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Finance through the Ages

Date unknown Compound Growth. Bacteria start to propagate by subdividing. They thereby demonstrate the power of compound growth.

c. 1800 B.C. Interest Rates. In Babylonia Hammurabi`s Code established maximum interest rates on loans. Borrowers often mortgaged their property and sometimes their spouses but in these cases the lender was obliged to return the spouse in good condition within 3 years.

c. 1000 B.C. Options. One of the earliest recorded options is described by Aristotle. The philosopher Thales knew by the stars that there would be a great olive harvest, so, having a little money, he bought options for the use of olive presses. When the harvest came Thales was able to rent the presses at great profit. Today financial managers need to be able to evaluate options to buy or sell a wide variety of assets.

15th century International Banking. Modern international banking has its origins in the great Florentine banking houses. But the entire European network of the Medici empire employed only 57 people in eight offices. Today Citicorp has 81,000 employees and 3500 offices in 93 different countries.

1650 Futures. Futures markets allow companies to protect themselves against fluctuations in commodity prices. During the Tokugawa era in Japan feudal lords collected rents in the form of rice but often they wished to trade their future rice deliveries. Rice futures therefore came to be traded on what was later known as the Dojima Rice Market. Rice futures are still traded but now companies can also trade in futures on a range of items from pork bellies to stock market indexes.

17th century Joint Stock Corporations. Although investors have for a long time combined together as joint owners of an enterprise, the modern corporation with a large number of stockholders originates with the formation in England of the great trading firms like the East India Company (est. 1599). Another early trading firm, Hudson`s Bay (est. 1670), still survives and is one of Canada`s largest companies.

17th century Money. America has been in the forefront in the development of new types of money. Early settlers often used a shell known as wampum. For example, Peter Stuyvesant raised a loan in wampum and in Massachusetts it was legal tender. Unfortunately, the enterprising settlers found that with a little dye the relatively common white wampum shells could be converted profitably into the more valuable black ones, which simply demonstrated Gresham`s law that bad money drives out good. The first issue of paper money in America (and almost in the world) was by the Massachusetts Bay Colony in 1690, and other colonies soon set their printing presses to producing money. In 1862 Congress agreed to an issue of paper money which would be legal tender. These notes, printed in green ink, immediately became known as greenbacks.

1720 New Issue Speculation. From time to time investors have been tempted by speculative new issues. During the South Sea Bubble in England one company was launched to develop perpetual motion. Another enterprising individual announced a company ¬for carrying on an undertaking of great advantage but nobody to know what it is. ­ Within 5 hours he had raised Р’Рі2000; within 6 hours he was on his way out of the country.

1792 Formation of the New York Stock Exchange.

The New York Stock Exchange (NYSE) was founded in 1792 when a group of brokers met under a buttonwood tree and arranged to trade shares with one another at agreed rates of commission. Today the NYSE is the largest stock exchange in the world,

trading on average about a billion shares a day.

1929 Stock Market Crashes. Common stocks are risky investments. In September 1929 stock prices in the United States reached an all-time high and the economist Irving Fisher forecast that they were at ¬a permanently high plateau. ­ Some 3 years later stock prices were almost 90 percent lower and it was to be a quarter of a century before the prices of September 1929 were seen again. Contrary to popular impression, no Wall Street broker jumped out the window.

1960s Eurodollar Market. In the 1950s the Soviet Union transferred its dollar holdings from the United States to a Russian-owned bank in Paris. This bank was best known by its telex address, EUROBANK, and consequently dollars held outside the United States came to be known as eurodollars. In the 1960s U.S. taxes and regulation made it much cheaper to borrow and lend dollars in Europe rather than in the United States and a huge market in eurodollars arose.

1972 Financial Futures. Financial futures allow companies to protect themselves against fluctuations in interest rates, exchange rates, and so on. It is said that they originated from a remark by the economist Milton Friedman that he was unable to profit from his view that sterling was overpriced. The Chicago Mercantile Exchange founded the first financial futures market. Today futures exchanges in the United States trade 200 million contracts a year of financial futures.

1986 Capital Investment Decisions. The largest investment project undertaken by private companies was the construction of the tunnel under the English Channel. This started in 1986 and was completed in 1994 at a total cost of $15 billion.

1988 Mergers. The 1980s saw a wave of takeovers culminating in the $25 billion takeover of RJR Nabisco. Over a period of 6 weeks three groups battled for control of the company. As one of the contestants put it, ¬We were charging through the rice paddies, not stopping for anything and taking no prisoners. ­ The takeover was the largest in history and generated almost $1 billion in fees for the banks and advisers.

1993 Inflation. Financial managers need to recognize the effect of inflation on interest rates and on the profitability of the firm`s investments. In the United States inflation has been relatively modest, but some countries have suffered from hyperinflation. In Hungary after World War II the government issued banknotes worth 1000 trillion pengoes. In Yugoslavia in October 1993 prices rose by nearly 2000 percent and a dollar bought 105 million dinars.

1780 and 1997 Inflation-Indexed Debt. In 1780, Massachusetts paid Revolutionary War soldiers with interest-bearing notes rather than its rapidly eroding currency. Interest and principal payments on the notes were tied to the rate of subsequent inflation. After a 217-year hiatus, the United States Treasury issued 10-year inflation-indexed notes. Many other countries, including Britain and Israel, had done so previously.

1993 Controlling Risk. When a company fails to keep close tabs on the risks being taken by its employees, it can get into serious trouble. This was the fate of Barings, a 220-year-old British bank that numbered the queen among its clients. In 1993 it discovered that Nick Leeson, a trader in its Singapore office, had hidden losses of $1.3 billion (Р’Рі869 million) from unauthorized bets on the Japanese equity market. The losses wiped out Barings and landed Leeson in jail, with a 6-year sentence.

1999 The Euro. Large corporations do business in many currencies. In 1999 a new currency came into existence, when 11 European countries adopted the euro in place of their separate currencies. This was not the first time that different countries have agreed on a common currency. In 1865 France, Belgium, Switzerland, and Italy came together in the Latin Monetary Union, and they were joined by Greece and Romania the following year. Members of the European Monetary Union (EMU) hope that the euro

will be a longer lasting success than earlier experiments.