Before this, charging interest on a loan was illegal in most Western countries. It was considered immoral and defined by the church as "usury."
Without access to capital and without capital markets, the West had suffered a tremendous decline for more than 1,000 years – your teachers called it the Middle Ages.
But they probably never considered that the Renaissance, with its amazing scientific, artistic, and political progress – and then the Industrial Revolution that followed later – was funded and made possible by Europe's bond markets.
The conventions, rules, and traditions of the modern bond market were established by the greatest single bond issue of all time.
In 1752, the entire English national debt was refunded with a single bond issue that "consolidated" all of the previous bond issues.
These bonds, which were perpetual (they never matured), paid 3% at par and were known, for hundreds of years, as "Consols."
They paid interest, in gold, until the end of World War II, when the British government tricked its bondholders into accepting sterling (paper money).
The poor fools were then summarily wiped out over the next 30 years as Britain bankrupted itself by adopting socialism.
It's truly amazing how 200 years of credit, wealth, and power can be so quickly squandered. But bad ideas have huge consequences.
Still... the 200 years or so that the British Crown paid, honestly and on time, set an important standard.
Consols led to the development of more capital markets through Eastern Europe and, most important, America.
Founding father Alexander Hamilton copied the idea and funded our government with perpetual bonds that paid 6%.
Later, the Populist president Andrew Jackson wisely paid off all of these debts. What a novel idea!
Let's not discuss the track record of our recent presidents in this regard. They have issued bonds that we will never, ever be able to repay. You're welcome, kids and grandkids. Good luck.
The binary nature of bonds – they're either paid back in full or they default – was established by the British merchant class (known as "Whigs").
They were in favor of using the power of the central government (taxes) to fund their investments.
As a result, they structured the Consol bonds to make sure they were always paid interest no matter what.
As private bonds were issued, the same traditions held:
Bond payments carried the force of law. There was no way for a bond issuer to pay back part of the note. They either paid in full or they were in "default."
For a long time, default meant not only losing your assets, but also going to prison if your assets didn't make your bondholders "whole."
He who borrows what isn't hizzn, must pay it back or go to prison.
