1 Running Head: BRITAIN USING BONDS TO FIGHT WARS

Britain: Using Bonds to Fight Wars and Become World Leaders Nicholas White Sacred Heart University 2 BRITAIN USING BONDS TO FIGHT WARS

Abstract

The purpose of this paper is to discuss how Britain unknowingly created a disruptive innovation in the form of bonds which ultimately shaped how debt markets function today. With the implementation of the first government bond by Britain, many countries followed suit, and it played a key role in war victories. Without the up-front capital, Britain might not have won the wars they did and in turn become the world leader that they were. The evolution of the bond and debt markets as a whole posed challenges for the world, with the collapse of economies and the Global Financial Crisis in 2008.

Concerns surrounding debt are that countries as well as individuals can become over-leveraged where they will be unable to pay back their debts when the time arrives. With this in mind, countries and people have learned more about how to balance financing with paying up-front. Through the history explained below it is apparent that we must continue to monitor our debt levels, and while we must use debt to our advantage, we must do so in moderation to avoid catastrophe as seen in the past.

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Introduction

A commonly used phrase used by people is that “the world is ever-changing.” It is apparent in people’s lives every day, with advancements being introduced frequently. When looking at these advancements, one must dig deeper to find the meaning of it: is this a disruptive innovator? Disruptive

Innovation (DI) is broadly defined as “any situation in which an industry is shaken up and previously successful incumbents stumble” (Christensen, Raynor, & McDonald, 2015, p.4). The world is currently experiencing this on exponential levels as the years go by, with more and more innovations disrupting how industries operate. The main reason for more innovations being realized is due to the rapid advancement of technology over the last three decades. Although technology is not a disruptive innovator, it is the main ingredient in the creation of DI.

Although the term “Disruptive Innovation” was coined in 1995 by Professor Clayton Christensen, it has proven to be something that has been around many centuries before. Dating back to the 1750’s, the British created the first tradeable bond, called a “consol”. This consol assisted Britain in winning many wars throughout history that might’ve lost without it. Although they incurred massive amounts of debt which later proved to hinder them, the consol provided the country with a strong foundation to build their infrastructure and propel them to victory. The consol was a disruptive innovator for the time by letting their people attain an asset that was tradeable among themselves, where people were able to not only help their country win wars, but also receive interest on their consol in the meantime.

Disruptive Innovation

The first official government bonds were issued by the Bank of England in 1694. These were issued in order to assist in fighting a war against France, and Bank of England became a vital part of the success of Britain in raising funds. It was important that Britain was able to raise funds, as they were at war many times during the 18th century, so they had to provide incentives and appealing terms to 4 BRITAIN USING BONDS TO FIGHT WARS potential investors in order to raise capital. As bonds grew more popular, Britain issued its first tradeable bonds in 1751. The Bank of England helped execute the raising of funds as well as paying the interest on the bonds. In the novel The Foundations of British Maritime Ascendancy: Resources, Logistics and the State, 1755-1815" by Roger Morriss (Cambridge UP, 2011), Morriss states “The security created by the integration of the Bank and state functions permitted the British government to raise very large sums at relatively low rates of interest. Much of the money was raised by subscription to irredeemable interest-bearing bonds or stock on London's capital market. The investments formed a long-term loan to the government. Their annual scale grew from £8.5 million to more than £20 million between 1756 and

1815. As a proportion of total expenditure, they rose from 37.5 per cent to 39.9 per cent at the end of the War of American Independence, then declined during the Napoleonic War to 26.6 per cent”

(Morriss, 2014, p. 94). What Morriss is stating here is that because of the Bank of England, Britain was able to borrow large sums of money due to the scale of the bank, and there are some pretty staggering growth rates here. Author Peter James Marshall states in his novel “The Making and Unmaking of

Empires: Britain, India, and America c. 1750-1783” that “central to the success of government borrowing by the mid-eighteenth century was a relatively small group of rich men dubbed ‘the moneyed interest’ by contemporaries. An analysis of the principal lenders of that year shows that big sums were allocated to five principal investors, representing Dutch and Jewish interests among others, with large blocks going to the directors of the Bank of England, the South Sea Company, the East India Company, and the insurance companies. They played an essential role in the British state’s capacity to fund the deployment of naval and military power throughout the world (Marshall, 2009, p.71). Britain first collected most funds from the Dutch, until roughly the start of the Napoleonic War, which “by then

Britain's domestic economy was generating wealth. Surplus business capital provided the core of investment in government debt...When country banks came into existence, they remitted surplus funds to London which were made available to the state through the purchase of consols and securities. As 5 BRITAIN USING BONDS TO FIGHT WARS the economy grew, money for loans to government always seemed available: In December 1796 a

"loyalty loan" of £18,000,000 was subscribed in four days” (Morriss, 2014, p.95). Due to the issuance of bonds, Britain was able to secure massive amounts of outside funding as a means for bolstering infrastructure and the military during a period in which they were at war plenty of times. At first, money came from overseas, but as the investment became more well-known by the people of Britain and the economy continued to become stronger, they were able to secure funding just in time for the start of the Napoleonic War.

Napoleonic War

The Napoleonic War was a time in which the French were looking to assert dominance in

Europe, still not appeased with what transpired in the French Revolution in terms of the war. It was a time just at the beginning of the nineteenth century when in 1803 the war started, with the first battle happening in 1805: the Third Coalition. Before this battle, most of Britain’s debt was secured from overseas investors. Looking at 1750 through the late 1760’s it is shown that the percentage of overseas nominal holdings in Britain had reached a peak of 16.6%, but once it hit its peak it gradually declined

(Wright, The Contribution of Overseas Savings to the Funded National Debt of Great Britain, 1750–1815,

2003, p.3). During the start of the Napoleonic War the percentage of overseas nominal holdings in

Britain had dropped between three and four percent (Wright, The Contribution of Overseas Savings to the Funded National Debt of Great Britain, 1750–1815, 2003, p.3). Taking a deeper dive as to why overseas investment fell, it was “possibly because of the much lower interest rates that held after the turn of the century, overseas investment in Bank- registered stocks declined by £3 million to 1806 and by another £2 million by 1810. At that point nominal investment since the beginning of the war against

France was a mere £15 million out of a total of £379 million” (Wright, The Contribution of Overseas

Savings to the Funded National Debt of Great Britain, 1750–1815, 2003, p.18). Due to the low interest rate environment at the time, it was not as attractive as it had once been for an investor, with them 6 BRITAIN USING BONDS TO FIGHT WARS usually getting higher returns for lending their money to the British government. It was realized that during the start of the Napoleonic War, 95.9% of borrowing came domestically, with 103.6% being domestic in 1802-1810, and 100.1% in 1811-1815 (Wright, British Government Borrowing in Wartime,

1750‐1815, 2003, p.6). This was tough for the British government, during a time where they were still fending off battles from nations and looking to assert their dominance. It was at this moment that they needed to better introduce consols as well as tradeable stocks through companies such as the South Sea

Company and East India Company. It was apparent their efforts had worked when data shows that the nominal debt increased during 1793-1801 from 1781-1784 by roughly 71.5%, a jump from £73.2mm to

£257.2mm (Wright, British Government Borrowing in Wartime, 1750‐1815, 2003, p.6). This was a staggering increase and one of the driving forces behind Britain’s victory in the Third Coalition, which was won due to the exceptional infrastructure and assembly of ships. Without this large increase in debt used through consols as well as tradeable consols, Britain would have been unable to finance the war.

Britain went on to assert their dominance on the battlefield through their intensive borrowing programs which ultimately led to the victory of the Napoleonic War. The people of Britain were incentivized to give their money to the government during a less attractive time in a low interest rate environment mostly because of the fact that they were intimidated by Napoleon. Consumer sentiment regarding the war was not very high, as they were fearful of an invasion which would put them at danger. Britain was able to turn this negative into a positive when they explained that by investing their money in them, they can ensure that such a thing will not happen. Consumer sentiment regarding war was not necessarily high, but consumer interest in borrowing with the government was attractive, as they were backed by the Bank of England and believed the government could repay the debt. Author

Michael D. Bordo and Eugene N. White explain that “before the Revolution, French fiscal policy strongly resembled British practice where large temporary increases in wartime expenditures were paid for by increased borrowing, leaving taxes relatively unchanged. This was a relatively efficient strategy for war 7 BRITAIN USING BONDS TO FIGHT WARS finance, but its success hinged critically on the credibility of the government to repay its accumulated and enlarged debt after war. If the government was perceived by the public to be pursuing a time inconsistent policy, that is, a policy likely to produce default once the debt is acquired, this avenue of war finance would have been closed” (Bordo & White, 1990, p.3). This is a crucial aspect as to why

Britain was so successful in war finance. Britain had built a rapport with overseas as well as domestic investors, creating a sense of trust and security that they will pay back their debts once war is completed. Unfortunately for France, they had not built that report and had to pay out higher interest rates, as investors saw the investment as riskier and wanted more yield for taking on such risk. If Britain hadn’t been viewed as secure, they would have had to pay out a much higher interest rate, which meant they wouldn’t be able to borrow as much as they did.

Although this helped Britain in the short-term, “taxes were increased simply to pay the interest on the increased debt. By the end of the Napoleonic War in 1816 the accumulated nominal British national debt was 1792 million, or rather more than 250 per cent of national income” (Wright, British

Government Borrowing in Wartime, 1750‐1815, 2003, p.2). This became the start of what was an over- leveraged nation who would not be able to pay back its investors, leading to an economic downfall a few centuries later.

Crimean War

By the time that Britain had won the Napoleonic War, they had incurred mass sums of debt. A few decades later, they found themselves forming an alliance with France to combat Russian efforts to expand their geographical footprint. One of the main reasons behind Britain’s intervention was because

Russia’s pressure on Turkey “threatened British commercial and strategic interests in the Middle East and India” (History.com Editors, 2009, para.2). Before the Crimean War, Britain signed “reciprocity treaties with many of the newly independent Latin American republics between 1824 and 1827, which 8 BRITAIN USING BONDS TO FIGHT WARS effectively formalized trading relationships established during their colonization by Spain and Portugal”

(Pigman, 2016, p.35). Because of these trade agreements being official, it “discouraged early attempts by other European powers to encroach upon Britain’s commercial and financial interests in the Latin

Republics. In addition to these treaties, Britain also signed the Treaty of Balta Liman in 1838, which was with the Ottoman Turkey. This Treaty’s focus was on “limiting the negative effects of Anglo-Turkish trade caused by internal transit taxes on commerce” (Pigman, 2016, p.35). Because of these agreements made prior to Russia’s encroachment in Turkey, Britain was compelled to respond with force.

With this is in mind, the cost of war was yet again exponentially more than Britain had anticipated at the start. When looking at the budget, “If we add to it the four war budgets from 1854, the year in which the war began, to 1857, the year in which the last expenses were incurred, we find a total of £81,931,696” (Advocate of Peace: (1847-1884) CRIMEAN WAR. SECTION II. LOSS OF MONEY

1869, p.2). In order to pay for these extraordinary values, Britain had to issue loans as well as increase their taxation. Initially Britain only wanted to increase the amount of loans issued, but it was not enough to pay for everything. They increase taxes on goods such as brandy and malt, sometimes by four-fold to cover the expenses incurred. This included many regions, such as England, Ireland, and Scotland. In terms of income tax, “The Act of 1853, which legalized its prolongation, extended it to Ireland, which had always been exempt from it. By the same Act, the exemption from the tax enjoyed by incomes below £150 was limited to incomes below £100. But incomes of from £100 to £150 were only to pay 5d. instead of 7d. in the pound. The Eastern War brought about, after April 5th, 1854, the doubling of these taxes” (Advocate of Peace: (1847-1884) CRIMEAN WAR. SECTION II. LOSS OF MONEY 1869, p.2). It is apparent that although Britain was raising funds through debt markets in the form of bonds, it could not keep pace with the costs associated with fighting this war. Because of this they were forced to keep issuing bonds, which became unattractive to investors as increasing the bond float lowers the price and indicates poor economic activity, so they had to increase taxes at incredibly high rates. 9 BRITAIN USING BONDS TO FIGHT WARS

Although Britain was able to fend off Russian forces with the help of France, who also incurred massive amounts of debt, it left Britain in a poor place following the war. Because of this, Britain’s next goal coming off the victory of the Crimean War was to stimulate the economy. Britain democratized in

1867, and although it was considered to be volatile, “the bond market reacted favorably to forward progress and eventual passage of reform with sharp drops in the premium that investors demanded to hold British sovereign debt, suggesting that the market viewed democratic reform in Britain as an effective form of political stabilization” (Dasgupta & Ziblatt, March 2015, p.3). Although there was political stabilization, the economy was still very much an underlying concern, with Britain’s continuation of increasing leverage that they had no means of paying back.

Britain Loses Status as World’s Reserve Currency

Looking into Britain, pounds sterling was the World’s Reserve Currency up until after World War

2. One of the many reasons that they were overtaken by the United States Dollar as the World’s Reserve

Currency was due to the fact their manufacturing capabilities had been diminished, and they were in massive amounts of debt.

Going back to Britain’s dominance, particular before World War 1, they led nations in trade,

“and around 60 per cent of world trade was invoiced and settled in pounds sterling” (Rajan, Kiran,

Hefeker, & Schnabl, 2006, p.2). The pound sterling was attractive to the world because “in addition to the pound’s roles as a vehicle and invoicing currency of choice, given that it was fully convertible, central banks used the pound most often to intervene in foreign exchange markets” (Rajan, Kiran, Hefeker, &

Schnabl, 2006, p.2). Because of its versatility and usage, the pound was extremely attractive. Many countries looked to the pound for overseas investment, and were therefore indebted too Britain. With arrangements made between London and respective countries specifically, it led to even more investment in Britain and these practices “further enhanced the liquidity of the London market, which 10 BRITAIN USING BONDS TO FIGHT WARS was probably the single most important fundamental making it attractive for foreign central banks and governments to hold interest-bearing assets there in the first place. Because the market was deep and liquid, official foreign holders of sterling could augment and deplete their positions without disturbing prices or revealing facts about their balance sheets” (Eichengreen, 2005, p.6). This goes along with the evolution of the bond, as Britain went from issuing them to their people and specific countries overseas, to a more modernized approach that entailed regional banks and colonial offices in London. The opening of these branches extended Britain’s outreach, and helped stimulate their economy for many decades as now instead of them being indebted, they were lending to other countries.

Although this was the case before World War 1, when the war started it became apparent that nations needed to raise funds for the increase in military spending needed. Many countries were seen to devalue their currencies, switching from the gold standard to paper money. The gold standard was an agreement in which all paper money were to be converted into gold, and sold at the asking price determined by the market. This was extremely devaluating to nations currencies due to there no longer being an option of capturing a profitable spread between paper money and the selling price of gold.

Because all nations started to do this, three years into World War 1 Britain decided to switch over to paper money as well. It was seen during this time that “The United States became the lender of choice for many countries that were willing to buy dollar-denominated U.S. bonds. In 1919, Britain was finally forced to abandon the gold standard, which decimated the bank accounts of international merchants who traded in pounds. By then, the dollar had replaced the pound as the world’s leading reserve” (Best,

2020, para.4). As a result of the switch by the world to paper money from the gold standard, Britain’s pound was not nearly as important before. By the time World War 2 came around, the United States started to supply all infrastructure needs as well as weapons for the Allies. Between Britain’s currency not being anywhere near as important before for foreign exchange, and the United States Dollar and 11 BRITAIN USING BONDS TO FIGHT WARS economy becoming larger than Britain, Britain was not seen as attractive to investors and countries any longer.

Although these factors led to the downfall of Britain as the World’s Reserve Currency, one cannot forget the underlying factors, such as Britain’s indebtedness. They had an enormous amount of debt before World War 1, and that only increase as that war started. Their manufacturing capabilities had been crippled as the United States had started to assert its dominance in that space, and they were left with a volatile economy that countries did not see as attractive going forward.

Britain was a powerhouse for many centuries before this, with the largest economy and military and manufacturing capabilities, but that all came to a halt due to the poor decision making of people in power for many centuries, over-leveraging themselves on numerous occasions to the point where countries and investors were unsure if they would receive payment back for investing with them.

Evolution of the Bond

When looking at the evolution of the bond, it has come a long way since Britain issued the first official government bond in 1694. In 1780, the United States issued its first official government bond, to help finance the Revolutionary War against Britain. These bonds were often issued to soldiers, often seen as deferred compensation for their work in the war. The United States was able to attain millions of dollars at the time through private investments, which ultimately led to the victory for independence.

Although the bonds had its upsides, it was met with controversy as “these early U.S. securities later caused a firestorm because soldiers weren’t sure if the notes would be redeemable and many sold them at cut rates to speculators knowledgeable that a national government would form and make good on earlier debt” (Addis, para.10). Although this was the case, it laid the foundation for many other nations to use bonds as a debt instrument for fighting wars, boosting their economy, and helping upgrade any needs of the nation. 12 BRITAIN USING BONDS TO FIGHT WARS

After the United States’ creation of its first government bond and both nations along with many others employing war finance into their strategies, the United States created the first Treasury-backed bonds in 1917 through the First Liberty Loan Act. There was also a second, third, and fourth Liberty Loan

Act, and the “Secretary of the Treasury was authorized by the first, second, third, and fourth Liberty bond acts to issue bonds in amounts aggregating $22,000,000,000. ' The authority has been exercised to the extent of $16,977,335,850, leaving a balance of Liberty bonds which may be issued under existing law of $5,022,664,150” (United States. Department of Treasury, p.91). Because of these acts, the United

States government was able to issue $5B worth of loans backed the Federal Reserve. This came about due to World War 1 beginning in Europe in 1914, and the United States government needed a way to fund the war. Some economists argued that the government should just increase taxes, but when assessing the option, Secretary of the Treasury, William McAdoo decided issuing bonds was the right choice because it was unclear how much money the war would cost to fund. If the cost of war were to be greater than taxes imposed, the Federal Reserve would have to hike interest rates, which would constrict the United States economy at a time when consumer spending and investment was necessary.

As bonds became more popular, countries found new ways to issue bonds, with different maturity dates and yields for taking on higher risk. During the late 1970’s corporations were granted permission to issue non-investment grade bonds of their own to help raise funds for their operations.

Non-investment grade bonds are seen as more risky, but carry a higher yield for investors taking on that risk. Before this, companies were only enabled to issue investment grade bonds, but because of the poor activity in the economy with heightened inflation and the Fed raising rates to combat it, the government towards a new instrument to stimulate debt markets. The government was looking for stimulus and they got it, as that high-yield bonds grew “from virtual nonexistence in 1980 to nearly $200 billion by the end of the decade” (Jefferis, 1990, p. 1). As the junk bond market continued to grow, so did investors and banks looking for new instruments in debt markets that could continue to grow profits 13 BRITAIN USING BONDS TO FIGHT WARS and the economy. This was when derivates were popularized, with instruments such as collateralized debt obligations (CDO) and mortgage-backed securities (MBS). With these being used at enormously high rates from 2000 to 2008, one is brought to the main cause of the Global Financial Crisis of 2008.

Global Financial Crisis of 2008

In 2008, we experienced one of the worst meltdowns if not the worst in the history of the world.

In the United States, massive banks such as Lehman Brothers and Bear Stearns went under, and people lost their jobs, homes, and everything over a few years. The main reason for the recession was because of the housing market, but more specifically, loans. It all started with the banks on Wall Street along with credit agencies when they decided to be very lenient in issuing mortgages. They started issuing mortgages to virtually anyone who desired one. Katalina M. Bianco, author of “The Subprime Lending

Crisis: Causes and Effects of the Mortgage Meltdown”, stated that “along with the rise of unregulated lenders came a rise in the kinds of subprime loans that economists say have sounded an alarm. The large number of adjustable rate mortgages, interest-only mortgages and “stated income” loans are an example of this thinking. “Stated income” loans, also called “no doc” loans and, sarcastically, “liar loans,” are a subset of Alt-A loans. The borrower does not have to provide documentation to substantiate the income stated on the application to finance home purchases” (Bianco, 2008, p.7).

Looking at “liar loans”, one can understandably be concerned by this and this should have been a flashing indicator at the time that something was fundamentally wrong with the lending strategy of banks.

The main reason banks were getting away with issuing these poor subprime mortgages was because they were wrapping them in tranches. Tranches “is used to describe a security that can be split up into smaller pieces and subsequently sold to investors” (Segal, 2020, para.1). Banks were taking multiple mortgages which all different ratings of safeness, bundling them together forming a tranche, 14 BRITAIN USING BONDS TO FIGHT WARS and presenting them as CDO’s and MBS that were ‘AAA-rated’, or the safest investment there is. This is where the credit agencies came into play, when they knew banks were doing this yet still decided that they would give these tranches a AAA-rating. Ultimately, these mistakes led to banks being extraordinarily over-leveraged, and when the housing market crashed due to people who could not afford the homes they were living in defaulting on the loan, banks took massive hits, which led to liquidity issues for investors looking to pull their money, and caused one of the biggest meltdowns in the history of the world. Looking at the creation of the consol in 1751 by Britain, none of this would have ever been possible without it. Consols laid the foundation for new debt instruments to be introduced and manipulated into different derivates. Although debt is normally seen as something that enables and assists people in purchasing items that they cannot pay all at once, here is a prime example of how debt crumbled the entire world’s economy over the span of a few years. These bonds were manipulated, packaged, and sold to the public under false-pretenses and it caused problems that still linger today.

Debt Markets Today

Debt markets post-2008 financial crisis has been one that has been conservative. Since being over-leveraged led to the downfall of the world’s economy, the Federal Reserve had set guidelines for banks regarding how much money they had in “excess reserves”, meaning money that is not being used in case of an emergency. According to Investopedia, the government made it attractive for banks to hold onto money as “Prior to Oct. 1, 2008, banks were not paid a rate of interest on reserves. The Financial

Services Regulatory Relief Act of 2006 authorized the Federal Reserve to pay banks a rate of interest for the first time. The rule was to go into effect on Oct. 1, 2011. However, the Great Recession advanced the decision with the Emergency Economic Stabilization Act of 2008. Suddenly, and for the first time in history, banks had an incentive to hold excess reserves at the Federal Reserve” (Chen, 2020, para.4) This bill was crucial in laying the foundation for debt markets to come, and it is one that has saved banks plenty of trouble during the current situation in today’s world: COVID-19. With COVID-19 spreading at 15 BRITAIN USING BONDS TO FIGHT WARS rapid rates, people have been left out of work which has constricted their disposable income and ability to live the life they once lived. For companies, hedge fund mogul Ray Dalio, the founder of Bridgewater

Associates and author of the award-winning novel “Principles”, stated that he believed that “the coronavirus outbreak will cost U.S. corporations up to $4 trillion, and ‘a lot of people are going to be broke’” (Li, 2020, para.1). This is startling number that has started to come to fruition as the days and weeks pass on. Banks in particular are taking major hits right now as people are not spending money and interest rates are low. When interest rates are low, banks yields decrease on their business activities. Banks are experiencing problems due to the fact that although interest rates are low, which is typically attractive to the borrower, it is not currently attractive as their income has decreased from being out of work, and many have even lost their jobs. Because of this, the Emergency Economic

Stabilization Act of 2008 has proved dividends again because although banks are less solvent than normal, they are liquid enough to stay afloat while this pandemic passes.

To combat this pandemic the Federal Reserve has turned to debt markets to ignite the economy yet again and keep it from stalling. The Fed released a statement on March 12, 2020, stating that they will use $1.5T in capital injections in hopes of stimulating the economy. They plan on achieving this through the repo market, short for repurchasing agreements. A repo market is directly tied to short- term liquidity as banks lend money at a certain rate and buy back that money at a higher rate, typically the next day, where they capture a profitable spread. The Fed stated that “the Desk will further offer

$500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period” (Federal Reserve Bank of New York, 2020, para.3). This shows the Fed’s commitment to assisting large institutions as well as consumers as they find new ways to stimulate an 16 BRITAIN USING BONDS TO FIGHT WARS economy that is experiencing downward pressure based on consumer sentiment as well as weakening fundamentals within the economy.

This is only one small section of debt markets, but it shows the complexity surrounding debt in today’s markets and all the different derivates that comprise it. Without the issuance of bonds by Britain back in 1694, it can be debated that the evolution of debt markets could be entirely different from where it is today.

Looking Ahead: Is Blockchain the Future?

Blockchain has been a buzz word for the past few years, with many companies, banks, and countries looking to utilize it for improvements on certain aspects of life going forward. Blockchain is described as a “distributed ledger technology” (DLT), which is “a technology that allows parties to transfer assets to one another in a way they can trust, through a computer network, without relying on intermediaries” (Contri & Galaski, 2016, p.4). Due to the trustworthiness of the technology, it “is expected to revolutionize industry and commerce and drive economic change on a global scale because it is immutable, transparent, and redefines trust, enabling secure, fast, trustworthy, and transparent solutions that can be public or private.” (Underwood, 2016, para.2). The reasoning behind the growing interested is due to the main piece of blockchain: the “blocks”. Deloitte states that “transactions are recorded in a public, tamper-proof repository organized in chronological blocks” (Contri & Galaski, 2016, p.4). This makes blockchain appealing because the security is very strong and hackers are unable to change or alter transactions once they have been placed to the blockchain. Many investors and companies believe blockchain will be the future especially in the financial services industry because transactions will become faster and cheaper. In addition, risk will decline “as credit history and asset provenance become immutable parts of the record” (Contri & Galaski, 2016, p.4). Also, compliance will become easier as there is a trail of the transaction in a simple and easy to find form, with all the 17 BRITAIN USING BONDS TO FIGHT WARS information that is needed during disputes right there. Because of these advantages, people find blockchain incredibly attractive and the future of debt markets and transactions as a whole as it assists with transparency between lenders and borrowers for all details surrounding transactions.

With this in mind, an example of how it can help debt markets in seen in the syndicated loan department. It is seen that syndicated loans can become more “expedited, abbreviated, integrated, monitored, and secure through blockchain” (Contri & Galaski, 2016, p.10). The main reason behind this is because there is many hours spent by back-office employees in investment and commercial banks verifying financial information from borrowers. Due diligence takes a long time in any transaction, but if blockchain were to be implemented here it would save time employees need to do due diligence, which opens more time to seeking new investors and expanding the United States loan market.

Credit Rating Agencies are starting to see the trend as well, with Morningstar Credit Ratings jumping into the industry of assets that are backed and issued through blockchain. In Fall 2019, it was reported that Morningstar was looking to bring “bring credibility to assets issued on a blockchain, also known as cryptoassets” (del Castillo, 2019, para.3). It was stated that this was “the largest bridge being built between the mostly uncharted world of blockchain, the technology first made popular by bitcoin, and the global debt securities industry, which had $117 trillion outstanding as of March 2019, according to the Bank for International Settlements” (del Castillo, 2019, para.4). This provides banks with support to focus on developing their own respective blockchain technologies specifically for debt markets as they will be able to send the assets to be rated by one of the largest credit rating agencies in the world.

Blockchain is something that is in the very early stages and is still considered unchartered. I believe that if used properly, blockchain can be implemented into debt markets across the world providing simplicity and accessibility for all in a transparent and secure way.

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Conclusion

Overall, Britain was the first nation to truly utilize debt as a means of wartime funding to develop their infrastructure, economy, and military throughout the 18th and 19th centuries. They laid the foundation for bonds to be issued by many other countries as a means of war finance, and without their usage of bonds it can be debated if they would have been the strong military powerhouse that they were back during these times. Although debt has its benefits, and without incurring debt it’s virtually impossible to grow your country, business, or worth, it must be learnt from Britain as well as the United

States that with debt come large amounts of responsibility. For Britain, it was seen on the borrowing side, when they were still paying off debts from the Napoleonic War as late as 2014. For the United

States, it was seen on the lending side, when they issued too many debts that were falsely advertised, and investors not credit worthy defaulted, causing a massive credit crunch that sent the global economy into turmoil. It must be understood that as debt become more complex and more normalized, governments and people must not become over-leveraged and make the same mistakes that were made in the past.

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References

Addis, C. (n.d.). 9 Revolutionary War. Retrieved April 14, 2020, from http://sites.austincc.edu/caddis/revolutionary-war/

Advocate of Peace: (1847-1884) CRIMEAN WAR. SECTION II. LOSS OF MONEY. (1869, August 01). Retrieved April 11, 2020, from https://archive.org/details/jstor-27904414

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