Lending is the economic basis of every civilization. People lend to each other informally until their business dealings and economic activities become more complex; then the systems supporting lending evolve and become more complex and formal too.
Modern day lending practices, banking systems and legal agreements have provided the structure for creating bonds. This type of lending has become a sophisticated market in its own right – $42 trillion in bonds are now issued in the U.S., and $106 trillion in bonds have been issued worldwide, according to SIFMA.
How Bond Markets Developed
Bonds were first issued in 14th century Venice when city residents were forced to lend money to the state to finance a war with Turkey.
When the Turks defeated the Italians, and city leaders could not pay its citizens, they proposed that its citizen-borrowers get a 6% interest payment until the loans were repaid in full. The citizens approved the proposal. This simple event created an entirely new financial market.
The idea that bonds could be issued to pay for wars and other large national or municipal capital projects proved very popular. Spain issued bonds to finance its exploration of South America, while Holland used bonds to build dikes. Other western European economies expanded rapidly using funds raised by issuing bonds.
In the U.S., Congress issued bonds to fund the Revolutionary War, and these became the