The Ascent of Money_ A Financial History

Chapter 2

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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.

The Euthanasia of the Rentier Rentier The fate of those who lost their shirts on Confederate bonds was not especially unusual in the nineteenth century. The Confederacy was far from the only state in the Americas to end up disappointing its bondholders; it was merely the northernmost delinquent. South of the Rio Grande, debt defaults and currency depreciations verged on the commonplace. The experience of Latin America in the nineteenth century in many ways foreshadowed problems that would become almost universal in the middle of the twentieth century. Partly this was because the social cla.s.s that was most likely to invest in bonds - and therefore to have an interest in prompt interest payment in a sound currency - was weaker there than elsewhere. Partly it was because Latin American republics were among the first to discover that it was relatively painless to default when a substantial proportion of bondholders were foreign. It was no mere accident that the first great Latin American debt crisis happened as early as 1826-9, when Peru, Colombia, Chile, Mexico, Guatemala and Argentina all defaulted on loans issued in London just a few years before.49 In many ways, it was true that the bond market was powerful. By the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention.50 It is hard to believe that Gladstone would have ordered the invasion of Egypt in 1882 if the Egyptian government had not threatened to renege on its obligations to European bondholders, himself among them. Bringing an "emerging market" under the aegis of the British Empire was the surest way to remove political risk from investors" concerns. It is hard to believe that Gladstone would have ordered the invasion of Egypt in 1882 if the Egyptian government had not threatened to renege on its obligations to European bondholders, himself among them. Bringing an "emerging market" under the aegis of the British Empire was the surest way to remove political risk from investors" concerns.51 Even those outside the Empire risked a visit from a gunboat if they defaulted, as Venezuela discovered in 1902, when a joint naval expedition by Britain, Germany and Italy temporarily blockaded the country"s ports. The United States was especially energetic (and effective) in protecting bondholders" interests in Central America and the Caribbean. Even those outside the Empire risked a visit from a gunboat if they defaulted, as Venezuela discovered in 1902, when a joint naval expedition by Britain, Germany and Italy temporarily blockaded the country"s ports. The United States was especially energetic (and effective) in protecting bondholders" interests in Central America and the Caribbean.52 But in one crucial respect the bond market was potentially vulnerable. Investors in the City of London, the biggest international financial market in the world throughout the nineteenth century, were wealthy but not numerous. In the early nineteenth century the number of British bondholders may have been fewer than 250,000, barely 2 per cent of the population. Yet their wealth was more than double the entire national income of the United Kingdom; their income in the region of 7 per cent of national income. In 1822 this income - the interest on the national debt - amounted to roughly half of total public spending, yet more than two thirds of tax revenue was indirect and hence fell on consumption. Even as late as 1870 these proportions were still, respectively, a third and more than half. It would be quite hard to devise a more regressive fiscal system, with taxes imposed on the necessities of the many being used to finance interest payments to the very few. Small wonder Radicals like William Cobbett were incensed. "A national debt, and all the taxation and gambling belonging to it," Cobbett declared in his Rural Rides Rural Rides (1830), "have a natural tendency to (1830), "have a natural tendency to draw wealth into great ma.s.ses . . . for the gain of a few draw wealth into great ma.s.ses . . . for the gain of a few."53 In the absence of political reform, he warned, the entire country would end up in the hands of "those who have had borrowed from them the money to uphold this monster of a system . . . the loan-jobbers, stock-jobbers . . . Jews and the whole tribe of tax-eaters". In the absence of political reform, he warned, the entire country would end up in the hands of "those who have had borrowed from them the money to uphold this monster of a system . . . the loan-jobbers, stock-jobbers . . . Jews and the whole tribe of tax-eaters".54 Such tirades did little to weaken the position of the cla.s.s known in France as the rentiers rentiers - the recipients of interest on government bonds like the French - the recipients of interest on government bonds like the French rente rente. On the contrary, the decades after 1830 were a golden age for the rentier rentier in Europe. Defaults became less and less frequent. Money, thanks to the gold standard, became more and more dependable. in Europe. Defaults became less and less frequent. Money, thanks to the gold standard, became more and more dependable.55 This triumph of the This triumph of the rentier rentier, despite the generalized widening of electoral franchises, was remarkable. True, the rise of savings banks (which were often mandated to hold government bonds as their princ.i.p.al a.s.sets) gave new segments of society indirect exposure to, and therefore stakes in, the bond market. But fundamentally the rentiers rentiers remained an elite of Rothschilds, Barings and Gladstones - socially, politically, but above all economically intertwined. What ended their dominance was not the rise of democracy or socialism, but a fiscal and monetary catastrophe for which the European elites were themselves responsible. That catastrophe was the First World War. remained an elite of Rothschilds, Barings and Gladstones - socially, politically, but above all economically intertwined. What ended their dominance was not the rise of democracy or socialism, but a fiscal and monetary catastrophe for which the European elites were themselves responsible. That catastrophe was the First World War.

"Inflation", wrote Milton Friedman in a famous definition, "is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quant.i.ty of money than in output." What happened in all the combatant states during and after the First World War ill.u.s.trates this pretty well. There were essentially five steps to high inflation: 1. War led not only to shortages of goods but also to2. short-term government borrowing from the central bank,3. which effectively turned debt into cash, thereby expanding the money supply,4. causing public expectations of inflation to shift and the demand for cash balances to fall5. and prices of goods to rise.o Pure monetary theory, however, cannot explain why in one country the inflationary process proceeds so much further or faster than in another. Nor can it explain why the consequences of inflation vary so much from case to case. If one adds together the total public expenditures of the major combatant powers between 1914 and 1918, Britain spent rather more than Germany and France much more than Russia. Expressed in terms of dollars, the public debts of Britain, France and the United States increased much more between April 1914 and March 1918 than that of Germany.56 True, the volume of banknotes in circulation rose by more in Germany between 1913 and 1918 (1,040 per cent) than in Britain (708 per cent) or France (386 per cent), but for Bulgaria the figure was 1,116 per cent and for Romania 961 per cent. True, the volume of banknotes in circulation rose by more in Germany between 1913 and 1918 (1,040 per cent) than in Britain (708 per cent) or France (386 per cent), but for Bulgaria the figure was 1,116 per cent and for Romania 961 per cent.57 Relative to 1913, wholesale prices had risen further by 1918 in Italy, France and Britain than in Germany. The cost-of-living index for Berlin in 1918 was 2.3 times higher than its pre-war level; for London it was little different (2.1 times higher). Relative to 1913, wholesale prices had risen further by 1918 in Italy, France and Britain than in Germany. The cost-of-living index for Berlin in 1918 was 2.3 times higher than its pre-war level; for London it was little different (2.1 times higher).58 Why, then, was it Germany that plunged into hyperinflation after the First World War? Why was it the mark that collapsed into worthlessness? The key lies in the role of the bond market in war and post-war finance. Why, then, was it Germany that plunged into hyperinflation after the First World War? Why was it the mark that collapsed into worthlessness? The key lies in the role of the bond market in war and post-war finance.

All the warring countries went on war bonds sales-drives during the war, persuading thousands of small savers who had never previously purchased government bonds that it was their patriotic duty to do so. Unlike Britain, France, Italy and Russia, however, Germany did not have access to the international bond market during the war (having initially spurned the New York market and then been shut out of it). While the Entente powers could sell bonds in the United States or throughout the capital-rich British Empire, the Central powers (Germany, Austria-Hungary and Turkey) were thrown back on their own resources. Berlin and Vienna were important financial centres, but they lacked the depth of London, Paris and New York. As a result, the sale of war bonds grew gradually more difficult for the Germans and their allies, as the appet.i.te of domestic investors became sated. Much sooner, and to a much greater extent than in Britain, the German and Austrian authorities had to turn to their central banks for short-term funding. The growth of the volume of Treasury bills in the central bank"s hands was a harbinger of inflation because, unlike the sale of bonds to the public, exchanging these bills for banknotes increased the money supply. By the end of the war, roughly a third of the Reich debt was "floating" or unfunded, and a substantial monetary overhang had been created, which only wartime price controls prevented from manifesting itself in higher inflation.

Defeat itself had a high price. All sides had rea.s.sured taxpayers and bondholders that the enemy would pay for the war. Now the bills fell due in Berlin. One way of understanding the post-war hyperinflation is therefore as a form of state bankruptcy. Those who had bought war bonds had invested in a promise of victory; defeat and revolution represented a national insolvency, the brunt of which necessarily had to be borne by the Reich"s creditors. Quite apart from defeat, the revolutionary events between November 1918 and January 1919 were scarcely calculated to rea.s.sure investors. Nor was the peace conference at Versailles, which imposed an unspecified reparations liability on the fledgling Weimar Republic. When the total indemnity was finally fixed in 1921, the Germans found themselves saddled with a huge new external debt with a nominal capital value of 132 billion "gold marks" (pre-war marks), equivalent to more than three times national income. Although not all this new debt was immediately interest-bearing, the scheduled reparations payments accounted for more than a third of all Reich expenditure in 1921 and 1922. No investor who contemplated Germany"s position in the summer of 1921 could have felt optimistic, and such foreign capital as did flow into the country after the war was speculative or "hot" money, which soon departed when the going got tough.

Yet it would be wrong to see the hyperinflation of 1923 as a simple consequence of the Versailles Treaty. That was how the Germans liked to see it, of course. Their claim throughout the post-war period was that the reparations burden created an unsustainable current account deficit; that there was no alternative but to print yet more paper marks in order to finance it; that the inflation was a direct consequence of the resulting depreciation of the mark. All of this was to overlook the domestic political roots of the monetary crisis. The Weimar tax system was feeble, not least because the new regime lacked legitimacy among higher income groups who declined to pay the taxes imposed on them. At the same time, public money was spent recklessly, particularly on generous wage settlements for public sector unions. The combination of insufficient taxation and excessive spending created enormous deficits in 1919 and 1920 (in excess of 10 per cent of net national product), before the victors had even presented their reparations bill. The deficit in 1923, when Germany had suspended reparations payments, was even larger. Moreover, those in charge of Weimar economic policy in the early 1920s felt they had little incentive to stabilize German fiscal and monetary policy, even when an opportunity presented itself in the middle of 1920.59 A common calculation among Germany"s financial elites was that runaway currency depreciation would force the Allied powers into revising the reparations settlement, since the effect would be to cheapen German exports relative to American, British and French manufactures. It was true, as far as it went, that the downward slide of the mark boosted German exports. What the Germans overlooked was that the inflation-induced boom of 1920-22, at a time when the US and UK economies were in the depths of a post-war recession, caused an even bigger surge in imports, thus negating the economic pressure they had hoped to exert. At the heart of the German hyperinflation was a miscalculation. When the French cottoned on to the insincerity of official German pledges to fulfil their reparations commitments, they drew the conclusion that reparations would have to be collected by force and invaded the industrial Ruhr region. The Germans reacted by proclaiming a general strike ("pa.s.sive resistance"), which they financed with yet more paper money. The hyperinflationary endgame had now arrived. A common calculation among Germany"s financial elites was that runaway currency depreciation would force the Allied powers into revising the reparations settlement, since the effect would be to cheapen German exports relative to American, British and French manufactures. It was true, as far as it went, that the downward slide of the mark boosted German exports. What the Germans overlooked was that the inflation-induced boom of 1920-22, at a time when the US and UK economies were in the depths of a post-war recession, caused an even bigger surge in imports, thus negating the economic pressure they had hoped to exert. At the heart of the German hyperinflation was a miscalculation. When the French cottoned on to the insincerity of official German pledges to fulfil their reparations commitments, they drew the conclusion that reparations would have to be collected by force and invaded the industrial Ruhr region. The Germans reacted by proclaiming a general strike ("pa.s.sive resistance"), which they financed with yet more paper money. The hyperinflationary endgame had now arrived.

Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country"s political economy. There surely were less catastrophic ways to settle the conflicting claims of domestic and foreign creditors on the diminished national income of postwar Germany. But a combination of internal gridlock and external defiance - rooted in the refusal of many Germans to accept that their empire had been fairly beaten - led to the worst of all possible outcomes: a complete collapse of the currency and of the economy itself. By the end of 1923 there were approximately 4.97 10 phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country"s political economy. There surely were less catastrophic ways to settle the conflicting claims of domestic and foreign creditors on the diminished national income of postwar Germany. But a combination of internal gridlock and external defiance - rooted in the refusal of many Germans to accept that their empire had been fairly beaten - led to the worst of all possible outcomes: a complete collapse of the currency and of the economy itself. By the end of 1923 there were approximately 4.97 1020 marks in circulation. Twenty-billion mark notes were in everyday use. The annual inflation rate reached a peak of 182 billion per cent. Prices were on average 1.26 marks in circulation. Twenty-billion mark notes were in everyday use. The annual inflation rate reached a peak of 182 billion per cent. Prices were on average 1.26 trillion trillion times higher than they had been in 1913. True, there had been some short-term benefits. By discouraging saving and encouraging consumption, accelerating inflation had stimulated output and employment until the last quarter of 1922. The depreciating mark, as we have seen, had boosted German exports. Yet the collapse of 1923 was all the more severe for having been postponed. Industrial production dropped to half its 1913 level. Unemployment soared to, at its peak, a quarter of trade union members, with another quarter working short time. Worst of all was the social and psychological trauma caused by the crisis. "Inflation is a crowd phenomenon in the strictest and most concrete sense of the word," Elias Canetti later wrote of his experiences as a young man in inflation-stricken Frankfurt. "[It is] a witches" sabbath of devaluation where men and the units of their money have the strongest effects on each other. The one stands for the other, men feeling themselves as "bad" as their money; and this becomes worse and worse. Together they are all at its mercy and all feel equally worthless." times higher than they had been in 1913. True, there had been some short-term benefits. By discouraging saving and encouraging consumption, accelerating inflation had stimulated output and employment until the last quarter of 1922. The depreciating mark, as we have seen, had boosted German exports. Yet the collapse of 1923 was all the more severe for having been postponed. Industrial production dropped to half its 1913 level. Unemployment soared to, at its peak, a quarter of trade union members, with another quarter working short time. Worst of all was the social and psychological trauma caused by the crisis. "Inflation is a crowd phenomenon in the strictest and most concrete sense of the word," Elias Canetti later wrote of his experiences as a young man in inflation-stricken Frankfurt. "[It is] a witches" sabbath of devaluation where men and the units of their money have the strongest effects on each other. The one stands for the other, men feeling themselves as "bad" as their money; and this becomes worse and worse. Together they are all at its mercy and all feel equally worthless."60

The price of hyperinflation: a German billion mark note from November 1923 Worthlessness was the hyperinflation"s princ.i.p.al product. Not only was money rendered worthless; so too were all the forms of wealth and income fixed in terms of that money. That included bonds. The hyperinflation could not wipe out Germany"s external debt, which had been fixed in pre-war currency. But it could and did wipe out all the internal debt that had been acc.u.mulated during and after the war, levelling the debt mountain like some devastating economic earthquake. The effect was akin to a tax: a tax not only on bondholders but also on anyone living on a fixed cash income. This amounted to a great levelling, since it affected primarily the upper middle cla.s.ses: rentiers rentiers, senior civil servants, professionals. Only entrepreneurs were in a position to insulate themselves by adjusting prices upwards, h.o.a.rding dollars, investing in "real a.s.sets" (such as houses or factories) and paying off debts in depreciating banknotes. The enduring economic legacy of the hyperinflation was bad enough: weakened banks and chronically high interest rates, which now incorporated a substantial inflation risk premium. But it was the social and political consequences of the German hyperinflation that were the most grievous. The English economist John Maynard Keynes had theorized in 1923 that the "euthanasia of the rentier rentier" through inflation was preferable to ma.s.s unemployment through deflation - "because it is worse in an impoverished world to provoke unemployment than to disappoint the rentier".61 Yet four years earlier, he himself had given a vivid account of the negative consequences of inflation: Yet four years earlier, he himself had given a vivid account of the negative consequences of inflation:

By a continuing process of inflation, governments can confiscate, secretly and un.o.bserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become "profiteers", who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than of the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless . . .62 It was to Lenin that Keynes attributed the insight that "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." No record survives of Lenin saying any such thing, but his fellow Bolshevik Yevgeni Preobrazhenskyp did describe the banknote-printing press as "that machine-gun of the Commissariat of Finance which poured fire into the rear of the bourgeois system". did describe the banknote-printing press as "that machine-gun of the Commissariat of Finance which poured fire into the rear of the bourgeois system".63 The Russian example is a reminder that Germany was not the only vanquished country to suffer hyperinflation after the First World War. Austria - as well as the newly independent Hungary and Poland - also suffered comparably bad currency collapses between 1917 and 1924. In the Russian case, hyperinflation came after the Bolsheviks had defaulted outright on the entire Tsarist debt. Bondholders would suffer similar fates in the aftermath of the Second World War, when Germany, Hungary and Greece all saw their currencies and bond markets collapse.q If hyperinflation were exclusively a.s.sociated with the costs of losing world wars, it would be relatively easy to understand. Yet there is a puzzle. In more recent times, a number of countries have been driven to default on their debts - either directly by suspending interest payments, or indirectly by debasing the currency in which the debts are denominated - as a result of far less serious disasters. Why is it that the spectre of hyperinflation has not been banished along with the spectre of global conflict?

PIMCO boss Bill Gross began his money-making career as a blackjack player in Las Vegas. To his eyes, there is always an element of gambling involved when an investor buys a bond. Part of that gamble is that an upsurge in inflation will not consume the value of the bond"s annual interest payments. As Gross explains it, "If inflation goes up to ten per cent and the value of a fixed rate interest is only five, then that basically means that the bond holder is falling behind inflation by five per cent." As we have seen, the danger that rising inflation poses is that it erodes the purchasing power of both the capital sum invested and the interest payments due. And that is why, at the first whiff of higher inflation, bond prices tend to fall. Even as recently as the 1970s, as inflation soared around the world, the bond market made a Nevada casino look like a pretty safe place to invest your money. Gross vividly recalls the time when US inflation was surging into double digits, peaking at just under 15 per cent in April 1980. As he puts it, "that was very bond-unfriendly, and it produced . . . perhaps the worst bond bear market not just in memory but in history." To be precise, real annual returns on US government bonds in the 1970s were minus 3 per cent, almost as bad as during the inflationary years of the world wars. Today, only a handful of countries have inflation rates above 10 per cent and only one, Zimbabwe, is afflicted with hyperinflation.r But back in 1979 at least seven countries had an annual inflation rate above 50 per cent and more than sixty countries, including Britain and the United States, had inflation in double digits. Among the countries worst affected, none suffered more severe long-term damage than Argentina. But back in 1979 at least seven countries had an annual inflation rate above 50 per cent and more than sixty countries, including Britain and the United States, had inflation in double digits. Among the countries worst affected, none suffered more severe long-term damage than Argentina.

Once, Argentina was a byword for prosperity. The country"s very name means the land of silver. The river on whose banks the capital Buenos Aires stands is the Rio de la Plata - in English the Silver River - a reference not to its colour, which is muddy brown, but to the silver deposits supposed to lie upstream. In 1913, according to recent estimates, Argentina was one of the ten richest countries in the world. Outside the English-speaking world, per capita gross domestic product was higher in only Switzerland, Belgium, the Netherlands and Denmark. Between 1870 and 1913, Argentina"s economy had grown faster than those of both the United States and Germany. There was almost as much foreign capital invested there as in Canada. It is no coincidence that there were once two Harrods stores in the world: one in Knightsbridge, in London, the other on the Avenida Florida, in the heart of Buenos Aires. Argentina could credibly aspire to be the United Kingdom, if not the United States, of the southern hemisphere. In February 1946, when the newly elected president General Juan Domingo Peron visited the central bank in Buenos Aires, he was astonished at what he saw. "There is so much gold," he marvelled, "you can hardly walk through the corridors."

The economic history of Argentina in the twentieth century is an object lesson that all the resources in the world can be set at nought by financial mismanagement. Particularly after the Second World War the country consistently underperformed its neighbours and most of the rest of the world. So miserably did it fare in the 1960s and 1970s, for example, that its per capita GDP was the same in 1988 as it had been in 1959. By 1998 it had sunk to 34 per cent of the US level, compared with 72 per cent in 1913. It had been overtaken by, among others, Singapore, j.a.pan, Taiwan and South Korea - not forgetting, most painful of all, the country next door, Chile. What went wrong? One possible answer is inflation, which was in double digits between 1945 and 1952, between 1956 and 1968 and between 1970 and 1974; and in treble (or quadruple) digits between 1975 and 1990, peaking at an annual rate of 5,000 per cent in 1989. Another answer is debt default: Argentina let down foreign creditors in 1982, 1989, 2002 and 2004. Yet these answers will not quite suffice. Argentina had suffered double-digit inflation in at least eight years between 1870 and 1914. It had defaulted on its debts at least twice in the same period. To understand Argentina"s economic decline, it is once again necessary to see that inflation was a political as much as a monetary phenomenon.

An oligarchy of landowners had sought to base the country"s economy on agricultural exports to the English-speaking world, a model that failed comprehensively in the Depression. Large-scale immigration without (as in North America) the freeing of agricultural land for settlement had created a disproportionately large urban working cla.s.s that was highly susceptible to populist mobilization. Repeated military interventions in politics, beginning with the coup that installed Jose F. Uriburu in 1930, paved the way for a new kind of quasi-fascistic politics under Peron, who seemed to offer something for everyone: better wages and conditions for workers and protective tariffs for industrialists. The anti-labour alternative to Peron, which was attempted between 1955 (when he was deposed) and 1966, relied on currency devaluation to try to reconcile the interests of agriculture and industry. Another military coup in 1966 promised technological modernization but instead delivered more devaluation, and higher inflation. Peron"s return in 1973 was a fiasco, coinciding as it did with the onset of a global upsurge in inflation. Annual inflation surged to 444 per cent. Yet another military coup plunged Argentina into violence as the Proceso de Reorganizacion Nacional Proceso de Reorganizacion Nacional (National Reorganization Process) condemned thousands to arbitrary detention and "disappearance". In economic terms, the junta achieved precisely nothing other than to saddle Argentina with a rapidly growing external debt, which by 1984 exceeded 60 per cent of GDP (though this was less than half the peak level of indebtedness attained in the early 1900s). As so often in inflationary crises, war played a part: internally against supposed subversives, externally against Britain over the Falkland Islands. Yet it would be wrong to see this as yet another case of a defeated regime liquidating its debts through inflation. What made Argentina"s inflation so unmanageable was not war, but the constellation of social forces: the oligarchs, the (National Reorganization Process) condemned thousands to arbitrary detention and "disappearance". In economic terms, the junta achieved precisely nothing other than to saddle Argentina with a rapidly growing external debt, which by 1984 exceeded 60 per cent of GDP (though this was less than half the peak level of indebtedness attained in the early 1900s). As so often in inflationary crises, war played a part: internally against supposed subversives, externally against Britain over the Falkland Islands. Yet it would be wrong to see this as yet another case of a defeated regime liquidating its debts through inflation. What made Argentina"s inflation so unmanageable was not war, but the constellation of social forces: the oligarchs, the caudillos caudillos, the producers" interest groups and the trade unions - not forgetting the impoverished undercla.s.s or descamizados descamizados (literally the shirtless). To put it simply, there was no significant group with an interest in price stability. Owners of capital were attracted to deficits and devaluation; sellers of labour grew accustomed to a wage-price spiral. The gradual shift from financing government deficits domestically to financing them externally meant that bondholding was out-sourced. (literally the shirtless). To put it simply, there was no significant group with an interest in price stability. Owners of capital were attracted to deficits and devaluation; sellers of labour grew accustomed to a wage-price spiral. The gradual shift from financing government deficits domestically to financing them externally meant that bondholding was out-sourced. 64 64 It is against this background that the failure of successive plans for Argentine currency stabilization must be understood. It is against this background that the failure of successive plans for Argentine currency stabilization must be understood.

In his short story "The Garden of Forking Paths", Argentina"s greatest writer Jorge Luis Borges imagined the writing of a Chinese sage, Ts"ui Pen:

In all fictional works, each time a man is confronted with several alternatives, he chooses one and eliminates the others; in the fiction of Ts"ui Pen, he chooses - simultaneously - all of them. He creates He creates, in this way, diverse futures; diverse times which themselves also proliferate and fork . . . In the work of Ts"ui Pen, all possible outcomes occur; each one is the point of departure for other forkings . . . [Ts"ui Pen] did not believe in a uniform, absolute time. He believed in an infinite series of times, in a growing, dizzying net of divergent, convergent and parallel times.65

This is not a bad metaphor for Argentine financial history in the past thirty years. Where Bernardo Grinspun attempted debt rescheduling and Keynesian demand management, Juan Sourrouille tried currency reform (the Austral Plan) along with wage and price controls. Neither was able to lead the critical interest groups down his own forking path. Public expenditure continued to exceed tax revenue; arguments for a premature end to wage and price controls prevailed; inflation resumed after only the most fleeting of stabilizations. The forking paths finally and calamitously reconverged in 1989: the annus mirabilis annus mirabilis in Eastern Europe; the in Eastern Europe; the annus horribilis annus horribilis in Argentina. in Argentina.

In February 1989 Argentina was suffering one of the hottest summers on record. The electricity system in Buenos Aires struggled to cope. People grew accustomed to five-hour power cuts. Banks and foreign exchange houses were ordered to close as the government tried to prevent the currency"s exchange rate from collapsing. It failed: in the s.p.a.ce of just a month the austral fell 140 per cent against the dollar. At the same time, the World Bank froze lending to Argentina, saying that the government had failed to tackle its bloated public sector deficit. Private sector lenders were no more enthusiastic. Investors were hardly likely to buy 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 only one option left for a desperate government: the printing press. But even that failed. On Friday 28 April Argentina literally ran out of money. "It"s a physical problem," Central Bank Vice-President Roberto Eilbaum told a news conference. The mint had literally run out of paper 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 there on Monday," he confessed.

By June, with the monthly monthly inflation rate rising above 100 per cent, popular frustration was close to boiling point. Already in April customers in one Buenos Aires supermarket had overturned trolleys full of goods after the management announced over a loudspeaker that all prices would immediately be raised by 30 per cent. For two days in June crowds in Argentina"s second largest city, Rosario, ran amok in an eruption of rioting and looting that left at least fourteen people dead. As in the Weimar Republic, however, the princ.i.p.al losers of Argentina"s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the princ.i.p.al beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes. inflation rate rising above 100 per cent, popular frustration was close to boiling point. Already in April customers in one Buenos Aires supermarket had overturned trolleys full of goods after the management announced over a loudspeaker that all prices would immediately be raised by 30 per cent. For two days in June crowds in Argentina"s second largest city, Rosario, ran amok in an eruption of rioting and looting that left at least fourteen people dead. As in the Weimar Republic, however, the princ.i.p.al losers of Argentina"s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the princ.i.p.al beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes.

Yet not all Argentina"s debts could be got rid of so easily. By 1983 the country"s external debt, which was denominated in US dollars, stood at $46 billion, equivalent to around 40 per cent of national output. No matter what happened to the Argentine currency, this dollar-denominated debt stayed the same. Indeed, it tended to grow as desperate governments borrowed yet more dollars. By 1989 the country"s external debt was over $65 billion. Over the next decade it would continue to grow until it reached $155 billion. Domestic creditors had already been mulcted by inflation. But only default could rid Argentina of its foreign debt burden. As we have seen, Argentina had gone down this road more than once before. In 1890 Baring Brothers had been brought to the brink of bankruptcy by its investments in Argentine securities (notably a failed issue of bonds for the Buenos Aires Water Supply and Drainage Company) when the Argentine government defaulted on its external debt. It was the Barings" old rivals the Rothschilds who persuaded the British government to contribute 1 million towards what became a 17 million bailout fund, on the principle that the collapse of Barings would be "a terrific calamity for English commerce all over the world".66 And it was also the first Lord Rothschild who chaired a committee of bankers set up to impose reform on the wayward Argentines. Future loans would be conditional on a currency reform that pegged the peso to gold by means of an independent and inflexible currency board. And it was also the first Lord Rothschild who chaired a committee of bankers set up to impose reform on the wayward Argentines. Future loans would be conditional on a currency reform that pegged the peso to gold by means of an independent and inflexible currency board.67 A century later, however, the Rothschilds were more interested in Argentine vineyards than in Argentine debt. It was the International Monetary Fund that had to perform the thankless task of trying to avert (or at least mitigate the effects of) an Argentine default. Once again the remedy was a currency board, this time pegging the currency to the dollar. A century later, however, the Rothschilds were more interested in Argentine vineyards than in Argentine debt. It was the International Monetary Fund that had to perform the thankless task of trying to avert (or at least mitigate the effects of) an Argentine default. Once again the remedy was a currency board, this time pegging the currency to the dollar.

When the new peso convertible peso convertible was introduced by Finance Minister Domingo Cavallo in 1991, it was the sixth Argentine currency in the s.p.a.ce of a century. Yet this remedy, too, ended in failure. True, by 1996 inflation had been brought down to zero; indeed, it turned negative in 1999. But unemployment stood at 15 per cent and income inequality was only marginally better than in Nigeria. Moreover, monetary stricture was never accompanied by fiscal stricture; public debt rose from 35 per cent of GDP at the end of 1994 to 64 per cent at the end of 2001 as central and provincial governments alike tapped the international bond market rather than balance their budgets. In short, despite pegging the currency and even slashing inflation, Cavallo had failed to change the underlying social and inst.i.tutional drivers that had caused so many monetary crises in the past. The stage was set for yet another Argentine default, and yet another currency. After two bailouts in January ($15 billion) and May ($8 billion), the IMF declined to throw a third lifeline. On 23 December 2001, at the end of a year in which per capita GDP had declined by an agonizing 12 per cent, the government announced a moratorium on the entirety of its foreign debt, including bonds worth $81 billion: in nominal terms the biggest debt default in history. was introduced by Finance Minister Domingo Cavallo in 1991, it was the sixth Argentine currency in the s.p.a.ce of a century. Yet this remedy, too, ended in failure. True, by 1996 inflation had been brought down to zero; indeed, it turned negative in 1999. But unemployment stood at 15 per cent and income inequality was only marginally better than in Nigeria. Moreover, monetary stricture was never accompanied by fiscal stricture; public debt rose from 35 per cent of GDP at the end of 1994 to 64 per cent at the end of 2001 as central and provincial governments alike tapped the international bond market rather than balance their budgets. In short, despite pegging the currency and even slashing inflation, Cavallo had failed to change the underlying social and inst.i.tutional drivers that had caused so many monetary crises in the past. The stage was set for yet another Argentine default, and yet another currency. After two bailouts in January ($15 billion) and May ($8 billion), the IMF declined to throw a third lifeline. On 23 December 2001, at the end of a year in which per capita GDP had declined by an agonizing 12 per cent, the government announced a moratorium on the entirety of its foreign debt, including bonds worth $81 billion: in nominal terms the biggest debt default in history.

The history of Argentina ill.u.s.trates that the bond market is less powerful than it might first appear. The average 295 basis point spread between Argentine and British bonds in the 1880s scarcely compensated investors like the Barings for the risks they were running by investing in Argentina. In the same way, the average 664 basis point spread between Argentine and US bonds from 1998 to 2000 significantly underpriced the risk of default as the Cavallo currency peg began to crumble. When the default was announced, the spread rose to 5,500; by March 2002 it exceeded 7,000 basis points. After painfully protracted negotiations (there were 152 varieties of paper involved, denominated in six different currencies and governed by eight jurisdictions) the majority of approximately 500,000 creditors agreed to accept new bonds worth roughly 35 cents on the dollar, one of the most drastic "haircuts" in the history of the bond market.68 So successful did Argentina"s default prove (economic growth has since surged while bond spreads are back in the 300-500 basis point range) that many economists were left to ponder why any sovereign debtor ever honours its commitments to foreign bondholders. So successful did Argentina"s default prove (economic growth has since surged while bond spreads are back in the 300-500 basis point range) that many economists were left to ponder why any sovereign debtor ever honours its commitments to foreign bondholders.69 The Resurrection of the Rentier Rentier In the 1920s, as we have seen, Keynes had predicted the "euthanasia of the rentier rentier", antic.i.p.ating that inflation would eventually eat up all the paper wealth of those who had put their money in government bonds. In our time, however, we have seen a miraculous resurrection of the bondholder. After the Great Inflation of the 1970s, the past thirty years have seen one country after another reduce inflation to single digits.70 (Even in Argentina, the official inflation rate is below 10 per cent, though unofficial estimates compiled by the provinces of Mendoza and San Luis put it above 20 per cent.) And, as inflation has fallen, so bonds have rallied in what has been one of the great bond bull markets of modern history. Even more remarkably, despite the spectacular Argentine default - not to mention Russia"s in 1998 - the spreads on emerging market bonds have trended steadily downwards, reaching lows in early 2007 that had not been seen since before the First World War, implying an almost unshakeable confidence in the economic future. Rumours of the death of Mr Bond have clearly proved to be exaggerated. (Even in Argentina, the official inflation rate is below 10 per cent, though unofficial estimates compiled by the provinces of Mendoza and San Luis put it above 20 per cent.) And, as inflation has fallen, so bonds have rallied in what has been one of the great bond bull markets of modern history. Even more remarkably, despite the spectacular Argentine default - not to mention Russia"s in 1998 - the spreads on emerging market bonds have trended steadily downwards, reaching lows in early 2007 that had not been seen since before the First World War, implying an almost unshakeable confidence in the economic future. Rumours of the death of Mr Bond have clearly proved to be exaggerated.

Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Bank of England and the Federal Reserve in the late 1970s and early 1980s, and continued with the spread of central bank independence and explicit targets in the 1990s. Just as importantly, as the Argentine case shows, some of the structural drivers of inflation have also weakened. Trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social const.i.tuency with an interest in positive real returns on bonds has grown. In the developed world a rising share of wealth is held in the form of private pension funds and other savings inst.i.tutions that are required, or at least expected, to hold a high proportion of their a.s.sets in the form of government bonds and other fixed income securities. In 2007 a survey of pension funds in eleven major economies revealed that bonds accounted for more than a quarter of their a.s.sets, substantially lower than in past decades, but still a substantial share.71 With every pa.s.sing year, the proportion of the population living off the income from such funds goes up, as the share of retirees increases. With every pa.s.sing year, the proportion of the population living off the income from such funds goes up, as the share of retirees increases.

Which brings us back to Italy, the land where the bond market was born. In 1965, on the eve of the Great Inflation, just 10 per cent of Italians were aged 65 or over. Today the proportion is twice that: around a fifth. And by 2050 it is projected by the United Nations to be just under a third. In such a greying society, there is a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power. As more and more people leave the workforce, recurrent public sector deficits ensure that the bond market will never be short of new bonds to sell. And the fact that Italy has surrendered its monetary sovereignty to the European Central Bank means that there should never be another opportunity for Italian politicians to print money and set off the inflationary spiral.

That does not mean, however, that the bond market rules the world in the sense that James Carville meant. Indeed, the kind of discipline he a.s.sociated with the bond market in the 1990s has been conspicuous by its absence under President Clinton"s successor, George W. Bush. Just months before President Bush"s election, on 7 September 2000, the National Debt Clock in New York"s Times Square was shut down. On that day it read as follows: "Our national debt: $5,676,989,904,887. Your family share: $73,733." After three years of budget surpluses, both candidates for the presidency were talking as if paying off the national debt was a viable project. According to CNN

Democratic presidential nominee Al Gore has outlined a plan that he says would eliminate the debt by 2012. Senior economic advisers to Texas Governor and Republican presidential candidate George W. Bush agree with the principle of paying down the debt but have not committed to a specific date for eliminating it.72

That lack of commitment on the latter candidate"s part was by way of being a hint. Since Bush entered the White House, his administration has run a budget deficit in seven out of eight years. The federal debt has increased from $5 trillion to more than $9 trillion. The Congressional Budget Office forecasts a continued rise to more than $12 trillion by 2017. Yet, far from punishing this profligacy, the bond market has positively rewarded it. Between December 2000 and June 2003, the yield on ten-year Treasury bonds declined declined from 5.24 per cent to 3.33 per cent, and remains just above 4 per cent at the time of writing. from 5.24 per cent to 3.33 per cent, and remains just above 4 per cent at the time of writing.

It is, however, impossible to make sense of this "conundrum" - as Alan Greenspan called this failure of bond yields to respond to short-term interest rate rises73 - by studying the bond market in isolation. We therefore turn now from the market for government debt to its younger and in many ways more dynamic sibling: the market for shares in corporate equity, known colloquially as the stock market. - by studying the bond market in isolation. We therefore turn now from the market for government debt to its younger and in many ways more dynamic sibling: the market for shares in corporate equity, known colloquially as the stock market.

Blowing Bubbles The Andes stretch for more than four thousand miles like a jagged, crooked spine down the western side of the South American continent. Formed roughly a hundred million years ago, as the Nazca tectonic plate began its slow but tumultuous slide beneath the South American plate, their highest peak, Mount Aconcagua in Argentina, rises more than 22,000 feet above sea level. Aconcagua"s smaller Chilean brethren stand like gleaming white sentinels around Santiago. But it is only when you are up in the Bolivian highlands that you really grasp the sheer scale of the Andes. When the rain clouds lift on the road from La Paz to Lake t.i.ticaca, the mountains dominate the skyline, tracing a dazzling, irregular saw-tooth right across the horizon.

Looking at the Andes, it is hard to imagine that any kind of human organization could overcome such a vast natural barrier. But for one American company, their jagged peaks were no more daunting than the dense Amazonian rainforests that lie to the east of them. That company set out to construct a gas pipeline from Bolivia across the continent to the Atlantic coast of Brazil, and another - the longest in the world - from the tip of Patagonia to the Argentine capital Buenos Aires.

Such grand schemes, exemplifying the vaulting ambition of modern capitalism, were made possible by the invention of one of the most fundamental inst.i.tutions of the modern world: the company. It is the company that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized. After the advent of banking and the birth of the bond market, the next step in the story of the ascent of money was therefore the rise of the joint-stock, limited-liability corporation: joint-stock because the company"s capital was jointly owned by multiple investors; limited-liability because the separate existence of the company as a legal "person" protected the investors from losing all their wealth if the venture failed. Their liability was limited to the money they had used to buy a stake in the company. Smaller enterprises might operate just as well as partnerships. But those who aspired to span continents needed the company.1 However, the ability of companies to transform the global economy depended on another, related innovation. In theory, the managers of joint-stock companies are supposed to be disciplined by vigilant shareholders, who attend annual meetings, and seek to exert influence directly or indirectly through non-executive directors. In practice, the primary discipline on companies is exerted by stock markets, where an almost infinite number of small slices of companies (call them stocks, shares or equities, whichever you prefer) are bought and sold every day. In essence, the price people are prepared to pay for a piece of a company tells you how much money they think that company will make in the future. In effect, stock markets hold hourly referendums on the companies whose shares are traded there: on the quality of their management, on the appeal of their products, on the prospects of their princ.i.p.al markets.

Yet stock markets also have a life of their own. The future is in large measure uncertain, so our a.s.sessments of companies" future profitability are bound to vary. If we were all calculating machines we would simultaneously process all the available information and come to the same conclusion. But we are human beings, and as such are p.r.o.ne to myopia and to mood swings. When stock market prices surge upwards in sync, as they often do, it is as if investors are gripped by a kind of collective euphoria: what the former chairman of the Federal Reserve Alan Greenspan memorably called irrational exuberance.2 Conversely, when investors" "animal spirits" flip from greed to fear, the bubble of their earlier euphoria can burst with amazing suddenness. Zoological imagery is of course an integral part of stock market culture. Optimistic buyers of stocks are bulls, pessimistic sellers are bears. Investors these days are said to be an electronic herd, happily grazing on positive returns one moment, then stampeding for the farmyard gate the next. The real point, however, is that stock markets are mirrors of the Conversely, when investors" "animal spirits" flip from greed to fear, the bubble of their earlier euphoria can burst with amazing suddenness. Zoological imagery is of course an integral part of stock market culture. Optimistic buyers of stocks are bulls, pessimistic sellers are bears. Investors these days are said to be an electronic herd, happily grazing on positive returns one moment, then stampeding for the farmyard gate the next. The real point, however, is that stock markets are mirrors of the human human psyche. Like psyche. Like h.o.m.o sapiens h.o.m.o sapiens, they can become depressed. They can even suffer complete breakdowns. Yet hope - or is it amnesia? - always seems able to triumph over such bad experiences.

In the four hundred years since shares were first bought and sold, there has been a succession of financial bubbles. Time and again, share prices have soared to unsustainable heights only to crash downwards again. Time and again, this process has been accompanied by skulduggery, as unscrupulous insiders have sought to profit at the expense of naive neophytes. So familiar is this pattern that it is possible to distil it into five stages: 1. Displacement Displacement: Some change in economic circ.u.mstances creates new and profitable opportunities for certain companies.2. Euphoria Euphoria or overtrading: A feedback process sets in whereby rising expected profits lead to rapid growth in share prices. or overtrading: A feedback process sets in whereby rising expected profits lead to rapid growth in share prices.3. Mania Mania or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money.4. Distress Distress: The insiders discern that expected profits cannot possibly justify the now exorbitant price of the shares and begin to take profits by selling.5. Revulsion Revulsion or discredit: As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether. or discredit: As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.3 Stock market bubbles have three other recurrent features. The first is the role of what is sometimes referred to as asymmetric information. Insiders - those concerned with the management of bubble companies - know much more than the outsiders, whom the insiders want to part from their money. Such asymmetries always exist in business, of course, but in a bubble the insiders exploit them fraudulently.4 The second theme is the role of cross-border capital flows. Bubbles are more likely to occur when capital flows freely from country to country. The seasoned speculator, based in a major financial centre, may lack the inside knowledge of the true insider. But he is much more likely to get his timing right - buying early and selling before the bubble bursts - than the naive first-time investor. In a bubble, in other words, not everyone is irrational; or, at least, some of the exuberant are less irrational than others. Finally, and most importantly, without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission or commission of central banks. The second theme is the role of cross-border capital flows. Bubbles are more likely to occur when capital flows freely from country to country. The seasoned speculator, based in a major financial centre, may lack the inside knowledge of the true insider. But he is much more likely to get his timing right - buying early and selling before the bubble bursts - than the naive first-time investor. In a bubble, in other words, not everyone is irrational; or, at least, some of the exuberant are less irrational than others. Finally, and most importantly, without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission or commission of central banks.

Nothing ill.u.s.trates more clearly how hard human beings find it to learn from history than the repet.i.tive history of stock market bubbles. Consider how readers of the magazine Business Week Business Week saw the world at two moments in time, separated by just twenty years. On 13 August 1979, the front cover featured a crumpled share certificate in the shape of a crashed paper dart under the headline: "The Death of Equities: How inflation is destroying the stock market". Readers were left in no doubt about the magnitude of the crisis: saw the world at two moments in time, separated by just twenty years. On 13 August 1979, the front cover featured a crumpled share certificate in the shape of a crashed paper dart under the headline: "The Death of Equities: How inflation is destroying the stock market". Readers were left in no doubt about the magnitude of the crisis:

The ma.s.ses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds - the market"s last hope - have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition.5

On that day, the Dow Jones Industrial Average, the longest-running American stock market index, closed at 875, barely changed from its level ten years before, and nearly 17 per cent below its peak of 1052 in January 1973. Pessimism after a decade and half of disappointment was understandable. Yet, far from expiring, US equities were just a few years away from one of the great bull runs of modern times. Having touched bottom in August 1982 (777), the Dow proceeded to more than treble in the s.p.a.ce of just five years, reaching a record high of 2,700 in the summer of 1987. After a short, sharp sell-off in October 1987, the index resumed its upward rise. After 1995, the pace of its ascent even quickened. On 27 September 1999, it closed at just under 10,395, meaning that the average price of a major US corporation had risen nearly twelve-fold in just twenty years. On that day, readers of Business Week Business Week read with excitement that: read with excitement that:

Conditions don"t have to get a lot better to justify Dow 36,000, say James K. Gla.s.sman and Kevin A. Ha.s.sett in Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. They argue that the market already merits 36K, and that stock prices will advance toward that target over the next 3 to 5 years as investors come to that conclusion, too . . . The market - even at a price-to-earnings ratio of 30s - is a steal. By their estimates, a "perfectly reasonable price" for the market . . . is 100 times earnings. - is a steal. By their estimates, a "perfectly reasonable price" for the market . . . is 100 times earnings.6

This article was published less than four months before the collapse of the dot-com bubble, which had been based on exaggerated expectations about the future earnings of technology companies. By October 2002 the Dow was down to 7,286, a level not seen since late 1997. At the time of writing (April 2008), it is still trading at one third of the level Gla.s.sman and Ha.s.sett predicted.

The performance of the American stock market is perhaps best measured by comparing the total returns on stocks, a.s.suming the reinvestment of all dividends, with the total returns on other financial a.s.sets such as government bonds and commercial or Treasury bills, the last of which can be taken as a proxy for any short-term instrument like a money market fund or a demand deposit at a bank. The start date, 1964, is the year of the author"s birth. It will immediately be apparent that if my parents had been able to invest even a modest sum in the US stock market at that date, and to continue reinvesting the dividends they earned each year, they would have been able to increase their initial investment by a factor of nearly seventy by 2007. For example, $10,000 would have become $700,000. The alternatives of bonds or bills would have done less well. A US bond fund would have gone up by a factor of under 23; a portfolio of bills by a factor of just 12. Needless to say, such figures must be adjusted downwards to take account of the cost of living, which has risen by a factor of nearly seven in my lifetime. In real terms, stocks increased by a factor of 10.3; bonds by a factor of 3.4; bills by a factor of 1.8. Had my parents made the mistake of simply buying $10,000 in dollar bills in 1964, the real value of their son"s nest egg would have declined in real terms by 85 per cent.

No stock market has out-performed the American over the long run. One estimate of long-term real stock market returns showed an average return for the US market of 4.73 per cent per year between the 1920s and the 1990s. Sweden came next (3.71), followed by Switzerland (3.03), with Britain barely in the top ten on 2.28 per cent. Six out of the twenty-seven markets studied suffered at least one major interruption, usually as a result of war or revolution. Ten markets suffered negative long-term real returns, of which the worst were Venezuela, Peru, Colombia and, at the very bottom, Argentina (-5.36 per cent) .7 "Stocks for the long run" is very far from being a universally applicable nostrum. "Stocks for the long run" is very far from being a universally applicable nostrum.8 It nevertheless remains true that, in most countries for which long-run data are available, stocks have out-performed bonds - by a factor of roughly five over the twentieth century. It nevertheless remains true that, in most countries for which long-run data are available, stocks have out-performed bonds - by a factor of roughly five over the twentieth century.9 This can scarcely surprise us. Bonds, as we saw in Chapter 2, are no more than promises by governments to pay interest and ultimately repay princ.i.p.al over a specified period of time

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