In consideration of our complex socio-economic landscape – that which we call the free market system – there are many aspects that may seem completely counterproductive and illogical without a nuanced understanding of the historical events and decisions that have led us to where we find ourselves today. If, for example, one agrees that banking is the brain of the body economic and that it is this brain that appropriately allocates resources to the body economic and its attendant industries in the form of funding and capital, then it must seem – at least from an outsider’s point of view – to be utterly perplexing that a rule limiting proprietary trading on a bank’s own balance sheet is not an obvious regulation to put in place.
But this assumes that the regulator is more correct – by orders of magnitude – and that what is lost in liquidity in the financial markets, is made up in the safety that would be implied in less risky treasury operations within banking counterparties. This argument, however, has a long and tortuous history, one that has seen the advantages and disadvantages on both sides: the deleterious effects of both an over-regulated banking industry versus a completely laissez faire approach to the markets, which undoubtedly contributed to the massive and rapid rise in credit and aggregate leverage that led to the two worst financial crises in history. And it is when these markets fail that the body economic experiences its most severe disorders.
It is not too much of an exaggeration to claim that the battlefront in the great war that has been at the heart of the meaning of the twentieth century – that is the war between free market democracy and socialist centralised control – is now being fought in the subcommittees and Senate hearings and special investigation units that oversee banking and the finance industry in general. The history of banking is the story of what is at stake in the idea of the free market – that banks should be independent for-profit private firms, for example. But what is also at stake are questions related to our personal freedoms. For if in a post September 11th 2001 world, and if in a post 2007/2008 financial crisis world, banks are now burdened with the problems of surveillance, extensive anti money-laundering checks, preventing the financing of terrorism, holding ever more and higher quality capital, whilst also being constricted by thousands of pages of laws and regulations – sometimes contradictory in nature in terms of capital and liquidity and tax treatments over complex instruments – then the degree to which we can call them free market agents is very limited.
This question of what banks should be in our western so-called free market world is not easily answered. But at the very least it would seem prudent to understand the events that have shaped the place we now find ourselves in. We have therefore brought together in this journal the stories and events that we believe formed important waypoints in the journey to where we find the industry of banking pivoted today. We begin with an Italian monk, who inadvertently invented the underpinnings of the statistical assumptions that drive most of what we call financial mathematics, whilst also proliferating a strange yet very useful technique called double-entry accounting. This technique has gone on to become the foundations of the audit and assurance industries – industries that lend a veneer of credibility to what Adam Smith would have called the invisible hand of the free market.
We cover the 1907 Panic and the power of J.P. Morgan and we also touch on the little-known Frenchman Louis Bachelier who, without intent, changed finance forever, fifty years after completing his doctorate thesis. We then examine the importance of OPEC and its irreparable damage to the idea of stable markets. And then we cover the build-up to the 2007/2008 financial crisis.
These articles are by no means intended to be a complete history, nor are they meant even to be internally consistent in their underlying message. But they are strung together, like worry beads on a leather string that a nun, or a hippie, or even an investment banker, may run through his or her fingers, whilst pondering the moral ambiguity of the world in which we live today.