What Do You See as the Greatest Catalyst/driver in Building the Present Global Financial Platform?

HISTORICAL EPISODES IN THE FINANCIAL MARKETS

What do you see as the greatest catalyst/driver in building the present global financial platform?

Since the apparition of writing in Mesopotamia, the financial system has continuously evolved to become a global platform connecting people and countries through various financial instruments. The economic development of the nations has been the driver paramount to build the system we know nowadays. Economic development of civilizations was impacted by various factors being the increase in global demand, intra and inter-country trade; wars, financial crisis and regulations; and new discoveries, industrial revolutions and wave of innovations.

Increase in global demand, intra and inter-country trade

Trade started by bartering goods and services but this system rapidly demonstrated limitations. To counteract the shortcomings, coins were invented in China improving business and becoming the first financial instrument. Adopted by the Phoenicians and the Greeks, coins enabled the two civilizations to grow through the development of a huge trading system all-over the Mediterranean Sea. With the development of banking and business from Italian bankers and merchant, cross-nation trade increased the aggregate demand and required innovation in the production. Technological innovations appeared in agriculture generating urban growth. This period of growth saw the appearance of the first Foreign exchange transaction by Italian traders with agents from Constantinople.

In the mean time, the Mediterranean Sea became the main hub of business with the emergence of banking centres created by the Italians through new trade routes and trade fairs. While the sea is the best route to do business with London, Amsterdam, Lisbon or Marseille, caravans of goods are expanding throughout Europe. Syndicates and partnerships are established between merchants; trade is standardized and new regulations are set. As new financial tool, loans are created to finance purchases leading to the appearances of concepts used nowadays such as time value, leverage or risk spreading. It is at the same period that other instruments were launched such as rental leases, repurchase agreements, maritime loans or letters of exchange.

Leader of the world and strong of an international trade with the colonies and the US, Great Britain had

 a strong and flexible banking sector emerged as the driver of the economy. From 1850 until the beginning of the Great War, the Kingdom poured massive amounts of capital in the colonies but also in South America. Newly independent countries such as Argentina needed resources. With its strong industrial base, Britain was perfectly placed to provide manufactured products. The country increased its global dominance in the foreign exchange market.

The war was also the reason behind the Bretton Woods agreements (currency convertibility to Dollar) and the creation

of IMF and IBRD.

In Europe, the post-war reconstruction motivated countries to collaborate and produced the European Payments Union and the European Coal and Steal Community that are the root of the European Union and the Euro currency.

Wars, financial crisis and regulations

Willing to expand their territories, nations engaged in wars throughout Western Europe at the end of the 11th century. The Crusades led to the necessity of transferring money through long distances and to the apparition of interest-bearing assets. At the time, only non-Christians could lend and this, therefore, represented a major financial innovation. Again, war has been an important factor of financial instrument development with the creation of transfer obligation to pay soldiers fighting in King Henry II’s wars in Wales.

Later, during the 17th century, the first bubble appeared in the Netherlands during the Tulip Mania. Options were used during this crisis to increase leverage instruments. These derivatives were developing rapidly in banking. It is at the same period that banks began to operate as deposit takers and exchanges.

In 1775, the War of Independence was raging in America. This Continental Congress, without the ability to tax the colonists, paid the troops by printing money (and leading to hyperinflation and depreciation of the Continental dollar). At the same time across the Atlantic sea, the French revolutionary government issued Assignats, paper money backed by the value of properties previously held by the Catholic Church as opposed to Gold or Silver at the time.

Few decades later, in 1798, the Rothschilds saw an opportunity in the Napoleonic Wars to develop a banking empire using their important and international network. Napoleon who was also funded by the US government after borrowing money from Barings and Hope. After losing the Franco-Prussian war, France paid an indemnity of 5 bn francs to the German empire that caused a stock market boom and an asset boom on real estate. Speculative lending practices in western states, decline in cotton prices and the burst of land bubble caused the Panic 1837 in the US. This led to the creation of an independent US Treasury.

Seventy years later, a failed attempt to obtain sufficient control in United Copper in order to manipulate the market price triggered the Bankers’ Panic and a run on banks. The New York Stock exchange fell 50% from its peak of 1906, a year earlier. Regional banks across the nation were withdrawing reserves from New York City’s banks until the intervention of J.P.Morgan who pledge large part of its own money and led a consortium of NY bankers to shore up the banking system. The inefficiency of the Independent Treasury was demonstrated during this event and pushed the government to investigate alternative solutions. Eventually, the Independent Treasure would be replaced by the Federal Reserve System.