Life of Being a Crown Prince in France - Chapter 1480 - 1386: Financial Hegemony

Chapter 1480: Chapter 1386: Financial Hegemony

Since the day the Iberian-Apennine Common Market was established, Joseph has wanted to create an international trade settlement system based on the franc.

In the early 19th century, the international payment methods used by European countries were very primitive, namely, bills of exchange.

For example, if merchant A in France wants to pay merchant B in Naples, he must first apply for a bill of exchange at a bank in France and pay in cash.

After that, the bank will send this bill of exchange to a bank in Naples with which it has a business partnership. Usually, the bill will state “payable 30 days after sight,” while some small banks state “payable 50 days after sight.”

When B receives the bill of exchange, if he doesn’t want to wait the full 30 days, he can only seek out a local bank to mortgage the bill in exchange for cash. Of course, this process incurs a “discount,” similar to a handling fee.

This process is not only very cumbersome but also involves at least three banks—if the issuing bank in France has no partners in Naples, then there might be an additional intermediary bank. For example, it might first be sent to a bank in Spain, which provides a credit guarantee, before being cashed out by the bank in Naples.

If any of these banks make a mistake, such as the recorder copying the amount or address incorrectly, the bill may be returned to the issuing bank for review and reissuance…

The payee might have to wait four months before actually receiving the payment.

As for why payment is made “30 days after sight”?

This is primarily due to the banks’ profit model — with the payment parked at the bank for 30 days, the bank earns 30 days of interest. Banks that earn from discounts thrive on this model. For example, the renowned Paris Discount Bank was once the largest bank in France.

Then there’s the concern of the bank receiving the bill that its partner bank might trick them. For example, if the Naples bank immediately pays the recipient in cash, the bank in France might find various excuses not to remit the funds.

As a result, the Naples bank needs a buffer period, at least to recover all payments from a month ago, before proceeding with further cooperation.

So, for merchants, a single transaction takes at least a month to complete—taking into account the travel time of the bill of exchange; even two months isn’t slow. Simultaneously, they incur significant discount fees on the bill of exchange.

Joseph clearly understands that the trade settlement systems in his mind from the future are essentially a dimensional downscale attack on the current bill of exchange model.

The control of this highly efficient settlement system will undoubtedly be in France’s hands. Coupling this with France’s massive trade volume and influence, the franc will eventually become the common settlement currency for most European countries.

And this will also mark the beginning of French monetary hegemony!

Sitting across from him, Ludovico was already bewildered by what he heard, involuntarily recalling his experiences with analytic geometry in the past.

He awkwardly said: “Your Highness, you mentioned establishing ’exchange rates’ … but aren’t there already exchange rates between different currencies? As for ’currency exchange banks,’ it seems that several current major banks already handle this…”

Joseph patiently explained to him:

“If everyone were trading using gold and silver coins, there would indeed be no need to intervene in exchange rates. However, with the use of banknotes, exchange rates frequently, even continuously, fluctuate.

“For example, suppose banks in Parma generally raise interest rates; the exchange rate of the Parma Rilla will immediately rise.”

Ludovico was momentarily stunned, then suddenly nodded in realization.

Previously, whether it was the Kurush, the ducat, or the florin, they could all be directly deposited in the bank. But now, only banknotes in lira circulate within Parma, so foreigners wanting to enjoy Parma’s high interest rates would have to exchange their various currencies into lira before depositing them in a bank.

As more and more people in the market buy lira, it is bound to become increasingly “valuable.”

Joseph continued: “Additionally, when the government massively prints banknotes, or when the country wins a war, such events will affect the exchange rate of banknotes.

“Of course, if a gold standard is implemented, exchange rates will become very stable.”

Ludovico murmured: “Our country cannot afford enough gold reserves to implement a gold standard for now…”

Joseph nodded: “That’s normal. So, we need to adjust exchange rate fluctuations between different currencies regularly based on the actual purchasing power of the banknotes.

“That way, during actual transactions, the settlement bank can execute currency exchanges based on the exchange rates.

“You see, we’re again discussing the matter of currency exchange banks.

“When using banknotes for international trade settlement, we encounter numerous issues.

“For instance, someone sells merchandise and gains a large amount of Parma Rilla. When they wish to exchange it for francs, their contracted bank might not have enough francs immediately available.

“In some cases, certain banknotes like the Paper Ruble cannot even find a bank in Parma willing to exchange them for Parma Rilla.”

Ludovico felt like he was back to studying analytic geometry, reluctantly saying with a bitter expression, “Then what should be done?”

Joseph smiled: “This is where the ’currency exchange bank’ I mentioned comes in. But I prefer to call it ’European Settlement Bank’…”

Originally, he planned to wait until the usage rate of the franc in Northern Italy and elsewhere increased, perhaps to a quarter of all transactions, before gradually launching the settlement bank.

But unexpectedly, Parma suddenly sent a “big gift” — the comprehensive use of the franc for settlement.

So, he decided to seize this opportunity to first establish the framework of the franc settlement system, even if initially only France and Parma use it. This period can be effectively utilized to train financial professionals and rectify system flaws.

Once other countries witness the extremely high efficiency of this settlement system, they will certainly begin to join.

During dinner, Ludovico still felt dizzy from all the new financial theories he’d heard, regretful for not bringing Baron Lucian along.

What he hadn’t anticipated was that the next day, after the Parma Minister of Finance reviewed the “European Settlement Bank Establishment Plan Book” sent via the Sharp Signal Tower, he too was left feeling dizzy.

Baron Lucian promptly delivered the plan book to the King and simultaneously gathered the top figures of Parma and executives from several major banks to discuss its contents together.

In the conference hall, the general manager of the Northern Commercial Bank, Palmeiri, held the plan book, his hands trembling slightly with excitement:

“This, this is simply a genius concept! The situation of bill of exchange defaults will completely vanish, and even small banks will be able to conduct settlement operations!”

Next to him, the president of the Parma Chamber of Commerce kept nodding: “If this plan can be implemented, each trade’s settlement time will be reduced to within two to three days!”

Only a few bank managers, whose main business was discounting bills of exchange, kept their heads down in silence.