FINANCIAL MARKET AND INSTITUTIONS REPORT

IN

THE ASCENT OF MONEY: EPISODE 2

Project work submitted in partial fulfilment of the

requirements for the award of degree of

POST GRADUATE DIPLOMA IN MANAGEMENT

Specialized in
BANKING, INSURANCE AND FINANCIAL SERVICES(BIFS)
Submitted by
SIVA SAI TEJA ALLAKA(F2021059)
SRISHTI PANDEY (F2021060)
TALARI SHIVANI (F2021061)
VINEET ARORA (F2021062)
YASHKUMAR SURSH IYER (F2021063)

Under the esteemed guidance of

INTERNAL SUPERVISOR
Dr. Arpita Amarnani
Chair, Centre for Excellence in Sustainable Development
Associate Professor - Finance
 1. SYNOPSIS
Ascent of money 2 is all about the “Bond Market”. It starts with how the bond market
works. It shows how much money is required to fund a war. In the 14th century, Tuscany,
Florence, Pisa, and Siena were at war with each other. And one of the mercenaries was Sir
John Hawkwood from Florence, who was thanked by the Florentines for skilfully waging the
war. War drained a lot of money from the countries, especially Florence whose debt rose from
50000 florins to 5 million by 1427. Florence got this huge amount of cash from the Bond
Market raised from its citizens.
Then came the battle of Waterloo in which shows how the person, who was the founder
of the world’s biggest bank in the world came into power. Nathan Rothschild made the first
million by speculating the outcome of the war between France and Britain. A film was made
on Nathan where it was shown that how Nathan was bribing the French to ensure
Wellington’s victory. Because of which they started selling the bonds which led to a crashing
of the bond market.
In 1815, when the British had lost the war, Rothschild had suffered a huge loss and
they had cash that nobody wanted. So, they traded all this amount in the bond market. As
prices started rising Nathan kept on trading which led to Nathan making a fortune of 600
million pounds.
Similarly American Civil War, the same method was used to fund the war. But because
of bad credit risk, they had trouble raising the fund. So, they invented a new trick that was
they will issue bonds which after the next crop harvest gets converted to cotton and the price
was the pre-war price.
During the First World War, the Government had to increase the supply of money
which led to Inflation. Germany and its allies had difficulty raising money from the market.
After their defeat and huge expenditure incurred for the war led to inflation and a drop in the
currency rate. The war led to hyperinflation, because of which the bond market started to
fall. Argentina was called the “Land of Silver”. Argentina had two wars, one was Generals and
the Left and the other was the foreign war against Britain. Because of which inflation rose to
10% per month. And in just one month the austral fell 140% against the dollar. Due to this
unemployment rose to 15%, many people were going hungry.
However, there was a comeback of the bond market in Argentina and everywhere.
Inflation was in control after a few decades because the commodities became cheaper. There
is still a growing demand for bonds but there is also a fear of inflations.
 2. ANALYSIS

a. Flow of Events
The Italian Renaissance (14th Century)

• The Italian Renaissance started the practice of raising money from its citizens to
finance Wars in the 14th Century
• The cities of Tuscany, Pisa, Siena and Florence were at war and hired mercenary
groups to conduct warfare on their behalf in the 1360s and the 1370s
• Among them the most famous was Mr. John Hawkwood from Essex
• Constant warfare and the need to raise even more funds caused the renaissance to
deploy more and more bonds
• Since these bonds were loans taken forcefully from the people, eventually with the
increase in bond volume, the bond value declined
The Battle of Waterloo and the rise of the Rothschilds

• The battle of waterloo brought forth an obscure family of 5 brothers who gained
massive popularity as the masters of the bond market
• The British army at waterloo led by Duke of Wellington was going up against the
French Army led by Napoleon
• The third Rothschild brother Nathan, was the mastermind of the entire Rothschild
banking system and was appointed the agent of the British government
• His job was to convert the cash raised in the bond market and convert it into gold so
that the duke could use it to finance the conflict
• To benefit from the war, he used his brothers present in prominent financial centres
of Europe to raise massive amounts of funds in the form of Gold to prepare for a long,
protracted war
• This gamble proved to be disastrous as the battle ended rather quickly with unneeded
gold reserves left to rot with Nathan Rothschild
• Rothschild suffered a heavy amount of loss and had to mitigate it somehow
• He used the gold to raise the price of bonds higher and higher and held for a year while
the buying frenzy lasted, and then sold his gold at 40% profit
The American Civil War

• A major turning point in the American Civil War was when the south lost the
Mississippi river in 1863
• However, there was an even more important event that took place in 1862 when New
Orleans was taken over by the union
• The Confederation used cotton to involve the bond market into the war
• They used cotton as collateral to back their bonds which increased trust in the market
• To incite Britain and consequently the Rothschilds to Finance their war effort, the
confederation tried to restrict the cotton supply to increase the price of cotton and
consequently, cotton bonds
 • The confederation levied an embargo on the shipments of cotton to Britain
• This worked temporarily and, in the process, wrecked Britain’s economy
• Then, the union took over New Orleans which prevented the investors to take physical
possession of their cotton
• The confederation’s movie backfired and the cotton backed bonds plummeted,
moreover, Britain eventually found alternate sources of cotton from Egypt, India and
China
• After the cotton backed bonds lost their value, the confederation did not have a choice
but to print large amounts of paper money to finance the war. Even this was low in
value compared to a similar concept applied in the north by the union
• Large volumes of money printed with decline in buying power led to extremely high
amounts of inflation in the south, which eventually led the north to victory
The Fall of Argentina (1989)

• Argentina suffered two wars, one between left wing generals in 1970s and one with
Britain for the Falkland Islands in 1982
• Incessant spending on warfare led to hyperinflation
• Inflation rates were as high as 10% per month
• The government tried to prevent a currency collapse by lowering interest rates
• Despite the efforts the Austral fell around 140% against the dollar and the World bank
also refused to lend money to the government citing their flawed civil policy
• The government began a desperate money minting spree, which ended because they
ran out of paper to print more
• Higher and higher denomination of notes were printed which caused inflation to jump
to 100% per month
• Eventually led to rioting and looting of shops by hungry mobs
Present Day

• Despite inflation fears the bond market is still going strong

• Governments have formed an equilibrium between Political power and financial
exposure
• Overall, the governments borrow massive amounts of money from people and are still
considered the most trustworthy borrowers
• The Bond markets still rule the world
b. Opinion
Our opinion is the points raised in the movie tells us how the bond market plays an
important role in wars (such as battle of waterloo, American Civil War, First World War)
Also, if we buy a government bond while raging a war is obviously risky. Nonetheless
we can expect a return proportional to the risk taken.
Evidence: In case of Nathan Rothschild, bond market made their family rich but there
is also risk involved. Nathan had acquired valuable experience as a smuggler of gold to Britain,
in breach of the blockade that Napoleon imposed on trade between England and Europe.
Never had numerous bonds been issued to finance a military conflict. Between 1793
and 1815 the British national debt increased by a factor of three, to £745 million, more than
double the annual output of the UK economy. But this increase within the supply of bonds
had weighed heavily on the London market. Since February 1792, the price of a typical £100
3 percent consol had fallen from £96 to below £60 on the eve of Waterloo, at one time sinking
below £50. Rothschild stacked up huge amounts of gold, anticipating a long, drawn-out war
between the French and the British, which proved to be a miscalculation.
According to a long-standing legend, the Rothschild family owed the
primary many their fortune to Nathan's successful speculation about the effect of the
result of the battle on the price of British bonds. The gold rapidly lost the value.
The points that were raised in case of Argentina are undoubtedly valid. Because the
inflation causes the interest rates fall and decrease the purchasing power of the sum invested
and interest payments due. Bond prices fall eventually.
Evidence: The World Bank froze lending to Argentina, saying this the government had
failed to tackle its bloated public sector deficit. Private sector lenders were no more
enthusiastic. Investors were hardly likely to shop for bonds with the prospect that inflation
would wipe out their real value within days. As fears grew that the central bank's reserves
were running out, bond prices plunged. There was just one option left for a desperate
government: the press. But even that failed. On Friday 28 April Argentina literally ran out of
cash. 'It's a physical problem,' financial institution vice chairman Roberto Eilbaum told a press
conference. The mint had literally run out of paper and therefore the printers had gone on
strike. 'I do not know how we're getting to roll in the hay, but the cash possesses to be there
on Monday,' he confessed.
By June, with the monthly rate of inflation rising above 100 per cent, frustration
was on the brink of boiling point. For two days in June crowds in Argentina's second largest
city, Rosario, ran amok in an eruption of rioting and looting that left a minimum of fourteen
people dead.
In terms of American civil war, it was not the decisive one to impose restrictions or
boycott collateral that is used to secure bonds.
Evidence: The Confederate Treasury had paid for its army at the start of the war, in
the absence of a pre-existing system of central taxation, by selling bonds to its own
 inhabitants in the form of two huge loans of $15 million and $100 million. The South, on the
other hand, had a limited quantity of liquid money due to its many self-contained farms and
tiny towns. To survive, it was later said, the Confederacy turned to the Rothschilds, hoping
that the world's wealthiest family could help them defeat the North in the same way that the
Rothschilds had helped Wellington defeat Napoleon at Waterloo.
The Rothschilds eventually turned from bond traders to fund managers managing a
large portfolio of bonds. This made it so that conflict was not beneficial to them anymore and
thus decided to stay on the side lines during the American Civil War. The south American
Confederation wanted to involve Britain, and specifically the Rothschilds into financing their
conflict. For this, they introduced cotton backed bonds, where investors could obtain their
cotton in case the government defaulted on interest payments.
To make these bonds more profitable the Confederation started imposing embargos
on cotton shipments to Britain. The embargo ended up collapsing Britain’s economy. The
price of cotton and consequently the cotton backed bonds increased. The union then acquired
New Orleans in 1862 which was the main port for cotton exports. This resulted in investors
unable to collect their quota of cotton during government defaults.
Moreover, Britain found alternate sources of cotton from India, China and Egypt. This
error led to the downfall of the South American Confederation.
c. Implications of the issues raised on financial institutions and markets:
War at Northern Italy:
In the 14th and 15th century in the medieval city, the states of Tuscany, Florence, Risa and
Siena were at war. The cost of these endless conflicts pushed Italy's city-states into
bankruptcy, with spending exceeding tax income. The city's debt had escalated from roughly
fifty thousand florins at the start of the 14th century to five million. This payment was to be
done to the condottiere, as they hired condottiere to raise a military and fight for them.
Instead of depending on outsiders’ funds to finance the war, the states decided to borrow
from itself. Florence turned its citizens into its biggest investors by forced loans and for which
interest was paid on the principal amount. These forced loans or debt instruments were noted
in simple lines in a ledger as original government bond. The main motive for issuing bond was
to finance the wars. This led to the start of the modern bond market.
The effect of the forced loans or bonds is as follows:

• Cities: - As the states of Tuscany, Florence, Risa and Siena already had doubled the tax
from quite few years this was not an option for them anymore to finance the wars.
The states of Tuscany, Florence, Risa and Siena had an added advantage as it saved
them from bankruptcy and solved the problem of public debt by facilitating finance
from its own citizens through debt instruments such as bonds.
• Citizens: - Although initially the citizens were forced to lend money to the states, it
still was beneficial to them as they were given interest on the face value of the bond
and were allowed to sell their bond whenever needed.
 • Economy: - As the number of unproductive wars increased, more bonds were issued
to meet the financial needs. This led to excess of supply of bonds in the bond market.
The greater the number of bonds issued, the less valuable they appeared to investors.
This also implies that the return on the bonds was quite good with respect to the risk
taken. As the value of bonds rose at par, the bond market oversaw setting interest
rates for the entire economy. From being used as a debt instrument to raise finance
for war it started to set interests rates in the economy.

Battel of waterloo:
During the battle of waterloo in 1815 the British government had enough money from bonds
and banknotes, but this was not of much use as they were not able to pay the British allies
against the French. They needed a universally accepted currency.
Nathan Rothschild founder of the Rothschild bank in London, was given the job – to take the
money from the bond markets and deliver it to the duck of Wellington as gold.

The effects are as follows:

• Gold as universally accepted currency: Exchange rate system came into effect in 1944,
to set up a better system of fixed exchange rates. Due to the absence of exchange rate
during 18th century the British realized the need of universally accepted currency
during war. Hence, they started using gold as the universally accepted currency.
• Wealth generated by Rothschilds: Rothschilds acted as the war financer as they had
a ready-made network within the family. All the five Rothschild brothers were in major
states which was an advantage to them. They accumulated vast wealth by trading gold
in the market. For example, if the price of gold in Paris is more than London then James
in Paris would sell and Nathan in London would buy. So, the main strategy was to sell
at a higher price and buy at a lower price hence increasing their profit margin.
• Bonds as investments: After facing heavy losses in March 1815 when Napoleon
returned to Paris, Nathan used the Rothschilds gold to make massive and huge
investment in government bonds. The price of the British bonds increased as the
British won the battle of waterloo. He sold his bond holding in July 1817, when
bond prices had risen by 40%, and his earnings were worth nearly £600 million
today. This led to a realization that bonds could be purchased and traded in a way
that created substantial money, and with money came power.

American civil war:

• Collateral for Bonds: The Souths financial strategy was to use cotton as a collateral to
back its bonds. The South used cotton to influence the value of the bonds by restricting
the supply of cotton.
 • Inflation: The strategy to manipulate the bond market by restricting trade routes to
united states of America, imposing embargo on all shipments to Liverpool had led to
cotton famine in the British. They had shut off the cotton tap but were unable to re-
turn it on. The Confederacy had no choice but to create paper dollars because its
domestic bond market was depleted and it only had two meagre foreign loans. Due to
increase in the supply of money this led to inflation. This had an adverse effect on the
economy and its citizens. An example of such situation was Argentina.
In 1989, inflation in Argentina had reached a monthly rate of 100% which led to
intense rioting and looting by hungry mob. The hyperinflation also effected the fixed
income group like civil servants, old-age pensioners, and bondholders living off the
interest on their investments.

Conclusion:
The Bond market, which started in the world as a means of financing war by
government borrowing, eventually ended up functioning as the bedrock of all other financial
markets, and the most important component for driving the economic vehicle forward.
It can be inferred that the corporate bonds like commercial papers, CD’s as well as
government bonds like T-bills came into existence by referring all the events and came up
with stringent norms and regulations favourable to both public and sellers.