History of Investment Banking

Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors.
Some of the earliest investment banking practices began in Europe. During the 12th and 13th centuries, European banks made long-terms loans to various rulers. In the 1300’s, Florence, Italy was a banking hub. King Edward III borrowed vast sums of money from the great banks of Florence to fund his war with France. He could not pay the money back, and the three biggest banks in Florence collapsed. 

During the 18th century, intermediaries bought government-issued debt and then resold it to investors at a profit. This process soon spread to the United States, where investment bankers quickly copied the practice. 

In the early 19th century, the financing of US railroads was dependent upon this investment method, which involved mainly investors overseas as well as wealthy US traders and ship owners. This lead to the grow of investment banking in the U.S. as well as in Europe. 

The investment banking industry is still experiencing many changes today. There have been many crisis’s in American history because of little regulation on banks. The government’s monetary policy and regulation of investment banking continually evolves as a result of these panics. Today,  investment banks in the United States are continuously reviewed and regulated by the Securities and Exchange Commission, or SEC. They are also intermittently regulated and investigated by Congress. This helps keep it safe for everyone so that history does not repeat itself. It will also help to avoid another panic to happen in the U.S. 


Why Investment Banking is Important

Most people don’t realize it, but the modern economy is a huge global network.  Many of the products that you use are obviously made in other parts of the world, but what’s less obvious is that the money you deposit and withdraw also travels across the world as well.

When you deposit and withdraw money from an ATM, it goes to and from your local bank.  However, you then have to ask where your local bank gets it’s money from, and it turns out that your local bank gets money from the global network.  You buy a plastic toy, that money goes to a factory in China.  That factory in China might choose to spend that money, in which case it goes back to some person in the US.  Alternatively, they may choose to save that money in which case it ends up buying some investment in the US, and may end up either paying for some ones medicare paid hospital bill or else someone’s mortgage.

When the government prints money it does so by electronically buying US treasuries.  Since the government doesn’t want to keep track of who wants to buy US bonds, it buys and sells through a network of banks who they sell/buy those bonds from their customers.

So you have sort a virtual network in which tens of billions of dollars flows through.  Investment banks are sort of the “money superhighway” and form the key ideas that make the world economic system work.

One good thing about the system is that the “money grid” is like the power grid or the internet, you don’t notice it because most of the time, it just works.  However, when it stops working, then you have massive amounts of disruption.
Investment banking is a worldwide process that is becoming very popular. The whole world has to work together in order for investment banking to work.