World Capital Markets History and Development

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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.