Life of Being a Crown Prince in France - Chapter 1481 - 1387: The Lubricant of International Trade

Chapter 1481: Chapter 1387: The Lubricant of International Trade

Another bank manager exclaimed loudly, “What’s even more impressive is that in the future, even a bank in Sweden or Poland with which we’ve never had dealings, we can still accept their letters of exchange.”

Palmeiri immediately smiled and said, “In the future, it will be direct payment for goods, rather than receiving letters of exchange.”

The heir of the Parombo family, sitting on the east side, asked him quietly, “Cooperate with banks we’ve never done business with? How is that possible?”

The latter pointed to the fifth page of the plan book in his hand, “Here, you see, the European Settlement Bank will be responsible for verifying their qualifications and ensuring that every settlement application they send is credible.”

Baron Parombo strained to read that section of text, once again looking at the Northern Commercial Bank manager for help with a pleading expression.

Although the Parombo family had a history of nearly two hundred years as an investment family, by his generation, they had become indulgent in pleasure and could not understand the brand-new financial concepts in the plan book.

Due to the extensive cooperation between the Northern Commercial Bank and the Parombo family, Palmeiri had to patiently explain to him:

“You can think of the European Settlement Bank as an institution responsible for trade supervision and transit.

“In the future, any bank that wants to do the trade settlement business between France and Parma must sign an agreement with it and submit a certain amount of collateral.

“When merchants from the two countries conduct transactions, the payment settlement application will first be sent to the European Settlement Bank, which will verify—for example, confirming that the payor has indeed received the payment and there’s been no misappropriation—before sending the application to the bank in the seller’s country.

“The bank receiving the settlement application will immediately pay the seller because the European Settlement Bank can guarantee that the applying bank will not default. [Note 1]”

Baron Parombo widened his eyes, “Immediate payment?! How can the European Settlement Bank ensure that the applying bank hasn’t played any tricks?”

Palmeiri maintained a smile and turned to page six of the plan book, “The European Settlement Bank will station examiners in all contracting banks, to monitor that the applying bank has indeed received the money and put it into the treasury, and then confirm the transaction with the European Settlement Bank.

“Similarly, the European Settlement Bank will first confirm that the bank in the seller’s country can produce the money before sending the application to them.”

No bank can station people to constantly supervise banks in other countries, but as an authorized third party, the European Settlement Bank can do so.

This seemingly simple financial model easily resolves the problem of cross-border settlement default, though historically it would take until the 20th century to appear.

“This method is truly fantastic!” Baron Parombo nodded vigorously in shock.

This way, the applying bank can no longer fabricate letters of exchange to draw funds from the other bank. The receiving bank also won’t delay payment due to a lack of cash flow.

“Wait,” he immediately thought of another question, “President Quirico just mentioned that transactions can be completed within two or three days. But the application form sent from Paris to Parma would take at least over a week.”

Palmeiri exhaled, turned over a page of the plan book: “Here. From now on, interbank settlement businesses will be conducted through the Sharp Signal Tower, and the application form can be delivered in at most half a day.”

Baron Parombo shook his head immediately, “That’s too unsafe. If someone spies on the signal tower, it could lead to transaction information leakage. Someone might even forge bank settlement forms to defraud money.”

His concerns are indeed reasonable. Sharp signal towers are built at high altitudes where anyone can see the flashing lights transmitting information through a telescope. As for forgery, although the likelihood is low, if a signal tower staff member is involved, it’s not impossible.

“You needn’t worry.” Palmeiri read from the plan book in his hand, “’Asymmetric encryption technology,’ hmm, invented by His Highness the Crown Prince of France, is said to be absolutely unbreakable.

“Insurance companies in Paris will also underwrite all settlement transactions, and they will fully compensate for any losses in the event of cryptographic breaches.”

Well, not exactly “absolutely unbreakable” either.

Due to the computational limitations of this era, Joseph could only use 32-bit RSA encryption technology, which encrypts texts by solving the “large integer factorization problem.”

Mathematical geniuses could probably decipher a secret letter in about six months.

Hmm, when using a Leibniz mechanical calculator, encrypting a cross-border payment application takes about half an hour to an hour of calculation.

Fortunately, there are quite a few people with excellent math skills in France, so every bank can find employees responsible for encryption calculations.

But this is still far more efficient than letters of exchange.

In fact, this set of encryption techniques has been used in the French Army for several years, and now it has been “transferred” to the financial domain.

Meanwhile, Lagrange is working with several mathematicians to design other asymmetric encryption methods for the French Army—with the asymmetric encryption concept brought by Joseph, finding suitable mathematical tools isn’t too difficult.

The manager of the Noce City Bank, sitting next to the Finance Minister of Parma, frowned at the plan book and said, “Baron, I have another question.

“If our country’s bank experiences a shortage of francs, foreign buyers’ payments cannot be converted into francs, which would interrupt the trade…”

The President of the Parma Chamber of Commerce immediately smiled, “You probably haven’t noticed the ’multilateral netting’ provision.

“This is one of the most impressive features of the European Settlement Bank.

“All settlement applications will stay there for a day.

“And their staff will hedge settlement applications between banks of all countries. For example, our bank needs the Paris bank to pay for 1,000 transactions, totaling 5 million francs. Meanwhile, Paris needs our bank to pay for transactions totaling 4.8 million francs.

“Thus, the European Settlement Bank will coordinate the banks of the two countries for internal adjustments, with only 200,000 francs needing to be physically settled. This maximally avoids problems of insufficient cash flow in banks.”

He opened his arms, “I can already see the scene of trade becoming incredibly prosperous because of this system!”

[Note 1] Here’s a brief explanation for friends who are not very familiar with international trade. Since international traders are far apart, they usually meet only once when signing the initial contract; afterward, transactions are completed through bank transfers.

Thus, for buyers, they can pay the transaction amount at a local bank and receive the goods. Sellers receive the payment locally and then ship the goods.

So, banks are an indispensable part of international trade.

Moreover, banks serving buyers do not actually send funds abroad; instead, they send a payment request, with the seller’s bank advancing the payment. Then, both parties periodically conduct actual cash settlements.