than the great industrialist Henry Ford himself. All of these men eventually flourished, not least because they were given a chance to try, fail, and start over. For their part, the banks simply assume that a proportion of the loans they make will go bad. After all, most people going bankrupt are relatively trivial sums. A chapter 13 doesn't wipe their debts out. It just reschedules them. So it's a mistake to think as Shakespeare's Antonio did of money lenders as mere leeches, sucking the life's blood out of unfortunate debtors. Credit and debt are the building blocks of economic development, but it takes banks to elevate that relationship beyond the tie between a loan shark and his hapless victim. It's only when borrowers like the ones on this Glasgow housing estate have access to efficient credit markets, but they can escape the clutches of the shylocks and the loan sharks. It's only when savers can put their money in dependable banks that it can be channeled from the idle to the industrious. But wait, I hear you ask, if banks are the answer, how could so many have collapsed so spectacularly in the past year, throwing the financial world into turmoil? To understand why bad debts in places like Memphis could cause such chaos, you need to understand how the relationship between banks and borrowers broke down, as loans came to be, secure-atized and sold on to unwell investors. Once upon a time being a banker was really rather boring, you lived by the 363 rule, which meant you paid 3% into deposits, collected 6% on loans, and were on the golf course by 3 o'clock. But not time, banking became really rather too interesting. A whole series of financial innovations made it possible for common or garden loans to poor folks in places like Memphis to met a more first into weird and wonderful things with names like collateralized debt obligations. Well this financial alchemy turning lead into gold or toxic waste into gil-ted securities was only possible because the acent of banks was followed by the acent of the second great pillar of the modern financial system, the bond market. And for an explanation of how that came about, will turn to Mr Bond himself. And there's more next week at 8 details coming up. The accompanying book to the series the Ascent of Money the Financial History of the World by Nile Ferguson is available my price 25 pounds. Kirstie, with a tale to tell about her own negative equity, back with fill on location location a survival guide next. We may think power resides with presidents and prime ministers in palaces and parlaments. Not so. In 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 Pimko, the world's biggest bond trading operation, which manages a portfolio of bonds worth $700 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 world of political power. Governments will always spend more than they raise in taxation, sometimes shed loads more, and they make up the difference by selling 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, but the one here took you a stock exchange and sell it. After the rise of banks, the birth of the bond market was the next big revolution in the history of finance. It created a whole new way for governments to borrow money. The bond market funded the wars that plagued Northern Italy 600 years ago. It dictated the outcome of the Battle of Waterloo and created the world's greatest financial dynasty. It 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 needs. Today, governments and companies use bonds to borrow on an unimaginably vast scale. All told that a bond's 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. If the bond market tanks then down goes the value of our pensions, and that's a huge part of our wealth as individuals. In 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 thunderbolt. That's why this Mr. Bond has become so much more powerful than the Mr. Bond created by Ian Fleming. And that's why both kinds of bond have a license to kill. Well, we're declared the ancient Greek philosopher had a cliotus. Is the father of all things? It was certainly the father of the bond market. For much of the 14th and 15th centuries, the medieval city states of Tuscany, Florence, Pisa and Siener were at war with each other. This was war waged as much by money as by men. In Peter Vanderhyden's battle of the money bags and strong boxes, piggy banks, treasure chests, and barrels full of coins lay into one another with lances and swords in a chaotic free for all. The Dutch verses inscribed at the bottom read, it's all for money and goods, this fighting and quarreling. But what they might just as easily have said is that war is impossible if you don't have the money to pay for it. And the way to do that, the ability to finance war through the bond market was like so much else, an invention of the Italian Renaissance. Rather than require their own citizens to do the dirty work of fighting, each city had military contractors, Condatieri, who raised armies to an ex-land and loot treasure from the others. Among the Condatieri of the 1360s and 1370s, one stood head and shoulders above the others. This is portrait in Florence's dwomo, a thank you from a grateful public. Unlikely though it may seem, this master mercenary was an Essex boy. So skillfully did he wage war that the Italians called Sir John Hawquid Giovanni Acuto. This castle was one of many pieces of prime real estate the Florentines gave him as an award for his services. But Hawquid was a mercenary who was willing to fight for anyone who'd pay him. Milan, Padua, Pisa, or the Pope. These dazzling frescoes in Florence's Palazzo Vecchio show the armies of Pisa and Florence clashing in 1364. At that time Hawquid was fighting on the side of Pisa, but 15 years later he'd switch sides. Why? Because Florence was where the money was. The cost of these incessant wars plunged Italy'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 Hawquid, Florence was drowning in deficits. This wonderful document in the Florentine state archive shows how the city's debt had exploded from around 50,000 Florence at the beginning of the 14th century. To five million by 1427, it was quite literally a mountain of debt. Hence the name, the Monte Cuminé. But from who could the Florentines possibly have borrowed such a vast sum? The answer is right here. From themselves. It was a revolutionary idea that would change the world of money forever. Rather than paying direct tax, citizens were now effectively obliged to lend money to their own government. In return for these forced loans, they received interest. These debt instruments, simple lines in a ledger, whether you're original government bonds. And the wonderful thing about them was that if you needed your money in a hurry, you could sell your bonds to other citizens. They weren't liquid assets. What this record tells us is how Florence 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's state from bankruptcy. The citizens were happy earning their interest. And the bond market led them by or sell as they saw fit. It 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 walls could be waged. The larger the debts of the Italian cities became, the more bonds they had to issue. And the more bonds were issued, the less valuable they looked to investors. At that was exactly the sequence of events in Venice. By the early 16th century, the city had suffered a series of military reverses, and the value of Venetian bonds had taken a hammering. At the mid-Deer between 150 and 915-29, the niche and mundane move of bonds were trading at just 10% of their face value. If you buy a bond when war is raging, you're taking a risk. The risk that the city wouldn't pay you back or pay your interest. On the other hand, remember that the interest is paid on the face value of the bond. So if you can buy it at just 10% of its face value, 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, if the bond market that sets interest rates for the economy as a whole, if the state has an effect to pay 50% then so do all the other boroughs. The bond market had been invented to help pay for it at his wars, but now it was setting interest rates for everyone. It's 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 19th 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 1828 by the radical member of Parliament Thomas Dunskem were describing Nathan Rothschild, bond trader extra-ordinaire and founder of the London branch of what became the biggest bank in the world. The bond market made the Rothschild's jependously rich, so rich that they could afford to build 41 stately homes all over Europe. This is number 29, what's done manner in Buckingham Shard, which has been restored in all its guild of glory by Jacob Rothschild, Nathan's great, great, great grandson. Well he was short, fat, obsessive, extremely clever, holy, focused and I can't imagine it would be the very pleasant person to have devious it. Between around 1810 and 1836, the five sons of Maya Amshel Rothschild rose from the obscurity of the Frankfurt Ghetto to attain a position of unequalled power in international finance. It 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 and I think he was determined, I don't think he suffered fools like me, maybe that's the family trade. This is one of the few surviving lessons from Nathan Rothschild to his brothers, written as always in Yuden Deutsch, that was German, translated into Hebrew characters and it gives you an idea what next to ordinary War Catholic the man had and how he tried to impose it on his poor long suffering brothers. Just listen to this, dear Amshel, I'm writing you my opinion because it's my damn juicy to do so. I read your letters not once but often a hundred times because you can well imagine that after dinner I don't read books, I don't play cards, I don't go to the theatre, my only pleasure is my business. It was this phenomenal drive allied with innate financial genius that propelled Nathan from obscurity to a mastery of the London bond market. Once again however, the opportunity for a financial breakthrough came from war. On the morning of June the 18th, 1815, 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 Battle of Waterloo is the culmination of more than two decades of intimate and conflict between Britain and France but it was more than just a battle between two armies. It was also a contest between rival financial systems, won the French based on plunder, 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 longstanding 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. It was this legend of Jewish profiteering that a century later the Nazis did their best to embroider. In 1940 Joseph Gerbl's approved the release of this film, De Hortchilds. Nathan is seen briving a French general to ensure that Duke of Wellington's victory and then deliberately misreporting the outcome of the Battle in London. This trigger's panic selling of British bonds which Nathan then snaps up a bargain basement prices. What happened during 1850 was altogether different. Far from making money from Wellington's defeat of Napoleon the Rothschilds were very nearly ruined bias. Their fortune was made not by Waterloo but despite it. This is how it really happened. Selling bonds to the public and raised plenty of cash for the British government. But neither bonds nor banknotes were any used 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 letter marks a turning point in the history of both the Rothschild family and the British government. It's dated the 11th of January 1814 and it's an order from the Chancellor of the Exchequer to the Commissary and Chief telling him to appoint Nathan Rothschild Mr. Rothschild as a British government agent. Nathan's job was to gather together as much gold and silver as he could find on the European continent and make sure that it got to the Duke of Wellington and his army who had just fought their way out of Spain into the south of France. It was an operation that relied heavily on the Rothschild's unique pan-European credit network and also a Nathan's ability to mobilize gold the way Wellington could mobilise troops. Shifting such vast amounts of gold in the middle of a war was hugely risky of course. Yet from the Rothschild's point of view the hefty commissions they were able to charge more than justified the risks. The Rothschild soon became indispensable to the British war effort. In the words of the British Commissary and Chief, Rothschild of this place is executed the various services entrusted to him in this line-admerably well and though a Jew, we place a good deal of confidence in him. The Rothschild's were so effective as war for an Anciest because they had already made banking network within the family. Nathan in London, Amshel in Frankfurt, James in Paris, Carl in Amsterdam and Salomon, Roving wherever Nathan saw fit. If the price of gold was higher in say Paris than in London, James in Paris would sell it. Nathan in London would buy. I think the edge over families like the bearings with them never competing was that they had their brothers in very important financial centres and countries. Now whether that was premeditated whether they thought that through as they got actually to get it as hard believe they might just pass that. That's what happened. And once they saw that it was an advantage, they worked on that advantage. In March 1815 Napoleon returned to Paris from Ex-Alain Elber determined to revive his imperial ambitions. Rothschild's immediately ramped up their gold operation, buying up all the bullion and coins they could lay their hands on. Nathan's written for buying this huge stock of gold was simple. He assumed that as with all the Napoleon's wars this would be a law. His gold would be more and more sought after and it would rise in value. It proved to be a near fatal miscalculation. Wellington famously called the Battle of Waterloo the nearest run thing you ever saw in your life. After a day of brutal charges counter charges and heroic defense the late arrival of the Prussian army finally proved decisive. For Wellington it was a glorious victory. But not for the Rothschild. No doubt it was gratifying to Nathan Rothschild to be the first to hear the news of Napoleon's defeat. Thanks to the swiftness of the Rothschild couriers he heard it fully 48 hours before Major Henry Percy delivered Wellington's official dispatch to the British Cabinet. But no matter how early he heard it the news from 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 pile 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 sought during the war would fall. Nathan was faced with heavy and growing losses. 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. The July 20th, 1850, 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 and treaties to sell Nathan held his nerve for another year. Eventually in July 1817 with bond prices up by 40% he sold his holding. His profits were worth approximately 600 million pounds today. The Rothschilds had shown that bonds were more than just a way for governments to fund their wars. They could also be bought and sold in a way that generated serious money. And with money came power. My actual Rothschild had repeatedly had monitored his five sons. If you can't make yourself loved, make yourself feared. As they bestow the mid 19th 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. Just a few months ago colleague of mine and my office who collect posters found these particular rather extraordinary, example of anti-Semitism and a stark form about the Rothschilds who as a victimized to them and others at times are the most extreme forms of undesirable capricapers and as directors by Jews. It was above all the Rothschilds seeming ability to permit or prohibit wars that arose the most indignation. You might have thought that the Rothschilds actually needed war. After all, some of Nathan's biggest deals had been produced by war. And if hadn't been for war, 19th century states wouldn't have needed to issue any bonds for the Rothschilds to buy and sell. But the trouble with war and even more so with revolution was that it increased the risk that a debt estate might fail to meet its commitments. And that hit the price of existing bonds. But the mid-19th century the Rothschilds were no longer mere traders. They were fund managers carefully tending to a vast portfolio of their own government bonds. Now they stood to lose much more than to gain from conflict. 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. Once again, it was the masters of the bomb 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 bomb 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 1863, two years into the conflict. That was the month when Union forces captured Jackson, the Mississippi State Capable, and forced a Confederate army to retreat westward to Vixberg their backs to the Mississippi River. Surrounded with Union gunboats bombarding their positions from behind, the southerners held out for a month before finally laying down their arms. After Vixberg, the Mississippi was firmly in the hands of the north. The south was literally split in two. Yet this military satellite 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 Vixberg where the Mississippi joins the Gulf of Mexico lies the port of New Orleans. This is Fort Pike built after 1812 to protect New Orleans from a future British attack. But 50 years later it wasn't able to protect the south from a northern attack when Captain David Fatagat seized New Orleans on April 28, 1862. It was a crucial moment in the Civil War, because New Orleans was the principal outlet for the south's most important export. Cotton. Without control over the cotton tray, 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 Italian 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 beaten Napoleon. Initially, the Confederacy had grounds for optimism. In New York, the Rothschild's agent was sympathetic having opposed the North leader Abraham Lincoln in the presidential election of 1860. But still, the Rothschild's hesitated. Lending to the British government to help to defeat Napoleon had been one thing, but buying bonds from a bunch of breakaway southern slave states seemed a risk too far. The Rothschild's 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 sense idea was to use cotton as collateral to back its bonds. Investors would be comforted to know that even 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 barge pole. But when an obscure French firm named Emil Erlangar and Company offered cotton back bonds, it was a completely different story. The key to the success of the Erlangar bonds was that they could be converted into cotton at the pre-war price of six pence a pound. These cotton bonds form the basis of the south's new financial strategy. If 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. In 1860, the Port of Liverpool was the principal gateway for imports of cotton to the British textile industry, then the mainstay of the Victorian industrial economy. More than 80% of the cotton came from the southern United States. Now that gave the Confederate leadership hope that they had the leverage to bring in Britain on their side in the Civil War. To ratchet up the pressure, they decided to impose an embargo on all shipments of cotton to Liverpool. For a while, the south's strategy worked brilliantly. Cotton prices saw. So did the value of the Confederates cotton backed bonds. The cotton embargo devastated the British economy. Mills were forced to lay off workers. Eventually, in late 1862, production orbit ceased. This cotton mill and style south of Manchester employed around 400 workers, but that was just a fraction of the 500,000 people employed by King Cotton across Lancashire. Obviously with no cotton, there was nothing for people to do. By the end of 1862, half the entire workforce of Lancashire had been laid off. A quarter of the population was on poor relief. They called it the cotton famine, but this really 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 overriding condition. The 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, 1862, was the real turning point in the American Civil War. Note 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 1863, the mills of Lancashire had found new sources of cotton in China, Egypt and India, and investors were rapidly losing faith in the south's cotton-back bonds. The consequences for the Confederate economy were disastrous. With its domestic mon market exhausted, and only two poultry foreign loans, the Confederates had no alternative, but to print paper dollars, like these ones here in the Louisiana State Museum, to pay for the war. In all $1.7 billion worth. Now, it's true that the north also printed paper money, but by the end of the war, its greenbacks were still 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, inflation in the south simply exploded. 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. It 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 all the world's stock markets put together. It's still a market that can make all break governments. That's it's surprise you that its key player began his money-making career in the casinos of Las Vegas. I was a blackjack player. One of the first professional blackjack players not to the Bragg, but in the late 60s, I went to Vegas and applied a card counting system to try and be 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 buyers or sales 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 gold finger. Rather, it's inflation. The lethal danger that inflation poses is that it undermines the value of being paid a fixed rate of interest in a bond. If inflation goes up to 10% and the value of a fixed rate interest is only 5, then that basically means that the bond holder is falling behind inflation by 5%. That's why at the first width of higher inflation bond prices fall. And in some cases, keep falling. To see just how bad things can get when the inflation regionia escaped 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 1946 when the newly elected president General Juan Domingo Perón came here to the central bank in Buenos Aires. It was astonished at what he saw. There is so much gold he marveled. You could hardly walk through the corridors. The very name Argentina suggests wealth, 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 harards in the world. One in London, likes originally other here. The avenue of Florida in the heart of Buenos Aires. Founded in 1912, this other harards is a reminder that Argentina used to be a rich country. Indeed, at one time, its per capita income was just 18% less than that of the United States. Investors who flocked to via Argentine bonds hope that Argentina would become the United States of South America. While Argentina's history since then is a classic illustration that all the resources and talent in the world can be set at not by chronic financial mismanagement. There have been many financial crises in Argentine history, but the crisis that hit the country in 1989 was unparalleled. The beginning of February, the country was suffering one of the hottest summers on record. In Buenos Aires, the electricity system just couldn't cope. Five are park cuts were commonplace. As it turned out, were the least of Argentine's problems. As is almost always the case, there were several well-traudened steps to monetary hell. Instead, one, the government spends more, much more than it can raise in taxation. Usually, but not always, it's because of a war. In Argentine's case, there were two, one, a civil war between generals and the left in the 1970s. The other, a foreign war, against Britain over the four countries. In 1982, by 1989, the financial system was about ready to blow. By February, inflation had already reached 10 per cent per month. Bags were ordered to close as the government tried to law interest rates and prevent the currency's exchange rate from collapsing. It didn't work. In just a month, the Austro-Fell 140 percent 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 loans for us coming from the World Bank, the government tried to finance its deficit by selling bonds to the public. But investors were hardly likely to buy bonds with the prospect that their real value would be wiped out by inflation in just a matter of days. Nobody was buying. The government was running out of options. In April, furious customers overturned shopping trollets after one supermarket announced over the loudspeaker that prices were being raised by 30 percent immediately. Shopps emptied of goods as owners weren't making enough money to buy new stock. The man gave him the price and he got the money. He was a company that had been given to the government. The government bond prices plunged as fears rose that the central banks reserves were running out. With no foreign loans and no one willing to buy bonds, there was only one thing left for an increasingly desperate government to do get the central bank literally to print more money. But they couldn't even get that right. On Friday, April 28, Argentina literally ran out of money. It's a physical problem. The central bank vice president told a news conference. What he meant was that Argentina's minted run out of paper to print new notes and the printers had gone on strike. I don't know how we're going to do it, but the money has got to be their own money 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. In May, the price of coffee went up by 50% in a week. Farmer stopped bringing cattle to market as the price for one cow was no the same as for three pairs of shoes. By June 1989, inflation Argentina had reached a monthly rate of 100% and annual rate of roughly 12,000 percent. To print that into concrete terms, if you wanted to go out for dinner in Buenos Aires in the Saturday night, in May you'd pay 10,000 out of strales. By June, you'd have to pay 20,000 for the same meal. And by the following month, it would take 60,000. You've heard of a fistful of dollars while you needed a drawfall of our strales just to buy a square meal. In June, popular frustration erupted in two days of intense rioting and looting by hungry mobs. At least 14 people died. In a country where a stake in the bottle of wine were on practically every table of every day, thousands were eating in soup kitchens or going hungry. It'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 like academics and civil servants on inflexible monthly salaries, old age pensioners, are particularly bondholders living off the interest on their investments. Buenos Aires is absolutely full of antique shops, like this one, laden down with jewelry and watchers and cutlery, all sold off by middle-class families who just ran out of cash. In the 1920s, the greater economist John Maynard Keynes had predicted the euther nasier of the bondholder, anticipating that inflation would eat up the paper wealth of financial families like the Ross Charles. As inflation swept through the world in the 1970s, Keynes seemed to be proved right. In 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 Italy, for the bond market was born 600 years ago. Italy is now country with one of the most rapidly aging populations in Europe. In such a graying society, there's 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 softer than inflation, have to answer to the pensioners' 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 wayally to if they expect to raise the money by selling yet more bonds. In modern Europe, as in Renaissance it's a late and equilibrium has been struck between political power and financial exposure. Today as much as ever, it seems it's the bond market, our old friend, Mr. Bond, that really rules the world. 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? In 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. The next episode is next Monday from 8 here on Channel 4. Now next tonight, a brand new series and how lucky our Wii are existence are very own human survival, all stems from catastrophes that happened billions of years ago. Tony Robinson has the evidence. The next episode is next Monday. Some people today say that companies and particularly multinational corporations rule the world. It's pretty hard to believe that any kind of human organization could tame the vast natural barriers of South America. But one company believed it could. By constructing a $1.5 billion gas pipeline from Bolivia right across the South American continent to the Atlantic coast of Brazil. By running gas along the longest pipeline in the world, 4,000 miles from the tip of Patagonia to the Argentine capital Buenos Aires. Such schemes exemplify the vaulting ambition of modern capitalism, but they're only possible because of one invention, the joint stock company. If the 16th century had seen a revolution in money and credit and the 17th at witness the birth of the bond market, then the next step in the story of the Ascent of Money was the rise of the joint stock unlimited liability company. But the ability of the company to transform our lives would depend on another innovation. The stock market. The price that people are prepared to pay for a company's shares in the market tells you how much money they think it'll make in the future. But as we've discovered in recent months of financial turmoil, stock markets can also be shock markets. The future is always uncertain, but we human beings are prone to over optimism. From prices here on the New York Stock Exchange surge upwards in sync, it's as if investors are grit by a kind of collective euphoria. What the former chairman of the Federal Reserve Alan Greenspan once famously called irrationally exuberance. So stock markets really can be like soap bubbles. We're little quite no when they're going to bust. The exuberance was especially irrational at the bust, especially painful, for the company that proposed those vast projects in Latin America. Enron became the biggest corporate fraud in modern American history. But Enron was very far from the only corporate scam since shares were first bought and sold 400 years ago. And the shady practices it epitomised live on. Indeed, they've been a key cause of the financial crisis we're living through now. Cookbooks, stock prices ripped, been there, done that for centuries. Nothing illustrates more clearly than the history of stock market bubbles. How hard human beings find it to learn from history. Yes! Let's see, thanks for watching! Let's go! Let's see where I'm going! Hidden away among the many splendors of Venice is a small clue to one of the most astonishing tales of adventure in all financial history. To the honor and memory of John Law of Edinburgh, most distinguished controller of the Treasury of the Kings of the French. This is the final resting place of the man who invented the stock market bubble. An ambitious Scott, a convicted murderer, a compulsive gambler and a flawed financial genius, he not only caused the first true boom and bust in asset prices. He also indirectly caused the French Revolution. There was a time when John Law owned a quarter of what is now the United States. Only to lose it all. In history's first great crash. From Edinburgh to Amsterdam to Paris, all the way here to New Orleans, and finally to Venice, Law's story is a classic tale of boom and bust. It's also a very much a story for our own times. Hidden away here in the warehouse of the Louisiana State Museum is the only known painting of John Law. Here is. With that lean and hungry look, he really is for all the world, a Scotsman on the lake. The path that led Law from obscurity to celebrity to notoriety is a path that many of the great stock market players have followed since. Law was born here in Edinburgh in 1671, the son of a successful goldsmith and heir to the estate of Llorston. In 1694, while living in London, Law killed a man in a duel over a woman. And was sentenced to death. Somehow, Law managed to escape from prison and fled to Amsterdam. He couldn't have picked a better town to lie low in. By the 1690s, Amsterdam was the world capital of financial innovation. To help finance their war against Spain, the Dutch had introduced one of the world's first national lottery. To protect their merchants from dodgy coinage, they'd created the world's first central bank. But the one that had the biggest impact on Law was the single greatest Dutch invention of the mall. The company. The story of the company had begun a hundred years before Law's arrival as Dutch traders spread out all over the world from Manhattan Island to the Cape of Good Hope. But it was an Asia that became the primary target of Dutch commercial expansion. Why? The East Endies were so alluring because of these spices. Pepper, cloves, nutmeg, ginger, Europeans craved them to flavor their food, but also to preserve it. Traditionally, they'd come overland by the Spicerot, but the Dutch plan was to fetch them the longer but quicker way by sea. And that Pungent aroma was the smell of money to be made. This painting shows the return of one of the first Dutch fleets from the East. The inscription reads, four ships sailed to go and get the spices towards Bantam and also established trading posts. And came back, richly laden to the poles of Amsterdam. Departed 1 May 1598, returned 19 July 1599. The Asian spice trade was so profitable that just one return trip could pay for the construction costs of a ship like this. But so prolonged was the journey around the Cape of Good Hope to the East. And so hazardous, that merchants had to pull their resources and their risk. The result was around six fledgling East India enterprises. In 1602, at the instigation of the Dutch government, these various companies came together to form the United Dutch East India chart of company, or Pheneneh De Aust in this company for short. And this is its original chart, which spells out that the company was to enjoy a monopoly on old trade from the Cape of Good Hope all the way east to the streets of Magellan. Pretty much half the world. The structure of the new entity was novel. The capital of the company was divided unequally between all the major Dutch cities. Citizens were invited to participate in the new venture by investing. It was the form of this investment that was the real novelty. This rather wonderful painting is of the family of one of the founders of the Dutch East India company, Dirk Bass. For 6,000 guilders, he and 16 other so-called participants became the firm's managing directors, the Bavindaber. At the 1606, however, anyone who put his money into the East India company received an acty, literally an action, or as we would say, a piece of the action, a share in the company's future profits. And here it is. The world's very first share certificate issued by the world's very first multinational company. Almost exactly four centuries ago. Three years later, Bass and his fellow directors declared that any shareholders who wanted their cash back could not have it refunded, but would have to sell their shares to another investor. Over night, a market for the company shares was born, the world's first true stock market. This invention was to change the face of finance forever, because it created a mechanism where by the price of shares was determined by the laws of supply and demand, sellers and buyers. And as the Renegade Scotsman John Law couldn't help but notice, the trading of these company stocks was making the world's first shareholders very rich indeed. The world's first joint stock company, the Dutch East India company, was ready to conquer the world. It had a new charter, new shareholders, and a burgeoning trade in these shares. But it had to fight to survive. Literally. Having established a string of factories and warehouses across South Asia from Java to India, the company had to struggle to keep the spanniers and their English competitors at bay. With 40 warships and a private army of 10,000 soldiers, the directors of the East India company were the original corporate raiders. For the Dutch East India company, far, far and far and trade went hand in hand. But the key to the company's success wasn't just its cannons, like these ones aboard the Batavia, the pride of its fleet. Like all big companies, it was able to combine economies of scale with reduced transaction costs. And what economists call network externalities, the ability to pull information between multiple employees and agents. The Batavia was part man of war, part multinational corporation. The big networked company was simply more efficient. That was why, by the 1620s, it had established a virtual monopoly on spice exports from Asia to Europe. The world's first multinational was making its shareholders enormously wealthy. I'm looking here, the original shareholders register of the Dutch East India company. Literally every name in here was a winner. If you put a thousand gilders into the company at its very inception, by 1736, your investment would have been worth 7000. Over its entire lifetime, the company paid an average annual dividend of 16.5% virtually all its profits were paid back to the shareholders. Dr. Kabaas' original shareholding of 6000 gilders had been transformed into a 500,000 gilder fortune. To John Law, lying low in Amsterdam having escaped the Gallows in London, the workings of the Dutch East India company came as a revelation. Law was living off his winnings at the gambling table. But he was fascinated by the relationships between the company, with its splendid offices in the Hooks Thrat, the nearby Stockings' change were dealers visually traded the company shares, and the bank of Amsterdam. Yet this Dutch financial system struck law as not quite complete. To laws financially supercharged mind, the Dutch were missing a trick or two. For one thing, it seemed completely nuts to restrict the number of East India companies shares when the markets were so clearly enamored of them. Law was also puzzled by the conservatism of the bank of Amsterdam. It had created an internal system which allowed merchants to settle their accounts by direct cashless transfers, but it hadn't issued any real banknotes to the public. The idea was already taking shape of a breathtaking modification of the institutions that law had first encountered here in Amsterdam. Only combined the properties of a monopoly trading company and a public bank, and the sky really would be the limit. Law was preparing to unleash a whole new system of finance on an unsuspecting nation. In 1716, John Law arrived in Paris. He had identified France as the ideal laboratory for what would be the biggest experiment in the history of the stock market. But why did the French give him his chance? The answer is that France's fiscal problems were exceptionally desperate. The country was saddled with enormous public debts as a result of the wars of Louis XIV. When the Sun King died in 1715, the Jucca Ollion, who was acting as a region for the underage King Louis XVI, faced a country on the brink of its third bankruptcy in less than a century. It was the perfect opportunity for law. The Maverick self-taught economist, who developed his theories somewhere between the casino and the stock market. Law's ambition was to revive economic confidence in France by establishing a bank on the Dutch model, but with the difference that this bank would issue paper money like this 100-leave remote. As money was invested in the bank, the government's huge debt would be consolidated, but at the same time, this was the really important part of law's system, paper money would revive French trade and with it, French economic power. The Royal Government gained doubly. Consolidation simply meant that its onerous debts were magically transformed into shares and laws back. At the same time, the monarch gained the ability to print as much money as he liked. As law wrote, I maintain that an absolute Prince who knows how to govern can extend his credit further and find needed funds at a lower interest rate than a Prince who is limited in his authority. In credit, supreme power must reside in only one person. That absolute power was in the hands of the Duke of Olior, who lived here in the Paléreil, just a short step from laws apartment in the Plasfondom. It was to him that law now unfolded his scheme. The prize was nothing less than the revival of French power through financial engineering. But that was only half of Laws in Genius Plan. As law wrote, the bank is not the only nor the grandest of my ideas. I will produce a work which will surprise Europe by changes more powerful than were produced by the discovery of the Indies. The second part of Laws' idea was that a huge monopoly trading company should be established. The company doxied on the company of the West. As he put it, the whole nation would become a body of traders and law himself. The aim here as the company's chief director would be at its head. The focus for this wildly ambitious scheme would be in America where the French laid claim to a vast tract of land either side of the Mississippi, Louisiana. The region gave laws company what was to become the Mississippi company, a monopoly on trade with the new colony. Frenchman regardless of rank would encourage to buy shares in the company. Laws' name headed the list of directors. In modern parlance, what these documents tell us is that Laws are tempting a reflation. And why not? France in 1716 was in a depression and Laws' bank notes helped stimulate a recovery. At the same time, what he was doing was effectively transforming a burdened, some and badly managed public debt into shares in what was a privatised tax gathering and trade company. What was not to like about that? In a fever of mass speculation, the Mississippi company's share price sawed from the original price of 500 liever to 5,000 on September the 4th. By December 1719, it had reached 10,000. And this is where it all happened. This was where Laws' share issuing offers was located. The route can't compact. You can imagine the scenes of frenzy here as half of Paris descended on this narrow alleyway, all desperate for a piece of the action. The higher the share price went, the more they wanted to buy. It was a classic stock market feedback loop. It was in these heavy times that the word millionaire was first coined. Yes, millionaires like entrepreneurs were invented in France. And by January 1720, John Law was the richest of them all. Louis XIV had said, Ligtassem Warr. I am the state. No, the Renegade Scotsman John Law was able to say, Licon Amisim Warr. I am the economy. In Scotsman, his palatial suite here in the press form, that's the Ritz hotel over there. Law had achieved a greater concentration of financial power in his hands than any individual in all French history. As controller General of French finances, he was literally in charge of the collection of all France's indirect taxes, the entire French national debt. The 26 mints that produced the country's gold and silver coinage, the company of the Indies better known as the Mississippi Company, which are the monopoly on the import of tobacco, all the France's trade with Africa and Asia, and the Louisiana Colony, which covered around a quarter of what is today the United States. In his own right, law also owned the Mazurian palace, more than a third of the buildings around the Plastvon-Tor, more than 12 country and states, several plantations in Louisiana, and a hundred million lever of shares in the Mississippi Company. Not bad going for a man who, when he'd first come here 12 years before, had been identified as a Jew or a professional gambler and a possible spy. By January 1720, laws triumph seemed complete. A Scotsman murderer was in effect, Prime Minister of France. Laws' problem was that he had no clear idea where to stop. On the contrary, he had a strong personal interest in printing more money, which is owned bank controlled, to drive up the price of his own company's shares. Fortunately, for law, both his bank and his company were now operating out of the very same building, the Mazurian palace, which he himself happened to own. So all he had to do in order to drive up the company's share price was to take a walk down the corridor from the office where the shares were issued to the office where the money was printed. He could say that law had become the ultimate insider trader. At route, laws system was what we nowadays call a Ponzi scheme, after the legendary Italian American con man Charles Ponzi. To pay out the generous returns its promise to the first lot of suckers, a Ponzi scheme needs to take in more money from the next lot of suckers. In John Laws scheme, the acquisitions of other companies and the generous dividends law paid were finance and not from company profits, but simply by selling new shares. Like all Ponzi schemes however, the effective law system was to generate an unsustainable bubble. Law had reflated the French economy, with a combination of paper money and public confidence. Now unfortunately, his bubble was about to go on. The French economy was about to go on. By the beginning of 1720, France was in the grip of a media, the Mississippi bubble. But the man responsible, the Renegade Scott's murderer and gambler John Law, who'd risen to become master of the entire French economy, was allowed to discover an invaluable law of finance. Trees don't grow to the sky. According to Laws PR campaign, the huge profits he was projecting would come from the French economy of Louisiana, which he painted as a veritable garden of Eden, inhabited by friendly noble savages willing to exchange a conucopia of exotic goods. These would float a France through a new city at the mouth of the Mississippi. New Orleans, named to flatter the always susceptible French region to the French economy. All the colony lacked was settlers. Grasping that Frenchmen were more interested in stock market speculation than the hard-graft of colonization, law launched a recruitment drive in the Franco-German borderlands. Several thousand bold Germans signed up and set sail to the Promised Land. They ended up here. This was the unfortunate immigrants' first glimpse of Louisiana, an insect-infested swamp, with an 80% of them had died of starvation or tropical diseases like yellow fever. Sadly for law, the Mississippi company's principal asset, its monopoly on trade with Louisiana, looked like being more or less worthless. As the inscription on this Dutch cartoon put it, this is the wondrous Mississippi land made famous by her share dealings, which through deceit and devious conduct has squandered countless treasures. However, men regard the shares, it is wind and smoke and nothing more. To law, economic success was all about confidence, but this was a confidence trick. In Paris, the first rumors began to circulate that all was not well with law's system. The share price of the Mississippi company began to slide. In a desperate bid to have out meltdown, law called on the Duke of Oliol to cut the official share price from 9,000 lever to 5,000. This was when the limits of royal absolutism, the foundation of law's system suddenly became apparent. Within weeks, the share price was in freefall. Angry crowds gathered outside laws banked. Stones were thrown, windows broken. By December, the shares had lost more than 90% of their value. This French map from 1730 gives an absolutely wonderful visual representation of the world's first stock market bubble. Here at the top is the goddess for tuna pouring down goodies from her horn of plenty. Here are the happy investors receiving their shares in the Mississippi company from flying cherubs. But down below, there are some other cherubs chopping up the shares beside a shattered printing press, and there are two more cherubs blowing bubbles. To the right, there are four very unhappy-looking men. One of whom is preparing to commit suicide by falling on his sword. As if tricked by a sword, the Mississippi bubble had no burst. It was at this moment that law vilified by the French people, fled the country. He never saw his wife and daughter again. He spent the rest of his life in Venice, dividing his time between writing long self-justifying letters and gambling. He died in 1729. In France, however, his devastating legacy lived on. Laws, bubble and busts, fatally set back France's financial development, putting Frenchmen off paper money and stock markets for more than a generation. The French Monarchy's fiscal crisis went unresolved, and for the rest of the reign of Louis XV and Louis XVI, the crown lived from hand to mouth. Eventually, France was driven by royal bankruptcy to revolution. The Mississippi bubble of 1719 was the first stock market bubble in history, but it's been by no means the largest. When we think of stock market bubbles, we think of this. The nightmare that haunts the world of finance, which has returned to hunters in the last few months, is that there could ever be a bust to match the Great Wall Street crash, which began on October 24, 1929, black Thursday. Over the next three years, the US stock market declined a staggering 86% reaching its near-deer in June 1932. What was worse, this asset price deflation was accompanied by the worst depression in all history. In the United States, output collapsed by nearly a third, unemployment reached a quarter of the civilian labor force. Why did the 1929 crash happen? Why indeed does any crash happen? This remains one of the most hotly debated questions in financial history. The role kinds of technical explanations for stock market crashes, but at route, it's all about herd psychology. In a bull market, that's when share prices are rising, even the smartest investors can succumb to what the former chairman of the American Federal Reserve, Alan Greenspan, famously called irrational exuberance. But when the herd changes direction, sometimes in reaction to nothing more than a change in the wind, their mood can also change from your 40 to blue. The herd, stopped. One cow gets scared, and that fear just translates to the whole herd and they all take off. In the rest, I don't know why they're scared, they just feel that fear and they're run. Fear overwhelms all rational thinking. They're telling us over. In market jargon, the buyers have turned into sellers, the bulls, into bears. Despite the zoological imagery, the point is that markets are mirrors of the human psyche. Like homo sapiens, they're prone to mood swings, from greed to fear. They can suffer from depression, and sometimes make an experience complete breakdowns. That happens rather more often than some financial theories would lead you to expect, but not so often, they're wherever quite ready for the next breakdown. If movements in financial markets were statistically distributed like human heights, they would hardly be any crashes. Most months would be clustered around the average, with only a tiny number witnessing extreme ups or downs. Let's face it. Not many of us are below four feet in height, or above eight feet. This is the classic bell shaped curve, where things are distributed according to their frequency. The most commonly occurring clustered here around the middle, and the relatively red dwarves and giants out here at the extremes. That's why it's quite a steep curve, because most human heights are quite close to the average. But if you do the same thing from financial markets for daily moves in the stock market, you end up with something that looks more like this, with relatively fewer small movements, and relatively more big movements down or up, and these are what the statisticians mean when they talk about long or fat tails. If stock market movements were distributed like human heights, and drop of 10% would happen only once every 500 years. And stock market crashes of 20% in a year would be unheard of, rather like people just six inches tall. What is in fact, there have been seven such crashes in the past century. As it turned out, those who feared that the brief panic of October 1987 would turn into the next great crash were proved wrong. The market had one really bad month then rallied. But that bubble provided a golden opportunity for corporate crucary. What John Law's Mississippi Company had been to the bubble that launched the 18th century, so another company would be to the bubble that ended the 20th. It was a company that promised its investors wealth beyond the dreams of Averis. It was a company that claimed to have reinvented the entire financial system, and it was a company that used its impeccable political connections to ride all the way to the top of the bull market. Named by Fortune Magazine as America's most innovative company for six consecutive years, that company was Enron. Seven years after its collapse, most of us have consigned Enron to the dustbin of financial history. Yet it pioneered many of the dubious business practices that continued to plague us today. In the three years up to August 2000, shares of the Houston Energy Company Enron had gone through the roof. Once a small-time gas company in Nebraska, it was now the fifth largest company in the United States with stated revenues of $111 billion. Enron was the darling of Wall Street. Yet a little historical knowledge might have made Enron's investors think twice. Indeed, the story of Enron was like a rerun of the Mississippi bubble 280 years before. John Law's plan had been to revolutionize French government finance. Can lay the chairman of Enron plan to revolutionize the global energy business? For years, the industry had been dominated by huge utility companies, which both produced the energy, pump the gas and generated the electricity, and sold it on to consumers. Lays big idea was to create a kind of energy bank which would act as the intermediary between suppliers and consumers. Its dream was to make Enron the greatest energy company in the world. caught up in the headdy spirit of the times was senior Enron executive Sharon Watkins. It was very electric you felt like you could if you came up with a good idea Enron would give you the money and you could go for it at a very young age. Like John Law, Ken Lay had friends in high places, he contributed generously to George H.W. Bush's presidential campaign. As president, Bush Julie pushed through legislation that deregulated the energy industry. Writing a global wave of energy privatisation Enron snapped up assets all over the world. In Latin America alone the company had interests in Colombia, Ecuador, Peru and Bolivia, where they laid a huge pipeline across the continent to Brazil. And thanks to the intervention of Ken Lay's personal friend George W. Bush Enron was able to acquire a controlling stake in the largest natural gas pipeline network in the world. Here in Argentina. Above all however Enron traded, not only in energy but in virtually all the ancient elements of Earth, water, fire and air. It even traded in Internet bandwidth. Enron led a Wall Street Surge unnervingly reminiscent of the Mississippi bubble. Despite his half-hearted warnings against irrational exuberance, this bull market was propelled upward by the chairman of the U.S. Federal Reserve, Alan Greenspan. As in John Law's time, a stock market bubble could only happen if money was abundant. And by raising interest rates only once between February 1995 and June 1990, Greenspan made sure that it was. The rewards for investors were immense and also for the managers here of the company's Houston headquarters who were generously incentivized with share options in the space of just three years. After 1997, the Enron stock price rose by a factor of very nearly five from below $20 a share to above 90. It was the Mississippi company all over again. Even a city used to extravagant oil-fired living had seen nothing like it. This is where Ken Lay and his Enron executives used to live in River Oaks, Houston's most exclusive neighborhood. In the final year of its existence, Enron paid its top 140 executives, an average of $5.3 million each. Luxury car sales went through the roof. You got multiples of your annual base pay. You were really less thought of if you got a percentage even if it was 75% of your annual base pay. Oh, you were getting a percentage. You wanted multiples. You wanted two times your annual base pay. Three times four times your annual base pay as a bonus. And Lay, the pillar of society, is supposed to highest moral standards for his company. The only problem was that like John Law's system, the Enron system was an elaborate fraud. Hey, David up in Enron. There's not much demand for power at all and you're running kind of bad. In this tape, an Enron trader is discussing with the El Paso Electric Company, how to hold California's consumers to ransom by closing pastations to restrict the supply of electricity. If you took down a steamer, how long would it take to get it back up? Three or four hours, it's like that? Oh, yeah. Well, once you go ahead and check it out, I'm going to spend two games. Okay. The results were not only the higher prices, Enron once it, but also despite their being plenty of power available, repeated blackouts for consumers. Enron's money was stolen in more ways than one. The company's stated assets were vastly inflated. But its key financial innovation was to remove its debts from the balance sheet and hide them in so-called special purpose entities. Dubious names like Chuko and Raptor. Each quarter the company's executives had to use more smoke and more mirrors to make actual losses look like bumper profits. It couldn't last. When you cook the books, and then you try to hide it, you're test. When they sensed the game would soon be up, lay and his cronies started to unload hundreds of millions of dollars worth of shares, while at the same time reassuring the public that the share price would continue to saw. Like John Law's desperate attempts to stem the free fall of Mississippi company shares, all Ken Leigh's reassurances were invaded. On November 15, 2001, Alan Greenspan, head of the U.S. Federal Reserve, received the Enron prize for distinguished public service, adding his name to a role of honor that included Mikhail Gorbachev and Nelson Mandela. Greenspan deserved it, because without his monetary policies in the late 90s, the Enron bubble and the dot com bubble that coincided with it would surely have been impossible. Just two weeks after the award ceremony Enron filed for bankruptcy, the company owed billions. But just how many billions. When Enron declared bankruptcy, December 2001, they met with their creditors to say, guys, I know on our balance sheet, we reported $13 billion of long-term debt. Our true long-term debt picture is $38 billion. It was $25 billion in off balance sheet debt. Did those numbers come as a shock to you? You knew there were problems, but not on that scale. Yes, I mean, they were all flabbergasted. The day before 4,500 employees at Enron's HQ were given their marching orders, a final round of bonus checks were issued to grateful executives. In May 2006, Ken Lay was convicted on all six counts of securities and wire fraud. His sidekick Jeffrey Scilling was sentenced to 24 years in prison. Lay died before sentencing, while on holiday in Aspen, Colorado. Yet the fraudulent practices that propelled Enron's rise in fall didn't die with Ken Lay. On the contrary, the habit of hiding debt off balance sheet that Enron pioneered subsequently spread throughout the Western financial system. The unraveling of this dodgy accounting has been a key component of the current crisis. In many respects, I think the Enron problem was in a Petri dish, and the German has spread throughout the financial markets. The sound of which comes from Enron traders and finance folks that are gainfully employed at banks and energy trading houses, so that rot is everywhere in the financial markets. The joint stock limited liability company truly is a miraculous institution. And yet throughout financial history, there have always been a few crooked companies, just as there have occasionally been irrational markets. Indeed, the two go hand in hand, because it precisely won the bulls of stampeding most enthusiastically, that people are most likely to get taken for the proverbial ride. As we've seen in the past year, the path of financial markets can never be as smooth as we would like. Since the current credit crunch began, some stock markets around the world have fallen by as much as 50%. So far as human expectations of the future, fear from the overoptimistic to the over pessimistic, from greed to fear, stock prices will tend to trace a line, not unlike the jagged and irregular peaks of the Andes. As an investor, you just have to hope that when you have to come down from the summit of euphoria, it'll be an a nice smooth ski slope, and not over as she a cliff. But is there nothing we can do to protect ourselves from real and metaphorical falls? As we'll see in the next episode of the Ascent of Money, finance is as much about risk as it is about return, and the big question is, are you in short, or are you hedged? If you want to find out why booms always go bust go to channel 4.com slash a scent of money for a chance to win a copy of new Ferguson's latest book. Next, and I'd a state of the art look at how an Ice Age has shaped our life on this planet, catastrophe continues with snowball earth. The most basic financial impulse of all is to save for a rainy day, because as we've been painfully reminded by the recent months of financial turmoil, the future is so unpredictable, the world really can be a dangerous place. Not many of us get through life without a little bad luck. Some of us get a lot. It's all about being in the wrong place at the wrong time, like New Orleans when Hurricane Katrina hit. The question is, how should we deal with the risks and uncertainties of the future? Should the owners be on the individual to ensure against disaster? Should we be able to rely on the voluntary charity of our fellow human beings when calamity strikes? Or should we be able to count on the state? In other words, the compulsory contributions of our fellow taxpayers to bail us out when the flood comes. That's a long way of asking a simple question. Are you in short? The British certainly think they are. Today, we pay a larger proportion of our income on insurance than any other people in the world. It's really rather odd, because Britain is one of the safest countries on earth. The struggle to overcome risk has been a constant theme of the history of money, from the invention of life insurance by two hard-drinking scots, clergymen, to the rise and fall of the welfare state, to the explosive growth of hedge funds and their multi-billionaire owners. At the core of our struggle with risk is an insoluble conflict. We want to be financially secure, and so we yearn for a predictable world. But the future always seems to come up with new and unpleasant ways to take us by surprise. We want Calculable Risk, or stuck with random uncertainty. When Hurricane Katrina hit New Orleans in the last week of August 2005, it caused death and destruction. Yet it's not a natural catastrophe that no threatens the survival of the city. The real lesson of the disaster is about money. How the risk of the disaster is that the risk of the disaster is not a disaster. The strength of the survival of the city. The real lesson of the disaster is about money. How the risk management system we call insurance simply failed when faced with a calamity on this scale. The Hurricane didn't hit New Orleans directly. The main force of the storm passed to the northeast of the city, but just as the residents breathed the sigh of relief, the real catastrophe began. This industrial canal links Lake Ponshard train to the Mississippi, and after the hurricane, the huge storm surge raised the water level in the canal so high that it broke the levee, pouring up to the lake over here into the 9th ward of New Orleans. Just to the east of the 9th ward, it's St. Bernard, a blue collar community of homeowners all on paper at least, covered by private insurance. The water is just a little bit dangerous. Kansler Joedefatta refused advice to leave the city, staying put during the storm. Eventually he was forced to retreat to the roof of the town hall, as the waters kept rising. And as you can see, this is the water line. That's the water line. That's where it came up to water came in this building in 14 feet of water in 15 minutes. From the second floor of this building, I could see coming down Judge Perez, a wall of water in that wall of water was debris cars, vehicles, pieces of roofs, and this wall of water. You know, you guessed to me, it had to be maybe 15 to 20 feet tall. I'd moved it fast, moving quickly, just coming down this boulevard street and just taking everything worth it as it would come. The whole of St. Bernard parish was inundated in just 15 minutes. Only five houses out of 26,000 weren't flooded. More than 2000 people were killed in Hurricane Katrina and the subsequent flooding. Here in St. Bernard parish, 140 people lost their lives, mostly because they became trapped in their houses as the flood water's rose. The painted signs on these abandoned houses say whether dead bodies were found after the flood water is receded, a little bit like Medieval London in the time of plague. Yet three years later, it's not flooding or plague that's killing you all in. A harsh financial reality has emerged. People can't live here anymore because they can't ensure their homes. One man made it his mission to show the limits of private insurance when it comes to a really big crisis. He's former Navy pilot Richard F. Scruggs, one of those lawyers that only America seems to produce. Dickie Scruggs took $50 million off his best-use industry. Then, $248 billion off to backer companies for failing to warn smokers of the danger of lung cancer. This kind of work has its rewards. Scruggs are shared in fees on the tobacco case with $1.4 billion. Scruggs' latest target has been America's insurance companies. His clients, hundreds of homeowners whose houses were destroyed by Katrina, argued that the companies were refusing to pay up on genuine claims, a view the insurer's disputed. There was a house there. A house next to it, where do you see the trailer? Scruggs had a dog of his own in this fight. His own home on Pasca Gulers Beach Boulevard, here on the Mississippi coast, was so badly damaged by Katrina that it had to be demolished. This is the front door. Right here. The edge of the slab, if you were. You were slabbed. If you could fix the system, but I have the means. I'm fortunate enough that I have the means to lose the house and build it back. Most people here don't. If you had the power to change the system so that people really were insured, how would you do that? Is there a way of making insurance work again? There is. And it's disclosure of what you're buying. So that you know, like a drug, is a black box warning on there. This is what it does. This is what you should watch out for. It's supposed to this device, which is called a modern insurance policy. Which no one can interpret or understand. It seemed as if the insurance companies had been well and truly scrapped. One of America's biggest insurers settled hundreds of cases brought by Scruggs on behalf of clients whose claims had been turned down. But in this bitter high stakes battle, the insurance companies had the last laugh. After winning the case, Scruggs was convicted and sentenced to five years for attempting to bribe a judge and influence the distribution of legal fees. And the big insurance companies responded to the weight of post-caterina claims by an effect declaring parts of the Gulf Coast and no home insurance zone. Today, as Cancel of Joy de Fata has found out, ensuring a house in this part of New Orleans is virtually impossible. They can't get a mortgage out of that. That is correct. They have to make a choice to build a house here. I do a relocate to another area where insurance may be a little bit cheaper and I can afford it. So that is hurting our community. It's taking our people away, the nucleus of this power and pulling them away. Three years after disaster struck, St Bernard Parish has only a third of its pre-caterina population. Of course life has always been dangerous. The real lesson of Katrina or any big disaster is that even when we think we're protected against risk, sometimes it turns out we're not. Even making quite modest insurance claims can see more trouble than it's worth. It leaves you wondering why we bother spending so much on insurance policies every year. Where did this strange habit come from? Saving up for the proverbial rainy day is the first principle of insurance. But the trick is knowing what to do with your savings so that unlike in New Orleans after Katrina, they're there in the kitty when you really need them. But to do that, you need to be more than usually canny. And that gives us a valuable clue as to where the history of modern insurance has its origins. Where else? But in Bonny, canny, Scotland. They say the Scots are a pessimistic people. Maybe it's the weather, all those hundreds of rainy days. Maybe it's the endless years of sporting disappointment. Or maybe it was the Calvinism we picked up at the time of the Reformation. Certainly, it's two Church of Scotland ministers who deserve the credit for inventing the first true insurance fund back in 1744. And fathering a multi-billion-pound industry. The cookyard of Graifrars is best known for the Graifropers, the Resurrection man, who came here in the late 18th century to supply the medical school edumbre university with corpses for dissection. But Graifrars' lasting importance comes from the work of the Minister here, Robert Wallace, and his friend Alexander Webster. It's somehow appropriate that it was Scottish ministers who invented modern insurance. After all, we tend to think of them as the embodiment of prudence and thrift, weighed down with an anticipation of impending divine retribution for every tiny transgression. But in fact, Robert Wallace was a hard drinker as well as a mathematical prodigy, who like nothing better than knocking back magnums of clad at with his bibulous buddies. Wallace and Webster were unhappy at the way the widows and children of their fellow clergymen were treated when the grim repas struck. They often find themselves homeless and penniless. The plan Wallace and Webster came up with was ingenious. The first true insurance fund in history. These are some of the voluminous calculations that Robert Wallace did now housed at the National Archives of Scotland, and you can see how he ran the numbers over and over again, making very careful assumptions about the maximum number of widows and orphans that would have to be provided for. The key point however was that from now on, ministers wouldn't just pay money in that would be paid out when one of their number died. Rather, they would pay premiums that would be used to create a fund, and the fund would then be invested for profitable purposes. The widows and orphans henceforth would be paid out of the returns on that money, leaving the premiums to accumulate. All it was required for the scheme to work was an accurate projection of how many widows and orphans they would likely be in the future. A calculation which Wallace and Webster made with extraordinary precision. The creation of the Scottish ministers widows fund was a milestone in financial history. For it provided a model not just for Scottish clergymen, but for everyone who aspired to provide for life's eventualities. By 1815 the principle of insurance was sufficiently widespread to be adopted for the widows of men who lost their lives. Fighting against Napoleon. At the Battle of Waterloo, your chances of getting killed were up to one in four. But at least if you'd taken out insurance, you had the consolation of knowing that your wife and children wouldn't be thrown out onto the street. Give a whole new meaning to the phrase, take cover. The Scottish ministers fund grew into the world-famous Scottish widows. Even novice, not renowned for their financial prudence, could join. Walter Scott took out a policy in 1826 to reassure his creditor's that they'd be paid in the event of his death. By the mid 19th century, being in short was as much a badge of respectability as going to church on Sunday. What no one anticipated back in 1744 was that the careful calculations of two Scottish ministers would grow into today's huge insurance industry. As Robert Wallace understood 250 years ago, size matters in insurance, because the more people are paying into a fund, the easier it becomes by the law of averages, to predict how much will have to be paid out each year. Although no individuals' date of death can be known in advance, actor is concorculate the likely life expectancy of a large group of individuals with quite astonishing precision. In other words, insurance is all about trying to cope with the risks of the future. If that is, you're insured in the first place. No matter how many private funds like Scottish winners were set up, there were always going to be people beyond the reach of insurance, who were either to poor or to fetus to save for that rainy day. The lot of the poor was once a pretty harsh one. Either a dependence on private charity or the harsh regime of the workhouse like this typically are still one here in the heart of Edinburgh. But yet by the 1880s, people began to feel that life's losers somehow deserve better. The seat was planted of an entirely new approach to risk. A seed that would ultimately sprout into the modern welfare state. The state system of insurance was designed to exploit the ultimate economy of scale by covering literally every citizen from the cradle to the grave. Yet while we tend to think of the welfare state as a British invention, in fact the world's first welfare superpower was Japan. Disaster just kept striking Japan in the first half of the 20th century. In 1923, a huge earthquake devastated Tokyo. As in New Orleans, many private insurance policies turned out to be worth little more than the paper they were printed on. A new idea began to emerge in Japan, but the state should take care of risk. But this was to be state protection allied with imperial ambition. The Japanese set up a welfare state. And they did it to promote warfare. It was the mid-20th century states in Seshable appetite for able-bodied young soldiers and workers, not some kind of bleeding heart, altruism that inspired the rise of welfare. State healthcare would ensure a fitter populace and a steady supply of able-bodied recruits to the Emperor's armed forces and to live a him and empire. The wartime slogan, all people are soldiers, was adapted to become all people should have insurance. The only problem was that Japan had gone to war with the world's economic colossus, the United States. Japan's warfare state proved to be a massive mistake. Quite apart from the nearly 3 million lives lost in Japan's doomed BIT for Empire. By 1945, the value of Japan's entire capital stock seemed to have been reduced to zero by American bombers. Cities built largely out of wood, but incinerated. Nearly a third of the urban population lost their homes. Practically the only city to survive intact was Kyoto, the former Imperial capital. 1945 may have seen the end of the Japanese war first date, but it wasn't the end of the Japanese experiment with state-sponsored welfare. In Japan, as in most combatant countries, the lesson was clear. The world was just too dangerous a place for private insurance markets to cope with, but the best will in the world. People couldn't be expected to ensure themselves against the US Air Force. The answer practically everywhere was the same, for government to step in, in effect, to nationalize risk. Perhaps the most familiar subsystem of welfare from the cradle to the grave, also born in the ruins of war, was devised by the British economist William Beverage. When the Japanese came up with their own comprehensive welfare system in October 1947, they'd advised the committee and social security recommended what amounted to beverage in or near-horbane. The average for the Japanese, and yet they weren't even further than Beverage had intended, as this copy of their report here in the library of the Japanese National Parliament makes clear. It called on the government to provide against every cause of poverty, sickness and injury, disability, death, childbirth, large families, all-day and unemployment. Whatever the reason, the needy would be guaranteed the minimum standard of living by national assistance. From now on, the Japanese would no longer have to rely on the benevolence of a feudal lord, or the luck of the gods. The welfare state would cover them against all the vagaries and vissitudes of the modern world. If they couldn't afford education, the state would pay. If they couldn't find work, the state would pay. If there were two ill to work, the state would pay. When they retired, the state would pay, and when they finally died, the state would pay their dependents. So what happened after the war in Japan was merely the extension of the warfare welfare state. The slogan now became, all people should have pensions. The Japanese welfare state seemed to be a miracle of effectiveness. In public health and education, Japan led the world. By the late 1970s, the Japanese could boast that their country had become the welfare superpower. Unlike this, the welfare state seemed to make so much sense. Japan had achieved security for all the elimination of risk. One of the same time growing so rapidly, but by 1968, it had the second largest economy in the world. One U.S. economist even predicted that Japan's per capita income would overtake America's by the year 2000. The welfare was working where warfare had failed to make Japan top nation. The key turned out to be not a foreign empire, but a domestic safety net. Yet there was a catch, a fatal flaw in the design of the post-war welfare state. Just what was it that caused those predictions of Japan's ultimate triumph added to fail to come true? The welfare state looked to be working smoothly enough in 1970s, Japan. But elsewhere, there were signs that all was not well. In Britain and throughout the Western world, the welfare state had seemed to remove the incentives without which a capitalist economy simply cannot function. The carrot of serious money for those who strive. The stick of hardship for those who are idle. The result was stagflation, low growth and high inflation. What was to be done? One man and his pupils thought they knew the answer. Thanks in large measure to their influence, one of the great economic trends of the past 25 years has been for the welfare. It had been for the welfare state to be dismantled. Reintroducing people with a sharp shock to the unpredictable monster they thought they had escaped from. Risk. In 1976, a diminutive professor called Milton Friedman, working here at the University of Chicago, won the Nobel Prize in economics. Milton Friedman won his place in the economic hall of fame by restating this simple equation. NV equals PQ, where N is the money supply. V is the velocity at which it circulates. P is the price level, and Q is the quantity of expenditures. Friedman's observation was simple. If the money supply went up, then so did the price level. Hence the quantity theory of money. But you needed much more than a piece of chalk and a blackboard to answer the second crucial question of Milton Friedman's career. What had gone wrong with the welfare state? In Chile, he found the perfect laboratory to test his theories. In September 1973, tanks had rolled through Santiago to overthrow the government of Chile's Marxist president Salvador Aende, who's attempt to turn the country into a communist state, had ended in totally economic chaos, and a call by the Chilean Parliament for a military coup. There on the balcony of the Carrera hotel, a potence of the Aende regime celebrated with champagne as Air Force jets flew overhead to bomb the Manada Palace. Here in the Palace, Aende prepared to make a desperate last stand, up with an AK-47 presented to him by his Cuban role model Fidel Castro. Looking out the Palace window and seeing the tanks literally rolling in, Aende realized that it was all over for his dream of a Marxist Chile. Cornered here in what was left of the presidential quarters, he took the decision to shoot himself. Caught the 35 years later, you can still see the bullet holes in some of the buildings around the square. What happened here in September 1973, in many ways, a world-wide crisis of the welfare state, and posed a stark choice between alternative economic systems. Without put collapsing and inflation rampant, Chile's system of universal benefits was effectively bankrupt. For a ending, the only solution was full blown Soviet style takeover of the entire economy. While the generals and their supporters knew that they didn't want that, but what did they actually want, given that the status quo was unsustainable. Enter Milton Friedman. In March 1975, Friedman flew from Chicago to Chile to answer that question. In addition to giving lectures and seminars, Friedman came here to the Manada Palace, for a meeting with the new Chilean President, General Augusto Pinosheat. Friedman spent three quarters of an hour with Pinochet, urging him to reduce the government deficit that he'd identified, as the main cause of Chile's sky high inflation, then running at an annual rate of 900%. A month after Friedman's visit, the Chilean junta announced that inflation would be stopped at any cost. The regime cut government spending by 27%. This problem of inflation is not of recent origin. It arises from trends towards socialism that started 40 years ago, and reached their logical and terrible climax in the A&D regime. For tindering this advice, Friedman found himself denounced, for acting as a consultant to a military dictator, responsible for the executions of more than 2000 real and suspicions that were not in the world. But the government was not in the world. But the government was not in the world. The government was not in the world. The government was not in the world. The government was not in the world. The responsibility executions of more than 2000 real and suspected communists, and the torture of nearly 30,000 more. Chicago's role in Chile's new regime consisted of more than just a visit by Milton Friedman, however. Since the 1950s, there'd been a steady stream of bright young economists going from this place, the Catholic University in Santiago, to study in Chicago, and they'd come back convinced of the need to balance the budget, tighten the money supply, and liberalise trade. These were the Chicago boys, Friedman's food soldiers. And yet the most radical of their ideas went beyond what Friedman had recommended to penetrate it. It amounted to a full-scale rolling back of the welfare state. The conservative economic revolution didn't begin in fact as Britain or Reagan's America. It began right here in Chile. The mastermind behind this wholesale dismantling of the welfare state was a young economist called Jose Pignera. Chile's economy was destroyed. We have had 50 years of protection as a state intervention. It's a light socialist view if you wanted. Then that was exacerbated during the A.N. The government. We had created a sort of welfare state, and that of course it was going bankrupt in Chile. Between 1979 and 1981, Pignera and his colleagues erected a radically new pension system for Chile. Giving every worker the chance to opt out of the old payers you go state system. Instead of a payroll tax, each worker now could put 10% of his wages aside into an individual personal retirement account to be managed by private competing companies. There was also a small premium for disability and life insurance. The idea was to give each worker a sense that the money being put aside was his own property, his own capital. Pignera gambled. He gave workers a choice, stick with the old system of payers you go, or opt for the new personal retirement accounts. It paid off. Convinced by Pignera's argument, 80% made the switch to a private pension plan. But was it worth it? Was it worth the huge moral compromise that the Chicago boys and the Harvard man made and they got into bed with a torturing, murderous, dictator ship? Well, they answered to that question very much depends on whether you think their reforms helped pay a peaceful way back to a sustainable democracy in Chile. And I think they did. In 1980 Pinochet conceded a new constitution that prescribed a 10-year transition back to democracy. 10 years later, he stepped down as president. Democracy was restored. And by that time, the economic miracle was underway that helped to ensure its survival. For the pension reform not only created a new class of property owners, each with his own retirement nest egg, it also gave the Chilean economy a massive shot in the arm. These brokers and the bankour to Chile are investing Chilean workers' pension contributions into the stock market. And they're doing a pretty good job of it. Average returns on the personal retirement accounts has been over 10% reflecting the fact that in the 20 years after 1987, the Chilean stock market has gone up by a factor of 18. There is a downside to the system to be sure. Since not everyone in the economy has a regular full-time job, not everyone ends up participating in the system. Which leaves a substantial chunk of the population with no pension coverage at all. An standing front of the communist party head Quartas here in Lavictoria, a suburb of Santiago, which was once one of the hotbeds of opposition to the Pinochet regime. Because most people here are either unemployed or working the informal sector, they don't all can't pay into the pension system, which means they don't get anything out of it. This is a kind of neighborhood where Che Guevara is still the local hero, not Jose Pignera. The poor of Chile may not have a private pension plan, and may have to make do with a meagre government hand out in their old age. But even they've benefited from Chile's rapidly growing economy. Rolls makes a difference in the life of every season. The poverty rate in Chile has gone down from around 50% to 13%. So this has been a huge success and the pension reform has been a critical element in this. The improvement in Chile's economic performance since the Chicago Boys Reforms is really very hard to argue with. In the 15 years before Milton Friedman's visit, the growth rate here was a measly 0.17% a year. In the subsequent 15 years, it increased by a factor of nearly 20. The poverty rate here is down to 15%, compared with 40% and the rest of Latin America. And when you look down at Santiago's shiny new financial district, you can see why the Chilean pension reform has been imitated right across the region and indeed around the world. For Britain's Margaret Thatcher, the general from Chile and the professor from Chicago were heroes who demonstrated that only by rolling back the welfare state could governments revive economic growth. Yet one country where this recipe has not been tried is the country that's come to need it most. Japan. So successful was the Japanese welfare superpower. That by the 1970s, life expectancy was the longest in the world. The problem was that Japan's welfare state was too successful. Today the program's run here at Japan's Ministry of Welfare rely on a never smaller number of active workers to support an ever rising population of retirees. Back in 1960, there was something like 11 active workers for every one retired person. But by 2025, that number could sink as low as two. In other words, there'll be one old age pensioner for every two bureaucrats working here at the Ministry. In just 30 years, the cost of social security benefits has risen in relation to Japan's national income by a factor of four. Today virtually all Japan's health insurance societies are in deficit and the pension funds are nearly out of money too. Japan's one so super welfare state is threatening to bankrupt the nation. In short, it seems such a brilliant idea in the calculations of those Scottish ministers and even more brilliant in Japan's all-encompassing welfare state. But as we've seen, the best laid schemes can be thrown into disarray by an unexpected turn of events. So is there any better way of managing risk in an uncertain world? Disasters like 911 and Katrina expose the limits of both traditional insurance and the welfare states. But insurance and welfare are the only ways to buy yourself protection against future shocks. These days, the smart way of doing it is by being hedged, not everybody's heard of hedge funds, but what exactly does hedging mean and where did it come from? The most of us, hedge funds are a mystery, but the one thing we do know is that they can make use to penndously rich. One hugely successful hedge fund manager paid $60 million for this sysat and he owns this dig out too. Not to mention a Jasper John's he paid $80 million for. He's also given hundreds of millions of dollars to charity. Ken Griffin is the founder of the Citadel investment group, one of the world's biggest hedge funds. Last year he navigated his way through the credit crunch so successfully that he was able to pay himself more than a billion dollars. To most of us, risk is scary, but all of Griffin's vast wealth has come because he's found a way of managing risk with a mixture of mathematical precision and brilliant intuition. Nothing is constant, nothing is the way it's always been. So what I find is that people who are really good at this have great intuition, they've great instinct. Their gut actually tells them something. The mathematics are important because they demonstrate you understand the problem. But ultimately the decision about whether or not to take a given risk I think is really a human judgment call in every sense of the word. The origins of hedging appropriately enough are agricultural. For a farmer, nothing is more important than the future price of his crop after it's been harvested and brought to market. But that could be higher or much lower than he expects. A futures contract allows him to protect himself by committing a merchant to buy the crop when it's bought to market at a price agreed when the seeds are being planted. The farmer gets a floor below which the price can't sink. The merchant gets a ceiling above which it can't rise. By signing a futures contract both the farmer and the merchant have hedged their bets. Both parties are better off and because of that, the world as a whole is much better off. It encourages capital formation, it encourages investment. It encourages people to do what is needed to be done to make the world a better place. With the development of a standardized futures contract, agreed rules and an effective clearinghouse, the first true futures market was born. And its both place was here in the Windy City. Shacago. After the city's futures exchange was established in 1874, Hedjun commodities became standard practice. The next step was for a conditional kind of future to evolve. The option. Some of this really is the financial equivalent of rocket science, but the underlying principle is simple. Because they derive from underlying assets, all futures contracts are known as derivatives. But an even smarter kind of derivative is an option. The buyer of a call option has the right say to buy a barrel of oil for $120 in a year's time. Now if the price of oil rises to $150, then the option is in the money, the smart guy makes a profit of $30. But if that doesn't happen, if the price of oil stays the same or actually declines, he's under no obligation to carry through the deal. All he does is to write off the cost of the option itself. Well, it's by buying and selling complex smart derivatives like options that Ken Griffin has become a billionaire. In theory, derivatives offer a new way to hedge against an uncertain future. A much smarter way than boring old insurance. At much more profitable. In the past decade, derivatives have seemed to take over the world of finance. But the end of 2007, the notional value of older derivatives contracts reached a staggering $596 trillion. That's 43 times the size of the American economy. There are tremendous economic benefits for people at work here. $20 billion in the hands of 1,000 people is really a 21st century phenomenon. This never happened 50 years ago. Yet as many have discovered to the great cost recently, there are downsides to derivatives too. When billionaire investor Warren Buffett described derivatives as financial weapons of mass destruction, he all but prophesied the downfall of American insurance giant AIG. As European headquarters there behind me, brought low not by selling insurance policies, but by selling derivatives that blew up in its face. Even Ken Griffin's hedge fund has lost a fifth of its value in a single month, as a result of dodgy derivative trades. Our basic human urge to protect ourselves against risk has proved frustratingly difficult to satisfy. In insurance companies let us down. Well-fair states sink into insolvency, and derivatives turn out to be a double-aged weapon too. And so for many families providing for the future note takes one very simple form, an investment in a house. The value of which is supposed to keep going up until the day the breadwinners need to retire. If the pension plan falls short, never mind. There's always home, sweet home. As a pension-or an insurance policy, this strategy has won very obvious flaw. It represents a one-way totally unhinged bet on a single market, the property market. But as we'll see in the next episode of the Ascent of Money, a bet on bricks and mortar, or good old Japanese wood, is anything but as safe as houses. So if you can't rely on property prices, what's the best way to make your house more of a place to live. The home show is on more for next. Coming up here on Channel 4, look at how the earth became a catastrophic planter of fire. It's the English-speaking world's favorite game. Property. And today, the stakes in the game are higher than ever. The original property game we know today is monopoly was actually invented back in 1903 to expose the unfairness of a social system with a small minority of landlords, screwed the majority of tenants. Thirty years later, an unemployed plumber named Charles Darrow patented a new version of the game, with the board based on the streets here in Atlantic City. It was Darrow who introduced the little houses and hotels. What the game of monopoly tells us, contrary to its inventors' intentions, is that it's smart to own property. And if it's smarter, and property, it's even smarter to lend money to the people who are own property. That's because the phrase, safe as houses, has a rather special meaning in the world of finance. What it means is that there's nothing safer than to lend money to people who own real estate. Why? Well, because if they default in the loan, you can always repossess the property. Even if they run away, the house can't. What's more, the English-speaking world's obsession with property has been the foundation for a unique economic and political experiment, the property owning democracy. Some say it's a model the whole world should adopt. The growth of property ownership gave rise to a new era in the history of finance. On the back of property literally, trillions of dollars have been borrowed, some of it by so-called subprime borrowers, people who previously been content to rent rather than own their homes. So it's come as rather a shock to millions of people that real estate is fundamentally no different from any other financial asset. Its price can go down, as well as up. It turns out that no amount of financial alchemy can turn little suburban boxes into treasure chests with roofs. Which raises the question, is property really a safest houses? Or could it be that we've let our love affair with real estate get completely out of proportion? Property ownership was once the preserve of an aristocratic elite. A states were passed down from father to son along with titles and political privileges. Everyone else was a mere tenant paying rent to their landlord. Even the right to vote in elections was originally a function of property ownership. In one respect, not much has changed in Britain since those days. A 60 million acres of British land around 40 million are owned by just 189,000 families. The difference is that they no longer monopolize the political system. Indeed, thanks to reform of the House of Lords, the hereditary period is being phased out of Parliament. Now you can explain the decline of the aristocracy in many ways, but as far as I'm concerned, the main driver was finance. Until the 1830s fought and smiled on the British land owning elite, the 30 or so families with gross annual income from their lands above 60,000 pounds a year, roughly 150 million pounds today. With such vast property assets backing them, an income from agriculture booming, it was hard to see how the aristocracy could fail to flourish. Yet by ignoring a fundamental truth about property, they ensure their own decline. Like many of us today, the great magnets saw the value of their property as a cash cow, and used it to bother to the hilt. Often more than the property was worth. What they'd feel to understand is that property is only a security to the person who lends you money. As a borderer, used to have to earn the money to pay back the loan. And for the great land owners of Victorian Britain, that suddenly became a very difficult thing to do. No where was the pain more acute than here in the heart of rural Buckinghamshire. There's something undeniably magnificent about this huge neo-classical palace, and stow house, arguably the greatest private residence built in England in the 18th century. Just look at these extraordinary scallion epilis, or the stunning elliptical plaster ceiling. And yet there seems to be something missing or other many things, because once, in each of these archives, there was a Roman statue. The exquisite Georgian far places have been ripped out and replaced by box-standard ones like this. Why? How did this most stately or stately homes become a mere shell of its former self? The answer is that this house belonged to the principal victim of the first modern property crash. Richard Plantagenet, Temple Nucent, Bridges-Chandos-Grenvall, second you could bucking. Stow was only part of the Duke's vast empire of real estate. In all, he owned around 67,000 acres in England, Ireland and Jamaica. These immense properties seemed more than adequate to back his extravagant lifestyle, and he spent money as if it might go out of fashion, or mistresses, or illegitimate children, what anything that he felt was compatible with his standing as a Duke of the Realm. By 1845, the jig was up. Green prices had begun their long, slight downwards, and so had the income from agricultural land. Rural property prices plummeted. Suddenly, the aristocracy found that their borrowings had outrun the value of their estate. The Duke was spending far more than his income, and most of that was being absorbed by interest payments. But there was to be one final bout of conspicuous consumption. In preparation for a visit by Green Victoria and Prince Albert, the Duke decided to splash out and refurbish Stowhouse from top to bottom. Fifteen saloons were stuffed full of the most expensive furniture that money could buy. The floorboards were groaning under the weight of General Velvet, embroidered satin and gold-bracade. When the Queen saw the results, she commented, rather waspishly, I am sure I have no subsplended apartments in either of my palaces. Sadly, the cost of this mega-makerver proved to be the final straw for the Duke of finances. In August 1848, to the Duke's horror, his son had the entire contents of Stowhouse auctioned off. Now, his ancestral stately home was thrown open for thrones of bargain hunters to bid for the silver, the wine, the China. Today, Stow is a private boarding school. It's a poignant symbol of the transience of land and wealth. In the modern world it turned out a regular job and a steady income mattered more than an inherited title, no matter how many acres you earned. Divorced by his long-suffering and much-patraid Scottish wife, whose entire wardrobe had been seized by sheriff's offices in London, the Duke was finally forced to relinquish Stow and move into rented accommodation. He eaked her at his days at his club for Carlton, writing a succession of highly unreliable memoirs and encouraged him to be chasing actresses and other men's wives. The fall of the Duke of Buckingham was a kind of harbender for a new democratic age, in which every adult would be given the vote, whether they owned a stately home or paid rent for a humble flat. As the aristocratic fortunes from agriculture declined, so the franchise was widened. Yet the advent of universal suffrage didn't mean that property ownership had become universal. On the contrary, as recently as 1938, less than a third of the UK housing stock was in the hands of owner Okipires. It was on the other side of the Atlantic that the first true property owning democracy would emerge, and it would emerge from the biggest financial crisis ever seen. The British government's home is a castle, and Americans know that there's no place like home to even before the homes are rather similar. Today we take the universal right to own our own home for granted. But before the 1930s, no more than two-fifths of American households were owner Okipires. If the old class system based on elite property ownership was distinctively British, the revolution that created a new property owning democracy was born out of a great American financial crisis. When the Depression struck in 1929, the US economy knows dived. The minority of people who did own their own homes couldn't afford the mortgage payments. Tenants too struggled to pay the rent when all they had coming in was the dough. No were were the effects of the Depression more painful than in Detroit. Soon the automobile industry here implied only half the number of workers it had in 1929 and at half the wages. By 1932, the dispossessed of Detroit had had enough. On March 7, 5000 workers laid off by the Ford Motor Company, much to the factory, to demand unemployment relief. What followed would force Americans to completely rethink their attitude to property ownership. As the unarmed crowd reached gate four of the company's river Rouge Plant and Deervon, scuffles broke out. Suddenly the factory gates opened and a phalanx of police and security men rushed out and fired into the crowd. Five workers were killed. Days later, 60,000 people sang the International at their funeral. The Communist Party newspaper accused Edsel Ford, son of the firm's founder Henry of allowing a massacre. The police had been arrested for a long time. Could anything be done to diffuse what was beginning to seem like a revolutionary situation, putting the seriously-propertyed forwards against their proper-dillist ex-employees? In a remarkable gesture of conciliation, Edsel Ford turned to a Mexican artist named Diego Rivera. He invited him to paint a mural that would show Detroit's economy as a site of cooperation, not class conflict. Diego Rivera was a lifelong communist. His ideal was of a society in which there would be no private property, which the means of production would be commonly owned. In his eyes, Ford's river Rouge Plant was the very opposite, a capitalist society, in which the workers worked and the property owners who ripped their awards of their efforts merely watched. When the murals were unveiled in 1933, the city's dignitaries were appalled. They saw them as communist propaganda, a travesty on the spirit of Detroit. The power of art is a wonderful thing, but it was clearly going to take something rather more powerful than art to heal a society so deeply split by the depression. Other countries turned to the extremes of totalitarianism, but in the United States the answer was the New Deal, and that included a new deal on housing. In radically increasing the number of Americans who could hope to own their own homes, the Roosevelt administration pioneered the idea of a property owning democracy. It proved to be the perfect antidote to red revolution. In effect, the government would rig the housing market to incentivize Americans to become property owners. Customers at local mortgage lenders known as savings and loans, the equivalent of British building societies, would have their deposits guaranteed by the government, even if a bank went bust. Crucially, a new federal housing administration was set up to offer larger, longer and lower interest loans. After the 1930s, most mortgages in the United States were fixed for 20 or 30 years. A new federal national mortgage association, nicknamed Fanny May, was set up to create a nationwide market for home loans. This couple is going through a model house now. The husband apparently isn't very keen about it all, but his wife is in trans by such convenient features as the Sturday Building Haryning Board. By reducing the monthly cost of a mortgage, these reforms made home ownership possible for many more Americans than ever before. They both would like to have this place for their value. To that they can't afford it. Or maybe they can. For according to this sign they can buy this house with monthly payments that are less than they now spend for rent. It's not too much to say that the modern United States, with its seductively same-ease suburbs, was born out of these new deal reforms. From the 1930s then, the US government effectively underwrote the mortgage market, bringing borrowers and lenders together. And that was the reason for the big explosion in property ownership and mortgage debt in the decades after World War II. There was just one catch, not everyone in American society had an invitation to the property owning party. When these houses were built and to try it back in 1941, whether you got the money or not for a mortgage, dependent on which side of this divide you lived. It was a real estate developer who built this six-foot-high wall right through the middle of Detroit's eight-mile district. He had to build it in order to qualify for loans from the federal housing administration. The loans were to be given for construction on that side of the wall, which was a predominantly white neighborhood. On this side on the black side, there was to be no federal credit, because African Americans were regarded as fundamentally un-credit worthy. It was part of the system that divided the whole city, in theory by credit rating, in practice, by color. Segregation in other words wasn't accidental, but a direct consequence of federal policy. This map by the federal home loan board shows the predominantly black areas of Detroit, the Lower East Side, and so-called colonies like the one we're in now in Burwood, Griggs. The letter D and colored red. You can see what the practice of giving home neighborhoods and negative credit rating came to be known as redlining. The result was that when people from around here needed mortgages, they had to pay significantly higher interest rates than the folks in the white part of town. Half a century later, the two categories of borrowers would come to be known you for mistaken as prime and subprime. But in the 1960s, this divide was the hidden financial dimension of the civil rights struggle. Blacks were to be excluded from the new property-owning society. There would be a heavy price to pay for this exclusion. On July 23, 1967, property into Detroit literally went up in flames. Four days of rioting, looting an arson rocked a city of Detroit in the worst outbreak of urban racial violence this year. Angered economic discrimination spilled over into five days of rioting that left 43 people dead. Significantly, most of the violence was directed not against people, but against property. Nearly 3,000 buildings were looted or burned. The real lesson for policy makers was that excluding ethnic minorities from the property-owning democracy was a fast track to trouble. To make people feel like stakeholders in the social status quo, you had to make them property owners. Indeed, widening home ownership might even turn the malcontents into conservatives. This was a lesson that Margaret Fatcher was quick to learn. Here in Britain, the idea of the property-owning democracy became a keystone of 1980s conservatism. By selling off council housing of bargain basement prices, Fatcher ensured that more and more British couples had a home of their own. That also meant that more people than ever had mortgages. Up until the 1980s, government incentives to borrow money and buy a house made pretty good sense for the average British family. Interest rates were relatively low in the 60s and 70s, and the inflation rate tended to creep up so that the real value of mortgage debt tended to fall. But there was a sting in the tail. The very same government that professed their faith in the property-owning democracy were also committed to fighting inflation. And that meant raising interest rates. The British and the American policy of encouraging people to take out mortgages had then cranking up interest rates, led in the late 80s to one of the most spectacular booms and busts in the history of the property market. It was to the 80s, what the subprime meltdown has been in our own time. The first, but not the last time that America's mortgage market has gone stark, raving mad. The first, but not the last time that the US has gone into the poverty market. The second, but not the last time that the US has gone into the poverty market. The second, but not the last time that the US has gone into the poverty market. Too many others, it's come as a shock that a crash in the American property market could trigger a major financial crisis. In fact, as so often in the Ascent of Money, it's happened before. In March 1984, American government regulators received a copy of a video showing mild after mild of half-built houses and condominiums along interstate 30, just outside Dallas in Texas. You can still see the empty slabs today. The investigation triggered by these unbuilt homes would expose one of the biggest financial scandals of all time, a scam that would make a mockery of the idea of property as a safe form of investment. This isn't a story about real estate, more like some real estate. The savings and loan associations, America's building societies, were not only central to Roosevelt's New Deal on Housing. By the 1970s, they were the foundation of America's property on Indochracy. Then in the 1970s, the savings alone industry was hit first by double-digit inflation and then by higher interest rates. It was a lethal double punch for institutions that were forbidden by law to raise the rates they paid to sailors, and which were receiving interest payments from local mortgage borrowers that had been fixed decades before. The response in Washington was to remove nearly all these restrictions. When deregulation was enacted in 1982, President Reagan was Cocka Hoop. All in all, I think we hit the jackpot. Well, some people certainly did. Liberated from the old constraints, the people running savings and loans suddenly saw a chance to make some serious money from the once boring business of mortgage lending. By raising savings rates, they could attract much more money from depositors than they could use these deposits as the basis for as many loans as they liked. Crucially, though, one thing didn't change. Savors deposits were still ensured by the government. It was an invitation to a gigantic free lunch for financial co-boys. This is the wise circle grill just outside Dallas, filled every lunchtime with local citizens of unblemished integrity. 20 years ago, the clientele was rather different. The city of Dallas had more than its fair share of fraudulent savings and loans. And this was where the Dallas property curve-wise came to hang out. The wise circle grill was the place to have brunch when they weren't whipping it up on their south-fork style wrenches. This was all very, very 1980s. One group of Dallas developers, the Empire Savings and Loan Association, offered the perfect opportunity to make money out of thin air, a rather out of flat Texan land. The surreal saga of Empire Savings and Loans began when Chairman Spencer Bane teamed up with a flamboyant high school dropout turned property developer named Danny Faulkner, who speciality was extravagant generosity with other people's money. The money in question came in the form of deposit accounts on which Empire paid alluringly high interest rates. This is Faulkner's point, one of the very first developments that Danny Faulkner ever built. And it spawned a veritable Empire of Faulkner, crest, Faulkner, creak, creasing, Faulkner, Fountain Faulkner, Oaks. Danny Faulkner's favorite trick was the flip. They would buy some parcel of land for peanuts and then sell it on to neither even investors who got the money. They lent to them by, you guessed it, Empire Savings and Loans. Danny Faulkner made a claim that he was a literate, but he certainly wasn't a numerate. Many investors never even got a chance to view their properties close up. Faulkner would simply fly them over in his helicopter without landing. By 1984, property development and Texas was out of control, paid for by government guaranteed deposits that would effectively go straight into the pockets of the developers. On paper, at least the assets of Empire had grown from $12 million to $257 million in just over two years. The trouble was that the demand for conders by Interstate 30 couldn't have possibly have kept up with the vast supply that was being generated by Faulkner, Blaine and their cronies. When the regulators finally blew the whistle in 1984, that reality couldn't no longer be escaped, and hundreds of the buildings that they erected ended up being bulldozed, or broke to the ground. Today, 24 years on, it's still a Texan way stand. In 1991, Faulkner and Baine were both convicted and jailed for fraud. One investigator called Empire, one of the most reckless and fraudulent land investment schemes in American history. In all nearly 500 savings and loans collapsed. According to one official estimate, nearly half had seen criminal conduct by inciders. The full cost of the crisis was $153 billion, making it one of the most expensive financial crises in American history, and the federal government which are deregulated the savings and loans in the first place had to pick up the bill, which is another way of saying that taxpayers forked out. It was the first clear sign that there might be a downside to the idea of the property on Indymorstein. Yet the savings and loans crisis was a mere tremor compared with the property earthquake that would strike the US market 20 years later. The savings and loans were an all-American crisis, but the subprime quake would shake the entire world of finance to its very foundations. When this wall was built to divide white homerthers from black renters in the 1940s, black families found it virtually impossible to get mortgages. 60 years later, that had all changed. We want everybody in America to own their own home. President George W. Bush declared in October 2002, challenging lenders to create five and a half million new minority homerthers by the end of the decade. Possibly encouraged by the federal government to relax lending standards, more than companies swarmed into areas like this one, offering all kinds of alluring deals. But, because so many of the new borrowers had patchy credit histories, these loans came to be known as subprime. No income, no job, no assets, that made you a perfect candidate for a ninja loan. The problem was that behind low introductory payments, these new mortgage loans were very different from the old 30 year fixed rate repayment loans of the past. Since the 1980s, the housing game has radically changed throughout the English speaking world. Morgages are for shorter and shorter durations, and more and more borrowers are opting for interest only mortgages. That makes households far more sensitive than they used to be to interest rate hikes. So how come the lenders didn't worry that these subprime borrowers were almost certain to default of interest rates robes? The answer to that question, and the key to the subprime crisis was another S word. Securitization. Instead of putting their own money at risk, subprime lenders immediately sold the loans on to banks here in and around Wall Street, and the banks then securitize the loans, which means they bundled them together, and then sliced and diced them so that at least the top tier could be classified as triple a rated investment grade securities. And the banks then sold these securities to investors a thousand miles away from Detroit, who were happy to pay for just a few extra hundreds of a percentage point in interest. The key to securitization was the distance between the mortgage borrowers in say Detroit, and the people who ended up receiving their interest payments. But at times small towns in Norway bought these securities, they had no idea what was really behind their investment. Financial Alkamea, when it was a business model that worked beautifully as long as interest rates stayed low, people kept their jobs and real estate prices continued to rise. Unfortunately, none of these things happened in Detroit. In 2006 alone, subprime lenders injected more than a billion dollars into those areas of the city where home values were already falling, an unemployment and mortgage rates were already rising. Where Detroit led, other cities soon followed. The tax time has come, and the tax time has come. The tax time has come. It's Thursday at noon, and I'm witnessing a twice daily ritual here on the steps of the Memphis Courthouse. About 30 homes are about to be auctioned off here, and the reason is that the mortgage lenders have foreclosed on the homeowners for failing to keep up with their interest payments. In 2006, South Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath R Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Rath Drainer Mindful Kromuth Awakened M candidly half of all American home loans. In September 2008, Fanny and Freddie were effectively nationalized to avoid a complete collapse of the mortgage market. Established Wall Street names like Bear Starrings, Lehman Brothers, and Meryl Lynch have vanished. Unlike savings and loans, this crisis extends right around the world. The four Norwegian municipalities of Rana, Hemniz, had Feldal and Narvik, which had invested their citizens' taxes in subprime-backed securities, and now sitting on an investment worth roughly 15% of what they paid for it. A loss of $100 million. In the English-speaking world, we tend to think of properties a one-way bet. A simplest way of getting rich is to play the property market. In fact, you'd be a mug to invest your money in anything else. But the remarkable thing about this supposed truth is how often reality gives it the lie. For like stock markets, property can soar and value, only to crash in the mouspectacular way. In Britain, between 1989 and 1995, the average host price fell by 18%. But that was nothing compared with what happened here in Japan. Another view is good. Very Austin Parr's decor, I'm loving that. Oh, that's the boiler. Okay, well, let's cut to the chase. How much is this place going to cost if I put the money down there? But it's a deal for good and I think that's the lie. So it would be close to $2 million. Okay, that's like a million pounds buys me this B-Zu apartment in Tokyo, but this is a smart neighborhood, right? That may sound like a lot, but in recent Japanese history, it's a real bargain. Between 1985 and 1990, property prices in Japan rose by a factor of roughly three. Banks fell over themselves to ride this wave. But it wasn't a wave. It was a bubble. And in 1990 it burst. Prices here in Tokyo fell by 75% wiping out all the previous games. This is cost of million pounds now. How much did it cost back in 1990 at the peak of the property bubble? So roughly three times the total. It's a close to possibly a $6 million. Three million pounds per hour. And we think we've had a property crash in the west, but this is a real property crash. So no property isn't a uniquely safe investment. House prices can go down as well as up. And as assets go, houses are pretty iniquid, which means you can't unload them in a hurry if you get into a financial jam. And that pretty much is the downside of the idea of a property owning democracy. A question, though, is whether we English speakers of any business try to export our model to the rest of the world. The real flaw in the property earning democracy, as recent events have proved, is that the housing market, like any asset market, is prone to booms and busts. But maybe there's another way of looking at property, as a means of unlocking new wealth by providing collateral for aspiring entrepreneurs. Could property owners should be the answer to the problems of the world's poorest countries? We've heard of some prime borrowers, we'll welcome to a subprime country. Argentina, where economic underachievement has been aware of life for a century. These slums and the outskirts of Buenos Aires seem a million miles from the elegant boulevard of the Argentine capital centre. But are people here really as poor as they look? One man didn't believe so. The Peruvian economist, Hernando Desotto, saw the Shabby residences like these in developing countries all over the world, as representing literally trillions of dollars of unrealised wealth. The problem is that the people who live here and encounter shanty turns around the world don't have secure legal title to their homes. That's bad because with an outer legal title to property, you can't use it as collateral to borrow money. And if you can't borrow money, then you can't possibly raise the capital you need to start a business. Part of the trouble is that in poorer countries it's a bureaucratic nightmare to establish secure legal title to property. It can take months, sometimes years longer than in the English-speaking world. For Hernando Desotto, breeding financial life is always dead capital. Is the key to providing the poor with a more prosperous future? The shanty turn of Qumez on the southern outskirts of Buenos Aires provides a natural experiment to test discerters theory. On one side of the turn, there are some of the most squalid slums I've ever seen. But just a few miles away, it's a very different story. It was in the early 1980s that a group of squatters here lobbied the government for secure legal title to their homes. Well, they were successful. And those willing to pay a nominal rent were granted leases which after 20 years converted into full ownership. You can tell the owner occupied by the fact that there's a fence, the walls are painted, there's even a rather accessible guard dog. After all, owners tend to look after property better than tenants. Some of the owners here are even realising the value of their properties, but putting them up for sale. Yet there seems to be a flaw in the theory. For owning their own homes hasn't made it significantly easier for people here to borrow money. Just 4% of them have managed to secure a mortgage. The reality is that owning property doesn't give you security. It just gives you creditors security. Real security comes from having an income as the Duke of Buckingham discovered in the 80 and 40s as Detroit homeowners are discovering today. And as I suspect, the people of Kilmer's would probably agree. For that reason, it probably isn't necessary for every entrepreneur in the developing world to take out a mortgage on his home. Or for that matter, on her home. In fact, property ownership may not be the key to wealth generation at all. This is Betty Flores. She runs a small coffee shop in El Alto, a poor suburb of the Bolivian capital La Paz. Betty is one of an increasing large number of women around the world who have bottled money with no security at all. She's the personification of an extraordinary new financial movement known as Microphynance. Did you borrow the money to set up this coffee stall? As the first house in El Alto, but it has some pressure that the service capacity is within. No, not far apart, I see it in this one. I personally think it's to make the stand. I borrowed money to make the stand. A few feet as she paid it all back? Yes, but she doesn't want to miss you. She paid off with this business already a long time ago. Nice. The story is like Betty's point to one of the great revelations of the Microphynance movement in a country like Belivia. It turns out that women are actually a better creditorist than men with all without a home security for the loan. It all rather flies in the face of the conventional image of the Spentrift, Fino. These women are hardly what you would call good financial risks. They probably have just a few dollars between them. Yet with no security, they're being lent money. Here in Belivia, lenders have come to realize that creditworthiness may in fact be a female trait. Carmen Velasco set up Pro-Mujer to provide finance to poor but enterprising women. Because the loans are unsacquired by property, the challenge is to get the women to pay them back. But they do. From the one they have to know that they have to repay or time that they have interest rates and they have to sink. So it's a process of learning that the beginning is very difficult because they are not used to handle alone. But they get used to it and they use salt route when they repay. I must say I'm hugely impressed by what I'm seeing here from Recurre. You can sense in this high-vectivity the transformation that microfinance is brought into these women's lives. And behind me you can see the bottom line. Women lining up to repay their loans punctually. Maybe it's time to change that old catchphrase from a safest houses to a safest housewives. Of course it would be a mistake to assume that microfinance is some kind of economic magic bullet. Just giving out loans won't necessarily concern poverty to the museums. But then betting everything on their house won't do that either. Financial illiteracy may be rampant, but somehow we were all experts on one branch of economics. The property market. We all knew that property was a one way bet. Except that it wasn't. All over the world it seems property prices are falling. From Memphis to Santiago. From London to the Pows. Encouraging home ownership may well create a political constituency for capitalism. But it also distorts the capital market by persuading people to bet the house on. Well, the house. People need to borrow money of course to start up businesses or to buy expensive assets. But it seems dangerous to lure them into staking everything on the far from risk-free property market. From Buckinghamshire to Bolivia to Bonnie Scotland. The key is to strike the right balance between debt and income. And next week I'll be suggesting that the entire world economy is in the process of getting that balance. Perilously wrong. The Assent of Money is available to buy on DVD now at Channel4.com slash shop. Next on Fort the story of the asteroid that did for the dinosaurs catastrophe with Tony Robinson coming up. 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