A timeline history of bonds

As one of the oldest financial instruments, bonds have allowed wealth to transcend borders and time to finance wars, connect continents through railroads, and build industries. Knowing the history of bonds helps explain how it has contributed to economic growth patterns and speculation cycles that lead to financial crises. 

From simple debt contracts between two parties to historical trends like colonialism, industrialisation, technological innovation, and globalisation. You will gain insights into how past applications of bonds as financing tools have continuing relevance for understanding current events and making investment decisions.

The early history of bonds

The earliest known bonds emerged in Venice around the 1100s. Venice issued the first recorded permanent bonds to fund a war against Constantinople. The bonds paid yearly interest and did not have a maturity date, allowing perpetual transferability. This enabled Venice to raise more capital than short-term loans that must be continually refinanced.

The introduction of negotiable bonds that could be traded between buyers and sellers was an innovation that expanded the funding potential for the governments that issued them. City-states in Italy and medieval monarchies in Northern Europe began issuing bonds to fund public works and military ventures. The Rothschild banking dynasty rose to prominence by trading bonds issued by European governments in the late 18th and early 19th centuries.

Bonds have also helped enable colonialism and the transatlantic slave trade starting in the 1600s. The Dutch East India Company issued bonds that funded the expansion of trade routes and military conquests by European nations. Merchants and plantation owners in slaveholding colonies also used bonds to fund their operations.

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Aided in resourcing structural developments

The history of bonds was integral to financing canals, railroads, and other infrastructure that enabled the First Industrial Revolution beginning in the late 1700s. The British government issued perpetual bonds to fund the expansion of canals that connected major manufacturing hubs during the Canal Mania of the early 1800s.

In the United States, railroad companies issued large amounts of bonds starting in the 1830s. By selling railway bonds to investors in Europe and the eastern US, companies financed new track construction that connected western territories. Total railroad mileage grew from 23 miles in 1830 to over 30,000 miles in 1860, opening up markets across the country.

Chicago issued bonds in the 1840s to support the expansion of streets, water service, and sewage systems needed for rapid urbanisation. The history of bonds started with low-interest rates and extended 30-year maturities. The bonds provided inexpensive financing for public works projects.

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Modern developments in bonds

Bonds continued to evolve and expand in the 19th and early 20th centuries. Municipal bonds continue to become a funding source for public works investments in growing American cities. Corporations also began issuing bonds on a large scale to fund expansion in the Industrial Revolution era. 

The history of bonds grew steadily through the rest of the 19th century as more local governments leveraged their taxing power to sell bonds. Major American cities from New York to San Francisco used bond financing to transform themselves with modern infrastructure. By the early 1900s, the municipal bond market had already gained a solid footing. 

Corporate bonds in the late 19th century

Following municipal bonds, the corporations also contributed to the rich history of bonds. Corporate bonds arose in the second half of the 19th century as the demand for capital soared with industrialisation and railroad construction. The first bond issuers in the private sector were railway companies. Railway companies issued bonds to finance the huge expenses of laying thousands of miles of railway tracks across the country.

Industrial corporations soon joined railroads in tapping the prosperous history of bonds. Manufacturers of steel, automobiles and other goods required huge capital investment in plants and equipment. Issuing corporate bonds became a way for companies to raise large sums without giving up equity. The ability to sell bonds also provided more flexibility in financing than bank loans.

As major corporations like US Steel and Standard Oil participated, the corporate bond market expanded significantly. J.P. Morgan and other central investment banks facilitated the rise of bond markets by underwriting corporate bond offerings. By World War I, industrial corporations accounted for over half of all outstanding corporate bonds as the market grew to finance America’s corporate expansion.

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Liberty bonds to fund World War I and World War II

Beyond funding infrastructure and industrial projects, there is a history of bonds financing America’s wars in the 20th century. When the US entered World War I in 1917, the government launched a massive bond-selling campaign to raise funds called the Liberty Loan program. Liberty Loan bonds, also known as Liberty Bonds, were sold in four separate offerings from 1917 to 1918.

Patriotic fervour led millions of ordinary Americans to purchase Liberty Bonds in denominations as small as $50. Four Liberty Bond drives raised nearly $17 billion for the World War I effort, paying for equipment and supplies. The program helped build political support for the war while tapping public funds.

In the 1940s, financing needs for World War II led to another massive government bond program. From 1941 to 1945, eight War Bond drives raised over $185 billion, with many Americans again buying small denomination War Bonds. Though initially called Defense Bonds, their name was changed to War Bonds after the Pearl Harbor attack in December 1941. Taxes covered about 40% of World War II costs, making the War Bond drives critical.

After World War II, bonds returned to their normal role, funding business expansion and public works. However, the War Bond campaigns demonstrated the power of bonds to marshal society’s resources for costly wars that required mobilising popular support. Beyond private investors, the rise and history of bonds also gave institutions like pension funds a means to earn income while promoting economic growth and, in the case of the World Wars, military might. Over two centuries, bonds have served as essential financial vehicles for development and war.

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Recent innovations and trends

In recent decades, ongoing financial innovation has expanded the bond market and made it more accessible to ordinary investors. The advent of high-yield “junk” bonds in the 1970s and their role in leveraged buyouts changed corporate finance. 

New classes of mortgage and asset-backed securities emerged as well. More recently, bond ETFs and mutual funds have made bond investing easier for retail investors. Electronic trading has also increased bond market liquidity.

High-yield junk bonds with below-investment-grade ratings first came into prominence in the late 1970s and early 1980s. These bonds financed speculative investments, mergers & acquisitions and leveraged buyouts. Junk bonds carried higher risks but paid higher interest rates than conventional bonds.

In the 1980s, securitisation led to a rapid growth in bonds backed by mortgages and other types of assets. Mortgage-backed securities allowed banks to pass through mortgage defaults to bondholders while replenishing capital to issue new mortgages. Asset-backed bonds also were created based on credit card debt, auto loans, and other financial assets.

Bond funds have grown massively since the 1990s by providing diversification and liquidity. New technology platforms and electronic trading have also increased liquidity in historically opaque corporate and government bond markets.

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Summary

Over centuries of history, bonds have served the critical economic purpose of transferring capital across time and distance. Bonds financed the public works that enabled urbanisation and funded the private companies that drove industrialisation. 

Wartime bonds tapped into patriotism while spreading the costs of conflicts over generations. Recent decades have seen ongoing financial engineering that has made bonds more flexible funding sources for businesses and governments and made bond investing more accessible to the public.

With this progression, we can appreciate how bonds have been entwined with major events and trends in political and economic history. The accumulated effect has provided an essential financial bridge between present capital and future growth. While bonds have facilitated speculative excesses, they have also funded progress, ultimately justifying their enduring prominence.

 

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