one of the first genuine central banks with note-issue monopoly, which was conferred at the time of its creation.[103] Among the 11 countries we cover in this section, only the British (1844) and the French (1848) central banks gained note issue monopoly before Belgium’s did. The German central bank was only established in 1871, gaining monopoly over note issue in 1905. In Italy, the central bank was only set up in 1893 and did not get monopoly over note issue until 1926. The Swiss National Bank, not founded until 1907, was formed by merging the four note-issue banks.
In the USA, the development of central banking was even slower. Early attempts to introduce even a limited degree of central banking failed quite spectacularly. The First Bank of the USA (80 per cent of which was privately owned) was established in 1791 with strong support from Alexander Hamilton, then Treasury Secretary, over opposition from the then Secretary of the State, Thomas Jefferson. However, it failed to get its charter renewed in the Congress in 1811, and the Second Bank of the USA that was established in 1816 met the same fate twenty years later. In 1863, the USA finally adopted a single currency through the National Banking Act, but a central bank was still nowhere to be seen.[104]
Given this situation, as mentioned earlier, the large New York banks were compelled to perform the function of lender-of-last-resort to guarantee systemic stability, but this had obvious limitations. Finally, in 1913, the US Federal Reserve System came into being through the Owen-Glass Act, which was prompted by the spectacular financial panic of 1907. Until 1915, however, only 30 per cent of banks (with 50 per cent of all banking assets) were in the system and as late as 1929 65 per cent were still outside the system, although by this time they accounted for only 20 per cent of total banking assets. This meant that in 1929 the law ‘still left some sixteen thousand little banks beyond its jurisdiction. A few hundred of these failed almost every year’.[105] Also, until the Great Depression, the Federal Reserve Board was de facto controlled by Wall Street.[106]
In table 3.3 below, we present a summary of the above descriptions of the evolution of central banking in the NDCs. The first column represents the year when various central banks were established; the second indicates when they became proper central banks by gaining note-issue monopoly and other legal endorsements. The table shows that the majority of the 11 countries in the table nominally had central banks by the late 1840s. However, it was not until the early twentieth century that these banks became true central banks in the majority of these countries. It was only in 1891, with the establishment of note-issue monopoly for the Bank of Portugal, that the majority of the 11 central banks in the table gained such monopoly.
| Table 3.3 | ||
| Development Central Banking in the NDCs | ||
| Year of establishment | Year when note-issue monopoly was gained | |
|---|---|---|
| Sweden | 1688 | 1904 |
| UK | 1694 | 1844 |
| France | 1800 | 1848[1] |
| Netherlands | 1814 | After the 1860s |
| Spain | 1829 | 1874 |
| Portugal | 1847 | 1891[2] |
| Belgium | 1851 | 1851 |
| Germany | 1871 | 1905 |
| Italy | 1893 | 1926 |
| Switzerland | 1907 | 1907 |
| USA | 1913 | After 1929[3] |
1. Controlled by the bankers themselves until 1936.
2. Legally note-issue monopoly was established in 1887. but de facto monopoly was only achieved in 1891 due to the resistance of other note-issuing banks. The bank is still wholly privately owned and cannot intervene in the money market.
3. 65 per cent of the banks accounting for 20 per cent of banking assets were outside the Federal Reserve System until 1929.
In the current phase of financial globalization led by the USA, the stock market has become the symbol of capitalism. When Communism was overthrown, many transition economies rushed to establish stock exchanges and sent promising young people abroad to train as stockbrokers, even before they had founded other more basic institutions of capitalism. Likewise, many developing country governments have tried very hard to establish and promote their stock markets, and to open them up to foreign investors, in the belief that this would allow them to tap into a hitherto unavailable pool of financial resources.[107]
Of course, many people, most famously John Maynard Keynes in the 1930s, have argued that capitalism functions best when the stock market plays a secondary role. Indeed, since the 1980s, there has been a heated debate on the relative merits of the stock-market-led financial systems of the Anglo-American countries, and the bank-led systems of Japan and the Continental European countries.[108] However, the orthodoxy remains that a well-functioning stock market is a key institution necessary for economic development – a view that was recently boosted thanks to the stock-market-led boom in the US, although this boom is fading fast due to the rapid slowing-down of the US economy.
Whatever importance one accords to the stock market and other securities markets, establishing institutions that regulate them effectively is unquestionably an important task. Given that stock markets recently became an extra source of financial instability in developing countries, especially when they were open to external flows, establishing the institutions to regulate them well is now an urgent task. So how did the NDCs manage the development of such institutions?
The early development of the securities market in Britain (established in 1692) led to a similarly early emergence of securities regulation. The first such attempt, made in 1697, limited the number of brokers through licensing and capped their fees. In 1734, the Parliament passed Barnard’s Act, which tried to limit the more speculative end of the securities market by banning options, prohibiting parties from settling contracts by paying price differentials and stipulating that stocks actually had to be possessed if the contracts that had led to their sales were to be upheld in a court of law. However, this law remained ineffective and was finally repealed in 1860.[109]
Subsequently, except for the 1867 Banking Companies (Shares) Act forbidding the short-selling of bank shares – which in any case remained ineffective – there were few attempts at securities regulation until 1939, when the Prevention of Fraud (Investments) Act was legislated. The act introduced a licensing system for individuals and companies dealing with securities by the Board of Trade, which had the power to revoke, or to refuse the renewal of, a licence if the party gave false or inadequate information in their application for it or when trading. The act was strengthened over time, with the Board of Trade being granted the power to establish rules concerning the amount of information that dealers had to give in offers of sales (1944) and to appoint inspectors to investigate the administration of unit trusts (1958).[110]
It was only with the 1986 Financial Services Act that the UK introduced a comprehensive system of securities regulation (brought into force on 29 April 1988). This act required the official listing of investments on the stock exchange and the publication of particulars before any listing; it also established criminal liability of those who gave false or misleading information, and prohibited anyone from conducting investment business unless authorized to do so.[111]
In the USA, organized securities markets dated from the 1770s. Early Institutions and Economic
