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Chapter 1386: Financial Hegemony

Ever since the establishment of the Iberian-Apennine Common Market, Joseph had envisioned creating an international trade settlement system based on the Franc.

In the early 19th century, international payment methods used by European countries were still quite rudimentary, limited to bills of exchange.

For instance, if Merchant A in France needed to pay Merchant B in Naples for goods, Merchant A would first have to apply for a bill of exchange at a French bank and pay the cash upfront.

The bank would then send this bill of exchange to a partner bank in Naples. Typically, the bill would be marked "payable 30 days after sight," with some smaller banks even extending it to "50 days after sight."

Once Merchant B received the bill, if they didn't want to wait the full 30 days, they could only approach a local bank and mortgage the bill to them for immediate cash. Naturally, this process involved a "discount," much like a service fee.

This entire process was not only incredibly cumbersome but also involved at least three banks. If the French issuing bank didn't have a direct partner in Naples, the bill might even need an intermediary step. For example, it might first be sent to a bank in Spain to secure a credit guarantee, before finally being passed to the Neapolitan bank for encashment.

If any bank along the chain made an error—say, a clerk transcribed the wrong amount or address—the bill of exchange would have to be returned to the issuing bank for review and reissuance.

The recipient could end up waiting four months before truly receiving their payment.

So, why was it "payable 30 days after sight"?

Firstly, this was the banks' profit model: by holding the payment for 30 days, the bank could earn 30 days of interest. Banks specializing in discounts, such as the famous Paris Discount Bank, which was once the largest bank in France, made their living from this very practice.

Secondly, the receiving bank worried about being shortchanged by its partner. For example, if the Neapolitan bank in the aforementioned scenario immediately paid the recipient cash, the French bank might then invent various excuses to avoid reimbursing them.

Thus, the Neapolitan bank needed a buffer period, at least to recover all remittances from the previous month before continuing further cooperation.

For merchants, therefore, a single transaction would take at least a month to complete—and counting the bill's transit time, two months was hardly slow. On top of that, they would incur significant bill discount fees.

Joseph knew full well that the trade settlement systems of later generations, which existed in his mind, would be a complete Dimensional Strike against the current bill of exchange model.

The control of this highly efficient settlement system would undoubtedly rest with France. Combined with France's immense trade volume and its influence in trade, the Franc would ultimately become the common settlement currency for most European nations.

And this would mark the beginning of France's monetary hegemony!

Ludovico, sitting opposite, had listened with a thoroughly bewildered expression, reminded of his struggles with analytical geometry back in the day.

He said somewhat awkwardly, "Your Highness, you spoke of 'fixing exchange rates'... but don't different currencies already have conversion ratios? And as for 'currency exchange banks,' it seems all the major banks can already handle that..."

Joseph patiently explained to him:

"If everyone traded using gold and silver coins, then indeed there would be no need to intervene with exchange rates. However, with the use of paper money, exchange rates fluctuate frequently, even constantly.

"For example, if banks in Parma generally raise their interest rates, the exchange rate for the Parma Lira will immediately increase."

Ludovico paused for a moment, then nodded in sudden realization.

Before, whether Ducats or Florins, they could all be directly deposited into banks. Now, with only paper Lira circulating within Parma, foreigners wanting to benefit from Parma's high interest rates would have to convert their various currencies into Lira before depositing them.

As more people bought Lira on the market, the Lira would certainly become more "valuable."

Joseph continued, "Other factors, such as governments printing large quantities of paper money or a nation winning a war, will also affect the exchange rate of paper currency.

"Of course, if a gold standard system were implemented, exchange rates would become very stable."

Ludovico murmured, "'Our nation would find it difficult to accumulate sufficient gold reserves, so implementing a gold standard is not feasible for now...'"

Joseph nodded. "'That's quite normal. Therefore, we need to constantly adjust the exchange rate fluctuations between different currencies based on the actual purchasing power of paper money.

"'This way, during actual transactions, a settlement bank can perform conversions between different currencies according to the prevailing exchange rate.

"'You see, we've returned to the matter of exchange banks.

"'When using paper money for international trade settlement, we will encounter numerous problems.

"'For instance, someone might sell goods and acquire a large sum of Parma Lira, then wish to exchange it for Francs, but their contracted bank might not immediately possess that many Francs.

"'Some paper currencies, such as paper Rubles, might not even find a bank in Parma willing to exchange them for Parma Lira.'"

Ludovico felt as though he was back to studying analytical geometry, and could only ask with a strained expression, "'What, then, should be done?'"

Joseph smiled. "'This is where my concept of 'currency exchange banks' comes into play. However, I prefer to call it the Bank for European Settlements...'"

He had originally intended to wait until the Franc's usage rate in Northern Italy and other regions became higher—perhaps reaching a quarter—before gradually introducing the settlement bank.

But to his surprise, Parma had suddenly presented a "great gift": the full adoption of Franc settlement.

Thus, he decided to seize this opportunity to establish the framework of the Franc settlement system. Even if only France and Parma used it initially, it would provide an ideal period to train financial professionals and rectify any system flaws.

Once other countries witnessed the exceptional efficiency of this settlement system, they would undoubtedly gradually come to join it.

By dinner time, Ludovico's head was spinning from the sheer volume of new financial theories he'd heard. He regretted not having brought Baron Luciani along.

What he hadn't anticipated was that the following day, after Parma's Ministry of Finance Minister read the "Bank for European Settlements Establishment Plan" sent via the Chappe signal tower, he too would find his head spinning.

Baron Luciani immediately presented the plan to the King. Concurrently, he convened Parma's most prominent financiers and high-level executives from several major banks to discuss its contents.

In the meeting hall, Palmieri, the General Manager of Northern Commercial Bank, felt his hand, clutching the plan, begin to tremble slightly with excitement.

"'This... this is simply a stroke of genius! Bill of exchange defaults will disappear completely, and even smaller banks will be able to conduct settlement business!'"

The president of the Parma Chamber of Commerce next to him nodded in agreement. "'If this plan can be implemented, the settlement time for each trade will be reduced to within two or three days!'"

Only a few bank managers, whose primary business revolved around bill discounting, remained silent, their heads bowed.