In one of my favourite books “Money Tales” (Economica, 2007), Alessandro Giraudo looks at the emergence of paper financial instruments and tells how the great medieval trade fairs of Europe were gradually replaced by financial fairs where no actual trade took place except in money.
He explains that even after the main continental trade routes had shifted away from the north-south axis that had depended on the Champagne commodities fairs, the fairs continued to function as an international clearing house for paper debts and credits, as they had built up a system of commercial law, regulated by private judges and quite separate from the feudal social order.
Order was maintained without “police” because of the absolute necessity to maintain a “good name”, prior to the later third-party enforcement of legal codes by the nation-state.
Hello. New instruments but no new institutions, new technology beyond traditional law enforcement and a private reputation-based scheme that grew up to facilitate commerce where previously gold and silver had been the oil that greased the wagon wheels. It’s almost as if identity had become the new… no, let’s not get distracted
Giraudo goes on to tell how over time, the power of the Genoese bankers rose and they shifted the fairs from France down to Piacenza, near Milan. The Genoese had established the function of the banker as a money merchant and separated this function from that of the “merchant banker” with holdings. Imagine how the idea of paper replacing gold and jewels and spices must have seemed to the institutions of the time! Fairs in which no goods were exchanged but money was!
The finance and wealth based only on paper astonished the traditional Italian bankers, and those of rest of northern Europe too, but they all had to adapt to the new reality so as not to be overtaken swept aside by this technological revolution.
Those Paicenza money market fairs went on to become the largest in Europe from the end of the 16th and into the 17th centuries with bankers from Flanders, Germany, England, France and the Iberian peninsula converging four times a year to meet with the Genoese, Milanese and Florentine clearing houses. The clearing houses put down a significant deposit in order to participate in the fairs and in return they fixed the exchange and interest rates on the third day of the fair (this was when interest rate fixing wasn’t the thing it is today). In addition to the bankers, there were also money changers who also had to put down a deposit (smaller) to present letters of exchange, and there were also there were also representatives of firms and brokers who participated in the trading.
During such fairs, the participants tried to clear all of the transactions in such a way as to limit the exchange of actual coins, so it was net settlement system. Any outstanding amounts were either settled in gold or carried forward to the next fair with interest. This was the first structured clearing system in international finance and it lasted until 1627, when the Spanish Empire went bankrupt (again) causing serious losses to the Genoese bankers who were its principal financiers (and sadly for them had no access to a taxpayer-funded bailout).
(Spain’s gold and silver from the Americas never translated into a strong financial services sector and trade-led economic growth. When Philip III had become King of Spain and Portugal in 1598, Spanish commentators were complaining that instead of being used to stimulate industry and business, the treasure from the Americas had created an attitude that held productive work in contempt, while foreigners – Genoese, Dutch, Germans – ran Spain’s trade and finance to their own profit.)
As a result of Spanish default, the financial centre of Europe shifted to Amsterdam, where The Bank of Amsterdam had been set up in 1609. It was owned by the city and fully backed by gold and silver. It was, as the Financial Times notes, a highly trusted institution. As Adam Smith wrote of it, “no point of faith is better established than that for every guilder, circulated as bank money, there is a correspondent guilder in gold or silver to be found in the treasure of the bank”. This meant that Amsterdam had a very efficient system for inter-merchant transfers (ie, account-to-account transfers at the bank) and was developing new and innovative instruments including futures and options.
(Later still, Europe’s money markets moved on to London, but that’s another story.)
Why am I retelling this tale. Well, Giraudo observes that while geography and politics have a strong influence on the location of financial centres, the deciding element has always been the capacity to invent and use new financial techniques, and above all to create a dynamic sense of innovation. This is where, in my opinion, London and New York still excel and why they remain powerful financial centres.
But what if that capacity to invent new financial techniques is in the future better exploited in Kenya or the Far East or on the Internet? What if financial innovation slips its mundane anchors and begins to float free on the tides of cyberspace? In London, in the UK and in Europe we have to make sure that we have a regulatory climate that supports innovation in financial services in the new economy, not one that attempts to prop up the old one.
In April, the UK Treasury unveiled a host of measures it said would show that Britain is open to cryptocurrencies and blockchain technology (which are not, in my opinion, synonymous with innovation in financial services, a much wider spectrum) and the Chancellor, Rishi Sunk, said that “It’s my ambition to make the UK a global hub for crypto asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country”.
What could these measures be? As the examples of Genoa and Amsterdam teach us, we need both a digital money infrastructure (ie, stablecoins) that is quite separate from the infrastructure for digital assets that might be used for speculation and we need and a digital identity infrastructure to support the ownership and trading of both.
Snippings 