APPUNTI financial markets and financial crisis: a historical approach, Appunti di Storia Economica

Scarica APPUNTI financial markets and financial crisis: a historical approach e più Appunti in PDF di Storia Economica solo su Docsity! FINANCIAL MARKETS AND FINANCIAL CRISIS: A HISTORICAL APPROACH LECTURE 1 7/01 MONEY Spits, skewer, axes used during sacred dinner in Hellenistic period were named “Obolòs” in Greek -> 1st type of Money. So, the origin of money comes from religion and it’s 1ST FUNCTION was being a STANDARD OF VALUE In the Odissey (Ulisses’s return to Itaca) all spits were equal, they looked the same. They were used only by upper people, but they all were equal during sacred dinners-> spread of the idea of a possible standard common value, standard of value, unit of account-> origin of money. Before that, there was a hierarchical, asymmetric society with no standard of value. This kind of money was first used only to pay taxes, gifts to the king, etc and they were first made of bronze. At that time there were philosophers such as Anassimandro, Anassagora, Talete that stated that the real reality stays beyond and is stable, something stable is reasoning and is a similar concept to the standard of value.  MONEY AS A COMMON STANDARD OF VALUE CONIAGE China was the first to introduce coins. With the creation of coins there it is a full standardization Money was used only for important payments, with huge value, not all payments. Ex: the Greek Drachma made of silver which represented Athena (cuteness, intelligence, authority, wisdom with the earl) -> MONEY AS A REPRESENTATION OF POWER (represented the authority, emperor)-> ancient Greece, roman empire The value of money was guaranteed by his inner and intrinsic value and that was the main task of the authority. The Greek money was used outside of Greece with no need of exchange-> domestic currency as an international currency because of the power of Greece it was accepted everywhere, stored in pottery with a guaranteed value. Inca civilization had no concept of money, labor was valuable (like communism). Silver and gold existed but not as a mean of payment. Pizzarro and the conquistadores were looking for el dorado, gold. They had anger of gold which was used for money. They came back to Europe with huge quantities of silver-> prices rose for the 1st time in Europe, there was a revolution, more silver arrived and more the prices were growing and so the value of silver decreased-> INFLATION. Humanity realized that value is not absolute, the value of money, silver and gold was not absolute-> money is only worth when people want to exchange it. Money is TRUST, something that can help us to get, dominate information and is always guaranteed by someone (authority). The role of authority today is reasoning trust and information. Money is the 1ST HUMAN ISTITUTION (apart from family), it is the 1st idea of how to spread affordability in society and it is a COMMON STANDARD OF COMMUNICATION (such as language). “Money” comes from “Moneo” (to advise). The roman mint (zecca) was close to the temple of Giunone Moneta (who advised the romans from the Gaul’s invasion). “Pecunia” comes from “pecus” (ship) that was a standard, mean of payment in Ancient Rome. LECTURE 3 19/01 Usury bans Since 13th century: debate on usury The Church considered usury any sum of money that exceeded the sum that had been lent (independently from the interest rate that was applied) This dogma came from the passage of the Gospel of St. Luca “mutuum date, nihil inde sperantes” Tommaso d’Acquino restated this concept: “nummus non parit nummos” (money can’t create other money)  Wealth is produced only by labor, not by money itself Lending was common in everyday life, not only used by specialized individuals such as merchants and bankers Usury laws did not hinter credit transactions with interest rates and interest-rate loans spread (in disguised forms: masked loans), several devices were created in order to bypass the ban: mask the loans Masked loans: vedi foto - Bill of exchange: interest rate hidden in the exchange rate of the 2 different currencies - Conratct emptio cum locationae: send a lot of money in term of land, Lending at acceptable interest was progressively allowed by the Church: specific conditions and then openly The Jews Only the Jews were allowed to apply interest rates on loans (exempted from the Christian laws)->Pawn banks Mainly consumer credit, pawn loans (small amounts of maney backed by a pawn), 20/25% of i.r. Jewish private banks widely spread in urban centers and in the rural communities till mid 15° c. (when Monti di Pietà was founded) The Church changes The Church realized the importance of credit (used in effect by religious institutions themselves, like monasteries, convents, abbeys) and the necessity of applying an interest rate on loans Interest rates were allowed in some specific circumstances: Interest rates on loans were allowed only in 3 circumstances: - damnum emergens: according to this principle the interest rate was allowed as it was considered the reimbursement of a direct loss - periculum sortis: the interest rate was considered the reimbursement of the loss of profit - lucrum cessans: the interest rate was considered the reimbursement of a ceasing gain Monte di pietà 1462, Perugia, Francisan Order (Benardino da Feltre) It provided credit for the poors (consumer credit) in order to avoid their recourse to the Jewish loans It provided interest free loans, secured with pawned items (used as collateral)-> little amount of money for a short time, if the debtor wasn’t able to return the money the object was sold as collateral It belonged to the commune, initial patrimony from wealth people: donations, legacies and deposits of rich people The movement spread first throughout Italy and later in other parts of Europe  money distributed as credit to the population to this condition, help the lower strata of the population Leone X, 1515: allowed the Monti to charge a low interest rate (5%) for their loans in order to tackle management costs, administrative costs Along with pawned loans, these credit institutions started to develop their credit activities and working as banks, accepting deposits for which they return an interest of 2/3% Not only pawned loans (small accounts) nut higher sums at higher interest rates (6%) 2 branches: - Monte Grande: provided interest-rate loans not only to the poor, to the middle class also Monte Piccolo: free loans, backed by pawns  monte di pietà started to operate as a bank Article “Bonds and government debt in Renaissance” How public debt was created, very ancient roots It coincided with the developed of city states (Venice, Genoa, Florence): growing and achieving more importance-> consolidate the empire (military needs) and finance it The cities needed money (taxes were slow and not efficient way)-> loans (debts) for short-term needs, forced loans (wealthiest individuals obliged to give money with an interest in a short term), when the city was not able to return it gave titles, etc-> costly and growing debt that needed structural change Innovative element: from floating debt to consolidated debt (irredeemable debt)  Venice The republic of Venice Naval and commercial power, galleys useful for wars and commerce, improvement of navigational instruments (compasses) enabled Italians to navigate far from land By the 11th century Venice= major force of Adriatic and Ionian seas Trade with the Levant-> export/import Introduced a way in which they could pay interests regularly-> new taxes to have a new source of revenues to pay interest rate interest regularly-> states as a trustworthy institution, attractive for investors New bonds: lower interest rate but the state was able to repay regularly trough new sources of revenues (taxes)-> bonds attractive and safe-> bonds tradable, inheritable, negotiable-> secondary market in which they were exchanged People from foreign cities started to invest too Citizens felt to belong to the state and shared their destiny with their state-> social connotations, impact on people, instrument of belonging-> lending money as a duty, involving large strata of the population, those who had savings could invest them in government loans (another type of investment) Depositi in zecca, 1520s Venice was able to eliminate government debt through depositi in zecca Issued by the Mint, voluntary loans, tax free, attractive interest rate, short term and irredeemable (vitalize, life annuities 17%) They constituted the pillar of the venetian public debt Venetian finances were so healthy that in the early XVII century the whole state debt was eliminated  Florence Riots at the beginning (Ciompi revolt): only the wealthiest are gaining Raised money directly from the market as well as Venice Consolidation later than Venice, with the Medici Relayed more of forced loans (prestanze): short term, interest rate of 10% - Monte delle doti , dowry: redeemable bonds when daughters got married or enter the convents in higher positions, investment for which people got in debt-> social meaning: improve your social position, also political meaning: created solidarity, political arrangements Not only economic function but also political and social and financed public debt: multiple functions - Creation of the Monte di pietà Other cities imitated the monte Function: lend money to poorest strata but also specialize in financial activity and operate as a bank  Genoa Casa di st. George: financial institution-> Genoa relayed on intermediary institution, semi private consortium The Casa lent the money to the State and in contro they received the responsibility and control of tax revenues: repayment It lasted until Napoleonic wars, pillar of the economic system  Basis of modern finance were layed, public debt Analogies and differences: Estimo: book in which every citizen was registered and also their taxes, tax register  Venice and Florence Debt administrated by a government agency-> Monte camera degli imprestiti (Venice), Monte (Florence) Direct relationship with citizens: open market Both used estimo, forced loans more frequent than voluntary loans  Genoa Debt administrated by a semiprivate consortium-> Casa di San Giorgio (intermediary institution) that mediated between the citizens and the government Fist bankers were merchants because of their large quantity of liquidity, disposal of large quantity of capital to be used to make loans, exchange currencies-> more and more specialized in banking activities The Medici XIV-XV centuries Organized in compagnia Anticipated the modern merchant banking Founder: Giovanni Di Bicci (1369-1429) and his son Cosimo (1389-1464) Relationship with the papacy, able to fiancé the Pope Rulers of the republic of Florence Lorenzo il Magnifico (1449-1492): prince They were foreign exchange dealers (currency exchange and bills of exchange): gained profit to bypass usury banks marked interest rates in the exchange of different currencies-> introduce double entry bookkeeping usury was an issue more in theory than in practice, commonly used even if prohibited became bankers that supplied loans to the crown, pope, rulers LECTURE 5 26/01 The price revolution The flow of gold and silver from the Spanish colonies increased greatly Europe’s supplies odf monetary metals (tripling them during the 15th c) Discovery of new mines of silver in Perù, Bolivia, Mexic Vast quantities were sent to Italy, Germany and the Netherlands to repay its debts and finance its long lasting wars Precious metals spread throughout Europe-> INFLATION (prices rocketed +3,+4) It affected not only the directed interested country but also other European countries and Russia creating a general inflation-> Price rose sooner and higher in Andalusia, whose ports were only legal entrepots for America gold and silver, than in distant Russia. Price of grain, flour and bread rose higher than those of most other commodities. And, at the same time real wages severely declined Price revolution that was the combination of: 1. increase of unit of account ( silver was depreciated in terms of trade, depreciation of the unit of account) 2. Increase of population Between 1500 and 1620 prices rose: + 4 in Spain, + 3,5 in France, + 2,5-3 in Italy Historians tried to investigate the phenomenon and gave rise to different theories Malestroit: the price revolution is the result of the depreciation of silver in terms of intrinsic value, because the quantity of silver diminished -> not true Quantitative theory of money Theory anticipated by J. Bodin (1578) and B. Davanzati (1588) Price level of goods and services is directly proportional to the amount of money in circulation, or money supply-> the new world’s discoveries and new mines lead to inflation MV=PT M: Money V= Velocity of transactions (constant v.) P= Prices T= Number of transactions (constant) FAIRS and BOURSES Meating places in which international goods were exchanged In medieval times local trade was handled in MARKETS, while international trade in FAIRS. Among the earliest were those of Champagne in France which dealt with Flemish cloth and fluorished particularly in the 12th and 13th centuries. Fairs were highly organized, coming at regular intervals (2 or 4 times a year), at regular places and evolving a set procedure, such as 9 days for trading cloth, 5 for leather, and then fixed day for settlement. During the time of fairs, foreigners were given the protection of the seigneurs, a right to which they were not entitled in other times.  The rise of the financial capitalism Settlement involved a species of clearing. Each merchant kept a book in which he entered what he owed (vostro) and what was owed to him (nostro). When the date for settlement came, an official of the fair would validate the claims and liabilities in the merchant’s book, and effect cancellations to reduce the need for payment in coin. Uncancelled balances might be paid in currency, in BoE brought to the fair, or in new bills drawn to carry the claim debt over the next fair.  Specialized fairs where credit instruments (bill of exchange, new bills) were exchanged, created a new place, creating the 1st credit market In due course, all kinds of financial transactions came to be handled at fairs, not only foreign exchange but real estate, banking, early forms of insurance, lotteries. Fairs flourished at various times and places: Champaigne, Geneva, Lyons, Besançon finally to Piacenza, where it developed into a Genoan fair purely trading in foreign exchange and reached one of the foremost apogee of financial speculation-> Bisanzone fair Bisenzone Exchange Fairs (1579-1680) Name kept also when the fair moved to Piacenza, where it reached its highest apogee Critical importance: through the fair genoise bankers financed the Spanish crown King Philip II of Spain in 1557 declared bankruptcy Great German banking houses went into chaos, ending the Fugger family’s role as the Spanish Crown’s main financiers. Bankers from Genoa replaced the Fugger, as the major financiers of the Spanish crown They greatly enriched from Bisenzone exchange fairs - expansion of the Genoese exchange fairs in Italy: the Genoese funded the Spanish Crown’s continuous demand for gold to fund its expansionist war policies - the need to transfer the American silver that reached Seville over to the Levant, where most of the silver was actually spent. The Genoese provided the Spanish Crown with two fundamental services here: - The first was the conversion of American silver transferred to Spain into gold that could be used in the Low Countries to pay the king’s military expenses. - The second was to supply the Spanish Crown with renewable short-term credit (high interest rates) The Bisenzone fairs were central to both processes. The Genoese set up these fictional fairs in the sixteenth century because the existing fair in Lyon had rapidly declined and it was unable to provide the large amounts of finance. At the fairs, the Genoese gathered liquid capital from several Italian states to finance the Spanish king’s operations. They then spread the risk among various creditors and made gold available in Antwerp on the king’s behalf via bills of exchange that were payable there. Lending to the king of Spain through these short-term loans (known as asientos) was risky, but the reward was comparatively high. The Genoese were able to manage this lending successfully for several decades, partly because their overall credit balance put them in a safe position, and partly because Genoa occupied a crucial position along the silver transfer route to the Levant. At Bisenzone, Genoese bankers entered into contact with other markets (such as Milan, Florence, and Venice) where they borrowed short term in foreign currency through the issue of foreign bills of exchange; the loans were frequently renewed and helped spread the risks of the Spanish debt over a wide market. Genoa was linked to Milan because the Genoese had direct control of Milan’s finances; Florence’s and especially Venice’s capital markets were also part of the network, although they were more independent and not directly involved with the asientos. The financial mechanism used in Bisenzone - pactum de ricorsa -represented a significant innovation that went well beyond the process of financing via bills of exchange.  The success of this mechanism depended on the integration of the Bisenzone fairs with the credit markets in Milan, Florence, and Venice; integration underpinned by risks and interest rates convergence. In 1600, the turnover at the Piacenza fair (fiera di Bisenzone) came to as much as 3 or 4 million crowns, as the totale sum of the statal revenues of Spain, Italy, England and France. North, Transaction cost: He explains the role of institutions and how much they can foster or hinder the economic development Transaction cost, 3 variables: - Operating cost: coordination, organization, cost of measuring, performance of agents - Different sizes of markets: small markets imply relationships between kingship, transaction costs really law, the wider the market is more information asymmetries there are and higher transaction costs-> institutions affect transaction cost, the most efficient the institution is the lowest transaction costs are Transaction cost: cost of achieving information - Enforcement is costly, 3rd party impartial, judicial system Ideology is a part of the transaction cost Stock ledger= all stock-holders’ names were entered at the time of purchase Mandatory periodic accounting provided information about its financial position (it lowered asymmetric information)-> everybody knew the names, the investments and the profits Limited liability, company made out of stocks Shareholders stood to lose only their investment in the company and no other assets in the event it failed- > raise money and share the risk No guarantee of returns At the beginning no commercial success, trade networks had still to be set up-> the dividends had originally to be paid in spices, rather than cash, that could be resold in the local market 1612: VOC would not be liquidated as announced at the beginning. Shareholders who wanted their cash back could sell shares to another investor -> JOINT-STOCK COMPANY - > STOCK MARKET (1608), liquid market  VOC as the 1st Join-Stock Company Imitated, basis in which other joint-stock companies and countries will be created in the next centuries Amsterdam Exchange Bank (Wisselbank) 1609 It was created in order to remedy the confusion of the numerous types of money in the market and to provide merchants effective money. Its functions: - accepting deposits - Reimburse such deposits in case it was asked - Exchange: through deposits the bank could provide the payments of different exchanges of the merchants that put their money there (Banco-giro in Venice) Dutch bankers started to accept VOC shares as collateral for loans-> link between the stock market and the supply of credit established Company-bourse-bank Rise of new kind of economy The Company’s charter was renewed in 1622: managers would no longer be appointed for life but could serve only 3 years at a time All of the Company’s net profits were distributed to the shareholders When capital expenditures were called for, the VOC raised money not by issuing new shares but by issuing debt in the form of bonds By 1650s the VOC has established a lucrative monopoly on the export of cloves, mace and nutmeg-> it became the major conduit for Indian textile exports VOC: world’s first big corporation = able to combine economies of scale with reduced transaction costs = pooling information between multiple employees and agents Business boomed = 1650s-1760s Regular dividends : 8 times the original investment, implying an annual rate of return of 27% This experience clearly demonstrated that high returns were achievable through the formation of complex administrative organizations capable of managing operators of great scale and scope. 1794: the VOC fall down VOC decline: rise and fall of VOC = rise and fall of the Dutch Empire Not a financial bubble! (i.e. Mississippi bubble, SSC bubble, etc.) The ascent of the VOC stock price was gradual, spread over more than a century. It took more than 60 years to fall back down Modern capitalism: the company It was made possible by the invention of one of the most fundamental institution: the company. It is the company that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized North discussion Lecture 7 2/02 Tulipmania and tulip Bubble 1636-7 There are scholars who do not consider it as a modern bubble, others believe it to have all the characteristics of a modern bubble It had no big consequences as the following bubbles that affected the real economy The Netherlands achieved a financial primacy and economic apogee that created an optimistic spirit, middle class growing and enriching thanks to the trade with the Indies-> euphoria in investors, merchants and large strata of the population High level of richness but no hierarchy, mindset changing The first modern financial institution were created: the Bourse of Amsterdam (1602, exchange of bill of exchange etc), Wisselbank (1609, national bank in which merchants could deposit their money in different currencies, payments made by the bank not transfering money but balancing payments of merchants), VOC (1602, 1st joint-stock company) Differences and analogies VOC-Medici: - Division of management and shareholders in VOC, in the Medici family administration - Unlimited liability in the Medici, limited liability VOC - Both had international characteristics - Capital from the family (corpo) and loans from no family members (sovracorpo, outside capital, outsiders) in the Medici, VOC: not only specialized people involved, open to all citizens Tulip: colorful flower, different from the Dutch environment; right climate condition to flourish easy; represented a status symbol (only wealthy people, cultivated by the elite, exotic); introduced in middle 16th century by ambassador of Turkey (tulip: turban) A speculation began, impossible to predict the color of the flower from the bulb-> speculation, gambling 1634: real market of tulips created, new investors (people from middle class, foreign from the business and finance world) attracted by the profits-> rise in the demand-> rise in prices-> rise of bulbs and profits At a certain point, only bulbs were exchanged (not flowers) and sometimes no real exchange at all because the market developed so rapidly: only rights of having the bulbs but no material bulb-> FUTURE MARKET (sellers promise to send bulbs of certain kind and weight in the following spring, buyers obtained the right of delivery a could sell the future bulb to others, price fluctuations followed)-> high risk, high gain (1973: yon kippur war, oil rare and costly -> futures established, fix the price now not knowing what the price will be in the future, values market) Most of transaction regulated by personal piece of credit with deadline in spring (bulbs taken out of the earth and delivered), sometimes not even delivered because they did not exist (pieces of credit not resellable) or because currency was lacking Semper Augustus: most precious tulip Vicerè tulip 3rd February 1637: crash of the market-> information circulated that there were no more buyers and impossible to sell flowers at any price-> debts not repaid, bankruptcy-> bubble burst Large strata of population involved “Shares market is not a place for rationality, players are unstable, insane crazy and arrogant. They sell without knowing why and buy without reason” Perso de la Vega, natures of financial bubbles Financial bubble (Minsky-Klinderberger model) 1. DISPLACEMENT: some changes in economic circumstances creates new and profitable opportunities for certain companies-> bubble rises from a new profitable sector arising 2. EUPHORIA: a feedback process sets in whereby rising expected profits lead to a rapid growth in share prices - “Funded” National Debt - Engaged “civil society” - Secondary Debt Market, and London Stock Exchange Representative Government: Parliamentary Supremacy 1688, “Glorious Revolution” - Swung political power decidedly to Parliament and away from the Crown - 1694 Triennial Act: Parliament meets every year, new elections must be held every 3 years - Economic policy decisions made largely by Parliament: much more responsive to public pressure than the Crown (Pincus and Robinson, 2014) - Growth of public petitioning - Policies became much more “inclusive” as a result (Acemoglu & Robinson, 2014) Glorious Revolution brought a greater “credible commitment” to protecting property rights (North & Weingast, 1989) - credible commitment to Inclusive policies : markets became more competitive, which fostered economic growth (Acemoglu & Robinson, 2012) - credible commitment to pay back debt Revolutionary Political Economy (Pincus, 2009)  Whigs: - Manufacturing (rather than land) was key to country’s wealth - Wealth was potentially infinite - Supported a central bank to finance war, improve circulation of money and credit, and bolster manufacturing - Ensured England would grow into a Commercial Empire  Tories: - Land and territorial empire was key to wealth - Zero-sum view of wealth (finite land/territory placed limits on economic growth) - Opposed the establishment of the Bank of England - England might have become an Authoritarian Territorial Empire BANK OF ENGLAND Bank of England, established 1694 Immediately loaned £1.2 million to the government Assisted development of private financial markets - First bank to issue bank notes Notes grew greatly over time (North and Weingast, 1989) Other banks began holding the Bank’s notes as reserves - Important commercial lender Improved Public’s Trust-> Manager of the National Debt - Referred to as “the Grand Palladium (protector/safeguard) of Public Credit” by its directors (Murphy, 2019) - The Bank had strong negotiating position to ensure the government was a reliable debtor because of its increasing importance in the economy Bank’s reputation relied on the government’s creditworthiness - The Bank was accessible to prospective private investors to analyze the government’s creditworthiness the same way they would a private debtor “…the Bank [of England] acted to embody public credit through its architecture, internal structures, and imagery and through the very visible actions of its clerks and the technologies that they used to record ownership and transfer of the national debt. The Bank of England, by those means, allowed creditors to interrogate the financial stability and reputation of the state in the same ways that they could interrogate the integrity of a private debtor.” Anne Murphy, 2019 Growing Tax-Base & Efficient Administration Through the 18th century, England became the highest taxed country in Europe - Provided security for potential investors - Enabled by the Glorious Revolution: Parliament now supported increased taxes because it had a much greater control over spending (Acemoglue & Robinson, 2012) - Revenue no longer belonged to the Crown, but was now the public revenue Meant investors are no longer lending to the Crown, but to the State - Growth in taxes bolstered the war effort; also, navy protected mercantile activity Established what Brewer famously called the “fiscal-military state” (Brewer, 1989) Improved efficiency: Unlike most European states, English tax-collector was not a hereditary (inherited) office that could be bought and sold (Brewer, 1989) - This reduced corruption and also the amount of money collectors would take for themselves (Ogilvie & Carus, 2014) - Tax administration becomes bureaucratized Example: Excise Tax (tax on certain domestically produced goods) --Excise bureaucracy grew from 1211 people in 1690 to 4800 in 1780 (Acemoglu & Robinson, 2012) --reduced corruption: hiring and promotion was largely merit-based, circulated handbook of conduct, salaried positions, workers were under strict supervision, meticulous bookkeeping (Brewer, 1989; Bucholz and Key, 2009) “Funded” National Debt Implemented a “Funded” National Debt - Loans now linked to specific taxes/revenue-sources through acts of Parliament - This greatly increased loan security - 1698, Parliament even created a back-up fund in the event that a specific fund was short: reduced risk even further (North and Weingast, 1989) - compare: 1672, Charles II, ”Stop of the Exchequer”—many banks hurt Engaged civil society and popular pressure “Credible Commitment” demanded “from below” (Murphy, 2013) - “Credible Commitment” was not unilaterally given ”from above” - Extremely engaged (and knowledgeable) investing community Published media (1662 Licensing of the Press Act expires in 1695) - Petitions (Murphy, 2013; Acemoglu & Robinson, 2012) - Bank of England records reveal a very engaged public Secondary market and London Stock Exchange Growth of the Secondary Market - Promissory Notes Act, 1704: enabled full negotiability of government bonds and corporate shares - London Stock Exchange: shift in balance of power to London (away from Amsterdam) Public debt was public’s primary investment instrument Spurs development of impersonal and anonymous financial market Conclusion:  Parliamentary Supremacy - Inclusive institutions that fostered inclusive policies --improved creditworthiness --aided economic growth  Bank of England - largest public lender - strong negotiating position improved Government’s creditworthiness - conduit for private investor and public borrower - important commercial lender  Robust and Efficient Tax System - dramatic surge in revenue/GDP ratio - Parliament permitted more taxes because they control spending - Improved efficiency through professional bureaucracy  Funded National Debt - loans now linked to specific revenue streams --increased loan security  Civil Society and popular elements - “Credible commitment” demanded “from below” --use of print media, petitions - Secondary Market and Stock Exchange - Negotiability of bonds and stocks - London Stock Exchange emerges as world leader - Spurs development of impersonal financial markets Lecture 9 9/02 Money, in short, was an indispensable instrument for tradesmen and a source of income for enterprising bankers and merchants. At the beginning of 17° c, in Northern Italy wealth was compared to a flow that had to propell economy in the same way rivers feed the sea. such as prices, wages and exchange rates but no effect on real (inflation-adjusted) variables, like employment, real GDP and real consumption money is a cloak 2. Centrality of money: Mercantilist thinkers as W. Petty, J. Law, J. Vanderlint and R. Cantillon, then J. Schumpeter and Keynes, saw money and financial institutions as propelling elements in economy, fostering – directly or indirectly - income and demand growth-> money has the same function of blood in the human body>>>interest rate is direct linked to investment supply, that produce employment and, generally, economic raise… Lecture 10 11/02 Tulipmania: 1st modern financial bubble, specific context-> no same outcomes and impacts as future financial bubbles, the nearest in impact is the experiment of John law and the Mississippi bubble John Law He was born in Edimburgh (1671-1729), Son of a successful goldsmith He swiftly frittered away his patrimony in a variety of business ventures and gambling He fought a duel with his neighbor. The latter accused Law to live with his mistress in the same building where he also lived. Law, in the duel, killed him-> Law was sentenced to death. He escaped from prison and fled to Amsterdam However he was an economist and mathematician He was tutored in monetary affairs by his London landlord and mentor, Thomas Neale who was Master of Mint and adviser of Charles Montagu of the Bank of England. In 1705 he wrote a pamphlet extolling the use of paper money entitled “Money and Trade Considered” = his central idea was that the bank should issue interest bearing notes that would supplant coins as currency Combine the properties of a monopoly trading company (see i.e. VOC) with a public bank that issued notes in the manner of the Bank of England -> He took some ideas from the VOC experience CONFIDENCE= confidence alone was the basis for public debt, with CONFIDENCE banknotes would serve just as well as coins ‘I have discovered a secret: how to make gold out of paper’ He had a financial scheme that he tried to propose to different regents but was systematically rejected because it was too risky, not in use in that time. He met the duke of Orleans (same age, characteristics), regent after the death of Luis XIII, decide to accept and try to implement Law’s project-> France was in a financial despair (wars of Luis XIV costly increased public debt, near bankruptcy (on the brink of its third bankruptcy) 1715: Law’s proposal = creation of a new bank = Banque Générale that issued notes payable in specie (gold or silver, convertible-> 1st time in history) 1717: BG notes should be used in payment for all taxes Law’ s ambition was to revive economic confidence in France by establishing a public bank, on the Dutch model (Wisselbank), but with the difference that this bank would issue PAPER MONEY Money was invested in the bank, therefore the government debt would be consolidated Paper money would revive French trade and with it French economic power!  The aim was positive: revitalize French economy and regain its political power-> positive aims and purposes, find a solution to take France out of the situation Very ambitious, innovative: he pushed the limits higher and created something new, that not existed before in which financial markets were not prepared-> 1. first step: creation of a bank issuing notes, new money, increase liquidity in real economy, 2. second step: create a new company on the model of VOC that could trade with foreign and unknown countries (Louisiana) Notes based on silver and gold (consolidation of public debt) and confidence in the State The Mississippi Company Law proposed to take over France’s trade with the Louisiana territory (wholly undeveloped stretch of land, crossed by the Mississippi river) 1717: a new Company of the West, Compagnie d’Occident -> was granted the monopoly of the commerce in Louisiana for 25 years; Capital was fixed at = 100 million livres, Shares = 500 livres each Frenchmen were encouraged to buy shares with billets d’état (issue by the Banque Générale) These were to be retired and converted into 4% rentes 1718: the government granted privileges to the Company that aimed at increasing the appeal of its shares 1718: the Banque Générale became the Banque Royale, the first French central bank To increase the appeal of its notes these could be exchanged for écus de Banque (fixed amount of silver) or the livres tournois (a unit of account) Transition from coinage to paper money Meanwhile the Company of the West continued to expand 1719: the Company took over the East India and China Companies: = Company of the Indies (Compagnie des Indies), better known as the Mississippi Company Law took control over the collection of indirect tax farms and later direct tax farms the Company lent 1.2 billion livres to the crown to pay off the entire royal debt (company-state) new opportunities of profit by sharing shares The French economy had been in recession in 1716. Law’s expansion of money supply with banknotes provided a stimulus Shares to raise capital, make share more profitable: returns of previous investors would gain profit from new investors and not from real profits, fake exchange -> PONZI’S SCHEME: it pays out returns to investors from money paid in by subsequent investors rather than real profits earned from operation or business -> speculation, pyramid (only the first investors gained profits from other investors) Law was interested in allowing further monetary expansion, which his own bank could generate June 1719: The company issued new shares of higher price (daughters) July 1719: other new shares (granddaughters) Law justified the higher price with the promise of future profits from Louisiana Rosy vision of the colony as a veritable garden of eden but was not real, he attracted investors by sharing this fake information-> role of optimism, enthusiasm Injecting liquidity: quantitative easing, Draghi -> difference: Draghi didn’t create inflation Quantitative theory of money, money revolution: inflation with liquidity Law also tried to convert public debt into equity-> SWAP (imitated the Bank of England) In reality = swetering, insect –infested swamp! 80% of people who went there died of starvation or tropical diseases Investors who wished to acquire the new shares were assisted by the Banque Royale The Bank allowed shareholders to borrow money using their SHARE = COLLATERAL, share PRICE ROSE EUPHORIA-> MANIA-> BUBBLE! NB: The word millionaire was first coined. Extraordinary increase in note circulation caused by Law (total money supply) (banknotes and shares was 4 times larger than the gold and silver coinage that French had used) High inflation Some people began to revert payment in gold and silver Gov = intervention = artificial measures Banknotes were made legal tender  After the bubble, in France all joint-stock company were prohibited and also the term bank could not be used South Sea Company Similar experience to Mississippi Company: both turned into bubble (twin bubbles) but different outcomes England John Blunt: aimed at converting gov DEBT (created to fund the War of the Spanish Succession) into the EQUITY of a company The company should have the monopoly of trade. In this case the ASIENTO= slave trade in Latin America When south sea company turned into a bubble and financial crise took place the English parliament issued a new law, Bubble act 1720: companies needed statutory authority to be established, joint-stock company were regulated, had to have the permission of the parliament and precise requisites  Watershed in the difference path dependence that the two bubble developed - In England stock market remained raised in capital in first place - In Europe intermediaries began to emerge in order to raise money-> financial intermediaries Vs In continental Europe the economic institutional enlightenment came from the top, ruling class -> emulation of institutional framework of England, English model-> joint-stock companies to build railways The first country to imitate England was Belgium: creation of the Banque pour favoriser l’industralization du Pays-Bas (Paribas)-> embryonic point of commercial banks In the 1820s - first in England - the function fulfilled by navigable rivers is inherited by the railways (systemic innovation involving many other innovations)-> If railway companies were to function efficiently, they required large quantities of capital together with the protection afforded by limited liability § The joint-stock company began its extraordinarily powerful performance in both infrastructure provisioning and in financing the modern industrial companies typical of the capital-intensive technological revolution, while the legal ban was loosing grip § Railway companies constituted exemplary cases of enterprises organized as joint-stock companies from both the corporate and the shareholding viewpoints The combination of limited liability and high dividends attracted a growing amount of capital - external to the promoters - to the railway sector and subsequent initiatives From the 1840s a growing number of representatives of all social ranks were attracted by railways shares and bonds-> upsource in income, people able to invest in financial market were more and more After the English Railway Mania of 1844–7, which culminated in the construction of more than 6,500 miles of railways, essential institutional and technological innovations were introduced which considerably reduced the information asymmetries that arose during the Bubble. These were: - legislation designed to ensure more transparency: it became mandatory to publish at least 2 previous budgets before entering the stock exchange market - more modern management methods - the intervention of specialized underwriters - new and more rapid means of communication to transfer financial information more quickly: spread of telegraphs - the establishment of specialized business publications and journals provided information to railroad investors-> The Economist journal was created It became necessary to have a central bank, a superior financial institution to regulate money supply and the functioning of different commercial banks In 1873 the chief editorial journalist of the economist published a pillar of central banking “Lombard street” (main financial street in London) Lecture 12 23/02 The emergence of central banking Lender of Last Resort (prestatore di ultima istanza): when the system is scrambling it is the someone who is saving the system The spread of fiduciary currency in most advanced European countries brought about the need of institutions that preserved trust in currency , as store of value. The first European issuing banks were created to: issue banknotes + manage public debt. Only later – between 19° and 20° century - these banks were transformed into Lender of Last Resort (LLR) Their role was: 1. managing the supply of fiduciary currency 2. guarantee the stability of the banking system. Central banks gradually acquired the instruments essentials to the monetary policy: 1. Official discount rate 2. Manage of the reserves 3. Open market operations in government bonds The transformation of issuing banks into Central Banks followed a complex process of bank system hierarchy. The Central Bank has 2 functions: 1. Macroeconomic function : supplying credit (LLR)-> evolved in early 19° century in UK and F 1. Microeconomic function : guaranteeing stability During financial crisis ‘issuing banks’ took on the role of LLR (rescuing banks or modifying discounts), becoming the pillar of financial systems. The monetary policy must guarantee stability in economic cycles Central Banks were born in the 1870s on the basis of the experience that the main issuing banks had during financial crisis.  In UK : 1873: W. Bagehot, the editor of The Economist, published a work Lombard Street in which he defined the norms that the LLR must follow in case of financial crisis, that is to expand liquidity. This thought (Central Bank = LLR) did not emerge by a theoretic thinking, but by evidence, studying the English market (Lombard Street)-> Bagehot rule became the guiding principle of any LLR Bank of England was not a public bank, not a state-owned bank-> with exception of the bank of France, all banks were private banks -> only after the 1929 crisis became public banks  In the US : the experience of ‘free banking’ (1837-1863) evolved towards a system of central banking =creation of the Federal Reserve (1913). Central Banks in Europe and in the US became slowly more and more autonomous from the government. However not always Central Banks in Europe and in the US were able to operate independently from the Government: they had to finance sometimes public debt by issuing banknotes; governments jeopardized both legitimacy of the Central Bank and monetary stability, causing inflation. Bank of England (BoE) model imitated by other European countries, though its specificity 1844: Bank Charter Act: It was an Act of the Parliament which restricted the powers of British banks and gave exclusive note-issuing powers to the central BoE Actually, the BoE was a private credit institution (joint-stock bank) and refused to take on the responsibility of LLR. However de facto it operated as LLR during the several financial crises (1857,1866 and 1878). European issuing banks – differently from the BoE – were State institutions, led by politics of intervention. Often notes issue was subject to public finance and its necessities.  In France 1720: Mississippi bubble and collapse of John Law’s system Total distrust towards ‘banks’ (any kind) and paper money French Revolution (1789-1796): inflation caused by large issuing of assignats = paper money issued by the Constituent Assembly to address imminent bankruptcy. They were backed by the value of properties formerly held by the Catholic Church, which were confiscated and the crown lands. The revolutionary government had to face increasing military expenses and used assignats = inflation The paper money issue + creation of issuing banks =inflation and financial crisis 1800: Bank of France (BoF) created by Napoleon for financing public expenditures linked to the long- lasting wars. 1803: it had the monopoly of issuing banknotes, but only within Paris. 1806: the Bank, that up to that moment had been administrated by managers chosen by private shareholders, was under the control of the government 1848: in France severe financial crisis occured: the Bank acquired the monopoly of issuing banknotes The discount rate was fixed at 4% throughout the first half of 19° century. The politcs of the BoF was to restrict the development of paper money and the use of bank deposits as means of payment. Lecture 13 25/02: bitcoins Lecture 14 2/03 The advent of gold standard in Britain (1717 -1844) Like so much of monetary history, fixing the pound sterling in 1717 at the gold price which lasted (with lapses from 1797 to 1819 and from 1914 to 1925), until 1931 was largely inadvertent, rather than the outcome of design. The problem at the time was silver. - 1900 Kansas City Democratic Convention. The populists wanted to go "from Kansas to fairyland," Dorothy = the American people: plucky, good natured, naive. Toto = the Prohibition (Temperance) party. Favored the bimetallic standard but like any fringe group often pulled in the wrong direction. So they got to be a dog. (Toto is a play on "teetotalers.") Oz = the almighty ounce (oz) of gold. The yellowbrick road = paved with gold bricks, but leads nowhere. Dorothy's silver slippers = originally the property of the Wicked Witch of the East, until Dorothy drops the house on the witch. Walking on the yellowbrick road with the silver slippers represented the bimetallic standard. (MGM changed the silver slippers to the vivid (garish, even) ruby slippers to exploit the fabulous technology of Technicolor.) The Wicked Witch of the East = Eastern banking and industrial interests. She is killed by Dorothy's falling house because the Populists expected that the eastern industrial workers would vote Populist, but this never really happened. The Wicked Witch of the West = the West was where the Populists were strongest. The only reason why the West gets a wicked witch is a) you need two bad guys to balance the two good guys, and especially, b) William McKinley was from Ohio, then thought of as a western state. The wicked witch is sometimes identified directly with President McKinley. The Scarecrow = western farmers. They were Populists. The Tin Woodsman = eastern workers. Populist mythology always looked to this group for support, but never found it in reality. Baum realized this (most Populists didn't) and shows the Tinman as a victim of mechanization. He's so dehumanized he doesn't have a heart. The Cowardly Lion = William Jennings Bryan. The Emerald City = Washington D.C. The colour is suggestive of paper greenbacks. The Wizard = President McKinley, but sometimes his advisor, Marcus Alonzo Hanna. Other countries on gold standard: • Governments stood ready to convert their monies into gold at a fixed price on demand. The central or national bank kept a reserve of gold to be paid out in the event its liabilities were presented for conversion. • Such central banks were usually privately owned institutions that, in return for a monopoly of the right to issue bank notes, provided services for the government. • They engaged in business with the public, which created scope for conflict between their public responsibilities and private interests. The composition of international reserves differed from country to country: • India, Philippines, Latin America = reserves took the form of financial claims on countries whose currencies were convertible into gold; • Russia, Japan, India = held nearly 2/3 of all foreign-exchange reserves The share of foreign balances increased from perhaps 10% of total reserves in 1880 to 20% on the eve of the World War I: - The pound sterling was the preeminent reserve currency, accounting for perhaps 40% of all exchange reserves at the end of the period. - French francs and German marks together accounted for another 40%. - Exchange reserves were attractive because they bore interests. National statutes differed in the quantity of reserves the central bank was required to hold: A) Fiduciary system = the central bank was permitted to issue a limited amount of currency not backed by gold reserves (Britain, Norway, Finland, Russia, Japan) B) Proportional system = gold and foreign exchange reserves could not fall below some proportion (typically 35 or 40%) of money in circulation (Belgium, the Netherlands, Switzerland Denmark) Hybrid system (A/B) = Germany, Austria-Hungary, Sweden and Italy - for There was elasticity in the relationship between the money supply and the gold and foreign-exchange reserves for other reasons as well. Statutes governing the operation of fiduciary and proportional systems specified only minimum levels for reserves. This lent flexibility to the operation of their gold standards. If currency was presented to the central bank for conversion into gold that was then exported, it no longer followed that the money supply had to decline by the amount of the gold losses. HOW THE Gold Standard WORKED 1752: David Hume’s The price-specie flow model He considered such a situation = only gold coins circulated and the role of banks was negligible: a) each time merchandise was exported, the exporter received payment in gold, which he took to the mint to have coined; b) each time an importer purchased merchandise abroad, he made payment by exporting gold. For a country with a trade deficit, the second set of transactions exceeded the first. It experienced a gold outflow, which set in motion a self-correcting chain of events. With less money (gold coin) circulating internally, prices fell in the deficit country. The specie flow thereby produced a change in relative prices (hence the name price-specie flow model). Imported good having become more expensive, domestic residents would reduce their purchases of them. Foreigners, for whom imported goods had become less expensive, would be inclined to purchase more. The deficit country’s exports would rise, and imports fall, until the trade imbalance was eliminated. As time passed and financial markets and institutions continued to develop, Hume’s model came to be an increasingly partial characterization of how the gold standard worked. Two features are to be incorporated in H.’s model: 1) International capital flows: net capital movements due to foreign lending were larger, often substantially, than the balance of commodity trade. 2) the absence of international gold shipments on the scale predicetd by the model. Only at the end of the World War I in the report of the Cunliffe Committee (a British government committee established to consider postwar monetary problems) was this version of the model properly elaborated. The only difference was that the money supply that initiated the process took the form of a paper currency: gold, rather than moving from circulation in the deficit country to circulation in the surplus country, moved from one CENTRAL BANK  to the other Extending the model to include a CENTRAL BANK that intervened to reinforce the impact of incipient gold flows on the domestic money supply thus could explain how external adjustment took place in the absence of substantial gold movements. The instrument used was the DISCOUNT RATE (another instrument for doing this was open-market operations, in which the central bank sold bonds from its portfolio). By manipulating its discount rate, the central bank could thereby affect the volume of domestic credit. It could increase or reduce the availability of credit to restore balance-of-payments equilibrium without requiring gold flows to take place When a central bank anticipating gold losses raised its discount rate, reducing its holding of domestic interest-bearing assets, cash was drained from the market. The money supply declined, and external balance was restored without requiring actual gold outflows. Lecture 15 4/03 Early American finance 1775-1913 Volatile system, fragility, banking crises-> led to establishment of federal reserve system American Independence (1775-1786) U.S. was a colony of Great Britain 18th century Debt caused Britain to increase taxes and regulation on colonies 1. BUS is Unconstitutional: explicitly disagrees with Supreme Court’s decision (“Constitution” is mentioned 44 times in Veto message) 2. BUS benefits the wealthy—harmful to average Americans Jackson’s message resonates with the public, he wins re-election in a landslide in 1834  U.S. has no Central Bank from 1836-1913 (77 years) This is not a ‘dead’ issue, debate still persists today-> Ron Paul run for presidency 2008 “end the fed” BUS’s federal deposits removed by Jackson - placed in state banks in 1833: Jackson’s so called “pet banks” - most scholars agree this contributes to the 1837 panic Panic of 1837: - state banks increase money supply - key feature is western land speculation (federal government land sell well below market value lower value, speculators bought the land and prices went high) - "Specie Circular” (1836)-> Jackson orders payment for government land must be paid in specie (not bank notes but in gold and silver)-> get away of the bubble but went worst (deflationary effect) President Tyler Vetoes bill for 3 rd BU S, 1841 Again, on Constitutional grounds: “Before entering upon the duties of that office [President] I took an oath that I would ’preserve, protect, and defend the Constitution of the United States’….[supporting the Bank] would be to commit a crime which I would not willfully commit to gain any earthly reward, which would justly subject me to the ridicule and scorn of all virtuous men.” President Tyler’s Veto message, 1841, same oath as president Biden Free Banking Era, 1837-63 (26 years) - No Central Bank - No Nationally-chartered bank(s) - relatively open/free market: no state charter needed - number of state banks grow dramatically Features: - no interstate branch banking (weakness) - banknotes redeemable in gold/silver - no national currency - most states required notes to be backed by state government bonds: avoid hyperimnflation, money supply less elastic, security for depositors “Wildcat Banking”: scandalous feature - fraudulent bankers set up locations in difficult to reach remote locations - notes often circulated at a discount - monthly publications: “bank note detectors” American Civil War, 1861-65 Free Banking Era will end with the Civil War - fought primarily over slavery: North vs. South - arguably the deciding factor was the North’s ability to finance the war (North possessed more capital)  North’s war finances: 2 methods of financing the war - “Greenbacks”: legal tender, fiat currency (moneta legale, not backed from anything apart from trust in the government) - depreciate by about 50%; but no hyperinflation - bonds: hugely successful bond campaign; show of patriotism  South: - less capital - far less successful bond campaign - Greyback’s (fiat currency): hyperinflation Civil War was a pivotal moment in America’s financial history: Republican’s (Abraham Lincoln) take power, like Hamilton, believe in a more activist central government End of the ”Free Banking Era” Beginning of the: ”National Banking Era” National Banking Era / System, 1863-1913 Congress passes a series of banking/financial Acts in the 1860s Goal: bring a more uniform system of banking; bring banking under stricter national governmental regulation General Features of the National Banking System: - still no central bank (idea of a central bank still not popular) - banks are now nationally-chartered (chartered by federal government), but interstate branch banking still illegal - regulated by (new office) Comptroller of the Currency - minimum capital requirements - established minimum reserve requirements - banknotes (redeemable) must be backed by federal bonds - state banks still existed, but could not issue bank notes Three Classes/Tiers of National Banks: 1. Central Reserve City Banks (in New York City—financial capital) --25% reserve requirement 2. Reserve City Banks (located in 18 cities) --25% reserve requirement --50% of reserves could be deposited with NYC Banks 3. Non-Reserve (country) Banks: --15% reserve requirement --9% could be deposited at a Reserve Ba National Banking System, Weaknesses: (serious) Banking Panics persisted: on average, every 10 years (1873, 1884, 1890, 1893, 1907), volatile system Common feature of panics: banks are illiquid, not necessarily insolvent Weaknesses: - Reserve Requirements & related Regulation --”Reserve” banks used other banks’ deposits as “call loans”; “pyramiding” loans on other banks’ deposits --creates problem when non-reserve banks withdraw their reserves --unstable structure—system stretched too thin - Restrictions on Branch Banking: --banks tied to local economy (risky situation) --undiversified - Capital Requirements: --requirements created “barriers to entry”/competition - No Lender of Last Resort (bank adding liquidity to the system that is illiquid, avoid failures and bankruptes) - Bond Collateral Requirements: --Banks cannot issue notes without buying gov’t bonds first --inelastic money supply It was these weaknesses that the Federal Reserve (central bank) was created to remedy Panic of 1907-> something needs to be done, system to fragile Federal Reserve Act, 1913 - Establishes the Federal Reserve system as Lender of Last Resort --banks can turn to the Fed during times of illiquidity --today, ”dual mandate”: price stability & full employment, but not initially - establishes a decentralized, but unified Central Bank --12 regional Federal Reserve Banks - all national banks must become members of the Federal Reserve System --must keep a percentage of their reserves at their regional Federal Reserve branch - Single/national currency, issued by the Federal Reserve (redeemable at the U.S. Treasury) Early America’s Financial System—Unstable but still Effective and Lucky United States’ growth took place during a relatively peaceful century U.S. could get away with its somewhat disorganized banking system Lecture 16 9/03 The interwar period, the roaring twenties and the Wall Street Crash of 1929 The world before WWI Rise in population: Europe +50%, outside Europe + 20% Outcomes of: - Decline in death rates (especially Non-E), decline of infant mortality= increase in the average life span = life expectancy Lecture 17 11/03 The wall street crash and great depression (1929-33) Lecture 18 16/03 The Bretton Woods system, its demise and the financialization in the 1970’ and social reform in the areas of BANKING, INDUSTRIAL AGRICULTURAL, MONETARY, INFRAEconomic recovery STRUCTURE (public works) 1) BANKING Banking holidays = For an entire week all banking transactions were suspended in an effort to stem bank failures and ultimately restore confidence in the financial system. Glass Steagall Act (1933) it separated commercial banking from investment banking) 2) NRA (National Industrial Recovery Act): private economic planning with government supervision to protect the public interest and guarantee the right of labour to organize 3) AAA (Agricultural Adjustment Act): It reduced agricultural production, by paying farmers (subsidies)and obliged them not to plant on part of their land + kill off excess livestock -> Its purpose was to reduce crop surplus and therefore effectively raised the value of crops. Control of most of the 6 million American farms  Italy - 1922: Benito Mussolini came to power = introduction of FASCISM Fascism celebrated the use of force, elevated war as the noblest human activity , condemned liberalism , democracy, individualism, socialism. The state was considered the supreme embodiment of the human spirit All industries were organized as trade associations (rather than business corporations) Workers, proprietors, state were represented, with party functionaries Labour unions were suppressed Prices, wages, working conditions, social insurance were controlled by the state The Fascist government sought to counter the economic depression of the 1930s by creating large state- supported enterprises in key sectors of the economy = more concerned with maintaining high employment rather than increasing efficiency The compromise between economic and political issues: the Bretton Woods System The extremely difficult situation at the end of the WWII was dealt with a strong intellectual effort which produced the Keynes Plan and the White Plan; they were discussed at Bretton Woods from 1st to 22nd July 1944. Both tried to deal with the main problems of the interwar period: the abandonment of fixed exchange rates, hindrances to multilateral trade, asymmetry in the adjustment – but they took different routes. - Keynes’s innovative proposal was founded on the principle of bank clearing to overcome the slow and cumbersome adjustment of the gold standard, as well as on the introduction of an international money managed by supranational authority; resort to capital controls would have permitted countries to adopt independent full-employment policies. - Harry White, instead, took a more conservative approach seeking to improve on the GES and eschewing controls. USA opposed Keynes’s Clearing Union for involving unlimited liability for potential creditors. The WHITE PLAN limited total drawing rights to a much more modest $5 billion and the U.S. obligation to $2 billion. The less generous the financing, the greater the need for exchange rate flexibility. U.S. proposals for fixed rates went by the board: the compromise between U.S. insistence that exchange rates pegged and British insistence that they be just adjustable was, predictably, the ‘adjustable peg’. The Bretton Woods conference inevitably ended in a compromise, giving rise to a hybrid construction. The system established was based on three elements: 1. Pegged exchange rates became adjustable , subject to specific conditions (namely the existence of what was knows as ‘fundamental disequilibrium’) 2. Controls were allowed to limit international capital flow s, that were disruptive between the two wars. 3. A new institution, the International Monetary Fund – armed with financial resources - was created to monitor national economic policies and extend balance-of-payments financing to countries at