This week’s learning is part 4 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3)
In the early 1800s, the English had developed a really strong bond market based on debt while the French had an anarchic financial system that made money by plundering colonies. The famous battle of Waterloo, as a result, was as much a fight between financials systems.
Enter Nathan Rothschild – an adept smuggler of gold coins. This skill was critical because armies needed cash in foreign lands and hence, Britain engaged Nathan who did a fantastic job by stationing a brother in prominent locations across Europe. This was the first example of “arbitrage” – they used their network to take advantage of favorable exchange rates.
While it is believed that the Rothschild’s made their fortune betting on Napoleons loss, the truth is a far cry. The moment they heard of war, Nathan Rothschild invested heavily into gold in preparation for a long war that would make him rich. The famous war, however, was incredibly short and this meant Nathan was left with mounds of gold nobody needed.
But, as his couriers were 2 days ahead of the official news of the victory, Nathan made a huge bet – he used his gold to buy British government bonds. Buoyed by the victory, the value of these bonds began to rise. Despite his brothers pestering him to sell, Nathan held on for 1 year – eventually selling them for a profit of 600 million pounds – $1 billion USD today – the greatest trade ever made.
Sketch by EB
This was a revolutionary time since bond markets lead to paper assets. Paper assets, in turn, meant that for the first time in human history, people could live anywhere and were not tied to the land they owned. Aristocracy suffered most because it was the first big shift in the owning of wealth and resulted in the coming of globalization as people began moving their assets easily. Next week, we will dive into the importance of the Rothschild in determining the key events in the history (not just finance) of the world..
A Learning a Day 