How finance shapes the world - for good and evil
Key context
Philip Roscoe is a professor and author who’s just written a new book, How to Build a Stock Exchange: The Past, Present and Future of Finance.
Why do stock exchanges matter? Well, look at the recent example of Thames Water. Shareholders bled a company dry which led to massive sewage issues with people's water. This was driven by the shareholder model - maximising shareholder profits.
There’s a narrative in finance that it’s about building wealth but a lot of the time it’s about extracting wealth - taking money from one group of people and giving it to another group, who are normally more powerful.
Finance isn’t science. It’s the consequence of loads of humans making decisions over time, so it’s chaotic
The markets have enormous power. Just look at the fall of Liz Truss. The markets threw out a PM within a matter of weeks.
If BlackRock decided to take global warming really seriously, the world would change.
Bit of history
1697 is the official first date of London Stock Exchange.
There were two kinds of occupation in London before the ‘Big Bang’ in the 1980s (when finance was de-regulated under Thatcher, or re-regulated some might say). You had brokers, who dealt with the public, and jobbers who traded in the exchange on their own account (with their own funds).
Brokers would literally walk around the stock exchange trying to find the best deals for their clients.
They were using ‘old money’ - stuff like shillings and six pence.
Their deals were verbal, which was the genesis of the phrase ‘my word is my bond’ - something my Dad loves saying.
In 1973 women were allowed to trade in the stock exchange for the first time!
Incentives changed massively in the Big Bang from small scale partnership style firms to big corporates. The older partnership model incentivised more prudent decision-making, because employees wanted to protect the partnership, as they ultimately wanted to make partner one day. In corporates, people were incentivised to gamble much more.
Finance and nation states
Markets have grown alongside modern nation states.
Back in the days of colonialism, companies like the East India Company, or the East Africa company, lent the UK government huge amounts of money. These corporates were responsible for some of the worst episodes in UK history - and yet they were in bed with the government.
These kinds of firms basically ripped money out of the rest of world and fed it back into the UK, legitimately.
Take the example of the railways in India. They were financed on payment terms that were so egregious that the debt was only really paid off in the 1960s. The UK's political military dominance translated into consistent and incredible long term returns for UK investors.
In the late 17th and early 18th century, the Atlantic triangle looked like this: goods left Liverpool, and were traded for slaves in Africa. Those people were shipped across the Atlantic (many of them dying). Those who made it were sold at the other end for cash, which was used to buy cotton which was then shipped back to Liverpool - with people making bags of money in between.
Liverpool became one of the finance capitals of the modern world because they invented things like credit notes to facilitate easier, more efficient trade in the Atlantic triangle. These were basically early bank transfers, or IOUs. This is an example of finance ‘cleaning up’ one of the worst practices in human history.
A lot of money was made in finance, from creating and maintaining these instruments - not slaving.
Our history in Britain is laced with examples of financial instruments cleaning up and legitimising morally abject activities.
