Chapter 1387: The Lubricant of International Trade
Another bank manager declared loudly, "What's even more impressive is that from now on, even a Swedish or Polish bank with no prior business relationship with us can have their bills of exchange processed by us."
Palmieri immediately smiled. "From now on, it will be direct payment for goods, rather than receiving bills of exchange."
The heir to the Palombo family, sitting on the east side, whispered to him, a look of confusion on his face, "Partnering with banks we've never done business with? How is that possible?"
The latter pointed to page five of the "Plan" in his hand. "Here, you see, the Bank for European Settlements will be responsible for verifying their qualifications and ensuring that every settlement request they send is credible."
Baron Palombo struggled to read the passage, then again cast a pleading glance at the Northern Commercial Bank manager.
Although the Palombo family was an investment dynasty with nearly two centuries of history, by his generation, they had become nothing more than hedonists, completely unable to comprehend the new financial concepts in the plan.
As the Northern Commercial Bank had extensive collaborations with the Palombo family, Palmieri had no choice but to patiently explain to him:
"You can think of the Bank for European Settlements as an institution responsible for trade oversight and intermediation.
"From now on, any bank wishing to conduct trade settlements between France and Parma must sign an agreement with it and provide a certain amount of collateral.
"The bank receiving the settlement request will immediately pay the seller because the Bank for European Settlements guarantees that the requesting bank will not default."
Baron Palombo's eyes widened. "Immediate payment?! How can the Bank for European Settlements guarantee that the requesting bank isn't playing tricks?"
Palmieri maintained his smile, turning to page six of the "Plan." "The Bank for European Settlements will station auditors in all signatory banks, overseeing that the requesting bank has indeed received the money and deposited it, then confirming the transaction with the Bank for European Settlements.
"Similarly, the Bank for European Settlements will also first confirm that the seller's bank can provide the funds before sending the request to them."
No single bank could possibly dispatch personnel to constantly supervise banks in other countries, but as an authorized third party, the Bank for European Settlements could do exactly that.
This seemingly very simple financial model easily solved the problem of default in cross-border settlements, though historically, such a model wouldn't emerge until the 20th century.
"This method is truly brilliant!" Baron Palombo nodded vigorously in astonishment.
This way, the requesting bank could no longer forge bills of exchange to siphon funds from the other bank. Nor would the receiving bank intentionally delay payment due to a lack of cash flow.
"Wait," he immediately thought of another problem. "President Quirico just said that transactions could be completed in two or three days. But a request form sent from Paris to Parma would take at least a week to arrive."
Palmieri sighed and turned another page of the "Plan." "It's right here. In the future, interbank settlement operations will all be conducted via Chappe signal towers, and requests will arrive in half a day at most."
Baron Palombo immediately shook his head. "That's too insecure. If someone intercepts the signal tower, transaction information could be leaked. Someone might even forge bank settlement slips to defraud funds."
His concerns were not unfounded. Chappe signal towers were all built on high ground, and anyone could easily observe the flashing signals transmitting information through a telescope. As for forgery, while less likely, it wasn't impossible if signal tower personnel were involved.
"No need to worry," Palmieri read from the plan in his hand. "'Asymmetric encryption technology,' invented by His Royal Highness, the Crown Prince of France, is reportedly absolutely impossible to crack.
"Parisian insurance companies will also underwrite all settlement transactions; should the encryption be compromised, they will fully compensate for any losses."
'Hmm, it's not "absolutely impossible to crack," actually.'
Given the computational capabilities of this era, Joseph could only use 32-bit RSA encryption, which involves solving the "large integer factorization problem" to encrypt text.
A mathematical genius could likely decrypt a coded message in about half a year.
'And, using a Leibniz mechanical calculator, encrypting a single cross-border payment request would take between half an hour and an hour of computation.'
Fortunately, France had many individuals excelling in mathematics, so every bank could find staff responsible for encryption calculations.
Still, this was far more efficient than bills of exchange.
This encryption method had actually been in use for several years in the French army and was now being "demoted" to the financial sector.
Meanwhile, Lagrange and several other mathematicians were designing other asymmetric encryption methods for the French army—with the concept of asymmetric encryption introduced by Joseph, finding suitable mathematical tools was not too difficult.
The manager of Noceto City Bank, sitting next to Parma's Minister of Finance, frowned as he looked at the "Plan." "Baron, I have another question.
"If banks in our country face a shortage of francs, foreign buyers' payments will be unable to be converted into francs, leading to a disruption in trade..."
The President of the Parma Chamber of Commerce immediately smiled. "You probably didn't notice the provision for 'multilateral netting.'
"This is precisely one of the most powerful features of the Bank for European Settlements.
"All settlement requests will remain there for one day.
"Their staff will offset settlement requests between all banks in various countries. For instance, if banks in our country need Parisian banks to pay for a thousand transactions, totaling 5 million francs, and Paris also needs our banks to pay 4.8 million francs for goods.
"Thus, the Bank for European Settlements will coordinate the banks of both countries to make internal adjustments. Ultimately, only 200,000 francs will need actual physical settlement. This will largely prevent issues of insufficient bank liquidity."
He spread his arms wide. "I can already see trade flourishing immensely because of this system!"
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