THE DEVELOPMENT OF LONDON AS THE FINANCIAL CENTRE OF THE WORLD
Before proceeding to examine the Money Market and banking system
of more modern days, it will be well to glance at the causes which
contributed to the predominance of London among international financial
centres, and made it the clearing house of the world. At the present
time this predominance is being assailed from several quarters—notably
Paris, Berlin, and New York—but there is no doubt that London still
holds a good lead, and with knowledge, activity, and perseverance
there appears to be no reason why it should not continue to be in the
forefront in the future.
In the _Wealth of Nations_ Adam Smith points out that the increase
and riches of commercial and manufacturing towns contribute to the
improvement and cultivation of the countries to which they belong, and
that commerce and manufacture introduce order and good government, and
with them the liberty and security of individuals.
In our own history we can trace the truth of these remarks. We have
already drawn attention to the flourishing state of trade which
developed during the reign of Elizabeth. New industries were started,
villages grew into towns, and new markets for our wares were opened
up in various parts of the then known world. In consequence of the
wars on the Continent, many wealthy merchants came or were exiled to
our shores, and settling here, helped to swell the growing business
of London. We were fortunate in the fact that this “greater liberty
and security of individuals,” enabling our forefathers to devote their
attention and wealth to the further development and expansion of the
commerce of the country, came about with us long before a similar state
of affairs began to have effect with our continental neighbours, and
this gave us a good start commercially. While our neighbours were still
in the throes of continual disputes and unrest, we were laying the
foundations of a world-wide system of trade. We were in a position to
supply the Continent with their various needs as they arose, to our own
immediate benefit and the further advancement of our commerce.
In connection with the more rapid development of commerce with us than
with continental nations must be remembered the energy and activity of
the race forming the population of our country—an energy and activity
not only in starting and conducting new industries, but in spreading
abroad to new lands and forming new colonies, thus enlarging the sphere
of our operations and the number of our markets.
Our geographical position has assisted materially in our commercial
development. The disturbances arising from the fear and risk of
invasion have been less pronounced than with continental nations,
and our extended coast-line, embracing many natural shelters, has
engendered our vast shipping industry, without which we could never
have attained to our present position. We have also had the advantage
of another natural circumstance in the proximity of our coal and iron
fields to each other. This gave us for a long period an unparalleled
command of certain trades dependent on this fact. Thus we see that,
owing to good government, national character, and natural conditions,
our trade was built up on a firm foundation, and was spread abroad
until its ramifications extended into every country of the world.
Turning now from the trade point of view to the monetary position, we
find that as our trade grew, so did our means and capacity of dealing
with that trade. Although in early days we were rather backward in
our banking system, yet that system developed quicker with us than
with other countries. The eighteenth century embraced many periods of
financial distress, but the Government never defaulted in any of its
engagements, and our leading merchants became renowned as men of honour
and integrity. During the early part of the nineteenth century our
position improved by leaps and bounds, our gold standard of currency
was firmly established, our merchants’ names became known and honoured
throughout the world, and direct financial operations between London
and all foreign parts became matters of daily occurrence.
These monetary transactions were very essential in the financial
growth of London, and were a large factor in our capital becoming the
centre of finance. Owing to the vast extent of our trade, both as to
its amount and diffusion, we were in a position to conduct financial
transactions the world over. From this it followed that when commerce
began to expand and grow among continental nations, it was found that
the easiest way of settling the financial business arising therefrom
was through the intermediary of London. England bought from and sold
to all nations, but in the first half of the nineteenth century
_reciprocal_ transactions between foreign centres of trade were few and
far between. For instance, suppose a New York merchant shipped produce
to Hamburg, he would draw on some appointed London house for payment;
the merchant in Hamburg who had bought the goods would then have to
find the means of providing this London house with the necessary funds
to meet the draft from New York. This he would do by buying a draft
in Hamburg from some merchant there who had shipped goods to London
and was wanting payment. This draft he would remit to the London house
on which the American exporter had drawn, and the London house would
collect the money represented by the Hamburg draft, thus settling both
transactions. This is only a rough example, but it is typical of what
came to be a regular custom.
Various countries may trade together, but unless they have direct
mutual financial transactions, they cannot settle their indebtedness
without remitting precious metal of one kind or another, or employing
the agency of another country which has direct financial dealings
with both. In the time of which we are speaking London was the only
centre which was in a position to carry out such transactions. In the
latter half of the past century, and especially towards the close of
the century, our position suffered through direct financial operations
between various countries becoming established, thus eliminating the
need of a middleman; but it may still be said of London that it has
direct financial and trading connection with _every country of the
world_, which at present cannot be said of either Paris, Berlin, or New
York. The very fact of the establishment in London of branches of the
leading banks and finance houses of France, Germany, and the United
States, emphasises the position which London has attained and still
holds in the financial world.