Lawrence Broz 207burgeoning worldwide trading relations, played a key role in this transition. Nathan
Rothschild, for example, arrived in London in 1798 and the Dutch banking house
of Hope and Company set up shop in the City and strengthened its ties to Baring
Brothers during the war period.
The wars acted as a major stimulus to the international lending activities of these
bankers. In the area of short-term foreign lending, the wars displaced Dutch
participation in not only British trade credits but also in the financial arrangements
behind a large and growing body of trade transactions between other countries. As
a result, foreign traders, already familiar with the names and reputations of the
international banking houses that had recently settled in London, began to look to
these institutions for facilities to effect the international transmission of remittances.
The internationalization of the London money market was paralleled by similar
developments in the London capital market. In fact, several of the same private
banks that financed bilateral and multilateral trade became the channel through
which foreign governments and other large borrowers approached the British capital
market. By virtue of their extensive foreign connections and their knowledge of
the mercantile world gained in the course of financing trade, these firms were
well placed for the handling of loans to foreign governments and corporations.
The depreciation and general instability of sterling during the period of suspended
gold payments constrained the foreign expansion of British finance. The City’s
international short-term lending business in its nascent form was harmed in two
ways. First, and most obviously, instability in the exchange rate posed the risk of
exchange losses to bankers long accustomed to fixed exchange rates. With the
prospect of debt repayment in depreciated currency, the banks and acceptance
houses involved in financing trade had strong reasons for advocating a return to
the gold standard before they extended their external activities. Second, foreigners
who received payment for their goods in sterling bills or held sterling assets as
working balances had to be confident in the stability of the pound because they
too could suffer losses from exchange instability. Indeed, for sterling to gain usage
internationally as a secure means of financing trade and making payments, and
for the London financial community to earn the “denomination rents” that accrue
specifically to the banking sector of nations whose currency serves as international
currency, foreigners had to have complete confidence in sterling’s gold value. If
nonresidents were to utilize sterling as an international medium of exchange and
as a reserve asset, England had to produce a protracted record of low inflation
and inflation variability, which in turn depended upon stable and consistent
government policies, particularly monetary policy. For Britain’s international
banking firms, the key to sterling’s status as a global currency, and the key to
London’s position at the hub of short-term international finance, was gold
convertibility.
International investment banking operations also depended, but to a lesser degree,
upon the restoration of monetary predictability. Since the fall in the value of sterling
meant losses for holders of long-term foreign securities that bore a fixed rate of
interest, private bankers supported the return to the gold standard. Their objective
was to distribute foreign securities to English savers; the reduction of exchange
risk would facilitate the sale of issues contracted in sterling.