World Capital
Markets History and Development
Maxwell (1994)
stated that Sumerian clay tablets consisted largely of records of a financial
nature, such as credit, loans, interest, and exchange rates. Since the days of
the Sumerians, over 5,000 years have already passed, there was a wide range of
literature about the capital market development and its history, which dates
back to the 1100s (Encyclopedia Britannica, 2010; Andromeda, 2010). It is good
to follow old tracks to know how people have done before and what Mongolians
should do now to operate an efficient and better modern stock exchange as a
late comer. Therefore, it can be said that financial institutions, especially,
the origin of stock exchanges, are as old as the hills.
It seems that the
main factor of stock exchange’s birth was trading activities in agricultural
and other commodities. Especially, trading and distance shipping opportunities
between nations was a root in the institutional beginnings of stock exchanges
appeared during the 16th and 17th centuries in Europe. Encyclopedia
Britannica (2010) acknowledged that trading in securities on a formal basis was
already common in the industrialized nations by the 19th century and Dutch East
India Company’s stock began to trade broadly in Amsterdam in 1609, which was the
first time ever in the history. It is believed that from that time, trading
activities started being regulated by governments and stock exchanges started
to be seen the new sources of funds. Furthermore, it was mentioned that mining,
rather than trade and commerce, was the impelling influence in the
establishment of stock exchanges in South Africa and
Canada. The same successful result could happen in Mongolia right now if there
are efficient infrastructure and right ecosystem. Moreover, Obstfeld &
Taylor (2004) argued that huge investments in American railroads, South African
gold mines, Egyptian government debt, and Peruvian guano were one of main
factors to establish and consolidate stock exchanges in these countries.
Besides business
industries nature, generally speaking, developments in shipping, transportation
logistics, information and communication technology, the internet, globalization,
international capital mobility, and regulatory environment or regulation and
deregulation made a huge change for stock exchanges around the world. I would
like to mention here only one example. As Obstfeld & Taylor (2004, p.16)
stated “the laying of the trans-Atlantic cable in 1866 reduced the settlement
time for intercontinental transactions from roughly ten days (the duration of a
steamship voyage between Liverpool and New York) to only hours”. In spite of these
achievements, in the First and Second World War, the great depression, economic
crisis including recent global financial crisis have marked by a sharp reaction
against the financial markets. Especially, Edwards & Patrick (1992) noted
that the two-oil crisis that occurred in the 1970s marked a big shift in global
financial flow in the postwar period. In other words, this demonstrated that
industrialized or developed countries could no longer dictate the destiny of
the world’s financial market.
Many years ago,
George Bernard Shaw said, “the lack of money is the root of all evil”. Therefore,
it is a big question mark for developing countries on how to finance huge projects.
However, commercial banks are a good solution for individuals and SMEs but not
really for big projects and multinational companies. Projects, which require
huge amounts of money eventually, have to go to capital market field. Nevertheless,
what would be the “right” ratio between money market and capital market to have
sustainable national economy? Perhaps this is ‘a million dollar’ question!
Commercial banks
specialize in short-term borrowings, which is liquid but lack of providing
long-term liquid financial products. It can be said that money markets and
capital markets are two wings of the national economy. Ritter and Silber (1977)
stated that the growth of national economy driven by well-functioned financial
markets by giving both lenders and borrowers options they would not otherwise
have, thereby increasing both savings and investment. Gart (1988) kept on saying
that the capital markets were meant to finance long-term investments such as
highways, shopping complex, and industrial plants. Apparently, still now, the best-known
capital market product in developing countries is common stocks that are traded
on the stock exchanges.