With the growth of large-scale industry and capitalistic enterprise, the British Empire started challenging Holland’s dominance over international trade and finance.
The gap between the two narrowed steadily and, at some point during the second half of the eighteenth century, London emerged as the undisputed center of European finance. Amsterdam’s fate was sealed in 1795 when French troops occupied this city and most of its financial activity moved to London.
London thus emerged as the leading center of the world and maintained this position until World War I. Paris, which had vied with London for this role throughout the nineteenth century, remained a dominant financial center in Europe.
The end of the American War of Independence and the Napoleonic Wars ushered in a period of political stability and created an economic environment conducive to the growth of international trade and investment. The strength of the sterling and of the British economy offered merchant banking houses in London the opportunity to engage in two distinct types of activity trade financing and investment banking.
An expanding commerce with European, North American and oriental markets required an increasing amount of short term financing.
Specializing in the financing of particular branches of trade, merchant banks advanced the credits for manufacturers to send their goods to agents abroad.
For sales in North America, for example, they customarily advanced up to two-thirds of the invoice to known clients, for periods of 3 to 4 months, while for sales in oriental markets advances were made for periods up to 12 months.
A leading firm in trade financing was that of Baring Brothers which specialized in transatlantic finance. The activities of Baring Brothers and other notable firms in trade financing were instrumental in the development and growth of a major market in acceptances in London.
Unlike foreign trade, which required short term financing, the growing needs of private and public borrowers for industrial and infrastructural development made unprecedent demands for long-term financing.
These demands expressed through the issuance of term debt and equity securities, became an established practice in countries that enjoyed significant savings and balance of payments surpluses – countries like Britain and France.
By subscribing to securities issued in the London and Paris financial markets, the British and French public financed a wide variety of industrial and infrastructural projects, such as railways, canals, factories and mines.
While local investors accounted for most of the subscriptions to the securities issued, in time foreign investors represented an important segment of the market. Their purchase of sterling-denominated foreign issues contributed to the development of significant entrepôt activity in London, in the nineteenth century.
Along with the private issues of domestic and foreign concerns, an increased amount of foreign government debt was floated in London. France, Russia, Austria, Portugal, Spain and Greece were among the first countries to raise funds in London.
Other countries, to issue bonds in London included Costa Rica, Bolivia, Guatemala, Honduras, Uruguay, Paraguay, Liberia, Peru, Spain, Egypt and Turkey. Leading merchant bankers such as Rothchild, Hambros, and Barings – arranged and underwrote these issues. London’s financiaI euphoria during the nineteenth century had its period of speculation, bond defaults, bank failures, and financial crises.
Opportunities within the British Empire and elsewhere led to the establishment, from the mid-century on, of dozen of British overseas. South Africa, Egypt, Turkey, The United States and specially the Far East attracted the establishment of a significant number of British banks, which were instrumental in financing trade transactions with Great Britain.
By the end of the nineteenth century and up to World War I, British dominance of international finance was shared with French and German banks which, too, were actively involved in imperial and colonial financing.