The Big Uneasy

In the Westerns I watched as a boy I was fascinated by ghost towns, short-lived settlements that had been left behind by the fast pace of change on the American frontier. It was not until I went to New Orleans in the wake of Hurricane Katrina that I encountered what could very well become America's first ghost city.
I had happy if hazy memories of the 'Big Easy'. As a teenager between school and university, savouring my first taste of free­dom, I discovered it was about the only place in the United States where I could get served beer despite being underage, which certainly made the geriatric jazz musicians in Preservation Hall sound good. Twenty-five years on, and nearly two years after the great storm struck, the city is a forlorn shadow of its former self. Saint Bernard Parish was one of the districts that was worst affected by the storm. Only five homes out of around 26,000 were not flooded. In all, 1 , 8 3 6 Americans lost their lives as a result of Katrina, of whom the overwhelming majority were from

Louisiana. In Saint Bernard alone, the death toll was forty-seven. You can still the see the symbols on the doors of abandoned houses, indicating whether or not a corpse was found inside. It invites comparison with medieval England at the time of the Black Death.

When I revisited N e w Orleans in June 2007, Councilman Joey DiFatta and the rest of Saint Bernard's municipal government were still working in trailers behind their old office building, which the flood gutted. DiFatta stayed at his desk during the storm, eventually retreating to the roof as the waters kept rising. From there, he and his colleagues could only watch helplessly as their beloved neighbourhood vanished under filthy brown water.

Angered by what they saw as the incompetence of the Federal Emergency Management Agency ( F E M A ) , they resolved to re­store what had been lost. Since then, they have worked tirelessly to try to rebuild what was once a tightly knit community (many of whom, like DiFatta himself, are descended from settlers who came to Louisiana from the Canary Islands). But persuading thousands of refugees to come back to Saint Bernard has proved far from easy; two years later the parish still has only one third

of its pre-Katrina population. A large part of the problem turns out to be insurance. Today, insuring a house in Saint Bernard and other low-lying parts of N e w Orleans is virtually impossible.

And without buildings insurance, it is virtually impossible to get a mortgage.

Nearly all the survivors of Katrina lost property in the disaster, since nearly three quarters of the city's total housing stock were damaged. There were no fewer than 1.75 million property and casualty claims, with estimated insurance losses in excess of $ 41 billion, making Katrina the costliest catastrophe in modern American history. But Katrina not only submerged N e w Orleans. It also laid bare the defects of a system of insurance that divided responsibility between private insurance companies, which

offered protection against wind damage, and the federal government, which offered protection against flooding, under a scheme that had been introduced after Hurricane Betsy in 1965. In the aftermath of the 2005 disaster, thousands of insurance company assessors fanned out along the Louisiana and Mississippi coast-line. According to many residents, their job was not to help stricken policy-holders but to avoid paying out to them by asserting that the damage their properties had suffered was due

to flooding and not to wind. The insurance companies did not reckon with one of their policy-holders, former US Navy pilot and celebrity lawyer Richard F. Scruggs, the man once known as the King of Torts.

New Orleans after Katrina: where insurance failed

It may sound like just another story of Southern moral laxity - or proof that those who live by the tort, die by the tort. Yet, regardless of Scruggs's descent from good fellow to bad felon, the fact remains that both State Farm and All State have now declared a large part of the Gulf of Mexico coast a 'no insurance' zone. Why risk renewing policies here, where natural disasters happen all too often and where, after the disaster, companies have to contend with the likes of Dickie Scruggs? The strong

implication would seem to be that providing coverage to the inhabitants of places like Pascagoula and Saint Bernard is no longer something the private sector is prepared to do. Yet it is far from clear that American legislators are ready to take on the liabilities implied by a further extension of public insurance.

Total non-insured damages arising from hurricanes in 2005 are likely to end up costing the federal government at least $ 1 0 9 billion in post-disaster assistance and $8 billion in tax relief, nearly three times the estimated insurance losses. According to Naomi Klein, this is symptomatic of a dysfunctional 'Disaster Capitalism Complex', which generates private profits for some, but leaves taxpayers to foot the true costs of catastrophe. In the face of such ruinous bills, what is the right way to proceed? When

insurance fails, is the only alternative, in effect, to nationalize all natural disasters - creating a huge open-ended liability for governments?

Of course, life has always been dangerous. There have always been hurricanes, just as there have always been wars, plagues and famines. And disasters can be small private affairs as well as big

public ones. Every day, men and women fall ill or are injured and suddenly can no longer work. We all get old and lose the strength to earn our daily bread. An unlucky few are born unable to fend for themselves. And sooner or later we all die, often leaving one or more dependants behind us. The key point is that few of these calamities are random events. The incidence of hurricanes has a certain regularity like the incidence of disease and death. In every decade since the 1850s the United States has been struck by between one and ten major hurricanes (defined as a storm with wind speeds above 1 1 0 mph and a storm surge above 8 feet). It is not yet clear that the present decade will beat the record of the

1940s, which saw ten such hurricanes. Because there are data covering a century and a half, it is possible to attach probabilities to the incidence and scale of hurricanes. The US Army Corps of Engineers described Hurricane Katrina as a 1-in-396 storm, meaning that there is a 0.25 per cent chance of such a large hurricane striking the United States in any given year. A rather different view was taken by the company Risk Management Sol­utions, which judged a Katrina-sized hurricane to be a once-in-

forty-years event just a few weeks before the storm struck. These different assessments indicate that, like earthquakes and wars, hurricanes may belong more in the realm of uncertainty than of risk properly understood. Such probabilities can be calculated with greater precision for most of the other risks that people face mainly because they are more frequent, so statistical patterns are easier to discern. The average American's lifetime risk of death from exposure to forces of nature, including all kinds of natural disaster, has been estimated at 1 in 3,288. The equivalent figure for death due to a fire in a building is i in 1 , 3 5 8 . The odds of the average American being shot to death are 1 in 3 1 4 . But he or she is even more likely to commit suicide (1 in 1 1 9 ) ; more likely still to die in a fatal road accident (1 in 78); and most likely of all to die of cancer (1 in 5 ) .

In pre-modern agricultural societies, nearly everyone was at substantial risk from premature death due to malnutrition or disease, to say nothing of war. People in those days could do much less than later generations in the way of prophylaxis. They relied much more on seeking to propitiate the gods or God who, they conjectured, determined the incidence of famines, plagues and invasions. Only slowly did men appreciate the significance of measurable regularities in the weather, crop yields and infections.

Only very belatedly - in the eighteenth and nineteenth centuries - did they begin systematically to record rainfall, harvests and mortality in a way that made probabilistic calculation possible.

Yet, even before they did so, they understood the wisdom of saving: putting money aside for the proverbial (and in agricultural societies literal) extreme rainy day. Most primitive societies at least attempt to hoard food and other provisions to tide them over hard times. And our tribal species intuitively grasped from the earliest times that it makes sense to pool resources, since there is genuine safety in numbers. Appropriately, given our ancestors' chronic vulnerability, the earliest forms of insurance were prob­ably burial societies, which set aside resources to guarantee a tribe member a decent interment. (Such societies remain the only form of financial institution in some of the poorest parts of East Africa.) Saving in advance of probable future adversity remains the fundamental principle of insurance, whether it is against death, the effects of old age, sickness or accident. The trick is

knowing how much to save and what to do with those savings to ensure that, unlike in N e w Orleans after Katrina, there is enough money in the kitty to cover the costs of catastrophe when it strikes. But to do that, you need to be more than usually canny. And that provides an important clue as to just where the history of insurance had its origins. Where else but in bonny, canny Scotland?

Driving Dixie Down

In M a y 1 8 6 3 , two years into the American Civil War, Major-General Ulysses S. Grant captured Jackson, the Mississippi state capital, and forced the Confederate army under  Lieutenant- General John C. Pemberton to retreat westward to Vicksburg on the banks of the Mississippi River. Surrounded, with Union gunboats bombarding their positions from behind, Pemberton's army repulsed two Union assaults but they were finally starved into submission by a grinding siege. On 4 July, Independence Day, Pemberton surrendered. From now on, the Mississippi was firmly in the hands of the North. The South was literally split in two. The fall of Vicksburg is always seen as one of the great turning points in the war. And yet, from a financial point of view, it was really not the decisive one. The key event had happened more than a year before, two hundred miles downstream from Vicks­ burg, where the Mississippi joins the Gulf of Mexico. On 29 April 1 8 6 2 Flag Officer David Farragut had run the guns of Fort Jack­ son and Fort St Philip to seize control of N e w Orleans. This was a far less bloody and protracted clash than the siege of Vicksburg, but equally disastrous for the Southern cause.
The finances of the Confederacy are one of the great might-have-beens of American history. For, in the final analysis, it was as much a lack of hard cash as a lack of industrial capacity or manpower that undercut what was, in military terms, an impress­ive effort by the Southern states. At the beginning of the war, in the absence of a pre-existing system of central taxation, the fledg­ling Confederate Treasury had paid for its army by selling bonds to its own citizens, in the form of two large loans for $ 1 5 million and $ 1 0 0 million. But there was a finite amount of liquid capital available in the South, with its many self-contained farms and relatively small towns. T o survive, it was later alleged, the Con­federacy turned to the Rothschilds, in the hope that the world's greatest financial dynasty might help them beat the North as they had helped Wellington beat Napoleon at Waterloo.

The suggestion was not altogether fanciful. In N e w York, the Rothschild agent August Belmont had watched with horror as the United States slid into Civil War. As the Democratic Party's national chairman, he had been a leading supporter of Stephen A. Douglas, Abraham Lincoln's opponent in the presidential elec­tion of i860. Belmont remained a vocal critic of what he called Lincoln's 'fatal policy of confiscation and forcible emanci­pation'.

 Salomon de Rothschild, James's third son, had also expressed pro-Southern sympathies in his letters home before the war began. Some Northern commentators drew the obvious inference: the Rothschilds were backing the South. 'Belmont, the Rothschilds, and the whole tribe of Jews . . . have been buying

up Confederate bonds,' thundered the Chicago Tribune in 1 8 6 4 . One Lincoln supporter accused the 'Jews, Jeff Davis [the Confed­ erate president] and the devil' of being an unholy trinity directed

against the Union. When he visited London in 1 8 6 3 , Belmont himself told Lionel de Rothschild that 'soon the North would be conquered'. (It merely stoked the fires of suspicion that the man charged with recruiting Britain to the South's cause, the Confederate Secretary of State Judah Benj amin, was himself a J e w . )

In reality, however, the Rothschilds opted not to back the South. Why? Perhaps it was because they felt a genuine distaste for the institution of slavery. But of at least equal importance was a sense that the Confederacy was not a good credit risk (after all, the Confederate president Jefferson Davis had openly

advocated the repudiation of state debts when he was a US senator). That mistrust seemed to be widely shared in Europe. When the Confederacy tried to sell conventional bonds in European markets, investors showed little enthusiasm. But the Southerners had an ingenious trick up their sleeves. The trick (like the sleeves themselves) was made of cotton, the key to the Confederate economy and by far the South's largest export. The idea was to use the South's cotton crop not just as a source of export earnings, but as collateral for a new kind of cotton-backed bond. When the obscure French firm of Emile Erlanger and Co. started issuing cotton-backed bonds on the South's behalf, the response in London and Amsterdam was more positive. The most appealing thing about these sterling bonds, which had a 7 per cent coupon and a maturity of twenty years, was that they could be converted into cotton at the pre-war price of six pence a pound. Despite the South's military setbacks, they retained their value for most of the war for the simple reason that the price of the underlying security, cotton, was rising as a consequence of increased wartime demand. Indeed, the price of the bonds actually

doubled between December 1863 and September 1864, despite the Confederate defeats at Gettysburg and Vicksburg, because the price of cotton was soaring. Moreover, the South was in the happy position of being able to raise that price still further - by restricting the cotton supply. 

In i860 the port of Liverpool was the main artery for the supply of imported cotton to the British textile industry, then the mainstay of the Victorian industrial economy. More than 80 per cent of these imports came from the southern United States. The Confederate leaders believed this gave them the leverage to bring Britain into the war on their side. T o ratchet up the pressure, they decided to impose an embargo on all cotton exports to Liverpool. The effects were devastating. Cotton prices soared from 6%d per

pound to 27%d. Imports from the South slumped from 2.6 million bales in i860 to less than 72,000 in 1 8 6 2 . A typical English cotton mill like the one that has been preserved at Styal, south of Manchester, employed around 400 workers, but that was just a fraction of the 300,000 people employed by King Cotton across Lancashire as a whole. Without cotton there was literally nothing for those workers to do. By late 1862 half the workforce had been laid off; around a quarter of the entire population of Lancashire was on poor relief. They called it the cotton famine. This, however, was a man-made famine. And the men who made it seemed to be achieving their goal. Not only did the embargo cause unemployment, hunger and riots in the north of England; the shortage of cotton also drove up the price and hence the value of the South's cotton-backed bonds, making them an irresistibly attractive investment for key members of the British political elite. The future Prime Minister, William Ewart Gladstone, bought some, as did the editor of The Times, John Delane.

Confederate cotton bond with coupons, only the first four of

which have been clipped

Yet the South's ability to manipulate the bond market depended on one overriding condition: that investors should be able to take physical possession of the cotton which underpinned the bonds if the South failed to make its interest payments. Col­lateral is, after all, only good if a creditor can get his hands on it. 

And that is why the fall of N e w Orleans in April 1 8 6 2 was the real turning point in the American Civil War. With the South's main port in Union hands, any investor who wanted to get hold of Southern cotton had to run the Union's naval blockade not once but twice, in and out. Given the North's growing naval power in and around the Mississippi, that was not an enticing prospect.

If the South had managed to hold on to N e w Orleans until the cotton harvest had been offloaded to Europe, they might have managed to sell more than £3 million of cotton bonds in London.

Maybe even the risk-averse Rothschilds might have come off the financial fence. As it was, they dismissed the Erlanger loan as being 'of so speculative a nature that it was very likely to attract all wild speculators . . . we do not hear of any respectable people having anything to do with it'. The Confederacy had overplayed its 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 now investors were rapidly losing faith in the South's cotton-backed bonds. The consequences for the Confederate economy were disastrous.

With its domestic bond market exhausted and only two paltry foreign loans, the Confederate  government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars' worth in all. Both sides in the Civil War had to print money, it is true. But by the end of the war the Union's 'greenback' dollars were still worth about 50 cents in gold, whereas the Confederacy's 'greybacks' were worth just one cent, despite a vain attempt at currency reform in 1864.47 The situation was worsened by the ability of Southern states and municipalities to print paper money of their own; and by rampant forgery, since Confederate notes were crudely made and easy to copy. With ever more paper money chasing ever fewer goods, inflation exploded. 

Prices in the South rose by around 4,000 per cent during the Civil War. By contrast, prices in the North rose by just 60 per cent. Even before the surrender of the principal Confederate armies in April 1865, the economy of the South was collapsing, with hyperinflation as the sure harbinger of defeat.

A Confederate 'greyback' State of Louisiana five-dollar bill

The Rothschilds had been right. Those who had invested in Confederate bonds ended up losing everything, since the victorious North pledged not to honour the debts of the South. In the end, there had been no option but to finance the Southern war effort by printing money. It would not be the last time in history that an attempt to buck the bond market would end in ruinous inflation and military humiliation.

Mountains of Debt

'War', declared the ancient Greek philosopher Heraclitus, 'is the father of all things.' It was certainly the father of the bond market. In Pieter van der Heyden's extraordinary engraving, The Battle about Money, piggy banks, money bags, barrels of coins, and treasure chests - most of them heavily armed with swords, knives and lances - attack each other in a chaotic free-for-all. The Dutch verses below the engraving say: 'It's all for money and goods, this fighting and quarrelling.' But what the inscription could equally well have said is: 'This fighting is possible only if you can raise the money to pay for it.' The ability to finance war through a market for government debt was, like so much else in financial
history, an invention of the Italian Renaissance. For much of the fourteenth and fifteenth centuries, the medieval city-states of Tuscany - Florence, Pisa and Siena - were at war with each other or with other Italian towns. This was war waged as much by money as by men. Rather than require their own
citizens to do the dirty work of fighting, each city hired military contractors (condottieri) who raised armies to annex land and loot treasure from its rivals. Among the condottieri of the 13 60s and 13 70s one stood head and shoulders above the others. His commanding figure can still be seen on the walls of Florence's Duomo - a painting originally commissioned by a grateful Floren­ tine public as a tribute to his 'incomparable leadership'. Unlikely though it may seem, this master mercenary was an Essex boy
born and raised in Sible Hedingham. So skilfully did Sir John Hawkwood wage war on their behalf that the Italians called him Giovanni Acuto, John the Acute. The Castello di Montecchio outside Florence was one of many pieces of real estate the Florentines gave him as a reward for his services. Yet Hawkwood was a mercenary, who was willing to fight for anyone who would pay him, including Milan, Padua, Pisa or the pope. Dazzling frescos in Florence's Palazzo Vecchio show the armies of Pisa and Florence clashing in 1364, at a time when Hawkwood was fighting for Pisa. Fifteen years later, however, he had switched to serve Florence, and spent the rest of his military career in that city's employ. Why? Because Florence was where the money was.

Pieter van der Heyden after Pieter Bruegel the Elder, The Battle

about Money, after 1570. The Dutch inscription reads: 'It's all

for money and goods, this fighting and quarrelling.'

Nevertheless, there was a limit to how many more or less unproductive wars could be waged in this way. The larger the debts of the Italian cities became, the more bonds they had to issue; and the more bonds they issued, the greater the risk that they might default on their commitments. Venice had in fact

developed a system of public debt even earlier than Florence, in the late twelfth century. The monte vecchio (Old Mountain) as the consolidated debt was known, played a key role in funding Venice's fourteenth-century wars with Genoa and other rivals. A new mountain of debt arose after the protracted war with the Turks that raged between 1 4 6 3 and 1 4 7 9 : the monte  nuovo.

Investors received annual interest of 5 per cent, paid twice yearly from the city's various excise taxes (which were levied on articles of consumption like salt). Like the Florentine prestanze, the Venetian prestiti were forced loans, but with a secondary market which allowed investors to sell their bonds to other investors for cash. In the late fifteenth century, however, a series of Venetian military reverses greatly weakened the market for prestiti. Having stood at 80 (20 per cent below their face value) in 1497 , the bonds of the Venetian monte nuovo were worth just 52 by 1500, recovering to 75 by the end of 1 5 0 2 and then collapsing from 102 to 40 in 1509. At their low points in the years 1509 to 1 5 2 9 ,

monte vecchio sold at just 3 and monte nuovo at i o . 

Now, if you buy a government bond while war is raging you are obviously taking a risk, the risk that the state in question may not 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 a 5 per cent bond at just 1 0 per cent of its face value you can earn a handsome yield of 50 per cent. In essence, you expect a return proportional to the risk you are prepared to take. At the same time, as we have seen, it is the bond market that sets interest rates

for the economy as a whole. If the state has to pay 50 per cent, then even reliable commercial borrowers are likely to pay some kind of war premium. It is no coincidence that the year 1 4 9 9 , when Venice was fighting both on land in Lombardy and at sea against the Ottoman Empire, saw a severe financial crisis as bonds crashed in value and interest rates soared. Likewise, the bond market rout of 1509 was a direct result of the defeat of the Venetian armies at Agnadello. The result in each case was the same: business ground to a halt.

It was not only the Italian city-states that contributed to the rise of the bond market. In Northern Europe, too, urban polities grappled with the problem of financing their deficits without falling foul of the Church. Here a somewhat different solution was arrived at. Though they prohibited the charging of interest on a loan (mutuum), the usury laws did not apply to the medieval contract known as the census, which allowed one party to buy a stream of annual payments from another. In the thirteenth century,

such annuities started to be issued by northern French towns like Douai and Calais and Flemish towns like Ghent. They took one of two forms: rentes heritables or erfelijkrenten, perpetual revenue streams which the purchaser could bequeath to his heirs, or rentes viagères or lijfrenten, which ended with the purchaser's death. The seller, but not the buyer, had the right to redeem the rente by repaying the principal. By the mid sixteenth century, the sale of annuities was raising roughly 7 per cent of the revenues of the province of Holland.

With the Glorious Revolution of 1688, which ousted the Cath­olic James II from the English throne in favour of the Dutch Protestant Prince of Orange, these and other innovations crossed the English Channel from Amsterdam to London. The English fiscal system was already significantly different from that of the continental monarchies. The lands owned by the crown had been sold off earlier than elsewhere, increasing the power of parliaments to control royal expenditure at a time when their powers were waning in Spain, France and the German lands. There was already an observable move in the direction of a professional civil service, reliant on salaries rather than peculation. The Glorious Revolution accentuated this divergence. From now on there would be no more regular defaulting (the 'Stop of Exchequer' of 1 6 7 2 , when, with the crown deep in debt, Charles II had suspended payment of his bills, was still fresh in the memories of London investors). There would be no more debasement of the coinage, particularly after the adoption of the gold standard in 1 7 1 7 . There would be parliamen­tary scrutiny of royal finances. And there would be a sustained effort to consolidate the various debts that the Stuart dynasty had incurred over the years, a process that culminated in 1 7 4 9 with the creation by Sir Henry Pelham of the Consolidated Fund.

 This was the very opposite of the financial direction taken in France, where defaults continued to happen regularly; offices were sold to raise money rather than to staff the civil service; tax collection

was privatized or farmed out; budgets were rare and scarcely intelligible; the Estates General (the nearest thing to a French parliament) had ceased to meet; and successive controllers-general struggled to raise money by issuing rentes and tontines (annuities sold on the lives of groups of people) on terms that

were excessively generous to investors. In London by the mideighteenth century there was a thriving bond market, in which government consols were the dominant securities traded, bonds that were highly liquid - in other words easy to sell - and attrac­tive to foreign (especially Dutch) investors.

 In Paris, by contrast, there was no such thing. It was a financial divergence that would prove to have profound political consequences. Since it was arguably the most successful bond ever issued, it is

worth pausing to look more closely at the famed British consol. By the late eighteenth century it was possible to invest in two types: those bearing a 3 per cent coupon, and those bearing a 5 per cent coupon. They were otherwise identical, in that they were perpetual bonds, without a fixed maturity date, which could be bought back (redeemed) by the government only if their market price equalled or exceeded their face value (par). The illustration opposite shows a typical consol, a partially printed,

partially handwritten receipt, stating the amount invested, the face value of the security, the investor's name and the date:

Received this 2 2 Day of January 1 7 9 6 of Mrs. Anna Hawes the Sum of One hundred and one pounds being the Consideration for One hundred pounds Interest or Share in the Capital or Joint Stock of Five per Cent Annuities, consolidated July 6th, 1 7 8 5 . . . transferable at the Bank of England . . .

A 5 per cent con sol purchased by Anna Hawes in January 1796

The meteoric rise of a diminutive Corsican to be Emperor of Franee and master of the European continent was an event few could have predicted in 1796, least of all Mrs Anna Hawes. Yet an even more remarkable (and more enduring) feat of social mobility was to happen in almost exactly the same timeframe. Within just a few years of Napoleon's final defeat at Waterloo, a man who had grown up amid the gloom of the Frankfurt ghetto had emerged as a financial Bonaparte: the master of the bond

market and, some ventured to suggest, the master of European politics as well. That man's name was Nathan Rothschild.

Of Human Bondage

Early in Bill Clinton's first hundred days as president, his cam­paign manager James Carville made a remark that has since become famous. T used to think if there was reincarnation, I wanted to come back as the president or the pope or a 400 baseball hitter,' he told the Wall Street Journal.  'But now I want
to come back as the bond market. Y o u can intimidate everybody.' Rather to his surprise, bond prices had risen in the wake of the previous November's election, a movement that had actually preceded a speech by the president in which he pledged to reduce the federal deficit. 'That investment market, they're a tough crowd,' observed Treasury Secretary Lloyd Bentsen. 'Is this a credible effort [by the president] ? Is the administration going to hang in there pushing it? They have so judged it.' If bond prices continued to rally, said Federal Reserve Chairman Alan Green­ span, it would be 'by far the most potent [economic] stimulus that I can imagine.'
 What could make public officials talk with such reverence, even awe, about a mere market for the buying and selling of government IOUs?
After the creation of credit by banks, the birth of the bond was the second great revolution in the ascent of money. Governments (and large corporations) issue bonds as a way of borrowing money from a broader range of people and institutions than just banks. Take the example of a Japanese government ten-year bond with a face value of 100,000 yen and a fixed interest rate or 'coupon' of 1.5 per cent - a tiny part of the vast 838 trillion yen mountain of public debt that Japan has accumulated, mostly since the 1980s. The bond embodies a promise by the Japanese government to pay 1.5 per cent of 100,000 yen every year for the next ten years to whoever owns the bond. The initial purchaser of the bond has the right to sell it whenever he likes at whatever price the market sets. At the time of writing, that price is around 102,333 yen. Why? Because the mighty bond market says so.

Japanese government ten-year bonds, complete with coupons

From modest beginnings in the city-states of northern Italy some eight hundred years ago, the market for bonds has grown to a vast size. The total value of internationally traded bonds today is around $ 1 8 trillion. The value of bonds traded dom­estically (such as Japanese bonds owned by Japanese investors)

is a staggering $ 5 0 trillion. All of us, whether we like it or not (and most of us do not even know it), are affected by the bond market in two important ways. First, a large part of the money we put aside for our old age ends up being invested in the bond market. Secondly, because of its huge size, and because big governments are regarded as the most reliable of borrowers, it is the bond market that sets long-term interest rates for the economy as a whole. When bond prices fall, interest rates soar, with painful

consequences for all borrowers. The way it works is this. Someone has 100,000 yen they wish to save. Buying a 100,000 yen bond keeps the capital sum safe while also providing regular payments to the saver. T o be precise, the bond pays a fixed rate or 'coupon' of 1.5 per cent: 1,500 yen a year in the case of a 100,000 yen bond. N o w imagine a scenario in which the bond market took fright at the huge size of the Japanese government's debt. Suppose investors began to worry that Japan might be unable to meet the annual payments to which it had committed itself. Or suppose they began to worry about the health of the Japanese currency, the yen, in which bonds are denominated and in which the interest is paid. In such circumstances, the price of the bond would drop as nervous investors sold off their holdings. Buyers would only be found at a price low enough to compensate them for the increased risk of a Japanese default or currency depreciation. Let us imagine the price of our bond fell to 80,000. At a stroke, long-term interest rates for the Japanese economy as a whole would have jumped by just over two fifths of one per cent, from 1.47 per cent to 1.88. People who had invested in bonds for their retirement before the market move would be 2 2 per cent worse off, since their capital would have declined by as much as the bond price. And people who wanted to take out a mortgage after the market move would find themselves paying at least 0.41 per cent a year (in market par­ lance, 4 1 basis points) more. In the words of Bill Gross, who runs the world's largest bond fund at the Pacific Investment

Management Company ( P I M C O ) , 'bond markets have power because they're the fundamental base for all markets. The cost of credit, the interest rate [on a benchmark bond], ultimately determines the value of stocks, homes, all asset classes.' From a politician's point of view, the bond market is powerful

partly because it passes a daily judgement on the credibility of every government's fiscal and monetary policies. But its real power lies in its ability to punish a government with higher borrowing costs. Even an upward move of half a percentage point can hurt a government that is running a deficit, adding higher debt service to its already high expenditures. As in so many financial relationships, there is a feedback loop. The higher interest pay­ ments make the deficit even larger. The bond market raises its eye­ brows even higher. The bonds sell off again. The interest rates go up again. And so on. Sooner or later the government faces three stark alternatives. Does it default on a part of its debt, fulfilling the

bond market's worst fears? Or, to reassure the bond market, does it cut expenditures in some other area, upsetting voters or vested interests? Or does it try to reduce the deficit by raising taxes? The bond market began by facilitating government borrowing. In a crisis, however, it can end up dictating government policy. So how did this ' M r Bond' become so much more powerful than the M r Bond created by Ian Fleming? Why, indeed, do both kinds of bond have a licence to kill?

Bankrupt Nation

Memphis, Tennessee, is famous for blue suede shoes, barbecues and bankruptcies. If you want to understand how today's bankers - the successors to the Medici - deal with the problem of credit risk created by unreliable borrowers, Memphis surely is the place to be.
On average, there are between one and two million bankruptcy cases every year in the United States, nearly all of them involving individuals who elect to go bust rather than meet unmanageable
obligations. A strikingly large proportion of them happen in Tennessee. The remarkable thing is how relatively painless this process seems to be - compared, that is, with what went on in sixteenth-century Venice or, for that matter, some parts of present-day Glasgow. Most borrowers who run into difficulties
in Memphis can escape or at least reduce their debts, stigma-free and physically unharmed. One of the great puzzles is that the world's most successful capitalist economy seems to be built on a foundation of easy economic failure.
Yet the consequences of default in Memphis are far less grave than the risk of death Antonio ran in Venice. After the Plasma Center, my next stop was the office of George Stevenson, one of the lawyers who make a living by advising bankrupts at the United States Bankruptcy Court Western District of Tennessee. At the time of my trip to Tennessee, the annual number of bank­ ruptcy filings in the Memphis area alone was around 10,000, so I wasn't surprised to find the Bankruptcy Court crowded with people. The system certainly appears to work very smoothly. One by one, the individuals and couples who have fallen into insolvency sit down with a lawyer who negotiates on their behalf

with their creditors. There is even a fast-track lane for speedy bankruptcies - though on average only three out of five bankrupts are discharged (meaning that an agreement is reached with their creditors).

The ability to walk away from unsustainable debts and start all over again is one of the distinctive quirks of American capitalism. There were no debtors' prisons in the United States in the early 1800s, at a time when English debtors could end up languishing in jail for years. Since 1 8 9 8 , it has been every American's right to file for Chapter VII (liquidation) or XIII (voluntary personal reorganization). Rich and poor alike, people in the United States appear to regard bankruptcy as an 'unalienable right' almost on a par with '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 their plans go wrong, even for the second time, thereby allowing the natural-born

 risk-takers to learn through trial and error until they finally figure out how to make that million. After all, today's bankrupt might well be tomorrow's successful entrepreneur.

At first sight, the theory certainly seems to work. Many of America's most successful businessmen failed in their early endeavours, including the ketchup king John Henry Heinz, the circus supremo Phineas Barnum and the automobile magnate Henry Ford. All of these men eventually became immensely rich, not least because they were given a chance to try, to fail and to start over. Yet on closer inspection what happens in Tennessee is rather different. The people in the Memphis Bankruptcy Court

are not businessmen going bust. They are just ordinary indi­viduals who cannot pay their bills - often the large medical bills that Americans can suddenly face if they are not covered by private health insurance. Bankruptcy may have been designed to help entrepreneurs and their businesses, but nowadays 98 per cent of filings are classified as non-business. The principal driver of bankruptcy turns out to be not entrepreneurship but indebted­ ness. In 2007 US consumer debt hit a record $ 2 . 5 trillion. Back in 1959, consumer debt was equivalent to 16 per cent of disposable personal income. N o w it is 24 per cent. One of the challenges for any financial historian today is to understand the causes of this explosion of household indebtedness and to estimate what the likely consequences will be if, as seems inevitable, there is an increase in the bankruptcy rate in states like Tennessee.

Before we can answer these questions properly, we need to introduce the other key components of the financial system: the bond market, the stock market, the insurance market, the real estate market and the extraordinary globalization of all these markets that has taken place over the past twenty years. The root

cause, however, must lie in the evolution of money and the banks whose liabilities are its key component. The inescapable reality seems to be that breaking the link between money creation and

a metallic anchor has led to an unprecedented monetary expan­sion - and with it a credit boom the like of which the world has never seen. Measuring liquidity as the ratio of broad money to output over the past hundred years, it is very clear that the trend since the 1970s has been for that ratio to rise - in the case of broad money in the major developed economies from around 70 per cent before the closing of the gold window to more than 100 per cent by 2005.  In the eurozone, the increase has been

especially steep, from just over 60 per cent as recently as 1990 to just under 90 per cent today. At the same time, the capital adequacy of banks in the developed world has been slowly but steadily declining. In Europe bank capital is now equivalent to less than 10 per cent of assets, compared with around 25 per cent at the beginning of the twentieth century. In other words, banks are not only taking in more deposits; they are lending out a greater proportion of them, and minimizing their capital base.

Today, banking assets (that is, loans) in the world's major econo­mies are equivalent to around 1 5 0 per cent of those countries' combined G D P .

 According to the Bank for International Settle­ments, total international banking assets in December 2006 were equivalent to around $ 2 9 trillion, roughly 63 per cent of world G D P .

Is it any wonder, then, that money has ceased to hold its value in the way that it did in the era of the gold standard? The modern-day dollar bill acquired its current design in 1957. Since then its purchasing power, relative to the consumer price index, has declined by a staggering 87 per cent. Average annual inflation in that period has been over 4 per cent, twice the rate Europe experienced during the so-called price revolution unleashed by the silver of Potosi. A man who had exchanged his $ 1 , 0 0 0 of savings for gold in 1 9 7 0 , while the gold window was still ajar, would have received just over 26.6 ounces of the precious metal. At the time of writing, with gold trading at close to $1,000 an ounce, he could have sold his gold for $26,596.

A world without money would be worse, much worse, than our present world. It is wrong to think (as Shakespeare's Antonio did) of all lenders of money as mere leeches, sucking the life's blood out of unfortunate debtors. Loan sharks may behave that way, but banks have evolved since the days of the Medici precisely in order (as the 3rd Lord Rothschild succinctly put it), to 'facilitate the movement of money from point A, where it is, to point B, where it is needed'. Credit and debt, in short, are among the essential building blocks of economic development, as vital to creating the wealth of nations as mining, manufacturing or mobile telephony. Poverty, by contrast, is seldom directly attribu­table to the antics of rapacious financiers. It often has more to do with the lack of financial institutions, with the absence of banks, not their presence. It is only when borrowers in places like the East End of Glasgow have access to efficient credit networks that they can escape from the clutches of the loan sharks; only

when savers can put their money in reliable banks that it can be channelled from the idle to the industrious.

The evolution of banking was thus the essential first step in the ascent of money. The financial crisis that began in August 2007 had relatively little to do with traditional bank lending or, indeed, with bankruptcies, which (because of a legal change) actually declined in 2007. Its prime cause was the rise and fall of 'securitized lending', which allowed banks to originate loans but then repackage and sell them on. And that was only possible because the rise of banks was followed by the ascent of the second great pillar of the modern financial system: the bond market.

The Birth of Banking

Shylock was far from the only moneylender to discover the inherent weakness of the creditor,  especially when the creditor is a foreigner. In the early fourteenth century, finance in Italy had been dominated by the three Florentine houses of Bardi, Peruzzi and Acciaiuoli. All three were wiped out in the 1340s as a result of defaults by two of their principal clients, King Edward III of England and King Robert of Naples. But if that illustrates the potential weakness of moneylenders, the rise of the Medici
illustrates the very opposite: their potential power. Perhaps no other family left such an imprint on an age as the Medici left on the Renaissance. T w o Medici became popes (Leo X and Clement VII); two became queens of France (Catherine and Marie); three became dukes (of Florence, Nemours and Tuscany).
Appropriately, it was that supreme theorist of political power, Niccolô Machiavelli, who wrote their history. Their patronage of the arts and sciences ran the gamut of genius from Michel­ angelo to Galileo. And their dazzling architectural legacy still surrounds the modern-day visitor to Florence. Only look at the villa of Cafaggiolo, the monastery of San Marco, the basilica of San Lorenzo and the spectacular palaces occupied by Duke Cosimo de' Medici in the mid sixteenth century: the former Pitti Palace, the redecorated Palazzo Vecchio and the new city offices (Uffizi) with their courtyard running down to the River A r n o .

But what were the origins of all this splendour? Where did the money come from that paid for masterpieces like Sandro Botti­celli's radiant Birth of Venus? The simple answer is that the Medici were foreign exchange dealers: members of the Arte de Cambio (the Moneychangers' Guild). They came to be known as bankers (banchieri) because, like the Jews of Venice, they did their business literally seated at benches behind tables in the street. The original Medici bank (stall would be a better descrip­

tion) was located near the Cavalcanti palace, at the corner of the present-day via dia Porta Rossa and the Via dell' Arte della Lana, a short walk from the main Florentine wool market. Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan,

notable more for low violence than for high finance. Between 1 3 4 3 and 1 3 6 0 no fewer than five Medici were sentenced to death for capital crimes.

 Then came Giovanni di Bicci de' Medici. It was his aim to make the Medici legitimate. And through hard work, sober living and careful calculation, he succeeded. In 1 3 8 5 Giovanni became manager of the Roman branch of the bank run by his relation Vieri di Cambio de' Medici, a moneylender in Florence. In Rome, Giovanni built up his repu­tation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican's coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some

base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another.

But Giovanni clearly saw even greater opportunities in his native Florence, whence he returned in 1397 . By the time he passed on the business to his eldest son Cosimo in 1 4 2 0 , he had established a branch of the bank in Venice as well as Rome; branches were later added in Geneva, Pisa, London and Avignon. Giovanni had also acquired interests in two Florence wool factories.

A banker on his bench: Quentin Massys, The Banker (1514)

Of particular importance in the Medici's early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank's books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money.

The libro segreto - literally the secret book - of Giovanni di Bicci de' Medici sheds fascinating light on the family's rise. In part, this was simply a story of meticulous bookkeeping. By modern standards, to be sure, there were imperfections. The Medici did not systematically use the double-entry method,

though it was known in Genoa as early as the 1 3 4 0 s . Still, the modern researcher cannot fail to be impressed by the neatness and orderliness of the Medici accounts. The archives also contain a number of early Medici balance sheets, with reserves and deposits correctly arranged on one side (as liabilities or vostro) and loans to clients or commercial bills on the other side (as assets or nostro). The Medici did not invent these techniques, but they applied them on a larger scale than had hitherto been seen in Florence. The real key to the Medicis' success, however, was not so much size as diversification. Whereas earlier Italian banks had been monolithic structures, easily brought down by one defaulting debtor, the Medici bank was in fact multiple related partnerships, each based on a special, regularly renegotiated con­tract. Branch managers were not employees but junior partners who were remunerated with a share of the profits. It was this decentralization that helped make the Medici bank so profitable.

With a capital of around 20,000 florins in 1402 and a payroll of at most seventeen people, it made profits of 151,820 florins between 1397 and 1420 - around 6,326 florins a year, a rate of return of

32 per cent. The Rome branch alone was soon posting returns of over 30 per cent. 36 The proof that the model worked can be seen in the Florentine tax records, which list page after page of Giovanni di Bicci's assets, totalling some 91 ,000 florins.

Detail from a ledger of the Medici bank

When Giovanni died in 1429 his last words were an exhortation to his heirs to maintain his standards of financial acumen. His funeral was attended by twenty-six men of the name Medici, all paying homage to the self-made capo della casa. By the time Pius II became pope in 1458, Giovanni's son Cosimo de' Medici effectively was the Florentine state. As the Pope himself put it: 'Political questions are settled at his house. The man he chooses holds office ... He it is who decides peace and war and controls

the laws . . . He is King in everything but name.' Foreign rulers were advised to communicate with him personally and not to waste their time by approaching anyone else in Florence. The Florentine historian Francesco Guicciardini observed: 'He had a reputation such as probably no private citizen has ever enjoyed from the fall of Rome to our own day.' One of Botticelli's most popular portraits - of a strikingly handsome young man - was actually intended as a tribute to a dead banker. The face on the medal is that of Cosimo de' Medici, and alongside it is the inscription pater patriae-, 'father of his country'. By the time Lorenzo the Magnificent, Cosimo's grandson, took over the bank in 1 4 6 9 , the erstwhile Sopranos had become the Corleones - and more. And it was all based on banking.

More than anything else, it is Botticelli's Adoration of the Magi that captures the transfiguration of finance that the Medici had achieved. On close inspection, the three wise men are all Medici: the older man washing the feet of the baby Jesus is Cosimo the Elder; below him, slightly to the right, are his two sons Piero (in red) and Giovanni (in white). Also in the picture are Lorenzo (in a pale blue robe) and, clasping his sword, Giuliano. The painting was commissioned by the head of the Bankers' Guild as a tribute to the family. It should perhaps have been called The Adoration  of the Medici.

 Having once been damned, bankers were now close to divinity.

Loan Sharks

Northern Italy in the early thirteenth century was a land subdiv­ided into multiple feuding city-states. 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. Nowhere was this more of a

problem than in Pisa, where merchants also had to contend with seven different forms of coinage in circulation. By comparison, economic life in the Eastern world - in the Abassid caliphate or in Sung China - was far more advanced, just as it had been in the time of Charlemagne. T o discover modern finance, Europe needed to import it. In this, a crucial role was played by a young mathematician called Leonardo of Pisa, or Fibonacci. The son of a Pisan customs official based in what is now Bejaia

in Algeria, the young Fibonacci had immersed himself in what he called the 'Indian method' of mathematics, a combination of Indian and Arab insights. His introduction of these ideas was to

revolutionize the way Europeans counted. Nowadays he is best remembered for the Fibonacci sequence of numbers, in which each successive number is the sum of the previous two, and the ratio between a number and its immediate antecedent tends towards a 'golden mean' (around 1618) . It is a pattern that mirrors some of the repeating proper­ ties to be found in the natural world (for example in the fractal geometry of ferns and sea shells). But the Fibonacci sequence was only one of many Eastern mathematical ideas introduced to Europe in his path-breaking book Liber Abaci, 'The Book of

Calculation', which he published in 1 2 0 2 . In it, readers could find fractions explained, as well as the concept of present value (the discounted value today of a future revenue stream).

 Most important of all was Fibonacci's introduction of Hindu-Arabic numerals. He not only gave Europe the decimal system, which makes all kinds of calculation far easier than with Roman numerals; he also showed how it could be applied to commercial bookkeeping, to currency conversions and, crucially, to the cal­ culation of interest. Significantly, many of the examples in the Liber Abaci are made more vivid by being expressed in terms of commodities like hides, peppers, cheese, oil and spices. This

was to be the application of mathematics to making money and, in particular, to lending money. One characteristic example begins:

A man placed 1 0 0 pounds at a certain [merchant's] house for 4 denarii per pound per month interest and he took back each year a payment of 30 pounds. One must compute in each year the 3 0 pounds reduction of capital and the profit on the said 3 0 pounds. It is sought how many years, months, days and hours he will hold money in the house . . .

Italian commercial centres like Fibonacci's home town of Pisa or nearby Florence proved to be fertile soil for such financial seeds. But it was above all Venice, more exposed than the others to Oriental influences, that became Europe's great lending labora­tory. It is not coincidental that the most famous moneylender in Western literature was based in Venice. His story brilliantly illuminates the obstacles that for centuries impeded the transla­tion of Fibonacci's theories into effective financial practice. These

obstacles were not economic, or political. They were cultural. 

Jews, too, were not supposed to lend at interest. But there was a convenient get-out clause in the Old Testament book of Deuteronomy: 'Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.' In other words, a J e w might legitimately lend to a Christian, though not to another J e w . The price of doing so was social exclusion. Jews had been expelled from Spain in 1 4 9 2 . Along with many Portuguese conversos, Jews who were forced to adopt Christ­ianity by a decree of 1 4 9 7 , they sought refuge in the Ottoman Empire. From Constantinople and other Ottoman ports they then established trading relationships with Venice. The Jewish presence in Venice dates from 1509, when Jews living in Mestre sought refuge from the War of the League of Cambrai. At first

the city's government was reluctant to accept the refugees, but it soon became apparent that they might prove a useful source of money and financial services, since they could be taxed as well as borrowed from.

 In 1 5 1 6 the Venetian authorities designated a special area of the city for Jews on the site of an old iron foundry which became known as the ghetto nuovo (getto literally means casting). There they were to be confined every night and on Christian holidays. Those who stayed in Venice for more than two weeks were supposed to wear a yellow O on their backs or a yellow (later scarlet) hat or turban.

 Residence was limited to a stipulated period on the basis of condotte (charters) renewed

every five years. A similar arrangement was reached in 1 5 4 1 with some Jews from Romania, who were accorded the right to live in another enclave, the ghetto vecchio. By 1 5 9 0 there were around 2,500 Jews in Venice. Buildings in the ghetto grew seven storeys high to accommodate the newcomers.

Throughout the sixteenth century, the position of the Venetian Jews remained conditional and vulnerable. In 1 5 3 7 , when war broke out between Venice and the Ottoman Empire, the Venetian

Senate ordered the sequestration of the property of 'Turks, Jews and other Turkish subjects'. Another war from 1 5 7 0 to 1 5 7 3 led to the arrest of all Jews and the seizure of their property, though they were freed and had their assets returned after peace had been restored.

 T o avoid a repetition of this experience, the Jews petitioned the Venetian government to be allowed to remain free during any future war. They were fortunate to be represented by Daniel Rodriga, a Jewish merchant of Spanish origin who proved to be a highly effective negotiator. The charter he succeeded in

obtaining in 1589 granted all Jews the status of Venetian subjects, permitted them to engage in the Levant trade - a valuable privi­lege - and allowed them to practise their religion openly. Never­ theless, important restrictions remained. They were not allowed to join guilds or to engage in retail trade, hence restricting them to financial services, and their privileges were subject to revo­cation at eighteen months' notice. As citizens, Jews now stood more chance of success than Shylock in the Venetian law courts.

In 1 6 2 3 , for example, Leon Voltera sued Antonio dalla Donna, who had stood security for a knight who had borrowed certain items from Voltera and then vanished. In 1 6 3 6 - 7 , however, a scandal involving the bribery of judges, in which some Jews were implicated, seems once again to have raised the threat of expulsion.

Though fictional, the story of Shylock is therefore not entirely removed from Venetian reality. Indeed, Shakespeare's play quite accurately illustrates three important points about early modern money-lending: the power of lenders to charge extortionate inter­est rates when credit markets are in their infancy; the importance of law courts in resolving financial disputes without recourse to violence; but above all the vulnerability of minority creditors to a backlash by hostile debtors who belong to the ethnic majority. 

For in the end, of course, Shylock is thwarted. Although the court recognizes his right to insist on his bond - to claim his pound of flesh - the law also prohibits him from shedding Antonio's blood.

And, because he is an alien, the law requires the loss of his goods and life for plotting the death of a Christian. He escapes only by submitting to baptism. Everyone lives happily ever after - except

Shylock.

Loan sharks, like the poor on whom they prey, are always with us. They thrive in East Africa, for example. But there is no need to travel to the developing world to understand the workings of primitive money-lending. According to a 2007 report by the Department of Trade and Industry, approximately 165,000 households in the U K use illegal moneylenders, borrowing in aggregate up to £40 million a year, but repaying three times that amount. T o see just why one-man moneylenders are nearly always unpopular, regardless of their ethnicity, all you need do is pay a visit to my home town, Glasgow. The deprived housing estates of the city's East End have long been fertile breeding grounds for loan sharks. In districts like Shettleston, where my grandparents lived, there are steel shutters over the windows of

derelict tenements and sectarian graffiti on the bus shelters. Once, Shettleston's economic life revolved around the pay packets of the workers employed at Boyd's ironworks. N o w it revolves around the benefit payments made into the Post Office accounts of the unemployed. Male life expectancy in Shettleston is around 64, thirteen years less than the U K average and the same as in Pakistan, which means that a newborn boy there typically will not live long enough to collect his state pension.

The arrest of a loan shark: Gerard Law is led away by police

officers of Glasgow's Illegal Money-Lending Unit

It is easy to condemn loan sharks as immoral and, indeed, criminal. Gerard Law was sentenced to ten months in prison for his behaviour. Yet we need to try to understand the economic rationale for what he did. First, he was able to take advantage of the fact that no mainstream financial institution would  extend credit to the Shettleston unemployed. Second, Law had to be rapacious and ruthless precisely because the members of his small clientele were in fact very likely to default on their loans. The

fundamental difficulty with being a loan shark is that the business is too small-scale and risky to allow low interest rates. But the high rates make defaults so much more likely that only intimi­dation ensures that people keep paying. So how did moneylenders learn to overcome the fundamental conflict: if they were too generous, they made no money; if they were too hard-nosed, like Gerard Law, people eventually called in the police?

The answer is by growing big - and growing powerful.