A Brief History of Investment Banking from Medieval Times to the Present

Investment banking taken generally to mean the financing of long-term capital needs, came into being with the merchants of medieval trade routes. In almost all developed economies of the world, even those developing late in the nineteenth century, investment bankers emerged from merchant banking roots. The provision of investment banking services has come from a variety of institutions over time and across countries. Products and services have evolved to include complex, often derivative, securities; and the legal regulation of investment banking has often changed abruptly, particularly in the last 100 years. Thus, even well-known investment banking names that have endured over the centuries bear little resemblance to their ancestors.

Monetary Systems

This chapter presents the evolution of Western monetary systems from the bimetallic standards of medieval Europe through the gold standard and Bretton Woods eras to today’s fiat money regimes. The chapter notes that issues of revenue creation enabled by the monopoly over money issue—through debasement and/or inflation—runs through this history, as does the significance of the credibility of the money issuer. An additional theme in the chapter is the role of changing technology of money issue, from the hammered coins of the medieval period, to the milled coins of the early modern period, through paper money issues to cryptocurrencies.

Small-scale Credit Institutions

This chapter begins by examining the reasons for the growing historiographical and theoretical interest in small-scale credit institutions, and in understanding variations in the institutional arrangements of intermediaries more broadly. It then briefly surveys the literature on a selection of these institutions—ROSCAs, savings banks, credit cooperatives, and building associations—to identify patterns of organization and development over time and place. Finally, it examines a number of theoretical perspectives that have been used to account for variation in in the organizational size, form, and practices that such small credit institutions embody. Specifically it considers transaction cost theories, location-based theories, socio-political theories, and cultural/narrative theories, and assesses their contributions and limitations in understanding the sources of variation and change in institutional arrangements.

Securities Markets

Securities markets exist to serve the needs of governments and businesses on the one hand and investors on the other, and the role that they played was a product of the balance between these two needs. Securities market had to compete for business with government finance and the intermediation of banks while investors could invest directly in business or property or save with banks. Those providing the market for securities also helped determine its shape. In some countries, that shape was left to self-regulation, while in others there was a considerable government intervention, often driven by events such as wars and financial crises. The result in some countries was the emergence of banks that controlled all aspects of the securities markets while for others the business was distributed between specialist intermediaries such as investment banks, brokers and dealers.

From Multinational to Transnational Banking

This chapter traces the history of cross-border joint-stock banking over roughly the last 100 years. Putting that history into its larger political, social, economic contexts may help shed light on our financial architecture’s social and economic significance, and even its sustainability. Despite recent interest in multinationals and banking, less is known about the cross-border management of financial firms than about that of other sectors. This chapter argues that during this period cross-border banking morphed from an activity conducted primarily by legally separate entities and on a comparatively small scale to one that is dominated today by megabanks that internalize a wide range of banking services in many countries and in most money-centres. It is a complex story, involving regulatory, technological, and political change in specific nations and among them.

Financial History and History

This chapter reflects on the connections between financial history and history, with particular attention to the specific contribution of the historical approach to a field that necessarily also draws from other disciplines, especially economics. It provides a historiographical survey of a field that matured in the 1980s and 1990s and considers the new challenges and the new opportunities that arose prior to the turn of the twenty-first century, with the growing use of formal economic theory and high-powered statistical techniques, the deepening divorce between economic history and history, the rise of financial economics, and also the financial crisis of 2008. The chapter argues that in order to survive as a distinct specialism and provide an essential contribution to the understanding of financial phenomena, financial history will have to integrate new theoretical and methodological trends, but obey the fundamental principles of the historical approach.

Capital Markets and Sovereign Defaults

This chapter provides a historical perspective on the relationship between capital markets and sovereign defaults. While the main body of the sovereign debt literature has rarely incorporated supply side factors, such as market distortions or conflicts of interest, we argue that the history of sovereign defaults cannot be understood without including the evolutionary structure of capital markets. The southern European debt crises and the recent controversy surrounding the role of holdouts demonstrate that certain proposals raised in previous default episodes deserve further discussion, in particular, those aiming to deal with problems of collective action, liquidity provision, and information flaws.

Banking Crises

Financial crises have been a common feature of the economic landscape for more than two centuries. The chapter defines banking crises, considers the type of costs that they impose, and outlines the most common causes of banking crises during the past 200 years. The remainder of the chapter considers five distinct historical periods: the nineteenth century, when the pattern of crises following ‘boom–bust’ economic cycles became established; the inter-war period, which was punctuated by two major sets of crises (post-First World War crisis and the Great Depression); the post-Second World War financial ‘lock-down’, which was characterized by stringent banking regulation and a complete absence of banking crises; deregulation and the return of crises in the 1970s; and the subprime crisis that emerged in 2008 and the subsequent Eurozone crisis.

Financial History and Financial Economics

This chapter looks at the bidirectional relationship between financial history and financial economics. It begins by giving a brief history of financial economics by outlining the main topics of interest to financial economists. It then documents and explains the increasing influence of financial economics upon financial history, and warns of the dangers of applying financial economics unthinkingly to the study of financial history. The chapter proceeds to highlight the many insights that financial history can potentially provide to financial economics. The main conclusion finds that financial economics can potentially learn more from financial history than vice versa.

Financial History and Economic Development

Financial history, both recent and more distant, offers lessons that often are neglected when reforms are being considered, especially in a post-crisis rush to ‘fix the system’. This chapter offers some observations that need to be factored in to any reforms. It takes stock of research on the role of finance and what works and what does not in policies that affect it. It then examines three topics in finance that have and may again hamper financial sector development, but that are receiving less attention than they deserve: the problems of insufficient size of financial systems and their diversification; financial repression, and how to manage it; and the need for dynamism and oversight in financial regulation, to enable societies to maximize the safety of the sector while still enjoying its benefits. Current reformers would do well to take account of these factors in their plans if they hope to avoid more crisis and reform.