The Ascent of Money: A Financial History of the World

Chapter 2 outlines the creation and development of the bond market, what Ferguson calls “the second great revolution in the ascent of money” (65). The bond market increases the credit supply for governments and corporations, and it affects everyone (1) through the investments that pension and retirement plans make in it and (2) by setting long-term interest rates for the overall economy.

“Mountains of Debt”

Again, the northern city-states of Italy played the crucial role in developing the bond market. Constantly at war with each other, they needed ways to fund their wars, and thus devised bonds. Venice and Florence compelled their citizens to loan the government money in exchange for interest (which was not considered usury because the loans were not voluntary). In Venice, these government bonds could then be sold for cash to other investors, and the bond market was born. Northern Europe also played a role in developing this market. Bonds there took the form of annuities (purchasing a series of annual payments for a fee) and lottery loans (investing in the small probability of a large return). Both France and the Netherlands used these methods successfully. When England’s Glorious Revolution of 1688 resulted in William of Orange of the Netherlands becoming King of England, such financial methods spread to Britain as well.