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International Banking for
a New Century

This new textbook provides an up-to-date overview of international banking as

the second decade of the twenty-first century unfolds. Integrating geo-economic,
operational, institutional, and regulatory changes in the financial sector, the vol-
ume’s methodology incorporates specific case studies and research, combining
theory with practical examples to illustrate the impact and consequences of past
and present financial crises.
The volume considers the core aspects of international banking, including its
structural and technical features, historical context, institutional evolution in core
markets, and wholesale, retail, investment, and private banking. It uses specific
examples from past and present literature, post-2008 case studies and histories,
and research materials, offering a fully updated overview of how international
banks respond to global crises, the origin, efficacy and evolution of financial
markets, and the regulatory framework within which they function.
One chapter is devoted to the evolution and potential of new markets, including
the financial sectors of the BRICS and other emerging economies. Each chapter
examines background, causes, impact, and resolution, focusing on specific cases
and their broader implications for the sector.
This textbook is a guide to the new, and at times uncharted, landscape to
be navigated by large domestic, cross-regional, and global banks, and will be
invaluable reading for students of finance, business, and economics, as well as for
those in the financial sector.

Irene Finel-Honigman is Adjunct Professor in banking and European economic

history at Columbia University’s School of International and Public Affairs
(SIPA), USA.

Fernando B. Sotelino is Adjunct Professor in banking and finance at Columbia

University’s School of International and Public Affairs (SIPA), USA.
This page intentionally left blank
International Banking
for a New Century

Irene Finel-Honigman and

Fernando B. Sotelino
First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business.
© 2015 Irene Finel-Honigman and Fernando B. Sotelino
The right of Irene Finel-Honigman and Fernando B. Sotelino to be
�identified as authors of this work has been asserted by them in accordance
with the Copyright, Designs and Patent Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced
or utilised in any form or by any electronic, mechanical, or other means,
now known or hereafter invented, including photocopying and recording,
or in any information storage or retrieval system, without permission in
writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging in Publication Data
Finel-Honigman, Irene.
International banking / Irene Finel-Honigman and Fernando Sotelino.
pages cm
1. Banks and banking, International–History. 2. International
finance–History. I. Sotelino, Fernando. II. Title.
HG3881.F4394 2015
332.1’5–dc23
2014047700

ISBN: 978-0-415-68132-2 (hbk)

ISBN: 978-0-415-68133-9 (pbk)
ISBN: 978-1-315-72317-4 (ebk)

Typeset in Times New Roman

by Cenveo Publisher Services
Contents

List of Illustrations vi
Acknowledgments viii

Introduction ix

╇ 1 History of international banking: international

banks (almost) never die 1

╇ 2 International wholesale banking 35

╇ 3 International personal banking 62

╇ 4 Bank failures and systemic crises 83

╇ 5 Sovereign debt crises and the ramifications for

international banking 113

╇ 6 International bank regulation and supervision 135

╇ 7 Banking in emerging economies 168

╇ 8 Financial fraud, corruption and illegal activities 191

╇ 9 International banking trends and challenges 215

References 224
Index 234
Illustrations

Figures
2.1 Global loan new issuance by region 42

Tables
1.1 Global systemically important banks (G-SIBS)  2
1.2 Monetary policy frameworks 14
1.3 Major mergers and acquisitions involving OECD
banks, 1986–2008 33
2.1 Commercial banks’ acquisitions of investment
banks, 1989–2006 37
2.2 Global syndicated loans, 1Q 2014 43
2.3 Global debt and equity issues, 2013  51
2.4 Global fixed income issues, 2013 52
2.5 All bonds in Euro, 2013 53
2.6 Global equity and equity related issues 54
2.7 Global M&A advisory 58
3.1 Private banking versus consumer banking 63
3.2 Top 25 private banks worldwide by assets under
management, 2013 67
3.3 Breakdown of UBS’s 2013 operating profits before tax 70
3.4 AMEX net revenues and net income, 2010 80
6.1 Selected credit risk weights under Basel I 140
6.2 Risk weights for corporates 143
6.3 Minimum capital requirements, Basel III  149
6.4 Capital conservation standards  150
6.5 LCR and NSFR conversion factors 153
6.6 G-SIBs’ buckets and minimum additional loss absorbency
cushion stock of highly liquid assets 155
6.7 Indicator-based measurement approach 157
6.8 Additional loss absorbency requirement for G-SIBs (2013) 158
7.1 Mexico’s largest domestic lenders (2013) 171
7.2 Brazil’s largest domestic lenders (2013) 174
 Illustrations╇ ╇ vii
7.3 India’s largest domestic lenders (2013) 176
7.4 IPOs by major Chinese banks  177
7.5 China’s largest domestic lenders (2013) 179
7.6 Indonesia’s largest domestic lenders (2013) 181
7.7 South Africa’s largest domestic lenders (2013) 183
7.8 Russia’s largest domestic lenders (2013) 185
7.9 Turkey’s largest domestic lenders (2013) 188
9.1 Strategy panel 222

Boxes
1.1 Barings banking dynasty 18
1.2 The house of Rothschild 18
2.1 International steel loan syndicate 40
2.2 Global transaction services at Citicorp 47
2.3 Global investment banking at Deutsche Bank 59
Acknowledgments

We are extremely grateful to Provost John Coatsworth (Columbia University) and

Dean Merit Janow (Columbia SIPA) for their generous support for this project.
Our colleagues at Columbia SIPA, Columbia Business School, and Columbia
Law School have offered invaluable advice, inspiration, and encouragement, in
particular Associate Dean Dan McIntyre and Professors Georges Ugeux, Volker
Berghahn, Albert Fishlow, Richard Robb, Richard Goldberg, and Alessia Lefebure.
We have benefitted greatly from the lectures of and discussions with friends in
the corporate world, media, and academia including Mordecai Kreinin, Bernard
Shull, Albert Eckes, Lucio Vinhas de Souza, Marc Chandler, Kathleen Hays,
Thomas Trebat, Lisa Schineller, Robert Albertson, Rodrigo Gonzalez, Markus
Jaeger and many others with whom we have shared our professional lives.
Finally, we want to express our deep appreciation to Geraldine McAllister at
Columbia University whose knowledge and editorial skill brought this book to
fruition.
Introduction

Since 2007, we have taught the core international banking course in the Master of
International Affairs Program (International Finance and Economic Policy
Concentration), at Columbia University’s School of International and Public
Affairs (SIPA). Coming from complementary backgrounds in economics, finance,
bank management, and intellectual history, we have sought to offer our students a
comprehensive perspective of the evolution of international banking, including
economic, geopolitical, and cultural determinants.
In 2010, Routledge invited us to develop a textbook in international banking
encompassing the financial crisis of 2008 and its implications for banks and bank-
ing systems globally. We were excited by this opportunity, if slightly daunted by
the enormity of the task. Yet, we could not have foreseen the extent to which
events such as the EU sovereign debt crises, the gradual (but still incomplete)
convergence of new banking regulations, the expanded supervisory roles of central
banks, and too-big-to-fail legislation would necessitate rewrites and updates.
Banks have shown extraordinary resilience, aided in part by innovative
programs introduced by governments during the worst of the crisis to make funds
available to financial institutions, but we have witnessed an important erosion of
the trust of society at large in these institutions. Our challenge has been to address
the critical elements of this process, while the identity and culture of banks, and
the fundamental role played by them, continue to be questioned and redefined.

Methodology
This volume is organized into nine chapters. In Chapter 1, we present an historical
overview from the origins of international banking through the first decades of the
twenty-first century. We explore the evolution of banks from domestic to global
institutions; from separate deposit, savings, investment, and custody functions to
the universal banking model; and from institutions bound by national jurisdiction
to globally-interconnected institutions. The individual cases that we examine in
this chapter include institutions once instrumental in domestic and cross-border
economic development, but which, since the early 1990s, have been dissolved or
have undertaken a much-reduced scope of activities (Barings, Rothschild, and
Crédit Lyonnais), as well as institutions that have achieved global predominance
x╇╇Introduction
since their inception, despite challenges and setbacks (HSBC, Citibank, JPMorgan,
Deutsche Bank).
In Chapter 2, we consider international wholesale banking, and examine how,
between the late 1980s and early 2000s, international banks redefined themselves
in order to compete effectively for the business of their institutional clients –
corporations, governments, and other financial institutions. We begin by exploring
why and how major commercial banks around the world have engaged in invest-
ment banking, and then describe the corporate commercial and investment banking
product offerings of international wholesale banks.
In Chapter 3, we consider international personal banking, retail and private.
We explore how some of those same forces that led to the reinvention of corpo-
rate banking, and the enforcement of legislation to prevent tax evasion and
money laundering globally, have influenced banks in their pursuit of international
personal banking activities, private banking, and consumer banking. We begin by
exploring the common aspects and the distinctive features of the provision of
personal banking services to high net worth individuals versus the public at large,
and then examine alternative strategies adopted by financial institutions in their
pursuit of private banking and consumer banking activities abroad.
In Chapter 4, we examine the causes, ramifications, and resolution of specific
bank failures, systemic crises, and country and regional banking crises, from the
U.S. Savings and Loan crisis (mid 1980s), Nordic banking crisis (1991–1993),
Japanese banking crisis (1995–1998), to the U.S. financial crisis and global credit
crunch of 2008. We explore the case of Iceland, where the collapse of the banking
sector brought about a near-default on sovereign debt, and that of Ireland, where
the failures of Irish banks induced near financial collapse.
In Chapter 5, we consider sovereign risk, exploring the causes of, build-up
to, and resolution of sovereign debt crises, and the implications for banks. We
examine a number of sovereign debt crises that have resulted in major regulatory
reform and/or institutional changes, in addition to offering valuable risk manage-
ment lessons to creditors, borrowers, and the International Monetary Fund (IMF).
We study the Latin American debt crisis of the 1980s that preceded the Basel I
Accord; the Asian crisis of 1997 and Russian crises of 1998 (the latter causing
the collapse of Long Term Capital Management) that preceded the Basel II
Accord; the Argentine crisis of 2002, a unilateral default still unresolved as of
mid 2014; and the Economic and Monetary Union (EMU) debt crises of the
European Union (EU) that preceded important institutional reforms, including
the establishment of the EU Banking Union.
In Chapter 6, we begin by reviewing the rationale for bank regulation. We then
examine the domestic regulatory regime of Canada, and the evolution in form and
substance of the international bank regulation accords, Basel I (1988), Basel II
(2004), and Basel III (2010). We discuss briefly measures aimed at protecting the
stability of domestic and global financial systems beyond the Basel III guidelines,
including restrictions to banks’ proprietary trading activities, and the evolving
debate around regulation of non-bank financial institutions, often bundled under
the label of shadow banks.
 Introduction╇ ╇ xi
In Chapter 7, we examine how domestic macroeconomic conditions, internal
political forces, and major external economic events have combined to shape the
structure of the banking industries of eight selected emerging economies, in
particular the resulting dynamics of competition among public sector, domestic
private sector, and foreign banks. The countries selected – all G-20 nations and as
such members of the Basel Committee on Bank Supervision – are from Latin
America (Mexico and Brazil); Asia (China, India, and Indonesia); and Europe, the
Middle East, and Africa (Russia, Turkey, and South Africa).
In Chapter 8, we examine a series of situations in which international banks have
failed to comply with domestic and international laws or regulations, resulting in
significant penalties and severe reputational damage. The situations selected include
the Securities and Exchange Act violations of Madoff and Enron; the activities of
rogue traders at UBS, Société Générale, and JPMorgan (London Whale); money
laundering violations at BCCI, Vatican Bank, Standard Chartered, and BNP
Paribas; tax evasion violations at UBS and Credit Suisse; and manipulation of the
London Interbank Offered Rate (LIBOR).
In Chapter 9, we review in brief the forces that resulted in the internationalization
of leading OECD banks between the late 1980s and 2008 (see Chapters 2, 3, and 7).
We examine the consequences of government responses to the US subprime crisis
and global credit crunch (see Chapters 4, 5, and 6), and explore the political and
cultural consequences of those cases of financial fraud examined in Chapter 8. We
conclude Chapter 9 with a discussion of a conceptual framework for decision
making by major international banks, regarding the scope of their international
activities, and taking into consideration the challenges faced by their boards of
directors and management in rebuilding and maintaining the trust of clients,
investors, and society at large.
This page intentionally left blank
1 History of international banking
International banks (almost)
never die

Introduction
This chapter presents a historical overview of the origins of international banking
through the first decades of the twenty-first century. It examines the evolution
from domestic to global institutions; from separate deposit, savings, investment,
and custodial functions to the universal banking model (or financial supermar-
ket); from institutions bound and limited by national jurisdiction to globally
interconnected institutions, subject to cross-border regulation.
Equally important to note is what this chapter does not cover. A history of
banking and money would encompass a broader geographic and geo-economic
spectrum, including the development of merchant societies in the Levant from the
Byzantine to the Ottoman Empire; the rise of commercial banks in eighteenth and
nineteenth century India and China; and the beginning of transactional trade and
deposit activities in Africa and Latin America.
However, the concept of international banks defined as financial institutions,
which offer retail, wholesale (corporate and investment banking), and insurance
services, establish branches, subsidiaries, and conduct business across borders, is
much more limited in geo-historic scope. Our focus, therefore, will be on its
origins in Europe and the United States, moving from Italy northward through
Amsterdam to London and, from 1905, to New York.
International banking was contingent on a strong central bank, a stable
currency, and the growth of a retail client base, which entrusted financial institu-
tions with deposits and savings, and a corporate client base, which needed credit
lines to further expand domestic and, in time, its international operations.
Nineteenth century economic expansion and wealth generation was fueled by
industrial innovation, a new economically active middle class, and the rise of
colonial empires. The surge in global trade required British and French banks to
extend their reach across Africa, the Indian subcontinent and South-East Asia.
London was the epicenter of banking and the markets in stock, bonds, and
currency, with the pound sterling the sole globally convertible currency from the
late seventeenth-century to the twentieth century, followed by the French franc
after 1865 and the US dollar after 1905.
2╇╇History of international banking
The historic resilience of European banks (including those of Britain and
Switzerland) and American banks is illustrated by the 2014 list of global systemi-
cally important banks (G-SIBs) in Table 1.1.
International banks in Europe, Japan, the United States, and Canada have a
long history of survival despite internal and external shocks, including acquisi-
tions and mergers, restructurings, wars, and economic crises. The financial crisis
of 2008 first spelled the near death of Royal Bank of Scotland (United Kingdom),
ING (Netherlands), Commerzbank (Germany), UBS (Switzerland), and Citibank

Table 1.1╇ Global systemically important banks (G-SIBs) as of November 2013 allocated
to buckets corresponding to required level of additional loss absorbency

Bucket1 G-SIBs in alphabetical order within each bucket

5 (Empty)
(3.5%)
4 HSBC
(2.5%) JP Morgan Chase
3 Barclays
(2.0%) BNP Paribas
Citigroup
Deutsche Bank
2 Bank of America
(1.5%) Credit Suisse
Goldman Sachs
Group Crédit Agricole
Mitsubishi UFJ FG
Morgan Stanley
Royal Bank of Scotland
UBS
1 Bank of China
(1.0%) Bank of New York Mellon
BBVA
Groupe BPCE
Industrial and Commercial Bank of China
ING Bank
Mizuho FG
Nordea
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui FG
Unicredit Group
Wells Fargo
Source: Financial Stability Board, 2013 (available at http://www.financialstabilityboard.org/wp-�
content/uploads/r_131111.pdf).
1“The bucket approach is defined in Table 2 of the Basel Committee document Global Systemically

Important Banks: Updated Assessment Methodology and the Higher Loss Absorbency Requirement,
July 2013. The numbers in parentheses are the required level of additional common equity loss absor-
bency as a percentage of risk-weighted assets that will apply to G-SIBs identified in November 2014,
with phase-in starting in January 2016” (Financial Stability Board, 2013: 3).
 History of international banking╇ ╇ 3
(United States), but government assistance, and partial takeovers or restructuring
enabled these institutions to remain in business, and most returned to
profitability.
On the French CAC 40, German DAX 30, and London FTSE 100 stock
indexes, over one third of the listed companies were created before World War I.
The financial institutions listed on these exchanges include Société Générale,
BNP Paribas, Crédit Agricole, Commerzbank, Deutsche Bank, Postbank,
Standard Chartered, HSBC, Barclays, Lloyds, and Royal Bank of Scotland. On
the Japanese Nikkei 225, the eleven banks listed include Sumitomo Mitsui,
Mizuho Trust, Resona Holdings, and Mitsubishi Financial, which originated in
the period of bank–industry conglomerates of the 1880s to 1900.
In the last decades of the twentieth century, banks such as Deutsche Bank
(Germany), UBS (Switzerland), HSBC (United Kingdom), UniCredit (Italy), and
Citibank (United States) evolved from powerful domestic brands with global
presence to multinational and multiregional, universal institutions, their profita-
bility often dependent more on host country investment and corporate arms than
on home country retail operations. International bank interconnectivity has
increased as transactions have come to depend increasingly on political and
economic conditions of more than one nation, and on the stability and effective-
ness of more than one system of laws and financial mores.
This chapter is organized into four sections as follows:

1. The evolution of cross-border and cross-regional banking from the Middle

Ages to the 1600s.
2. The history of central banking from the 1600s to the 1800s.
3. The maturation and expansion of international banking from the 1800s to
World War II.
4. Financial institutions, multilaterals, and international banks post-World War II.

The evolution of cross-border and cross-regional

banking from the Middle Ages to the 1600s
The concept of international banking developed in Europe in concert with almost
a thousand years of cross-border wars, cross-regional trade, and currency transac-
tions, as money lenders, money changers, and merchants were needed to provide
funds, lend, and create instruments for expansionary wars.1
Great natural resources did not automatically generate domestic or regional
economic development. Empires rich in commodities, mineral wealth and human
capital such as the Mamluks in Egypt or the Ottoman Empire, remained
entrenched in autocratic and theological structures, which often hindered the
development of independent financial systems and institutions. Although these
dynasties fostered merchant classes, urban commercial centers, and monetary
transactions, banking remained extremely limited as rulers maintained absolute
control over state and private wealth, constricting capital mobility and the devel-
opment of financial instruments and services.
4╇╇History of international banking
Across Europe, development of a merchant and financial class was far from
even. From the Renaissance period onwards, key players in international banking
were small geographic entities in need of trade and international monetary trans-
actions to increase productivity and exert power. These included the Italian city
states of Genoa, Florence and Venice, as well as the Netherlands and England.
These latter thrived due to parliamentary and republican regimes, few Church-led
constrictions and relatively tolerant open societies, which fostered wealth genera-
tion and industrial activity. Hampered by church interdictions, repression of
minorities and lack of economic control, the Holy Roman Empire, encompassing
Spain, Portugal, and parts of Germany, never became a banking or financial
center, despite vast maritime power and movement of currencies.2

Origins of cross-border banking

From the fall of the Roman Empire (456) until the Crusades (1095–1270),
�banking was limited within domestic borders. Under the Carolingian Empire
(800–888), silver coinage circulated over an area almost the size of the present
day European Union (EU), but trade did not extend beyond limited perimeters.
By the eleventh century, seasonal markets, fairs, and the greater concentration of
urban centers helped propagate acceptance of coins and specie. Yet barter econo-
mies remained the norm in isolated rural communities. From 1095 to 1270 the
expeditions of the Crusades, instigated by the Vatican, led thousands toward the
Holy Land. All routes from Europe passed to and from Italy, requiring complex
financial dealings and activating commodity and currency markets. Italian
merchants took on international banking functions, serving as intermediaries
between monarchies, lending and extending credit to finance wars and trade. In
1338, there were more than eighty banking houses in Florence. The Bardi,
Peruzzi, and Datini families, with branches in England, lent to the British Crown
until Edward III’s massive debts at the start of the Hundred Years’ War provoked
the first city state bankruptcy in 1345 to 1347. By 1470, the House of Medici had
branches in Avignon and Lyon (France), Bruges (Belgium), and London
(England), where accounts were kept in florins, the official gold coin minted in
Florence and convertible throughout Europe. In fourteenth century Florence there
were clear distinctions between moneychangers and bankers who dealt in inter-
national trade and coordinated government and papal loans.

Cross-border trade and exchanges

Cross-border trade transacted by dynastic merchant families generated immense
profits and wealth. As merchants required the freedom to conduct trade year
round and travel without restrictions new instruments were created, which did not
require carrying large amounts of specie, including bills of acceptance, endorsed
checks, bank notes, and promissory notes. A merchant in Florence could
purchase goods from a merchant in Bruges, and pay for them by buying a bill
of exchange drawn by a third party in Seville. The concept of one-month,
 History of international banking╇ ╇ 5
three-month, and six-month or year-long maturities stems from the period
assigned to payment based on geographic distance. The 1596 records of the
Besançon fair describe the proceedings of wealthy merchants, government emis-
saries, brokers and important moneychangers who came from Genoa, Seville,
and Florence to establish a syndicate to regulate rates of exchange by decree.
From 60 to 200 men paid a membership fee of 3,000 gold ecus for the privilege
of deciding rates and closing deals worth 30–40 million ecus: “Four times a year
it was the scene of decisive but discreet meetings, something like the International
Bank of Basel in our day” (Braudel Vol. 1, 1979: 91). During the reign of
Francois I of France (1517–47), and under the Spanish-led Holy Roman Empire
(1519–1608), large merchant houses no longer limited or beholden to their
community, thrived wherever money could be generated and reinvested in differ-
ent regions or countries.
The Age of Discovery, from the sixteenth to the mid seventeenth century,
transformed trade and currency transactions as new markets in Asia and the
Americas fueled a surge in trade in gold and silver from the Americas to Seville,
Lisbon, and on to Amsterdam and London.3 Unregulated, exploitative, and
extremely profitable, trading houses functioned as centers of exchange, finance,
and multinational transactions. The Dutch East India Company, chartered in
Amsterdam in 1601, dominated trade between Europe and Asia through the
seventeenth and eighteenth centuries as the world’s largest import–export
company. Declaring annual dividends for its stockholders, it offered “longer
terms of credit, low prices, forswearing of freight and related charges, offers of
full insurance, substantial advances, new arrangements for pay involving half bill
and half bond: such became the stock in trade for merchants eager to acquire a
piece of the growing India traffic” (Hancock 2002: 164).

The history of central banking from the 1600s to the 1800s

Public finance and independent central banks first developed in the Netherlands,
Sweden, and England. These parliamentary monarchies or republics relinquished
total control over state finances and promoted interdependency between fledgling
markets, merchants, and financiers. By the end of the seventeenth century, bank-
ers in Amsterdam and London no longer served the monarch solely, but rather
invested in the interests of a community or nation.4 At the end of the Wars of
Religion (1524–1598), Protestantism helped further promote economic develop-
ment in Northern Europe, freeing commercial activity from theological restric-
tions and enabling the rise of an empowered merchant class.
After almost two generations of wars and the Revolution of 1688, England
achieved fiscal harmonization, putting into practice the use of bank notes and
deposits, a century before Continental Europe. The creation of the Bank of
England in 1694, the monetary reforms of 1699, and increased Parliamentary
control of state finances allowed British merchant and trading houses, including
the Royal Bank of Scotland and Barclays, to evolve organically into joint stock
companies.
6╇╇History of international banking
Central banking: political and economic evolution
The evolution of government guaranteed financial institutions5 established to
foster international trade, finance the government, and function as national
commercial and deposit banks represented a major shift from autocratic to oligar-
chic control of a nation’s finances. The creation of the Bank of England under the
aegis of Parliament in 1694 marked a major evolution away from Crown control
of money issuance, to a separate institution granted the power to set monetary
policy through its monopoly right to print fiat money with legal tender.
“Independence of central banks is itself not a measurable variable, but it usually
goes hand in hand with institutional settings such as the nomination of members
of the monetary policy board for defined terms, the protection of board members
from political interference, and the independence of central banks’ budgets
within the confines of applicable public sector guidelines” (Standard and Poor’s
2011). In addition to “[t]he truly unique power of a central bank … the power to
create money …” (Deane and Pringle 1994: viii), each central bank was entrusted
with custodial, transactional and settlement powers.
As central banks in the European Union, Japan, and the United States expanded
the scope of their activities and responsibilities in the wake of the 2008 financial
crisis, it is important to distinguish between (i) central banks established organi-
cally as economies evolved from private to public finance, which called for
harmonization of minting and note issuance, government guaranteed trading and
credit facilities, unified monetary policy, and supervision of financial institutions;
and (ii) central banks that were created in times of crisis as a means of stabilizing
and restructuring economies. The former include the German Reichsbank (1875),
Bank of Japan (1882), Bank of Canada (1934), Imperial Bank of Russia (1866),
and the Federal Reserve System (1913). The latter include the Bank of France
(1801), Deutsche Bundesbank (1957), Bank of Russia (1991, 1998), and Bank of
China (1949). The role and responsibilities of these institutions evolved over
time, in response to events both at home and abroad.
The Bank of Amsterdam, established in 1609 “…under the city’s guarantee […]
took in a merchant’s coinage, assessed the valid metal and […] gave him credit
on its books and stored the metal away” (Deane and Pringle 1994: 34). It acted
as a custodial and deposit entity, but high risk loans to the Dutch East Indian
Company brought about its demise in 1819.
The Bank of Stockholm was established by royal charter in 1656 as both a lend-
ing and exchange bank, combining commercial and deposit functions. Over-
lending and inadequate collateral provoked a run and the Bank collapsed in 1664.
In 1668, Parliament created the Bank of the Estates (Riksens Ständers Bank) as
a government lending bank, which only “advanced money against six month
interest bearing deposits or tangible assets” (Deane and Pringle 1994: 35).
Renamed Sveriges Riksbank in 1867, it assumed all private banks’ right of issu-
ance and was granted monopoly over note issuance in the early twentieth century.
The Bank of England was chartered in 1694 when merchant financier William
Patterson, backed by a powerful group of London merchants, provided a
 History of international banking╇ ╇ 7
£1.2€million loan to the government at 8 percent return. “The subscribers to the
loan were to be incorporated as the Governor and Company of the Bank of
England, the first joint stock bank in the country” (Deane and Pringle 1994: 38).
Once approved by Parliament, the Bank was granted a “monopoly of joint stock
banking, the handling of the government’s account, the right to deal in bullion, to
discount approved bills of exchange … and to issue notes” (Deane and Pringle
1994: 39). Established in Threadneedle Street in 1734, the Bank of England has
never ceased operations nor changed location in nearly 300 years. The Bank
received a monopoly over all banking activity until 1800, when a new charter
began to “permit joint stock banks of deposit in London or within 65 miles
thereof” (Bank of England Charter of 1800). “With the government’s promise to
pay behind it, the Bank could issue notes to match the sum lent to the govern-
ment” (Deane and Pringle 1994: 39), the Bank would also become the bankers’
bank, where other commercial banks used accounts with it to settle claims
between themselves and kept their reserves. Oversight power over all financial
institutions was further reinforced in the aftermath of the South Sea Bubble in
1720 (see Chapter 4).
Reforms were enacted under Sir Robert Peel’s Bank Charter Act of 1844. The
note-issue department was separated from its commercial banking operations in
an attempt to mitigate the inherent conflict of interest between the ability to print
fiat money and the temptation to lend, for either profit or power. Furthermore,
oversight of commercial and merchant banking was enhanced as the Bank
balanced its various responsibilities: “a political duty to attend to the govern-
ment’s financial needs […]; a statutory duty to maintain the convertibility of
banknotes into gold” and a commercial duty to pay dividends to its shareholders
(Ferguson 2001: 179). Finally, in the 1870s, the Bank of England assumed the
role of lender of last resort to the banking system as a whole.

The Gold Standard

The decisions to unilaterally peg the pound sterling to gold occurred in stages
over the course of the nineteenth century from the creation of the universal Gold
Standard of 1880 to 1914. During the period 1815 to 1860, England’s flexible
gold standard and France’s bimetallism worked in concert to assure cooperation
on currency fluctuations, especially in the volatile period following the American
Gold Rush of 1849 and the Australian Gold Rush of 1851. As gold production
rose dramatically, destabilizing currency markets and contributing to the Crash of
1857, the Bank of England and the Bank of France coordinated efforts to main-
tain stability in the inflows and price of gold.
Despite currency destabilization and realignments in the wake of World War€I,
the United Kingdom remained on the Gold Standard until 1931. Yet, France and
England experienced economic crises provoked by their inability to coordinate
and stabilize monetary policies, exacerbated by delayed and ineffective responses
to German hyperinflation in the period 1921 to 1922, and the failure of the Bank
of England, the Bank of France and the Federal Reserve to act as lenders of last
8╇╇History of international banking
resort. Following World War II, the Bank of England was nationalized on
March€1, 1946.
The next major challenge to the Bank of England’s authority and role came
with the signing of the Maastricht Treaty (Treaty on European Union) in 1991–2,
with an opt-out clause for the United Kingdom regarding economic and monetary
union. British Prime Minister Margaret Thatcher rejected the concept of an inde-
pendent super-banking structure: “We do not accept that a European system of
central banks or Eurofed should be wholly independent” (Smith 1990). In 1992,
the United Kingdom, Denmark and, in 1995, Sweden were granted opt-out
clauses, allowing them membership of the European Union without the require-
ment to participate in the European Monetary Union. They would retain their
domestic currencies, and their monetary and regulatory policies would remain
under the control of their central banks. In conclusion, the Bank of England
retained full autonomy and, in 1997, following the edicts of the Maastricht
Treaty, the Bank gained operational independence in setting monetary policy. EU
Banking Union (2014–15) will be discussed in Chapter 6.

The Bank of France

The Charter of the Bank of France, signed by Napoleon Bonaparte and the
Minister of Finance, stated that “as inevitable result of the French Revolution and
a long and expensive war, the nation needed to establish a bank that would rees-
tablish commercial credit, movement of capital in order to foster the recovery of
public and private entities” (Charter of the Bank of France, 13 February 1800).
The founding shareholders were Napoleon Bonaparte, members of his family,
and Consuls of the Republic. It was created with state funds and private capital
of 30 million francs, in the form of metal alloy (as France was devoid of gold or
silver), and divided into 30,000 shares.
The Bank of France was subject to the policies of the state in coordination with
the Ministry of Finance, with the Governor of the Bank appointed by the state.
The Bank would be entrusted to honor the obligations of the newly created
French Republic. Its mandate was to discount bills of exchange, and to extend
credit and payment to the extent permitted by its reserves. The Bank enjoyed a
monopoly over issuance of the new French franc (1801), power of decision over
monetary policy, and the sole authority to open branches or subsidiaries.
From 1840, the Bank could offer lending facilities, bank branching, and serve
as a vehicle for the government’s industrial and monetary policy. And in 1866,
special decree extended its authority over monetary policy and currency issuance
in Algeria, and throughout the French colonial Empire of French Indochina
(1898), Tunisia (1902), and Morocco (1907).

The Reichsbank
Until unification in 1871, German banking was dominated by independent
merchant banks in Bremen, Frankfurt, and Cologne. There were divergent
 History of international banking╇ ╇ 9
currency standards: The Prussian thaler and Austrian gulden were linked to
silver, while Bremen was on the gold standard. Paper money was neither readily
accepted nor trusted, as different principalities issued non-convertible notes. By
the mid 1860s, bankers and industrialists called for a new currency, the mark, and
the introduction of the gold standard, to link the German currency to the pound
sterling. Following unification under Bismarck, Germany accepted the Gold
Standard in the Coinage Act of December 4, 1871. The Banking Act of March
14, 1875 established the Reichsbank, modeled on the Bank of England. The
Banking Act named the Reich’s Chancellor as head of the Reichsbank, giving
Bismarck unsurpassed power over financial and political institutions.

Post-world War I banking crisis and hyperinflation

In the aftermath of World War I, the burden of reparations imposed on defeated
Germany severely destabilized the European balance of power. While the Allies
could raise capital in the United States, German assets were expropriated under the
Trading with the Enemy Act of October 1917 (Kobrak 2008). Between 1919 and
spring 1921, the exchange rate of the German mark to the US dollar remained
steady until the Allies delivered the ultimatum to Germany requiring 121 billion
gold marks in reparations by October 1921. Hyperinflation took hold, and the rate
of the mark to the dollar spiked from 275 in May 1922, to 370 in June 1922, to 400
in July 1922, 2000 by August 1922, reaching 7000 by November of that year. The
Reichsbank continued to print money in higher and higher denominations until
by€the end of 1923, the exchange rate reached 12 trillion marks to one US dollar
on€the black market. The crisis was partially staunched when Hjalmar Schacht,
President of the Reichsbank, created a new currency, the Rentenmark. In June
1931, the Federal Reserve, Bank of England, Bank of France, and the newly formed
Bank for International Settlements (BIS) organized to lend the failing Reichsbank
US$100 million, but it was too little, too late. Political and social chaos ensued and
in the wake of economic disaster in 1933 the Nazi regime came to power. The Bank
was nationalized and served as finance vehicle for the Third Reich’s war efforts and
their appropriation of capital and assets from occupied countries.

World War II and reconstruction

Under Allied Occupation following its defeat in World War II, Germany was
forbidden from recreating an independent banking system. German banking was
reconstructed in 1948, allowing regional banks, Landesbanken, to be established
as note issuing banks. In order to control immediately rampant inflation, a new
currency was created in June 1948: the Deutsche mark.

The Bundesbank
Germany’s new central bank was created under the Bundesbank Act of 1957, under
which the eleven Landesbanken became regional headquarters of the Bundesbank.
10╇╇History of international banking
The Bundesbank enjoyed a monopoly over note issuance, clearing house, and
supervision of all German banks. It acted as the state’s banker and manager of
currency reserves. Far more importantly, the Bundesbank Charter “designates the
safe guarding of the currency as the bank’s prime responsibility” (Bernanke and
Mihov 1996: 2). Based in Frankfurt, the bank was declared absolutely independent
of the German government in Bonn. With the collapse of the Soviet Union in 1991,
and the reunification of East and West Germany, Chancellor Kohl required the
Bundesbank (over the objections of its Governor, Otto Pohl) to establish immediate
parity of 1:1 between the near worthless ost mark and powerful Deutsche Mark.
With the signing of the Maastricht Treaty, the Bundesbank and the Bank
of France coordinated policies to maintain the structure of the European
Monetary System (the Snake fixed parity bands of the 12 EU currencies).
Bundesbank monetary policy would become the model for the new European
Central Bank in 1998.

Bank of Japan
The Edo reign of the Shogunate era, where financial activity was limited to
merchant banks was replaced by the Meiji Restoration in 1871 to 1882. Japan
established the yen under the New Currency Act of 1871, and the Bank of Japan
under the Bank of Japan Act in June 1882. In 1884, the Bank abolished regional
(former feudal fiefdoms) rights to open private banks and print money, establish-
ing monopoly of the money supply. The period from the 1880s to 1905 saw the
modernization of market and banking practices and institutions. Following the
German model of industrial-financial interdependency with emphasis on heavy
industry, military expenditures, large industrial groups (zaibatsu) established
their own in-house banks: Mitsui, Mitsubishi, Sumitomo, and Yasuda.
During World War II, the Bank of Japan was reorganized under ward powers
in 1942 to help finance the military. Following its defeat and under U.S. occupa-
tion (1945 to 1949) the functions of the Bank of Japan (as was the case with the
Reichsbank) were suspended. The Bank of Japan reopened in 1949, the same year
that the American Dodge Plan was put into effect, based on the model of the
Marshall Plan. American funded reconstruction required Japan to have a balanced
budget, reduced inflation, and a fixed exchange rate pegged to the US dollar of
US$1=360 yen. Although General McArthur abolished the industrial monopolies
(keiretsu) in order to force diversification and transparency, the Japanese Diet
amended the Anti-Monopoly Law in 1953, allowing major corporations to
resume the practice of cross shareholdings and interlocking directorates. Mitsui,
Mitsubishi, Sumitomo, and Dai-ichi-Kangyo reorganized into “horizontal keiretsu
comprised of several dozen members including a main bank, large financial insti-
tutions, the largest manufacturing firms and a large general trading company”
(Pyle 1996: 250). Between 1950 and 1973, “74.1% of all external financial
sources raised by Japanese corporations were provided through banks (the corre-
sponding number for the Federal Republic of Germany was 66.6%, and only 28%
for the U.S.)” (Schaede 1996: 5). A strong recovery was fueled by capital
 History of international banking╇ ╇ 11
accumulation (savings rate reached 27 percent in 1970), and export driven indus-
trial growth financed by public and private banks.
The Ministry of International Trade and Industry (MITI), the Ministry of
Finance, and the Bank of Japan set industrial policy and interest rate policy aimed
at export growth and innovation. Companies could borrow massively from state
approved banks with lax oversight. In case of default there would be “bailouts by
mother banks of troubled industrial entities” (Schaede 1996: 4). Following the
economic collapse of 1995 to 1998, a number of reforms were implemented, with
independence and transparency included in the Bank of Japan’s new charter
under the Japanese bank reform edicts of June 1997 (see Chapter 4).

The Federal Reserve system

In the United States, the U.S. Government sought to establish a central bank in
1792 and again in 1816. Yet both the First and Second Bank of the United States
were rejected by Congress as infringements of state rights and federally imposed
regulation. Only following the Knickerbocker Bank crash of 1907, and a series
of scandals that exposed the level of corruption and unregulated activity in
stocks, bonds and interlocking directorates, did the House Committee on Banking
and Currency call for hearings to establish a central bank with supervisory and
oversight functions. The United States Congress was under pressure to establish
a central bank within the Treasury, but a consortium of bankers proposed the
alternate Aldrich Plan to maintain central bank independence. The Federal
Reserve Act of 1913 was a compromise between the Wilson Administration and
the Aldrich Plan. “The Federal Reserve, then was a regionally diversified joint
venture […] that affiliated the banking community with the federal government”
(Shull 2005: 57), with one member elected from each district for its Reserve
Board.
The Federal Reserve assumed responsibility for monetary policy, as monopoly
issuer of fiat money with legal tender, and as lender of last resort. The prosperity
and expansion of the U.S. economy until 1927 seemed to validate Federal
Reserve monetary policy, which encouraged the expansion of consumer credit,
and stock market speculation often on margin calls.
Post-1935, the Charter of the Federal Reserve was expanded to include
“formulating and executing monetary policy; Supervising and regulating deposi-
tory institutions; Providing an elastic currency; Assisting the Federal Government’s
financing operations and; Serving as the banker for the U.S. Government”
(Federal Reserve Bank of New York). Following the financial crisis of 2008, the
powers of the Federal Reserve were expanded once again, and this will be exam-
ined in more detail in Chapters 4 and 6.
Following the stock market crash of October 1929, the values of all stocks and
investment trusts declined dramatically. Bank deposits were not protected and in
December 1929, when the New York City-based Bank of the United States was
closed, 400,000 depositors were affected. The Federal Reserve and New York
State banking authorities did not intervene to save the bank.
12╇╇History of international banking
Between 1932 and 1937, a number of significant banking reforms were intro-
duced. In 1932, the first Glass-Steagall Act addressed issues of giving the Federal
Reserve more leeway in lending to banks. Although bank reserves increased in
1932, this did not “stem the continued decrease in bank loans and investments or
in the money supply” (Shull 2005: 99). Between 1930 and 1932, over 5,000
banks failed: “Most banks had both liquidity and solvency problems resulting
from declines in the value of their assets” (Shull 2005: 99). In February 1933, on
the eve of Franklin D. Roosevelt’s inauguration, groups of banks began to
suspend payments. In March 1933, President Roosevelt declared a four-day bank-
ing holiday and, under Proclamation 2039, prohibited “any transactions in foreign
exchange and the export, hoarding, melting, or earmarkings of gold or silver coin
or bullion or currency.”
Congress enacted the Securities Act of 1933 and the Securities Exchange Act
of 1934, giving the newly-created U.S. Securities and Exchange Commission
(SEC) supervisory responsibility for all U.S. broker dealers, trading, and invest-
ment firms. Full disclosure was required on new security issues. Inside operations
and short selling were outlawed. The Federal Reserve Board was granted author-
ity to fix margin requirements, and, under the Glass-Steagall Act of 1934,
commercial banks were divorced from their securities affiliates.
Title 1 of the Banking Act of 1935 established Federal Deposit Insurance “on
a permanent basis under the auspices of the Federal Deposit Insurance
Corporation” (Shull 2005: 115). Furthermore, The Banking Act of 1935 increased
the powers of the Board of Governors of the Federal Reserve, making it “an
independent agency of the federal government, removed from political considera-
tion” (Shull 2005: 117).
Although the Federal Reserve Act codified the function of “examination and
supervision of member banks” in its charter, major banks could choose whether
they would be regulated by state charters or by a national charter with oversight
by the Office of the Comptroller of the Currency (OCC) (see Chapters 4 and 7 on
the JPMorgan London Whale trading losses, which revealed both a lack of
compliance with OCC regulations and the inability of the OCC to monitor U.S.
global bank subsidiaries).
The Federal Reserve Bank of New York, has powers in addition to those of the
other Reserve Banks. These additional powers include “conducting open market
operations; intervening in foreign exchange markets, storing monetary gold for
foreign central banks and international agencies” (Federal Reserve Bank of New
York). The New York Fed’s functions include responsibility for the regulation
and supervision of international operations of the banks under its charter.
Supervisory powers are complemented by the New York State Banking
Department on the oversight of the largest U.S. global banks, including Citi and
JPMorgan Chase. The New York Clearing House Interbank Payments System
(CHIPS), was established in 1953 (and restructured in 1970), as a computerized
funds transfer system for international dollar payments linking major U.S. and
foreign banks with offices in New York. Since 1981, settlements occur at the end
of each day with the final settlement through adjustments in the special accounts
 History of international banking╇ ╇ 13
balance at the Federal Reserve Bank of New York. The role of the Federal
Reserve in the 2008 financial crisis is discussed in Chapter 4; and its expanded
regulatory powers under the Dodd–Frank Wall Street Reform and Consumer
Protection Act (2010) (Dodd-Frank Act) are presented in Chapter 6.

European Central Bank

The creation of the European Central Bank on January 1, 1998 was a unique
phenomenon. For the first time in financial history, a central bank was established
to set monetary policy for a regional bloc rather than one sovereign nation and
one currency zone. The Maastricht Treaty mandated as of January 1993 that:

When exercising the powers and carrying out the tasks and duties conferred
upon them by this Treaty and the Statute of the ESCB,6 neither the ECB,
nor a national central bank, nor any member of their decision-making bodies
shall seek or take instruction from Community institutions or bodies, from
any government of a Member State or from any other body.
(Treaty on European Union, The Maastricht Treaty,
Article 107, 1993:221)

Functions
Under the provisions of the Maastricht Treaty, all central banks of the European
member countries had to renounce sovereignty and become part of a new entity, the
European Central Bank. “The prime objective of the ESCB shall be to maintain
price stability” (Article 105: 218). This mandate respected the legacy of the
Bundesbank which had served as the anchor for European monetary policy. (The
European Central Bank will be examined in greater depth in subsequent chapters.)
The gradual convergence in the functions of central banks is illustrated in
Table 1.2.

Maturation and expansion of international

banking from the 1800s to post-world War II

Great Britain and France: Bankers to the World

By 1800, as banker to Europe, London functioned as “clearing house to foreign
countries” (Bagehot 1897: 33) with its financial center on Lombard Street serving
as intermediary between international commerce and British finance. England
was the world’s largest lender: “because she possesses an unequalled fund of
floating money, which will help in a moment any merchant who sees a great
prospect of new profit” (Bagehot 1897: 15).
From the 1850s, Britain and France established vast industrial financial networks
spread across Africa, India, and most of South East Asia, while maintaining trade
connections in the Americas, Canada and Russia through railroad financing.
Table 1.2╇ Monetary policy frameworks

Bank of England Eurosystem Federal Reserve System Bank of Japan

Established/Made 1694/1998 1998 1914 1882/1998

independent
Monetary policy Monetary Policy Committee Governing Council, Federal Open Market Policy Board, 9 members
decision- comprising 22 members: Committee (FOMC),12
making body the ECB Executive members: 7 Board
Board (6 members) and Governors, President of the
the Governors of the 16 New York Fed, and 4 of the
NCBs of the Eurosystem 11 other reserve banks Fed
Presidents on rotating basis;
19 participants
Appointment of Nine members: the President and Governing Governors (14-year terms)/ Board members appointed
policy makers Governor, the three Council members Chairman (4-year term) for 5 years by the cabinet;
Deputy Governors appointed for 8 years by appointed by the President parliamentary ratification
for Monetary Policy, national governments; and approved by the required
Financial Stability and ratified by European Congress; Bank Presidents
Markets & Banking, the Parliament selected by Bank directors
Bank’s Chief Economist (largely local banking/
and four external members business community)
appointed directly by the
Chancellor
Independence Yes. Enshrined in the 1998 Yes. Enshrined in the Yes. Fed is a “creature of Yes. Established in the 1998
from political Bank of England Act Maastricht Treaty the Congress” and must BoJ law, but (at times)
influence report regularly, but enjoys not well respected by the
substantial independence by political establishment
long-standing tradition
Monetary policy Monetary stability: stable Price stability is the primary Multiple objectives: to promote Multiple objectives: price
objective(s)/ prices and confidence objective as set in the maximum employment, stability and the stability
Mandate in the currency. Stable Maastricht Treaty. The price stability, and moderate of the financial system.
prices are defined by the ECB has quantified this long-term interest rates. Price stability objective is
Government’s inflation as medium-term inflation Price stability not defined, set in qualitative terms in
target, which the Bank goal of below but close but widely viewed as 1–2% the 1998 law and policy
seeks to meet through to 2% comfort zone (skewed board has quantified this
the decisions taken by toward upper portion) for as a range of 0% to 2%
the Monetary Policy core PCE inflation inflation in the medium
Committee term
Monetary policy The MPC intends ... to Two pillar strategy. First Focus on economic forecasts; Two perspectives strategy,
strategy maintain the present pillar focuses on shorter- rates adjusted to optimise the first focusing on
highly stimulative stance term economic and price expected outcomes and short-term inflation
of monetary policy until developments (“economic minimise risks of deviating developments and the
economic slack has been pillar”); second pillar from those outcomes second on economic and
substantially reduced, focuses on longer-term (factoring in costs of those inflation developments
provided this does not inflation outlook based on deviations). Preference for as well as financial
entail material risks to monetary analysis gradualism unless risks stability in a longer-term
price stability or financial dictate more aggressive perspective
stability action
Decision-making By majority vote Consensual, with the Consensual (less so under By majority vote; dissents
style President assuming Bernanke than Greenspan), are frequent (55% of
the role of moderator; with Chairman clearly first decisions since the BoJ
dissents are rare among equals. Dissents are law was enacted were
infrequent, multiple dissents taken with at least one
are very rare dissenter); Governor is
generally opinion leader
Role of monetary Both play a significant role Neither plays a significant role Both play a significant role
aggregates and independent of their effects
asset prices on growth and inflation
(Continued)
Table 1.2╇ Monetary policy frameworks (Continued)

Bank of England Eurosystem Federal Reserve System Bank of Japan

Established/Made 1694/1998 1998 1914 1882/1998

independent
Accountability and a. The decisions on interest a. Immediate press a. Immediate announcement a. Immediate announcement
transparency rates are announced at conference after following the FOMC, with after monetary policy
12 noon immediately Council meetings with voting record (2:15 pm local meetings (around 12
following the Thursday introductory statement time) noon local time) with
meeting and Q&A (2:30 pm voting record, followed
local time) by Governor’s press
conference (3:30 pm
local time)
b. Minutes are published b. Annual Report to b. Meeting minutes three weeks b. Minutes (generally a
two weeks after meeting, EU institutions and later month later, three days
detailing members’ votes presentations to the after next monetary
European Parliament policy meeting)
c. Members can be called to c. Monthly Bulletin c. Full transcripts of meetings c. Monthly Report of the
answer questions before published five years later Policy Board 34–40 days
Parliament after meetings
d. Speeches d. Frequent speeches by FOMC d. Speeches
participants
e. Semi-annual monetary policy e. Semi-annual report to the
report to Congress; other Diet
hearings
Source: Gerdesmeier et al. 2007, with author’s additions from the Bank of England website.
 History of international banking╇ ╇ 17
British and French banks established branches, representative offices, and subsidi-
aries in their respective colonial holdings to finance railroads, mining, diamonds,
and trade in agricultural commodities. Standard Bank of British South Africa
financed diamond fields and gold mining in Johannesburg. The Charter Bank had
offices in Bombay, Calcutta, Shanghai, Hong Kong, and Singapore.7
From 1850 to 1900, merchant banking shifted into specialized investment houses,
and large domestic institutions were established based on universal banking, mixed
banking, house banking, and overseas and colonial banking (Bonin 2009).
Hong Kong Shanghai Bank (HSBC) was founded in 1865 by Thomas
Sutherland, Hong Kong Superintendent of the largest British navigation
company. He envisaged the need to create a separate bank to help finance the
growing trade between China and Europe, and new opportunities for China–
United States trade, opening the first branch of a British bank in San Francisco in
1865. Instrumental in railroad financing in India and China, within a decade the
bank also opened branches in Yokohama and Kobe (Japan), and Shanghai
(China). In 1889, HSBC took a stake in Imperial Bank of Persia. The
Commonwealth Bank Corporation, founded in Australia in 1912, extended the
presence of the Commonwealth through the Pacific Islands.
In India, Charter Bank established subsidiaries in Bombay and Calcutta in
1853, followed by HSBC which was to dominate the banking market in India
after 1870. After independence in 1947, there were 1,100 small banks across
India, which combined insurance and commercial activities. The evolution of the
Indian banking sector from nationalization (1969), to the consolidation of public
sector banks (1991), to the slow privatization and creation of new private banks
from (1993 to 2014) will be examined in Chapter 8 on emerging markets).
In North Africa and Indochina, the French Banque Suez and Banque IndoChine
(1875) functioned as political vehicles for the interests of the French State and as
conduits for trade and investment.

International investment banks

The Barings and Rothschild banking dynasties led their respective sectors from
the domestic to the global market. Both families began as merchant houses in
London and Frankfurt in the 1760s, and had expanded by the mid nineteenth
century into bond issuance, advising governments, and acting as intermediaries
in cross-regional financial transactions. Beyond Europe, Barings led in the
Americas and Rothschild in Russia and the Ottoman Empire. Barings, according
to an anecdote circulated as early as 1817, was perceived as the sixth great power
in Europe following England, France, Prussia, Austria, and Russia (Fay 1996).
Rothschild, and to a lesser degree Barings, bridged the gap between being banker
to the Crown, banker to the state, and partner or guarantor to other banks.
The Second Empire (1852 to 70) pursued pro-business policies and legislative
measures, which allowed corporate and regional deposit banks to flourish. The
challenge was to catch up rapidly with British finance and to mobilize “‘sleeping
funds’ (hoarded, liquid, or savings) … to support the growth of industry and
18╇╇History of international banking

Box 1.1╇ Barings banking dynasty

Francis Baring founded Barings bank in 1762, lending to the Crown during
the American Revolutionary War of 1776. During the Napoleonic Wars of
1801 to 1815, Alexander Baring transformed the bank into a major interna-
tional house. In the railroad boom of the 1840s, Barings speculated on its
own account in French and Russian bonds, Austrian stocks, and American
railroad shares. Barings partnered in syndicated loans and bond issues across
Europe, with Rothschild, Bischoffsheim, Cassel, and Oppenheimer Banks,
and in New York and Boston with Kidder Peabody and JPMorgan, becom-
ing America’s lead correspondent banker. Its reputation was undisputed
until the near-fatal decision to invest in the volatile Argentinian market in
1890, when the bank disastrously opted to underwrite a share issue for
Buenos Aires Water Supply and Drainage Company. Once the market
collapsed amid political chaos in South America, the shares became worth-
less, leaving Barings heavily overcommitted. The resolution to the crisis was
the first multinational bailout of an international bank. In November 1890,
Barings was rescued by a consortium established by the Bank of England,
the Bank of France, the Imperial Bank of Russia, and Rothschild. After
World War I, Barings functioned as banker to the monarchy. Expanding in
the 1970s and, following the transformation of British investment banking
in 1986 (known as Big Bang), it engaged in corporate finance and trading
activities. By the late 1980s, once again under family ownership, the bank
turned from traditional banking to high risk foreign exchange (FOREX)
transactions, concentrated in its overseas subsidiaries, falling victim to and
unwitting participant in a massive rogue trader fraud (See Chapter 4).
Barings lost over US$1.8 billion in 1995. The bank collapsed and was taken
over by the Netherland bank ING for the price of US$1.

Box 1.2╇ The house of Rothschild

The Rothschild family originated in Frankfurt as textile and commodities
traders dealing in bills of acceptance in the late 1780s. During the Napoleonic
Wars, Nathan Rothschild arrived in London and made a fortune buying gold
bullion and selling it to the British government. By 1815, established in Paris,
Frankfurt, and London, the family set up information networks, alliances, and
cross linkages with German, Austrian, and French banking houses and
governments, including the establishment of Credit-Anstalt in Vienna in
1855. Instrumental through the 1850s in the underwriting of railroad bonds
throughout Europe, their interests later turned to copper, rubber, and oil.
Railroads required government–private sector cooperation and joint Â�financing.
 History of international banking╇ ╇ 19

Governments had to sell or lease land, and private engineering, construction,

design and industrial companies had to build the tracks, trains, and stations
which created immediate need for cross-border bonds and massive long-term
investment and guarantees. In 1852, at the start of the Second Empire (1852
to 1870), the French branch of the Rothschild’s, wanting to emulate British
joint stock banks, helped fund the first French investment bank, Société
Générale du Crédit Mobilier in direct competition with the Bank of France.
Following the Franco-Prussian War of 1870, the bank played a key role in the
first French war reparation bond issue. Returning to France after being forced
out during World War II, the bank was briefly nationalized in 1981 under
President Mitterrand’s socialist government. In the early 2000s, the French
and British houses of the Rothschild bank merged.

services growth … [and] to accelerate economic history” (Bonin 2009: 3). In

1863, a new law was passed on the creation of joint stock companies, no longer
under the aegis of the Bank of France and its branches. Crédit Lyonnais, Société
Générale, and Crédit du Nord were established in competition, but also in coop-
eration with the Banque de France. These commercial banks established univer-
sal banking, defined as “the overlap between retail and corporate banking, on one
hand, and investment banking on the other—that is, the convergence of lending
activities and the management of payment type on one side, and issuing securi-
ties, underwriting and brokerage activities, and structured finance (long-term
lending, financial engineering, project financing) on the other” (Bonin 2009: 3).
These institutions evolved into international banks in three separate and intersect-
ing venues: deposit-taking and corporate commercial banking, cross regional invest-
ment banking, and colonial banks. In the first category, Crédit Lyonnais (1863) and
Société Générale (1864) established branches and offices abroad, opening the first
foreign branch of a French credit facility in London in 1870. By 1875, Crédit
Lyonnais had branches in Cairo and Alexandria to finance cotton, in Constantinople
to serve wheat trade from Ukraine, and in Smyrna, Jerusalem, and Jaffa. Branches
were opened in Russia from 1878, extending credit facilities between Russia and the
Ottoman Empire. Yet Crédit Lyonnais was closed out of two major markets: India
due to British hegemony, and the United States due to protectionist tariffs against
foreign banks, state banking laws, and British competition led by Barings.

German Hausbank: from domestic to international banking

Universal banking remained the European model until the 1890s, when Germany
developed a new concept of industry–bank interdependency. Based on cross-Â�
shareholdings, which allowed banks to promote industrial policy, the hausbank
model was created. Following German unification in 1871, and the creation of the
Reichsbank in 1875, Deutsche Bank, Commerz, Dresdner and Disconto were
established.
20╇╇History of international banking
Deutsche Bank was created as a joint-stock company in 1870 by George
Siemens of Siemens and Halske “for the purpose of representing German finan-
cial interests on international markets … to clear transactions, absorb foreign
debt, and take positions in foreign firms” (Kobrak 2008: 5). From 1876 to 1899,
Deutsche Bank, like Crédit Lyonnais, expanded activities outside the country
with offices in Bremen, Hamburg, and London, followed by holdings in France,
New York, and branch offices in Shanghai and Yokohama. As British banks were
dominant in Asia, Germany decided to focus on South America and the United
States, working closely with Morgan, Warburg, and Speyer, as well as the
Rockefellers. Deutsche Bank’s business expanded significantly: “from 1870 to
1913 business volume grew from 239.3 million mark to 129.2 billion mark”
(Kobrak 2008: 19). Forced out of American markets in World War I, as an enemy
agent institution, and branded with collaborating with the Third Reich during
World War II, Deutsche Bank and other German banks reconstituted in the late
1950s, kept a low profile and did not return to the United States until the 1970s.

Swiss banks
Swiss banking focused on small private banks, founded from the 1760s, to repre-
sent French interests through Geneva, and German Austrian interests through
Zurich and Basel, with domestic offices in Geneva, Zurich, Basel, and Lugano,
and international offices in Luxembourg, London, and New York. Post-1848, the
creation of the Swiss franc and the neutrality of Switzerland made it a safe haven.
Adopting the French universal banking model, Credit Suisse was founded in
1856, the Swiss Bank Corporation in 1872, and Union des Banques Suisses in
1912. After World War I, Swiss banks offered discrete wealth management
services with the added advantage of political neutrality through the 1930s. The
Swiss Banking Act of 1934 assured total confidentiality on numbered accounts.
The evolution of Swiss international private banking and expansion into interna-
tional investment banking is discussed in Chapter 3. The ramifications of the
2008 crisis are discussed in Chapters 4 and 7.

The first Pan-European investment bank: Paribas

Paribas, chartered in 1872 in the aftermath of the Franco-Prussian war, became the
leading international investment bank in Europe, under French home office and
directorship. It was a unique model of cross-border cooperation: “to German
signatures were added French, Swiss, Belgian, Dutch, and Danish signatures;
Jewish signatures next to Catholic and Protestant signatures; Paris is associated to
London, Brussels, Amsterdam and Geneva” (Bussière 1992: 28). The founding
German Bischoffsheim family opened a small private bank in Brussels after
Belgium’s independence in 1830, and a bank in Paris during the July Monarchy
(1830–1848). In 1869, they set up the third major deposit bank in France, Banque
de Paris. By 1877, Paribas became lead bank in Russia and Sweden, and estab-
lished connections to Barings and the Americas. With branches in Amsterdam,
 History of international banking╇ ╇ 21
Brussels, and Geneva, Paribas participated in the creation of the Russo-Chinese
Bank in 1896, to help finance railroad and mining projects in Siberia and
Manchuria (Bussière 1992: 51). Rival and partner in international syndications
with Crédit Lyonnais and Société Générale, the bank remained the leading French
investment bank through the twentieth century. Briefly nationalized from 1983 to
1986, it merged with BNP in 1999 to become France’s largest universal bank.

Russia: imperial bank to the Trans-Siberian railroad

Russia under Tsar Alexander II opened to the modern economic world with the
creation of the Imperial Bank of Russia in 1860, modeled on the Bank of England.
However, as in previous (and future) periods of economic and social reform, the
momentum was short-lived and impacted only a small segment of the urban popu-
lation. Although the Imperial Bank in the 1890s had the largest reserves of gold
and was an active partner in transcontinental transactions, its economic progress
remained sporadic and barely extended beyond Moscow and St Petersburg. Russia
never created independent banks and depended on vast investments and bond
issues from French and American investors to finance the Trans-Siberian railroad,
completed in 1905. Defeat in the Russo-Japanese War (1904 to 1905), with a
newly militarized Japan and the beginnings of popular rebellion in 1905, further
limited Russia’s fledgling entry into the modern economic age.
In 1917, during the Russian Revolution, the revolutionary leader Lenin appro-
priated and nationalized all foreign holdings in the Imperial Bank of Russia,
closing the door to international investment. Crédit Lyonnais, the largest bank in
St Petersburg in 1917, lost all assets invested in railroad bonds. U.S. National
City’s office in Petrograd (formerly St Petersburg) was forced to close on
December 14, 1917, when all banking assets were appropriated by the State,
losing almost US$26 million.
Under the Soviet Union (1917 to 1991), Russian banking consisted of four
state-owned banks: Gosbank, the USSR state bank, which presided over credit
allocation; Vneshtorgbank for foreign trading operations; Stroibank for long term
capital investment; and Sberbank, the only deposit savings bank for Soviet citi-
zens, with all deposits backed by a government guarantee.

The fall of the Soviet Union and transition period: 1991–1998

In 1991, individuals were given the right to create banks, which, “led to a huge
increase in the number of small banks from less than one hundred in 1988 to
nearly 2,500 at the end of 1995” (Fitch Ratings Report 2007). Sberbank was
privatized, but volatility and changes in the leadership of the Central Bank, in
conjunction with large-scale privatization of over 250,000 state and municipal
enterprises, created a period of confusion and a need for emergency funds.
Although the policies of the Central Bank stabilized in 1994, the privatization
process remained opaque and prone to corruption, setting the stage for
the oligarchs’ takeover of the former government-owned commodity and oil
22╇╇History of international banking
and gas sectors. The Russian ruble crises and the international consequences
will be examined in Chapter 4.
By 2000, a second wave of foreign bank penetration into Russia had begun, led
by Citi, HSBC, Société Générale, Unicredit, Raiffeisen, and Goldman Sachs.

United States: global banker

After the American Revolution in 1787, currencies began to flow toward the
United States, with Holland the largest subscriber to overseas loans. Banking
remained a state-by-state endeavor with little interest in international transactions
outside of New York, Boston, and San Francisco – following the gold rush of
1849. French and Dutch bond issues helped finance the railroads until the 1857
financial crises on Wall Street and the Paris Stock Exchange briefly curtailed the
flow of capital to the United States. The first foreign bank, Bank of Montreal,
opened in 1859, followed by the Hong Kong Shanghai Banking Corporation.
Prior to the American Civil War (1861 to 1865), banks proliferated, and were
largely unregulated. In the West, wildcat banks were issuing close to 7,000 differ-
ent kind of notes, many totally worthless, with no proof that they were backed by
gold or silver. By 1860, there were about 1,600 banks with capital of more than
US$400 million, and bank note circulation of more than US$200 million. In
1863, during the American Civil War, President Lincoln established the Office of
the Comptroller of the Currency (OCC) under the auspices of the Treasury
Department, which would serve as the sole chartering, supervisory, and monitor-
ing bank regulator until the creation of the Federal Reserve in 1913. The OCC’s
function was to regulate, supervise, and charter agencies of foreign banks, and to
guarantee “the safety and soundness of the national banking system” (Office of
the Comptroller of the Currency 2007: 11).
Throughout the nineteenth century, state restrictions required foreign banks to
go through London for transactions denominated in foreign currency, and for
commercial transactions with European counterparts (Wilkins 1989). These limi-
tations created opportunities for Barclays and Barings, which established partner-
ships with U.S. investment houses, including Morgan, and Kidder Peabody. An
American bankers’ conference, in 1901, emphasized the need to combat
“American banking provincialism” and hoped to persuade Washington that
“authorizing the establishment of international banks with headquarters to be in
New York” would facilitate international trade and benefit the U.S. economy
(“Bankers Discuss Far Eastern Commerce.” The New York Times, 1901).
However, despite interest from American bankers in 1904 to set up a Russo-
Chinese bank for Far Eastern commerce, and in 1910 to create a Russo-American
bank to facilitate investment in the Russian fleet, French and British banks domi-
nated global financial markets right up to World War I.
In the late 1890s, retail banks opened in urban immigrant communities to serve
ethnic communities, with businesses focused on facilitating remittances back to
the home country: Bank of America began as Bank of Italy in San Francisco in
1904, to cater to the Italian small-businesses community.
 History of international banking╇ ╇ 23
National City Bank of New York (Citibank):
first American international bank
Foreign exchange operations opened in First National Bank of Chicago in 1873,
in Bank of New York in 1893, and in National City Bank in New York in 1897.
National City Bank, which represented the interests of Rockefeller and Standard
Oil, was the first major U.S. bank to establish branches abroad. By 1905, National
City directors were on the boards of railroad and insurance companies, as well as
Western Telegraph, and utility companies engaged in foreign investment.
During World War I, the United States, a major supplier of grain, steel, and
arms, also became the world’s leading provider of capital as Wall Street financed
the war with foreign loans and war bonds. By 1919, “the country shifted from its
former net debtor position and became a net creditor to the world” (Myers
1970:€270). Foreign holdings of American securities declined from US$5.4 billion
in 1914 to US$1.6 billion in 1919. “When their securities had been liquidated, the
Allies had to borrow and by the end of 1920, Great Britain owed the United States
4.2 billion dollars, France owed 3 billion and Italy 1.6 billion” (Myers 1970: 270).
The Edge Act of 1919 allowed corporations to carry on commercial banking
activities abroad and issue foreign securities. Between 1914 and 1916, American
banks led by National City Bank opened branches in Buenos Aires, Rio de Janeiro,
Santiago, and Havana. In 1927, National City Bank had branches across China, with
the largest amount of loans, assets, and overdrafts in Shanghai, totaling US$8.7
million. Between 1920 and 1929, “the total of American foreign investment, direct
and portfolio, increased from US$7 to 17 billion” (Myers 1970: 96). By 1930,
“European firms and governments were far and away the largest borrowers under-
written by National City” (Miller 1993), and in 1933, National City Bank was present
in twenty countries with seventy-six branches (Annual Reports of the Comptroller of
the Currency 1927–29). After World War II, First National City Bank and Chase
Manhattan led the return of U.S. financial firms to international markets. In 1961,
First City Overseas Investment Corporation was created for new U.S.-based subsidi-
aries and affiliates. In 1966, the newly named Citibank introduced Dollar Certificates
of Deposit in London and a year later, the first international credit card, which would
later become MasterCard. Under the leadership of Walter Wriston (President and
Chairman from 1967 to 1984), Citi began to aggressively expand abroad its corporate
and retail operations. Once the Soviet Union fell, Citibank became one of the first
foreign-owned banks in Russia and returned to China in 1995. After the merger with
Travelers in 1998, under the guidance of Sandy Weil, Citi’s presence in over 100
countries began to suffer setbacks. Foreign retail operations were cut back in the
2003–7 period, after legal and risk management problems in Italy, Japan, Australia,
and India. (For more details of the post-2008 period, see Chapters 2 and 4).

JP Morgan: the first U.S. lender of last resort

JP Morgan opened JP Morgan & Company in 1861. Willing to invest in new
scientific and industrial ventures in the late 1870s, he funded the work of both
24╇╇History of international banking
Thomas Edison and Andrew Carnegie. In the crash of 1873, Morgan orches-
trated a compromise between the battling railway interests, establishing himself
as the mediator in financial rescues. In 1893, in order to calm the markets during
the bimetallism currency crisis, President Cleveland called on Morgan to rescue
the Treasury’s gold supply by setting up a special bond issuance, guaranteed by
JP Morgan & Company. Assuming the mantle of central banker, “Morgan spent
most of the decade reorganizing bankrupt railroad and industrial companies.
When the government all but ran out of gold in 1895, he raised 65 million dollars
and made sure it stayed in the Treasury’s coffers” (Strouse 1999: 66). In 1907,
without interstate or federal regulations in place, banks functioned haphazardly
across the country with processing and clearing house operations in New York.
As a result of failed commodity ventures in October 1907, New York-based
Knickerbocker Trust could not meet its obligations with US$60 million dollars
on deposit, and only US$10 million in cash. With no national central bank, the
Government called on Morgan to bring together the heads of all major New
York banks to arrange a loan to Knickerbocker Trust in order to calm markets
and stem the flight of gold from New York, staunching a potential crisis in
London and Paris.

The creation of the Federal Reserve and U.S. income tax: 1913
The Stock Market Crash of October 1929 and period of the Great Depression
happened against all expectations. Irving Fischer, respected U.S. economist had
stated only a few months before that “stock prices have reached what looks like
a permanently high plateau” (Shull 2005: 96). “Tuesday, 29 October, was the
most devastating day in the history of the New York stock market” until October
19, 1987, and September 15, 2008 (Galbraith 1988: 133). New York banks
increased loans in order to avert a money panic, as banks outside New York
reacted “by calling home over two billions” (Galbraith 1988: 136).
The two major New York banks with international operations, National City
and Chase National, suffered huge losses of money, prestige, and credibility.
Charles Mitchell, head of National City was arrested on tax evasion in 1933,
accused of stock manipulation and insider trading. The repercussions of the Great
Crash and the subsequent reforms are discussed in Chapters 4 and 6.
From the end of World War II until the 1980s, U.S. banks consolidated, with
investment banks focused on traditional underwriting and advisory services.
Through the early 1990s, American banks began to merge, starting at the regional
level.8 The 1994 repeal of the McFadden Act of 1927, which had prohibited
interstate branching by commercial banks, precipitated a surge of acquisitions.
The announcement of the Travelers–Citibank merger in 1998 brought about the
repeal of the Glass-Steagall Act (1934), which had established the separation
between commercial banking and securities underwriting activities, including
insurance. Following the enactment of the Gramm-Leach-Bliley Act in 1999,
most major U.S. corporate commercial lenders began to engage in investment
banking (see Chapter 2).
 History of international banking╇ ╇ 25
The Eurodollar and Eurobond market
Eurodollars was the term for dollars on deposit outside of the United States, “an
international money market focused on short term credit flows, while the Eurobond
market is an international capital market dealing with long term bonds (debt)”
(Hughes and McDonald 2002). In 1948, under the Marshall Plan (European
Recovery Program), the United States provided US$13 billion in aid to help
rebuild the infrastructure and industrial base of war-torn Europe. Within a decade,
American corporations such as IBM, General Motors, and General Electric
expanded into Europe, generating vast flows of US dollars. This phenomenon
coincided with a weakening of British trade hegemony following the 1956 Suez
Canal crisis, and the recovery and gradual return of Germany to the international
financial market after 1957, increasing the need for US dollar-based instruments.
The first international transactions between the United States and the European
Economic Community were in the Eurobond market, and took place between
European investors who owned dollars and European borrowers who wanted
dollars. SG Warburg of London (who created the market in 1963 with a US$15
million issue for the Italian State Highway Authority) competed with Credit Suisse
for the first 1.8 billion Eurobond issue by the European Economic Community.
“About $4.8 billion of Eurobonds were issued from 1963 through 1967, rising to
$17.5 billion in the five years through 1972” (Glover 2013).
The establishment of the London Interbank Offered Rate (LIBOR), in 1963, set
the criteria for the euro currency interbank market, channeling flows of capital
between international banks. (The Libor scandal on manipulation of rates
between 2008 and 2012 will be discussed in Chapter 7). President Nixon’s deci-
sion to decouple gold and the US dollar in August 1971, and the 1973 oil crisis,
generated a flood of petrodollars (oil was denominated in US dollars) recycled in
U.S. and British banks. Between 1973 and 1988, euro deposits increased from
$300 billion to $1.2 trillion, the result of the flow of petrodollars and the resur-
gence of Asian economies. As international banks used the euro bond market as
a safe haven for placing surplus funds short term, it created a need for new clear-
inghouses and oversight mechanisms.
In 1973, Society for Worldwide Interbank Financial Telecommunications
(SWIFT) was created in Brussels, with 239 banks in 15 countries to establish
common standards for financial transactions and standardization of financial
messages. In 2009, it expanded to centers in Switzerland, the Netherlands and the
United States. (Global syndicated loans and fixed income securities markets are
examined in Chapter 2.)

Financial expansion and reciprocity in foreign markets

U.S. bank presence abroad

In 1960, only nine U.S. banks had overseas offices, led by First National City
Bank, Bank of America, and Chase Manhattan. By 1970, the number increased
26╇╇History of international banking
to 80 banks with 540, increasing to over 900 by the 1990s. In the early 1970s,
U.S. banks held 30 percent of the world’s banking assets (by contrast, in May
1990 they held less than 10 percent). By the end of 1974, U.S. banks (with Bank
of America, Citicorp, and Chase Manhattan) were in the top five global banks by
total assets. As U.S. bankers sought access to the recovering economies in Europe
and Asia, there began a demand for reciprocity by foreign banks entering the U.S.
market, led by French, Swiss, and British banks and followed after 1878 by
German and Japanese banks.
Foreign corporate banks seeking to expand into new markets, took advantage
of more flexible regulation in the United States, which allowed foreign banks to
open interstate branches or subsidiaries. After the Crash of 1987, Alan Greenspan,
Chairman of the Federal Reserve, endorsed efforts by large industrial corpora-
tions to acquire banks, creating vast pools of capital which favored large mergers.
The U.S. Treasury decided that “the Government should encourage creation of
very large banks that could better compete with financial institutions in Japan and
Europe” (Nash 1987). In 1991, after the fall of the Soviet Union and the opening
of new markets across Central and Eastern European countries, U.S. and
European banks competed for market share in emerging markets across Asia,
Latin America and the former Eastern Europe. However, following the Asian and
Russian currency crisis of 1997 to 1998, 65 to 80 percent of the banking sector
of the Central and Eastern European countries came under foreign ownership, led
by Austrian (Raiffeisen, Ernst), Swedish (Swedbanken, Nordea), Italian
(Unicredit), and French (Société Générale) banks. For political and cultural
reasons, Germany did not pursue buyouts in these countries or in the former
Soviet Union. Deutsche Bank expanded its U.S. and Asian operations, while
Spain’s Santander expanded into Latin America.

The Bank for International Settlements

The Bank for International Settlements (BIS) “is an international institution,
founded in 1930 with the goal of resolving the reparations problems that arose
following World War I” (Yago xvi). However, in May 1931 when Austria’s largest
bank, Credit-Anstalt, collapsed, when called upon to help engineer a bailout, the
BIS did not have the power to intervene (see Chapter 4). In 1938 it was suggested
that the BIS serve as a clearing house or common fund to help finance trade and
stabilize economies, as volatility in exchange rates increased, but this plan failed.
The BIS came under severe attack after World War II, when it was revealed to have
violated neutrality and served as conduit for Third Reich confiscated gold, which
allowed the Nazi regime to purchase raw materials and equipment. At Bretton
Woods in 1944, the American contingent represented by Harry Dexter White and
Treasury Secretary Robert Morgenthau asked that the BIS be liquidated and
replaced by the IMF (Steil 2013). The BIS survived and, following the Smithsonian
Agreements in the 1970s, the BIS took on new advisory and regulatory functions
with the establishment in 1974 of the Basel Committee on Banking Supervision.
 History of international banking╇ ╇ 27
Following the Crisis of 1987, the Basel Committee set out recommendations
on capital adequacy requirements, which became Basel I. Basel II was set out in
2003, and in 2010 the framework for Basel III was established (see Chapter 6).

Post-World War II financial institutions,

multilaterals and international banking

Bretton Woods
The Bretton Woods meeting in July 1944 at Mount Washington hotel in Bretton
Woods, New Hampshire, brought together delegates from 44 countries to create
a global financial framework under the aegis of the United States. In a near-
completely devastated world, it established a system of fixed exchange rates with
one percent parity bands pegged to the US dollar, with the US dollar acting as
reserve currency, overseen by the International Monetary Fund (IMF), and the
International Bank of Reconstruction (World Bank). Following John Maynard
Keynes’ and Harry Dexter White’s blueprint, it established the United States as
guarantor of economic security. Until August 1971, when President Nixon expe-
diently decided to decouple the US dollar from gold and freed foreign exchange
markets (formalized in the December 1971 Smithsonian Agreements), the condi-
tions set out in Bretton Woods guided all global financial decisions.

The International Monetary Fund

The International Monetary Fund (IMF), established in 1944 in the framework of
Bretton Woods, was to provide international coordination of monetary policy;
coordination of inflation criteria; and coordination and oversight of trade
balances, in order to protect against the devastating post-World War I conse-
quences of hyperinflation, severe trade imbalances, and adversarial and disjointed
monetary policy.
This was accomplished by “making general resources of the Fund temporarily
available … under adequate safeguards” (IMF 2014) in order to allow nations to
correct balance of payments, stabilize currencies and regain market credibility.
De facto, after 1960 the IMF assumed the function of global lender of last resort
to sovereign governments, expanding from 30 members in 1947 to 103 in 1966,
and 187 in 2011.
Starting in the 1960s, the IMF increased in size and scope, its mandate enlarged
to include: technical assistance; consultative monitoring to new countries
(Africa); increased collaboration with the World Bank, the General Agreement
on Tariffs and Trade (GATT), and the Organisation for Economic Co-operation
and Development (OECD); and the creation of Special Drawing Rights facility
(SDR). With the fall of the Soviet Union, the IMF assumed a larger role in emerg-
ing economies: monitoring inflation, growth, and productivity as preconditions to
assistance (Article IV consultation). In the Asian and Russian crises of 1997–8,
28╇╇History of international banking
the IMF began to demand greater scrutiny of countries’ banking and financial
supervision, and regulatory soundness.
After 1998, the IMF worked in closer coordination with BIS, central banks,
and the World Bank to prevent as well as resolve banking crises. (See Chapter 5
on the Turkish crisis of 2001; see Chapters 4 and 5 on the global financial crisis
of 2008 and the EU sovereign debt crisis.)

The World Bank group

The World Bank and in particular the International Bank for Reconstruction and
Development was established in 1946 to provide long-term financing for the
reconstruction of Europe’s destroyed infrastructure. Its functions include the
promotion of economic development, with specific emphasis on the financing of
infrastructure investments, business and social development initiatives. Under the
presidency of Robert McNamara (1968 to 1981), driven by the emergence of new
nations across Africa, the World Bank expanded its role in non-OECD countries.
The interrelationship between the World Bank and international finance devel-
oped in the 1950s to promote closer cooperation between private business invest-
ment and joint public private endeavors in developing countries. The International
Finance Corporation (IFC) was established in 1956 as a member of the World
Bank Group, its function to be a multilateral source of loans for the private sector
in emerging markets. The first investment in 1958 was a US$1 million loan to
help finance Siemens’ projects in Brazil. The objectives of the IFC are financing
private sector projects in the developing world, helping private companies mobi-
lize capital, and providing technical assistance and advisory services to help build
financial markets.

European international banking: consolidation and

mergers pre- and post-Maastricht
The fall of the Soviet Union, and the creation of the European Union following
the currency crisis of 1992 to 1993 was accompanied by a series of financial
shocks, reversals, and major restructuring. Over the course of the decade and a
half from 1992 to 2007, Europe underwent privatization, reform, consolidation,
and deregulation.
The 1989 Single Banking Market Program, implemented in the 1993 Second
Banking Directive, established the single banking passport, which provided any
bank licensed to do business in one European Union member state reciprocal
rights to do business in all other European Union states. The goal was to establish
pan-European banks and to facilitate the creation of bank branches and subsidiar-
ies across the European Union. Domestic consolidation (see chart below) began
in the 1990s through privatization, deregulation, and liberalization prompted by
increased competitiveness, led by the United States. After the 1995 bailout of
Crédit Lyonnais, the largest French state-owned bank, the European Commission
had to address the issues of privatization, limits on state subsidies and the rights
 History of international banking╇ ╇ 29
of foreign banks to acquire any other EU member country banks (see also
Chapter 4). Under the provisions of the European Commission on Competitiveness
decision of July 1995 on state subsidies and privatization of state banks, any bank
in a European Union member state could set up a branch, subsidiary, merge or
acquire any bank in another member state.
Between 1997 and 2005, the European Union, and in particular Germany and
France remained heavily overbanked. Despite domestic mergers, cross-border
deals (outside of the Nordic region) rarely occurred, nor were encouraged.9
Cross-border mergers worked more smoothly in countries with long traditions of
financial and commercial cross-border interactions and interdependencies, such
as was the case with Finland’s Merita Bank, Sweden’s Nordbanken, and in the
Belgian-Dutch merger of Banque Brussels Lambert and ING.

Germany
Despite becoming Europe’s economic powerhouse, German banking remained
averse to consolidation. In 1997, Germany’s major merger occurred between
Bayrische Vereinsbank and Bayrische Hypotheken und Wechsel bank to create a
“bank of regions” with an emphasis on retail banking seeking to emulate the
United States approach to “super regional” banks (Dermine 2006). Deutsche
Bank initiated the first large scale US–EU merger with Bankers Trust in 1998.
However, despite powerful corporate and industrial cross-shareholdings and
international name recognition, German international banks represent only a
small share (about 35 percent) of the domestic market, which was dominated by
the State-subsidized Landesbanken until 2005 and savings institutions (see also
Chapter 4). Failed attempts at mergers between Deutsche Bank and Commerz
Bank, and Deutsche Bank and Dresdner in 2000 were symptomatic of the internal
fragmentation and lack of efficiency. Only in summer 2008, Commerz and
Dresdner were merged to create a new German mega bank.

France
From 1950 to 1980, France benefited from three decades of steady recovery and
growth in domestic retail and corporate banking. The largest banks (BNP,
Crédit Lyonnais and Société Générale) as well as the Bank of France and large
segments of the industrial base remained under Government majority owner-
ship. In 1981, a Socialist government under President Mitterrand imposed
nationalization of all private and semi-private banks with assets of over one
billion francs. As the economy faltered these measures were reversed by 1983,
following the British and U.S. model in favor of modified capitalism promoting
growth and an aggressive push for investment abroad. From the mid 1980s to
1993, corporations and banks were denationalized: Paribas in 1984, Société
Générale privatized in 1987, and BNP in 1993. Crédit Lyonnais was privatized
in 1999 and merged with Crédit Agricole in 2003. In 1999, BNP merged with
Paribas, rapidly diversifying from traditional commercial activities and
30╇╇History of international banking
corporate banking into investment banking, underwriting, proprietary trading,
and mergers and acquisition activity.

Italy
Italian banks, weakened by fragmentation, inefficiency, and close to 80 percent
public sector control, underwent an aggressive turnaround in the 1990s. Bank
ownership was further complicated by federal, regional, and municipal holdings as
well as century-old foundation and church holdings. Consolidation reduced the
number of banks from nearly 1,200 to about 900. In 2000, only about 15 percent of
the sector remained under state control. Five large international banking groups
dominated, further reduced to three, Unicredito, Intesa and Capitalia, by 2010.

United Kingdom
After two decades of post-war economic stagnation under heavy government
regulation, the U.K. economy surged under Prime Minister Margaret Thatcher’s
pro-privatization, pro-business, pro-market policies. The London euro dollar
market attracted global capital and new opportunities for U.S. investment banks,
led by Solomon and Morgan Stanley. The U.K. bank model of separation of
merchant bankers, stockbrokers, and jobbers under fixed commissions began to
unravel under intense U.S. competition. By 1984, merchant bankers began to buy
stakes in brokers and jobbers, and foreign banks led by SG Warburg and Morgan
Stanley were allowed to participate in the privatization of British Telecom. These
reforms culminated in the October 27, 1986 deregulation of the financial
merchant banking structures known as Big Bang.
U.K. banks concentrated on the United States, Far East, and emerging markets,
largely bypassing the European Union. Although U.K. banks were judged more
profitable and better run than their competitors, by 2007 after the failure and
government bailout of Northern Rock, the situation had deteriorated drastically
(see also Chapters 4 and 5).

Spain
After the acquisition of Banco Banesto in 1994, Santander began a process of
growth through mergers and acquisitions in Latin America and the United
Kingdom. Santander was the EU leader in successful cross-border mergers and
acquisitions, with the acquisition of Abbey National in 2004, and the Santander–
Royal Bank of Scotland–Fortis buyout of ABN Ambro in 2007 (which subse-
quently collapsed in 2008). Santander and BBVA, the leading Spanish corporate
banks, emerged relatively unscathed from the 2008 crisis until the failure of the
Spanish savings and thrift sector and the collapse of Bankia in 2012, requiring
massive EU bailouts (see Chapter 4).
Through 2013, cross-border banking mergers have been limited as each
member state maintained its own banking regime and internal regulatory
 History of international banking╇ ╇ 31
structures, coupled with economic patriotism policies: France, Germany, Italy,
and Spain avoided rigorously foreign buyouts of major domestic banks.

Central and Eastern Europe and former Soviet Union

Between 1991 and 1993, the countries of Central and Eastern Europe and the
former Soviet Union established central banks, reinstated domestic currencies, and
sought to create and restructure their banking sectors. The European Commission’s
1995 White Paper, “Preparation of the Associated Countries of Central and
Eastern Europe for Integration into the Internal Market of the Union” described a
number of major impediments including a lack of trained management, supervi-
sory bodies, appropriate legislation, and credit worthiness. The World Bank IFC
Emerging Markets Yearbook (1997) and the Fink et al. paper (1998) found the
sectors extremely weak due to: residual inefficient state ownership; ineffective
supervision due to lack of funding and training; excessive corruption due to crony-
ism and lack of accountability and information.10 In the aftermath of the 1998
ruble crisis, all Central and Eastern European banks had to be recapitalized (see
also Chapter 5).
Between 1998 and 2003, between 65 and 80 percent of these banking sectors
were foreign bought or acquired by the core EU banks: Unicredit, Raiffeisen,
Swedebank, Nordea, and Société Générale. Despite these economic challenges,
under the Accession Clauses of the Treaty of Nice, Poland, Latvia, Lithuania,
Hungary, the Czech Republic, Estonia, Slovenia, and Slovakia (as well as Cyprus
and Malta) became new members of the European Union in 2004, followed by
Romania and Bulgaria in 2007, and Croatia in 2013.

Global consolidation in banking

From the end of World War II until the 2008 U.S. subprime meltdown crisis,
through country and regional financial crises and bank failures (discussed in
Chapters 4 and 5), the world marched inexorably toward globalization, through
the increased liberalization of the flows of goods and factors of production
(including capital, although not labor) and the resulting expansion of the interna-
tional reach of business enterprises.
As amply discussed in the previous sections of this chapter, the internationali-
zation of banking activities can be traced to the early 1200s, and has never ceased
to expand. But until the early 1980s, it had rested fundamentally in green field
type initiatives by banks, such as the opening of representative offices and/or
branches overseas to explore trade financing opportunities, provide credit in
foreign currency to large institutional borrowers and/or capture personal savings
of individual customers in the host country.
It is only toward the end of the 1980s that a process of financial liberalization
that increasingly lowered the barriers to entry to foreign banks in most jurisdic-
tions around the world (see Chapter 2) and greater harmonization of banking
regulations among sovereign jurisdictions (see Chapter 6) created the conditions
32╇╇History of international banking
for their more aggressive allocation of capital in the establishment of commercial
and investment banking operations overseas
Table 1.3 at the end of this chapter illustrates this trend. It presents a list of
major domestic and international acquisitions and mergers involving OECD
banks around the world between 1989 and 2008. For the purpose of this table,
“major” is defined as either a merger between two of the top five competitors of
any particular jurisdiction (a country or, in the case of the United States, a state)
or an acquisition where the institution being acquired is one of the top five
competitors in its home jurisdiction.
A few observations to be more thoroughly explored throughout this book
already emerge from the examination of Table 1.3.
First, the establishment of national champions – defined as clear domestic
market leaders – tended to precede major cross-border acquisitions.
Second, U.S. and Japanese national champions, formed only around the
turn of the century, showed significantly less aggressiveness toward major
cross-border acquisitions than their European counterparts, formed during the
early 1990s.
Third, German and Swiss banks – the former facing domestic cultural barriers
to further domestic consolidation in commercial banking as a result of the relative
strength of state-owned Landesbanks and the latter already internationally well-
established in wealth management – were the ones that engaged in the most
important acquisitions of investment banks overseas.
This long period of market-driven expansion of geographic reach and broaden-
ing of the scope of activities by leading banks around the world came to a halt in
2008. The U.S. subprime meltdown crisis and global credit crunch forced govern-
ments to come to the rescue of many of their major financial institutions, a
process that included financial support for bank mergers without much regard for
potentially excessive concentration of market power.
Examples of such transactions were: the Commerzbank–Dresdner and Lloyds–
HBOS mergers in Germany and the United Kingdom, respectively; the absorp-
tions of Bear Stearns and Washington Mutual by JPMorgan Chase, of Countrywide
and Merrill Lynch by Bank of America, and of Wachovia by Wells Fargo in the
United States; and the acquisition of Fortis by BNP Paribas.
The crisis also brought about a thorough re-examination of bank regulation
globally, which resulted in significantly tighter standards of minimum capital
adequacy, minimum liquidity, and transparency and disclosure requirements, in
addition to expanded supervision and intervention power to bank regulators.
Faced with the need for immediate replenishment of capital cushions, interna-
tional banks began to divest from non-core operations, many of them overseas
businesses sold to home banks.
Examples of such transactions were the acquisitions by Capital One (United
States) of HSBC’s credit card operations and of ING-Direct in the United
States; the purchase by Itau Unibanco (Brazil) of Citibank’s Credicard subsidi-
ary in Brazil; and of Barclays (United Kingdom) of ING-Direct in the United
Kingdom.
 History of international banking╇ ╇ 33
Table 1.3╇ Major mergers and acquisitions involving OECD banks, 1986–2008

Country1 Domestic2 International3

France Crédit Agricole-Indosuez, 1996

Crédit Agricole-C. Lyonnais, 2003
-> Crédit Agricole
BNP-Paribas, 1999 ->
BNP Paribas
Germany Deutsche: M. Grenfell (UK), 1989;
B. Trust (US) 1999
Dresdner: K. Benson (UK), 1995
Bayerische Vereins-B. Hypotheken, HVB: Bank Austria, 2000; Credit
1998 -> HVB Anstalt, 2003 (Austria)
Italy C.Romagnolo-C.Italiano, 1995 -> UniCredito: HVB (Germany,
UniCredito Austria, C. Europe), 2005
Ambroveneto-Cariplo, 1997 ->
INTESA
Sanpaolo-IMI-B.Napoli,1999 ->
Sanpaolo IMI
INTESA-Sanpaolo, IMI, 2006 ->
Intesa Sanpaolo
Netherlands ABN-Amro, 1990 -> ABN Amro ABN Amro: Real (Br), 1998;
Antonveneta (It), 2005
NMB Postbank-ING, ING: Barings (UK), 1995
1991 -> ING
Spain B.Vizcaya-B.Bilbao, 1988 (BBV) BBVA: Continental (Peru), 1995;
BBV-Argentaria, 1999 -> BBVA Francez (Arg), 1996; Bancomer
(Mex), 2000
B.Central-B.Hispano, 1992 (BCH)
Santander-Banesto, 1994 Santander: Rio (Arg), 1997; Serfin
Santander-BCH, 1999 -> (Mex), 2000; Banespa, 2000 and
Santander ABN Real, 2007 (Br); Totta,
(Portugal),1999; Abbey (UK),
2004; Sovereign (US), 2005
United Britain HSBC(HK)-Midland (UK), HSBC: Marine Midland (US),1980;
Kingdom 1992 -> HSBC Roberts (Arg), 1997
Bamerindus (Br), 1997; Bital (Mex),
2002;
Household International, 2003 (US)
Source: Authors
1
Country or state of acquirer’s headquarters
2
Name of acquirer first; name of resulting financial group in bold at the end
3
Name of acquirer in bold; country of acquired in parentheses

However, as the global economy in 2014 continued to heal from the great
recession and the international framework of bank regulation across multiple
jurisdictions to evolve, important challenges remained for the boards of directors
and the management of banks around the world to navigate their companies
toward growth, and less volatile profitability, while also collectively contributing
to the restoration of society’s faith in the financial system.
34╇╇History of international banking
Notes
1.↜渕 These wars of conquest, religion and expansion included the Crusades; the Hundred
Years War (1347–1453); Dutch–Spanish and Anglo Dutch Wars (1558–1674);
American War of Independence (1775–1776); Napoleonic Wars (1799–1815);
Revolutions of 1848; Franco Prussian War of 1870; World Wars I and II.
↜渕2.↜渕 In spite of its political and military power, France never achieved a corresponding
level of economic power. This is explained by the power the absolute monarchy
retained over the State Treasury, and their refusal to transfer minting privileges to a
central bank to reform a corrupt and exploitative tax system or to establish independent
oversight of State finances.
↜渕 3.↜渕 Despite being leaders in international maritime trade, German and Nordic city states
of the Hanseatic League remained wary of banking and credit-based activities.
↜渕4.↜渕 This was contrary to the situation in the Austro-Hungarian, Russian, Mongol and
Ottoman Empires.
↜渕 5.↜渕 The term central bank does not appear until the mid 1800s.
↜渕 6.↜渕 European System of Central Banks
↜渕 7.↜渕 Standard Chartered was created by the 1969 merger of these institutions.
↜渕8.↜渕In the north east, Bank of America acquired Bank of Boston and Bank of New
England (1985); Wells Fargo expanded throughout the west, acquiring Signet Banking
Corporation, Crocker National Bank, First Fidelity Bancorp (1986–7), and Core States
Financial Corp (1990). In New York, Bank of New York and Irving Trust merged
into Bank of New York Mellon (1988); and Chemical, Manufactures Hanover Trust
merged with Chase Manhattan (1996). JPMorgan and Chase merged in 2000.
↜渕 9.↜渕 “For continental Europeans recent takeover battles and mergers constitute a radical
departure. But it will be pointless radicalism if politicians and bankers are unwilling
to permit a genuine efficient economic outcome. The arrival of the Euro will not in
itself, create competitive European financial markets” (“Shaking Up Europe’s Banks”,
Financial Times, 24 August 1999).
↜渕10.↜渕 The assets of the eight countries of Central and Eastern Europe totaled only US$188
billion, with disproportionately high liquid assets and bad loans.
2 International wholesale banking

Introduction
In this chapter we examine the process of adjustment and re-invention engaged
in by international banks over recent decades in order to compete effectively for
the business of their institutional clients – corporations, financial institutions, and
government entities.
We begin by exploring why most major commercial banks around the world
have chosen to engage in investment banking activities, and how they have sought
to achieve this goal and become fully-fledged wholesale banking (corporate
commercial plus investment banking) franchises.
We explore next the typical corporate commercial and investment banking
product offerings of international wholesale banks. We conclude each examina-
tion with examples drawn from publicly available information on the wholesale
banking activities of two major international banks, Citibank and Deutsche Bank.

The concept of wholesale banking

The 1990s were a period of rapid expansion and reinvention for the banking
industry globally. Three main factors affecting the fundamentals of financial
intermediation contributed to this expansion: significant regulatory changes; an
extraordinary acceleration in the use of digital technology; and the explosive
growth of securities markets.
On the regulatory front, substantial changes in response to a trend toward
financial liberalization came about almost simultaneously on both sides of the
Atlantic. In Europe, the Financial Services Action Plan (1999) formalized a series
of measures toward a single wholesale financial market and a more open retail
market in the European Union (EU), completing a process of gradual reduction
of barriers to cross-border financial intermediation initiated ten years previously,
with the EU Second Banking Directive (Dermine 2002).
In the United States, over six decades of regulations around both interstate
banking and universal banking were removed. In 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act revoked restrictions on interstate banking
and mergers among banks, first introduced in 1927 under the McFadden Act.
36╇╇International wholesale banking
The Gramm-Leach-Bliley Act of 1999 completed the elimination of regulatory
constraints on securities underwriting activities by commercial banks set in place
originally by the Glass-Steagall Act of 1933.
On the technological front, rapid acceleration of the paper-to-digital trend
revolutionized the ways in which financial information could be consolidated and
disseminated, contractual obligations established and monitored, and trades
conducted and settled.
Finally, and facilitated by the technological evolution mentioned above, there
was a huge increase in the volumes of savings managed outside the banking
sector, from insurance companies and pension and mutual funds to a myriad of
independent asset managers. As recorded by the working group commissioned by
the Bank for International Settlements’ (BIS) Committee on the Global Financial
System in 2007, financial assets managed by institutional investors had more than
doubled in most countries between 1995 and 2005: from US$321 billion to
US$1.507 trillion in Australia; from US$556 billion to US$1.432 trillion in
Canada; from US$1.176 trillion to US$3.008 trillion in France; from US$1.057
trillion to US$2.152 trillion in Germany; from US$1.759 trillion to US$4.014
trillion in the United Kingdom; and from US$10.546 trillion to US$21.811 tril-
lion in the United States (www.bis.org/publ/cgfs27.pdf).
Other things being equal, increased competition for a particular asset class in any
given market results in downward pressure on the credit risk spreads associated with
that asset class. As investment opportunities in one country became increasingly
available to savers from another country, credit spreads tended to narrow further. The
extraordinary reduction in the costs associated with bridging the information asym-
metry between savers and borrowers that resulted from this technological change and
financial liberalization, regardless of their geography, had the effect of substantially
reducing the financial margins banks could charge for top credit risks. The most
traditional core source of revenues for a commercial bank – carrying businesses’
credit risk on its balance sheet – became less and less financially rewarding.
The natural response of most leading commercial banks was to expand the
scope of their corporate banking activities into securities underwriting and corpo-
rate finance advisory services, such as project finance mergers and acquisitions
advice. The strategies adopted varied from building from within, acquiring inde-
pendent investment banks, and/or a combination of both. Nevertheless, once their
investment banking capabilities became institutionally well-rooted, most banks
proceeded to combine the offerings of corporate commercial and investment bank-
ing platforms under a single major organizational structure, the wholesale bank.
A selected list of well-known broker-dealers and/or investment banks acquired
by commercial banks, such as the acquisition of Morgan Grenfell by Deutsche
Bank (1990), prior to the global financial crisis triggered by the U.S. subprime
meltdown in 2008 is presented in Table 2.1.
As a final observation, government entities and other financial institutions
demand most of the same financial services offered by banks to large corporations.
For this reason, while choosing different denominations (e.g. Institutional Clients
Group, at Citicorp; Corporate Banking and Securities, at Deutsche Bank), most
 International wholesale banking╇ ╇ 37
Table 2.1╇ Commercial banks’ acquisitions of investment banks, 1989–2006

Year Acquirer Country of Target Country of Origin

Origin

1989 Deutsche Bank Germany Morgan Grenfell United Kingdom

1995 Dresdner Bank Germany Kleinwort Benson United Kingdom
1995 ING Netherlands Barings United Kingdom
1996 Credit Suisse Switzerland First Boston United States
1997 Nations Bank United States Montgomery Secs. United States
1997 BancBoston United States R. Stephenson United States
1997 Bankers Trust United States Alex Brown United States
1998 SBC Switzerland Warburg D. Read United Kingdom
1998 Credit Suisse Switzerland Banco Garantia Brazil
1999 Chase Manhattan United States Hambrecht & Quist United States
1999 Deutsche Bank Germany Bankers Trust United States
2000 BNP France Paribas France
2000 Citigroup United States Schroder United Kingdom
2000 Credit Suisse Switzerland DLJ United States
2000 UBS Switzerland Paine Webber United States
2001 SunTrust United States Robinson Humphrey United States
2003 Chase Bank United States R. Flemings United States
2003 Wachovia United States Prudential United States
2006 Wachovia United States A.G. Edwards United States
2006 UBS Switzerland Banco Pactual Brazil
2006 Wells Fargo United States Barrington Assoc. United States
Source: Authors

banks have converged to place the full spectrum of their corporate banking, capital
markets, and financial advisory services to institutional clients (large companies,
government entities, and financial institutions) under a single organizational
umbrella, a full service wholesale bank.

International corporate commercial banking

An international (or cross-border) loan is a credit obligation between a borrower
established in one national jurisdiction and a lender from a second national juris-
diction. A cross-border loan can be structured as a funded (e.g. a cash advance by
the lender to finance the exports of a borrower) or unfunded credit facility (e.g. a
bank guarantee made to an exporter on behalf of an importer); it can be provided
directly to a company, or take the form of credit support to another bank which, in
turn, takes the credit risk of that company; it can be secured (e.g. backed by some
sort of collateral such as inventory, receivables, a contracted flow of exports) or
unsecured; it can be short-term or long-term; it can be made by one bank alone, a
small group of banks (club deal), or a large number of banks with various roles and
taking different levels of risk (loan syndicate); and, finally, it can be extended with
full recourse to a particular borrower or with limited recourse to the borrower, with
different third parties taking the responsibility for specific risks (project finance).
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"I come for peace," replied De Soto, "and seek only a peaceful
passage through your land. I need food for my people and canoes
and rafts to cross the river, and I beg you to help me."
The Indians said that they themselves were in want of food, as there
had been a terrible sickness the year before, and that many of their
tribe had died and others had gone away for fear of the pestilence,
thus leaving the fields uncultivated. They also said that their
chieftain was a young princess and they had no doubt she would
receive them kindly and do everything for them. Having said this,
the chiefs returned to the other side of the river.
And now the Spaniards, looking across the river, saw that there was
a great stir in the village opposite. First, a very large and beautifully-
decorated canoe appeared upon the banks, followed by several
other canoes also very beautiful; then a gorgeous palanquin, borne
by four men, was seen coming toward the river; the palanquin
stopped at the banks, and from it a graceful girl, very finely dressed,
entered the state canoe. She sat down upon the cushions in the end
of the canoe, over which was stretched a canopy; she was followed
by eight female attendants who entered the canoe after she had sat
down. Then the six men who had just been to see De Soto entered
a large canoe which was rowed by a number of other Indians. The
canoe in which the princess sat was fastened to this one, and then
they started, followed by several other canoes in which were the
most noted warriors of the tribe.
The Spaniards were charmed with the beautiful young princess. Her
attendants brought with them a chair of state upon which she took
her seat after bowing to De Soto, and then they began a
conversation by means of the interpreter, Juan Ortiz. The princess
said that it was true the pestilence had left the tribe very poor, but
that she would do everything she could to provide them with food;
she offered half of her house to De Soto, and half the houses in the
village to the soldiers, and said that by the next day there would be
rafts and canoes ready to take the Spaniards across the river.
De Soto was much touched by the kindness of the princess and
promised to be her friend forever. Then the princess rose and placed
a large string of costly pearls around De Soto's neck, and he in
return presented her with a gold ring set with a ruby; and then, with
promises of help on the morrow, the princess and her people
returned to the village.
The next day the princess had the rafts made and the Spanish army
crossed the river; while crossing four horses were carried away by
the swift stream and drowned, for which the Spaniards grieved very
much, as these horses had been of great service to them in their
journey. When they arrived at the village they found very pleasant
quarters awaiting them; as there were not houses enough to hold all
the soldiers, some wigwams had been built in a beautiful mulberry
grove just outside the village, and the Spaniards were delighted to
stop a while with these friendly Indians.
The mother of the princess was a widow living some miles down the
river, and De Soto wished to see her, and, if possible, make a friend
of her, so the princess, as soon as she heard this, sent twelve of her
chieftains to invite her mother to visit her; but the queen refused to
come, and said that her daughter had done wrong to receive the
Spaniards. This made De Soto all the more desirous to make the
queen his friend, so he sent thirty of his men to see her, with large
presents and offer of friendship. The princess sent one of her
relatives to guide the party; he was a young man about twenty years
old, very handsome, and with fine manners. He was dressed in a
suit of soft deerskin which was trimmed with embroidery and fringe,
and wore a head-dress made of feathers of various colors; he
carried in his hand a beautiful bow, highly polished, so it shone like
silver, and at his shoulder hung a quiver full of arrows. The
Spaniards were delighted with the fine appearance of their guide,
who indeed looked worthy to serve the charming princess, and the
party left the village in high spirits.
The guide led them along the banks of the river, under the shade of
fine old trees; after a walk of some miles they stopped for their
noon-day meal, seating themselves in the shade of a beautiful grove
through which they were passing. The young guide, who had been
very pleasant and talkative all the way, now suddenly became very
quiet. He took the quiver from his shoulder and drew out the arrows
one by one; they were very beautiful arrows, highly polished and
feathered at the end; he passed them to the Spaniards, who
admired them very much, and while they were all busy looking at
them, the young Indian drew out a very long, sharp arrow shaped
like a dagger. Finding that no one was looking at him, he plunged
the arrow down his throat, and almost immediately died.
The Spaniards were much shocked and could not imagine why this
had happened, but they afterward found out that the young guide
was a great favorite with the queen, and that knowing she did not
want to see the Spaniards, who, he thought, might perhaps seize
her and carry her away, and not daring to disobey the princess,
whom he loved and respected, he had chosen this way to free
himself from his trouble.
The other Indians did not know where the mother was, so the
Spaniards returned without seeing her. De Soto was much
disappointed at this, and tried again to find her place of retreat, but
without success. In the meantime the Spaniards had heard from the
Indians that there were great quantities of white and yellow metal in
their country, and they thought it must be gold and silver; but when
the Indians brought it into camp, they found that the gold was
copper and the silver mica, and they were again disappointed.
The princess now told De Soto that about three miles away there
was a village which was once the capital of the kingdom, and that
there was a great sepulchre there, in which all their chieftains and
great warriors were buried, and that immense quantities of pearls
had been buried with them. De Soto, with some of his officers, and
some of the Indian chiefs, visited this place and found it to be a
large building three hundred feet long and over a hundred feet wide,
covered with a lofty roof; the entrance was ornamented with
wooden statues, some of them twelve feet high, and there were
many statues and carved ornaments in the inside. By the side of the
coffins were small chests, and in these had been placed such things
as it was thought the dead chieftains would need in the spirit world.
When an Indian died his bow and arrows were always buried with
him, as it was supposed he would need them in the "happy hunting-
grounds," and, besides, many other things, as you already know. In
these chests the Spaniards found more pearls than they had ever
dreamed of. It is said that they carried away from this place fourteen
bushels of pearls, and the princess told them if they would visit
other villages they would find enough pearls to load down all the
horses in the army. The Spaniards were delighted and proposed to
De Soto that they should make a settlement there, but he was
determined to go further on in search of gold.
He had noticed that for some time the Indians had not been so
friendly as they were at first; some of his soldiers had ill-treated the
natives—although he had given strict orders that they should not—
and now he felt sure that the princess meant to escape from the
village, and that her tribe would begin a warfare with his army. So
he thought the safest thing to do would be to compel the princess to
go with him when he marched away. He knew that the Indians
would not harm him if she were with him, as they would be afraid of
harming her, too; so he told her it was necessary for her to go with
him. The princess did not like this plan at all, but she said nothing,
and in a few days De Soto began his march accompanied by the
Indian princess, in her beautiful palanquin, which was attended by a
large number of her chieftains, all handsomely dressed, and wearing
their gorgeous head-dresses with their nodding plumes. For some
days they travelled through the forests, when one day, as they were
passing through a very thick wood, the princess suddenly leaped
from her palanquin and disappeared among the trees. She had made
this plan with her warriors, and De Soto never saw or heard of her
again.
It is very sad to think that a friendship which began so happily
should have ended thus, and had De Soto acted differently, the
princess would always have remembered him as a noble man; as it
was, she must have been sorry she ever trusted him at all. Had he
told her that he wished to leave her village, and to part with her and
her people as friends, she would, no doubt, have let him go in
peace; but by carrying her off he made her his enemy forever. His
only excuse is that he thought it would really be safer both for his
men and hers to make her go with him.
The Spaniards continued their journey, and in a few days came to a
large Indian village. The young chief received De Soto kindly, as he
had heard he did not come to make war. He took him to his own
house and gave his men pleasant quarters, and they remained there
two weeks. The Indians told them that there were copper and gold
farther on, and some Spaniards went to find it, but were again
disappointed. However, there were pearls in the rivers, and some
very beautiful ones were obtained. Many of these pearls which the
Indians had were of little value, as they had bored holes through
them with a red-hot iron so they might string them for necklaces
and bracelets. De Soto was presented with a string of pearls six feet
in length, with every pearl as large as a hazelnut, which would have
been of immense value, had not the beauty of the pearls been
dimmed by the action of fire. The Indians obtained the pearls by
laying the oysters on hot coals, and as the heat opened the shells
the pearls could be taken out. To please De Soto, the chief ordered
his men to do this in his presence, and from some of the largest, ten
or twelve pearls were taken about the size of peas. De Soto left this
pleasant Indian village and again commenced his march, and now
came many dark and sad days. The Indians he met after this were
mostly hostile, and there were many dreadful battles in which De
Soto lost men and horses. They journeyed summer and fall and
winter, passed through dense forests where the horses could
scarcely move, and marched over barren tracts of country where
they could get no supplies; they suffered from hunger and sickness,
and many died on the weary march, but De Soto would not turn
back, he was still determined to find gold. At length, when they were
almost worn out with travelling for days through a region more
dismal than any they had passed through, uninhabited, and filled
with tangled forests and swamps, they came to a small village, and
here De Soto discovered, not the gold he sought, but something else
which has made his name immortal. The little village was built on
the banks of a river, and when De Soto went down to its margin he
saw that, compared with the other rivers he had seen, it was like a
sea. The river was a mile and a half wide, and rolled swiftly by,
carrying with it trees and logs and driftwood. For ages this great
river had rolled from the lake country above down to the Gulf, but no
white man had ever looked upon it until now. De Soto, in his search
for gold, had discovered the great Mississippi, the largest river in the
United States, and one of the longest on the globe. The Indians
called the river Mesaseba, which means, in their language, the
Father of Waters.
De Soto did not remain here long, the chief was not friendly, and
after a few days' rest the Spaniards crossed the Mississippi and
continued their march.
Once they passed near an Indian village whose chief came out to
meet them. The chief said, as the Spaniards were more powerful
and had better arms than the Indians, he believed that their God
was also better than the Indian god, and he asked them to pray to
their God for rain, as the fields were parched for want of water. De
Soto replied that they were all sinners, but that he would pray to
God, the Father of Mercies, to show kindness unto them.
So he ordered the carpenter to cut down a large tree, which was
carefully trimmed, and then formed into a gigantic cross; it was so
large that they were two days in completing it, and it took one
hundred men to raise it and plant it in the ground. It was placed
upon a bluff on the western bank of the Mississippi. The morning
after the cross was raised the whole Spanish army, and many of the
natives, formed a solemn religious procession and walked around it.
De Soto and the chief walked side by side, and the natives and
soldiers followed after, two by two. It seemed for the time as if
Indian and Spaniard were not only friends, but brothers. The priests
chanted hymns and offered prayers, and then the whole procession
advanced two by two to the cross, knelt before it, and kissed it.
Upon the opposite shore of the Mississippi thousands of Indians
were gathered, who were watching the service with the greatest
interest; at times they seemed to take part in the exercises; when
the priests raised their hands in prayer, they too raised their eyes to
heaven, and lifted up their arms as if asking help, and the murmur
of their voices floated across the waters of the river, and mingled
with the sighing of the wind through the trees, and with the notes of
the Christian hymns, and with the words of the Christian prayers;
and the blue sky above smiled down alike on the haughty Spaniard
and on the simple native, as he kissed the great wonder cross, the
symbol of Him to whom all men are the same, and whose love
reaches down to all.
After the prayers the people returned to the village in the same
order, the priests going before and chanting the Te Deum; and Las
Casas, the historian, writing of this, says, "God, in his mercy, willing
to show these heathens that he listeneth to those who call upon him
in truth, sent down, in the middle of the ensuing night, a plenteous
rain, to the great joy of the Indians."
So the rain fell, and the Indian sowed his seed and gathered
harvests of golden grain; and the cross stood there in the shadow of
the forest, and the mighty river rolled on before it, and in the years
to come, when the memory of the Spaniard had almost faded away,
it was still to the red man a sign of the love of the Great Spirit, who
had helped them in their need.
De Soto did not stay long among these friendly Indians, but pressed
on his way. There were again toilsome marches and weary hours of
disappointment, and, at last, the brave heart of the leader grew sad
and hopeless. The climate was unhealthful, and De Soto was taken
sick with fever, and at the same time he was told that the chief of
that country was getting ready for a great battle, in which all the
neighboring tribes would join, and that they meant to kill every
Spaniard in the country.
But De Soto could fight no more battles, for he was dying. One by
one the faithful soldiers knelt by his bed, and weeping, bade him
farewell. He asked them to live as brothers, loving and helping one
another, and urged them to convert the natives to the Christian
religion. And so the brave soldier died, far from home and that
sunny Spain which he loved so well, and the whole army wept for
him, for they loved him, and grieved to think that they should see
him no more.
It was thought best not to let the Indians know of De Soto's death,
as they might attack the Spaniards at once if they knew their great
leader was gone. So De Soto was buried at night by torchlight, and
no salute was fired over his grave, nor any dirge chanted by the
priests; but the Indians suspected that he was dead, and even
visited the spot where he was buried; so the soldiers, for fear the
natives would remove the body after they went away, decided to
take it up themselves and sink it in the river. They cut down an
evergreen oak, whose wood is almost as heavy as lead, and
hollowing out a place large enough for the body, placed it in it, and
at midnight it was taken out to the middle of the river, into whose
depths it immediately sank. Then the soldiers, in the silence and
darkness, returned to the camp, and De Soto was left alone in the
wilderness, and only the stars and the river knew where he slept.
His soldiers built some boats and sailed down the Mississippi to the
Gulf, and after much hardship reached a Spanish settlement in
Mexico. Few were left of the brilliant company that had left Spain
three years before, and so ended the expedition which had sailed
away from home so gaily. Their search for gold had been like
following the will-o'-the-wisp, which leads on and on, and then
vanishes at last, leaving you alone in the darkness.
 CHAPTER XIV.
VERRAZANO.

In France, as well as other European countries, the wonderful

accounts of the wealth of India and Cathay had been listened to with
delight and surprise, and the king, Francis I., determined to send out
some ships and see if they might not discover the new way to the
East that people had been looking for so long. He thought, too, that
he would claim and settle a part of America, so that the New World
should not be entirely owned by Spain and England. Before this,
France had been content with sending a few fishermen to the
northern coasts of America, but they made no settlements, and, as
soon as the fishing season was over, always went back to France
again.
But in 1523 an expedition left France for the purpose of finding a
passage to Cathay, and exploring the coast of America. The
expedition was commanded by Giovanni Verrazano, an Italian. Soon
after leaving France, a tempest came up, and all the ships but one
were obliged to return; but Verrazano, with this one, the Dauphine,
went on to the Madeiras, and leaving that place in January, 1524,
sailed boldly across the Atlantic. After a voyage of over a month,
during which time another very severe storm overtook them, they at
last saw land. It is supposed that this was the coast of Carolina.
Fires were blazing all along the coast as far as the eye could reach,
and Verrazano knew by that that the country was inhabited. He
sailed along for many miles, keeping close to the shore, and was
delighted with the new country, which seemed more beautiful than
any he had ever seen before. The shore was covered with fine white
sand, making a beach nearly fifteen feet wide, quite level, except
here and there where the sand was formed into hillocks, which were
covered with strong short grass. Back from the shore were broad
fields, which were kept fresh by the numerous streams that flowed
into the sea, and still farther back stood immense forests, whose
great variety of color charmed the eye. Verrazano was surprised to
find here many kinds of trees that were unknown to him, and said
that no words could describe the beauty of these forests. "Think
not," he says, "that they are like the Crimean forests, or the
solitudes of Scythia, or the rigid coasts of the north, but adorned
with palm trees, and cypress, and laurel, and species unknown to
Europe, which breathe forth from afar the sweetest of odors."
And combined with the aromatic perfume of the pines was the scent
of the violets and roses, and of the beautiful lilies that swung in the
lakes, and everywhere birds were singing, and graceful deer looked
with startled eyes through the leaves of the hanging vines; and the
first impulse of the Frenchmen was to land and enjoy some of the
flowers and fruits of this fair land.
In the meantime the natives had come down to the beach, and
stood looking with wonder on the Frenchmen; but as soon as the
seamen rowed toward the shore the timid Indians fled toward the
woods. But the Frenchmen, by signs and friendly motions, made
them understand that they need not fear, and soon they all came
crowding round the seamen with cries of delight, pointing out at the
same time the best place to land. Verrazano, in turn, was delighted
at the appearance of the natives, whose fine figures, and beautifully
ornamented robes, and gayly decked out hair, placed them above
the common savages that the Frenchman expected to find in the
wilds of America. After a pleasant little call here, Verrazano kept on
his way, still going northward, carefully examining the coasts, and
finding everywhere the same luxuriant growth of trees and flowers.
Still, there was no good harbor to be seen; but as the ship was in
need of fresh water he decided to try and land. But this he found to
be impossible, as the waves broke with great force upon the open
beach, making it dangerous for any boat that ventured too near. The
natives stood on the shore watching his efforts, and stretched out
their hands as if inviting him to land, but he was obliged to give up
the attempt and go back to the ship. The natives still continued to
make friendly signs, and Verrazano replied to them as well as he
could, and ordered a sailor to swim ashore with some presents. The
man obeyed, and got near enough to the shore to throw the gifts
into the ready hands of the Indians; but as he turned to swim back
to the boat he was overpowered by the breakers and dashed upon
the beach.
The Indians immediately surrounded him, and lifting him up gently,
carried him farther up on the beach, out of the reach of the waves.
But as soon as the man recovered from his faint, and saw where he
was, he began crying loudly for help, and as the natives answered
his cries with louder and shriller ones of their own, Verrazano and
his companions expected to see the unfortunate seaman speedily
killed by the savages; but in this they were mistaken, for the
Indians, after they had sufficiently admired the whiteness and
delicacy of his skin, built a fire, and did all they could to help him out
of his trouble. Verrazano met the same kindness from all the people
along the coast; he found them always ready to offer their
friendship, and to be of use whenever they could. It is sad to think
that for all the good he met at their hands he should allow his men
to return evil; but such is the case, for one of them having
kidnapped a little Indian boy, the captain not only allowed him to be
received on the ship, but carried him away to France, and none of
his friends ever heard from him again.
The Dauphine went on up the coast, turning in now and then to
explore, a little way, the many bays and rivers which it passed, and
reached, one pleasant day, what is now known as the Bay of New
York. Leaving his ship, Verrazano took a boat and sailed into the
inner bay, approaching the island on which New York City now
stands. This was the most beautiful spot that the voyagers had yet
seen. All around stretched the wooded heights of New Jersey and
Long Island, and the great river coming from the north seemed to
promise a fair passage to some far distant land. The natives came
thronging down on the beach from both shores, and, from their
friendly tones and signs, seemed to offer a welcome; but before
Verrazano could go very far into the "beautiful lake," as he called the
harbor, he was compelled by the rising of the wind to put back to
the ship and sail on. But his visit is interesting, because he was
probably the first white man who had visited the beautiful harbor
which to-day is known as one of the greatest commercial ports in
the world.
And now the course was changed, and the Dauphine sailed east
through Long Island Sound until Narragansett Bay was entered, and
then a northerly course was taken, and the harbor of Newport
reached. Verrazano describes the country as very fair and pleasant,
and indeed it must have appeared so, with its fields of blossoming
trees and miles of stately forests. Before the boat touched the shore,
the natives flocked down to the beach, and thirty canoes surrounded
the vessel, all filled with the wondering Indians. At first they did not
come very near, but sat at some distance from the ship, silently
admiring the white-skinned strangers before them; and then they
suddenly gave a long shout of welcome, and began to come near to
the ship and take the gifts of beads and bells and knives that the
seamen threw out to them, and finally their last fear vanished and
they entered the ship. Here, as farther south, Verrazano was struck
with the fine faces and figures of the natives. Among them were two
kings, the elder one about forty years of age. He was dressed in a
robe of deer-skins beautifully embroidered, and wore around his
neck a chain of gold set with large stones of various colors. His head
was bare, but his hair was carefully arranged, tied behind, and
ornamented with pearls and feathers. The younger king, who was
about twenty-four, was dressed in the same way, and all the warriors
who accompanied them wore deer-skins highly ornamented and
polished. The women did not approach the vessel, but remained at a
distance, seated in the canoes; but Verrazano saw that they were
fine-looking, and modest in behavior, and that they too wore the
finely-dressed skins of the deer, and had their hair arranged in a
variety of ornamental braids. The hair of the older women was
arranged very much like that of the women of Egypt and Syria, and
the married women were distinguished by ear-rings of certain,
peculiar form.
Verrazano stayed here some fifteen days, pleasantly entertained by
the natives, and finding them always friendly and trustful. He made
several trips up the bay, and examined the shores closely in search
of gold and silver, which he found the natives thought much less of
than they did of the brass rings and strings of beads that he
bestowed upon them. But evidently the bay did not lead to Cathay,
and no precious metals were found on its borders, and so Verrazano
got the Dauphine under way again, and taking affectionate leave of
the Indians, sailed out into the Atlantic and up the coast toward
Maine. And now the country changed very much in appearance, and
the natives were less friendly. There were no beautiful palm-trees, or
delicate blossoms of apple and peach, and in place of green fields
and sunny meadows, were only sand and rocks. The natives would
not come near the ships or let the Frenchmen land, and the trading
was all done by means of a long cord stretching from the ship to the
shore, and over which the articles were passed, the natives
retreating hurriedly to the woods as soon as the bargains were
made. But Verrazano landed in spite of the opposition of the Indians,
and went several miles into the country. He found that the huts were
poorer than those at Narragansett Bay, which were made of split
logs and nicely thatched, and that the country was poorer, too, than
any he had seen yet. When he started back to the ship the natives
followed his party, shooting arrows at them, and showing their anger
by fierce, wild cries. But the Frenchmen reached the ship in safety,
and were soon sailing away, still northward, and soon reached the
shores of Maine, whose outlying islands, Verrazano said, reminded
him of some portions of the Adriatic. And then, being short of
provisions, and knowing that the whole wide sea lay between him
and France, he turned the Dauphine homeward, having explored the
Atlantic coast, from the Carolinas to Maine, more carefully than any
other navigator had yet done. When he returned to France he gave
it as his opinion that the passage to Cathay did not lie through the
New World, and stated that America was very much larger than
Europeans had hitherto believed. His voyage is considered important
because of the good idea he gave of the eastern coast of America,
and because he corrected the wrong belief that the New World was
as small as other navigators had declared.
But he could not make them believe that there was no passage to
Cathay through the fair provinces of the New World: that beautiful
dream was not dispelled for many a long year after Verrazano and
his bold crew had become old and gray.
 CHAPTER XV.
JACQUES CARTIER.

Verrazano told such wonderful stories of America that many other

Frenchmen felt a desire to go and see the country for themselves
and find out if the stories were true. But some years passed before
any new expedition was sent out, and even then it was only
undertaken because the French became jealous of the power that
Spain was getting in the New World.
Spain already claimed Mexico, Peru, Florida, and the Pacific, and all
at once the French king became alarmed and asked if God had
created the new countries for Castilians (Spaniards) alone! His
courtiers hastened to tell him no, indeed, and that France had as
good a right as any other country to own and settle America. And so
Verrazano was sent out, and after him, ten years later, came Jacques
Cartier, who left the fort of St. Malo in April, 1534.
 JACQUES CARTIER FINDS NEWFOUNDLAND INHOSPITABLE.

The ships sailed across the Atlantic, taking a more northerly course
than usual, and in twenty days reached Newfoundland. Cartier
coasted along until he reached the Straits of Belle Isle, which he
passed through and entered the Gulf of St. Lawrence, and then
sailed leisurely along the western coast of Newfoundland. But much
to his disappointment the country was not beautiful and pleasant, as
he had heard, but, on the contrary, very dismal and inhospitable.
The fertile valleys and green fields that Verrazano had spoken of
were nowhere to be seen, but instead only rocks and stones, and
wild rough coasts.
The natives were very savage in appearance and not very friendly;
and Cartier made a very short stay here, and steered across the Gulf
to a bay on the opposite side, where he found the natives also in
poor condition, living on raw fish and flesh, without clothing, and
using their upturned canoes as houses. But the country itself was
much pleasanter than that on the opposite side of the Gulf, and so
Cartier decided to take possession of it. Accordingly he called all his
company together, and with great ceremony raised a huge cross and
claimed the whole region for the King of France.
The natives had all gathered round and stood looking on curiously.
There stood the cross, thirty feet high, carved with three fleur-de-
lys, and the inscription, "Vive le Roi de France;" and not at all
understanding what right these strangers had to their country, the
chief and his principal men told Cartier, as well as they could by
signs, that they would much rather he should take the cross down
again and go away with his ships and leave them in peace. And
Cartier explained to them in turn that the king he served was very
powerful and rich, and able to send many soldiers and take the land
by force if he so wished; but that also he was a very kind and loving
king, and wanted to do all that he could for the Indians, and that the
very best thing that could happen to them would be to have some
Frenchmen come there and settle and teach them the arts of peace.
And then he gave them some trifling presents, some strings of glass
beads, and yards of bright calico, and bits of colored glass, and
shining penknives, and the Indians were so impressed by these gifts
that, partly from a desire to obtain more, and partly through fear of
the great unknown king, they not only let the cross remain standing,
but what was much more, the chief consented to let his two sons go
back to France with Cartier, and see for themselves the riches and
power of his country and king.
And so the two Indian boys sailed away with these white strangers,
and learned stranger things than they had ever dreamed of. Never
before had they been farther away from land than they could go in a
day's journey in their birch bark canoes; but now, as they stood on
the deck of this great ship, and saw the land fade from their sight,
and the great, boundless sea all around stretch away and away until
it met the sky, and the sun drop down into the water and redden its
glossy waves, it was all so different from what they had been used
to that their hearts grew sick with longing for home and the fear
that they had sailed into a new world and left their friends forever.
But by and by, as the familiar stars came out, and the moon's
friendly face appeared, and the night came softly down on the sea,
the ship ceased to seem so strange and looked very comfortable and
pleasant, and when the morning came they did not look backward,
but only forward, to that mysterious France toward which they were
sailing, and which they reached after a pleasant voyage early in
September.
Cartier had been gone four months, and his account of his voyage
was so encouraging that it was decided to send out another
expedition as soon as the winter was over. The Indian lads were well
received at the French court. The king was very kind and
condescending and generous, and told them that it would be his
greatest pleasure to send over some of his subjects, and make all
the Indians Christians. And the two boys, Taignoagny and Domagaia,
looked at the silk and velvet robes of the French nobles, and at the
diamonds and rubies that glittered in their sword-hilts, and at the
king's beautiful palaces, and the marble cathedrals and splendid
mansions of Paris, and decided that to be a Christian must be indeed
a happy lot, and expressed their willingness to have their whole tribe
converted as speedily as possible.
Their whole visit was a succession of wonders and delights, for
France was more beautiful even than their wildest dreams of their
own "happy hunting-grounds," where it was supposed that the
Indians had everything they could desire. But what Canadian Indians
had ever dreamed of such a land as this, with its fields of flowers,
and miles of ripened grain, and sunny slopes purple with luscious
grapes? Even the winter was pleasant, with but little snow and ice
outside, and warm, comfortable rooms inside. Very different from
their own winter, where the snow lay thick on the ground for
months, and the rivers and lakes were frozen, and the pines and
balsams hung thick with icicles whose musical tinkling seemed like a
sad song for the summer that was gone. Yes, Cartier had told the
truth, his king was very powerful and rich and great, and when the
spring came and another fleet left St. Malo, Taignoagny and
Domagaia were quite in love with France, and very eager for the
voyage to be over, so that they could tell their friends all the
wonderful things they had seen there.
Cartier and his companions were in fine spirits, for the voyage
promised to be a fair one, and they were all sure that honor and
wealth awaited them in the New World. In August they arrived at
the Gulf of St. Lawrence, and passing Anticosti Island entered the
mouth of a great river. Taignoagny and Domagaia said that the name
of this river was Hochelaga, and that it came from a far distant
country, and was so long that no man had ever seen the beginning
of it. Cartier listened to this story with interest; the stream was so
broad and deep that he thought perhaps it was not a river at all, but
a strait, and that he had at last discovered the long looked-for
passage to the East. But the Indians told him that as they went up
the river it became narrower, and its waters changed from salt to
fresh, and then Cartier saw that it could not be the wished-for strait,
and so made no haste to follow its course.
He sailed slowly up the great river, which is now known as the St.
Lawrence, examining the country on either side, and looking for a
good place to spend the winter. He passed the Saguenay, and some
distance beyond anchored at an island called by him Isle-aux-
Coudres, because of the abundance of hazels, and after a short stay
here, sailed still farther on and stopped at another island, which
abounded in grapes and which he called Bacchus Island—now
known as the Isle d'Orleans. Here he received a visit from the
natives, a large number of whom had come from the shore in
canoes to look at these white visitors.
Cartier invited them on board his ship, but they were afraid to come
very near until Taignoagny and Domagaia appeared, and assured
them there was no danger, and that the Frenchmen were friends.
The Indians were rejoiced to see their two young countrymen again,
and came crowding aboard the ships to hear their wonderful stories
about France. Donnacona, the chief, made a long speech, in which
he offered his friendship to Cartier and thanked him for his kindness
to his young countrymen, and then kissed his hand and placed his
arms about his neck in token of gratitude and trust, and then he
invited Cartier and his men to his own home at Stadacona, a little
village which stood where now stands the beautiful city of Quebec.
The village stood on the cliffs, high above the river, which flowed
beneath, and which formed there a pleasant and safe harbor for the
ships. So Cartier accepted Donnacona's invitation and they all went
to Stadacona, and spent some time there very pleasantly, getting
acquainted with the Indians and learning their mode of living,
listening to their stories of bear and deer hunts, and their accounts
of snow-shoeing and tobogganing, and expeditions up the river and
into the great forests all around.
Particularly they liked to dwell upon their battles with another great
chief who lived farther up the river. This was Hochelaga, after whom
the river was named, and who was the most powerful chieftain in
the country. Donnacona was very jealous of him, and was therefore
much surprised and grieved when one day Cartier said that he had
made up his mind to go and pay Hochelaga a visit.
In vain Donnacona tried to make him believe that the way was long
and dangerous, and that Hochelaga would probably take him
prisoner and treat him and his men very cruelly. Cartier was all the
more resolved to go. And then Donnacona resolved to play a trick
upon him, and see if he could not frighten him from going to
Hochelaga, and so keep all the shining looking-glasses and knives,
and bright basins, and pretty glass beads for himself and his own
people, for he could not bear to think that any of this wealth should
fall into his rival's hands. So one afternoon, as Cartier and his friends
stood looking over the sides of their ship, they saw a most horrible
sight. A canoe pushed out from shore and approached the vessel. It
was paddled by some disguised natives, and in it were three Indian
devils. And dreadful devils they were—the Frenchmen had certainly
never imagined such a kind before. Their faces were as black as
soot, and they were dressed in black and white hogskins, and wore
horns more than a yard long on their heads. And as they neared the
ship they shouted and yelled in a very diabolical manner, and
altogether acted as much like devils as they knew how. And crowds
of natives followed them down to the bank, shrieking and howling
and throwing up their hands, and then rushing back to the woods as
if in great fright. Taignoagny and Domagaia, who stood by Cartier's
side, also threw up their hands, and looking toward heaven declared
that these devils had come from Hochelaga, and that the god
Cudruaigny had sent them to warn the French that all who
attempted to visit Hochelaga should perish on the way, for
Cudruaigny would send snow-storms, and ice-storms, and cold
piercing blasts from the north, and the French would all die
miserably of cold and exposure.
But the French only laughed at the devils, and called Cudruaigny a
"noddy," and said they had received word from heaven that the
weather would be fair, and that they would all be defended from the
cold, and so the Indian devils, who were no match for French
priests, turned back to the shore, and the natives, giving three loud
shrieks in token of their defeat, took the devils in their midst and
began a wild dance on the beach; and the next day, when Cartier
started for Hochelaga, they sent their good wishes with him, and
promised protection to those who remained behind.
For days and days Cartier sailed along the beautiful banks of the
great river, stopping now and then to enter the great forests which
were full of all kinds of game, or to gather the wild grapes that hung
full on every side; and everywhere the natives came down to the
beach and greeted them pleasantly, and when they reached
Hochelaga they found a great crowd of Indians waiting to receive
them and lead them to their village. Cartier and his companions put
on their velvet mantles, and plumed hats, and dazzling swords, and
marched on with great pomp, followed by the admiring crowd.
The village was very pleasantly situated; in front flowed the shining
waters of the Hochelaga, which was nearly a mile wide at that point,
and behind, like a protecting spirit, stood the beautifully wooded
mountain which Cartier called Mount Royal, a name which it still
bears. The village itself stood in the midst of great fields of Indian
corn, ripe for gathering, surrounded by palisades for defence against
hostile tribes. There were about fifty huts, that of the chief being the
largest, and situated in the centre near the great public square,
where all the people now gathered and looked with wonder and
reverence on these new-comers. And the mothers brought their little
children in their arms, and begged that these white strangers would
touch them, thinking in some strange way that even the touch of
these wonderful visitors would bring blessing with it. They were
quite ready to believe that these white men came from a land richer
and greater than their own; indeed they would have believed that
they came from heaven itself if Cartier had told them so, for all the
Indians always worshipped beautiful objects, and they thought that
men whose skin was soft and white, and who wore such rich
clothing, must belong in some great land where men were nobler
and better than poor half-clothed races like their own.
And so they brought their sick king and laid him down before Cartier,
and asked him to touch him and heal him, and Cartier knelt down
and rubbed the king's useless limbs and prayed over him; but more
than that he could not do. But the sight of the kneeling Christians,
and the sound of their prayers uttered to an unseen God, filled the
Indians with awe: they too knelt down and looked toward heaven,
and made the sign of the cross, and prayed as well as they knew
how, that the strangers' God would pity them and heal their sick and
lame and blind.
King Agouhanna then gave his crown of porcupine quills to Cartier as
a token of gratitude, and as this was the only thing of the least value
that the poor chief possessed, Cartier accepted it with great
courtesy, and in return presented the tribe with some of those brass
rings and brooches and beads and knives that Donnacona had tried
in vain to keep for himself. And these made the Indians wild with
joy, and so altogether the visit of the Frenchmen was a great
success, and when they returned to Stadacona they told such stories
of the kindness and good-will of the Indians at Hochelaga that
Donnacona was quite devoured with jealousy and hated his rival
more than ever.
The French built a fort now, and got ready to spend the winter
comfortably, and their preparations were made none too soon, for in
a few weeks the river had frozen over, and the ships lay buried in
snow, and the strangers began to see a Canadian winter for
themselves and judge how they liked it. Although very different from
any winter they had ever spent before, it might have been a
pleasant one had not a terrible disease broken out among the
Indians, which soon spread to the French camp. In a short time
twenty-four of Cartier's men had died, and the rest were all sick but
three.
Cartier became afraid that the Indians would attack the fort and
destroy his men, if they learned of their weakness, so he ordered
them to keep away, and whenever any of them came near he had
his men beat against the sides of their berths with sticks and
hammers, so that the Indians would think they were at work. But
the Indians, instead of meaning harm, thought only of doing good.
As soon as they learned that the French had taken the disease they
came to them and offered their own remedies, and tried in every
way to be of use. The squaws brought to the camp the boughs of a
certain tree and taught the French how to prepare tea from the bark
and leaves, and this medicine was so powerful that in a few days all
the sick became well, not only those who were suffering from this
disease, but also those who were afflicted with any other malady. It
is not known exactly what this tree was; it may have been the
sassafras, or possibly the spruce; but whatever it was it cured the
sick and the French were very grateful, and said that all the
physicians in France could not have done as much in a year as these
Indian squaws accomplished in one day by means of this wonderful
medicine.
The French made a very cruel return for all the kindness they had
received from their dark-skinned friends, for in the spring, when
Cartier left Canada, he carried with him the good chief Donnacona
and nine of his countrymen as prisoners to France. It was a very
wicked and treacherous thing to do, for Cartier had invited the chief
and his men on board the ships to take part in a feast that was
being given in honor of his departure; but as soon as he saw that
the Indians were in his power he gave orders for the ship to sail,
and so Donnacona and his friends were carried away from their
relatives, who stood crying and begging for mercy on the bank of
the river, and that was the way the French left Canada and its
friendly people, who had shown them nothing but kindness and
trust.
It was not usual for Frenchmen to treat Indians in this way, for of all
the Europeans who came to America the French were the most
beloved by the natives. They were the only ones who could live
peaceably side by side with their Indian neighbors, who grew to love
and respect them, sometimes attending their churches and often
bringing their children to be baptized by the kindly French priests,
and Cartier being a Frenchman was afterward very sorry for the
deceit he had practised, and, no doubt, would have taken
Donnacona and his captive friends back again to Canada; but the
Indians could not live in exile, and before long they had all died of
homesickness except one little girl, who indeed grew up and married
happily, but who still longed all her life for a sight of the wide shining
river and the dark clustered pines of her native land.
Four years after, France made another attempt to settle Canada.
Cartier then met with the reward of his former treachery. The
Indians were no longer friendly, and refused to believe him when he
said that only Donnacona was dead, and the rest were all married
and living in France as great lords.
Besides, the French had been disappointed in not finding gold and
silver in the country, and so after awhile Cartier's ship sailed back to
France again, and it was nearly fifty years before another attempt
was made to make a French settlement in the northern part of
America.
 CHAPTER XVI.
THE HUGUENOTS.

About the middle of the sixteenth century a great religious quarrel

arose in France, because some of the people wished to leave the
Roman Catholic Church and found a new religion. These people were
called Huguenots, and the king of France and the priests of the
Church, and most of the great noblemen, thought they would be
doing a very nice and good thing if they could make the Huguenots
come back into the Church again and be satisfied with their old faith.
So many cruel things were done by the king and his ministers, and
the poor Huguenots had a very hard time of it. They were shot and
burned and hanged—men and women and little helpless children;
and the more Huguenots were murdered, the more the king thought
that he was doing God good service.
But there was one great nobleman who thought the Huguenots were
right, and joined himself to them and said he would give his money
and his life to protect them. This man was Admiral Coligny; and as
he was very rich and powerful he decided to send the Huguenots
away from France to America, where they would be able to live
peaceably, without fear of the cruel king.
So Coligny sent out some ships, carrying as many Huguenots as they
could, to the New World, and every one thought that the trouble
would be nicely settled in this way and that France was well rid of
the Huguenots.
The company was commanded by John Ribault, a very good and
brave man, and one not likely to be discouraged, for it needed a
brave heart to lead these people so far from their loved France and
find homes for them in a strange land. The voyage was very long
and so stormy that it seemed sometimes they would never reach
America at all, and they grew very tired of the sight of the sea,
always so gray and threatening, looking like a great monster ready
to devour them all; but at last, one beautiful spring day, as they
stood looking wearily toward the west, a very fair and pleasant
country met their view.
A shining, level beach stretched up and down, and behind this the
land was green with great trees whose waving branches seemed to
nod a welcome to the strangers. As far as they could see this
beautiful forest was all that met their eyes, not a sign of hill or
mountain; and the next day, when, after sailing along the coast a
little way, they entered the mouth of a deep, broad river, and saw
the fresh meadow grass, and smelled the perfume of the shrubs and
flowers, they thought that they had been indeed led to a pleasant
home, and hoped that their troubles were over. It was on the first
day of May, 1562, that they landed on the banks of this river, and for
that reason they called it the river of May—it is now known as the
St. John. The Indians, no doubt, wondered very much to see these
white strangers, but they received them very kindly and showed
them by signs and gifts that they wished to be friends; they brought
them finely-dressed skins, and leather girdles, and strings of pearls,
and golden ornaments; and the French gave in return some colored
beads and shining knives, and—most wonderful of all to the Indians
—squares of tiny looking-glasses. These seemed very beautiful to
the simple natives, who had never seen their faces before except in
the clear waters of their lakes and rivers.
The second day after the landing Ribault set up a stone column on
which were engraved the arms of France. He meant by this that he
claimed all that country for the king of France, and for any
Frenchmen who might want to come there and live, and that no
other European nation would be allowed to settle there without his
permission. The Indians did not in the least know what the stone
column meant; they did not suppose for a moment that these kind-
looking strangers, whom they had received so cordially, meant in
return to take possession of their land just as much as if it had been
given them by their chiefs. But this is just what the French did mean
to do, and if the Indians had been unfriendly there would have been
a great deal of trouble; but the natives of Florida were among the
most peaceable of the Indian tribes, and they and the new-comers
got along very peaceably and grew very fond of one another.
Everywhere in America the Indians were treated better by the
French than by any other nation, and wherever the French settled
the Indians soon became their friends. So the Huguenots took
possession of their new home and found living there very pleasant,
indeed; and in fact they could scarcely have chosen a better place
than this fair land, with its abundance of fruits, its rivers full of fish,
and its forests abounding in animals, valuable for food and skins. But
although this pleasant country seemed almost like heaven after the
troubles they had had in France, still they were not satisfied. They
noticed that the Indians wore ornaments of gold and silver, and that
they had great strings of pearls and turquoises; and these things
seemed, in the eyes of the French, of more value than anything else.
And then, too, they had heard marvellous stories of Cibola, a place
on the Pacific coast, where there were great cities with houses built
of lime and stone, and whose inhabitants wore garments of wool
and cloth, and decked themselves with turquoises and emeralds, and
all their household utensils were made of gold and silver, and the
walls of their temples were covered with gold, and their altars were
studded with precious stones. A wonderful place was Cibola,
containing, perhaps, a valley of diamonds and rivers of gleaming
pearls. So they decided not to stay quietly here, but to look around a
little and see if they could not find a place as rich in gold and silver
and precious stones as Cibola itself.
They sailed up the Atlantic coast and found the country just as
beautiful and promising as their first view of it, and found also the
same kind welcome from the natives. By and by they entered the
harbor of Port Royal, and it was decided that this would be a good
place to make a settlement, leaving some of their number there
while the rest returned with Ribault to France to report the success
they had met with. It, perhaps, would have been better if they had
all gone back home, for a very sorry time had those who were left
behind. Instead of making provision for the future, they thought only
of the gold and silver they might get, and depended entirely on the
Indians for their food; and although the Indians were most
generous, still their food gave out at last and the Frenchmen had
nothing to do but wait for Ribault's return. But as the months passed
and he did not come, they set off for France in a small vessel they
had built, and after almost perishing of hunger and thirst, were
picked up by an English ship and taken on their way. The feeble
were sent on to France, but all the strong were taken to England as
prisoners; and so ended the first attempt of the Huguenots to settle
America.
But Coligny decided to try again, and in 1567 another company of
Huguenots left France under the command of René de Laudonnière.
They had a pleasant voyage and arrived in June at the River of May.
As soon as they stepped on the shore they were greeted with shouts
of welcome from the Indians, who came crowding around crying out
Ami! Ami! the only French word they remembered.
How glad they were to hear this familiar greeting. Like their friends
who had been there before, they felt that this pleasant place would
be a haven of rest from the stormy times in France. Then Satournia,
the Indian chief, led them to the stone pillar that had been set up
two years before, and which they found crowned with wreaths of
bay and having at its foot little baskets full of corn which the Indians
had placed there. The simple-hearted natives kissed the stone
column reverently and begged the French to do the same. And to
please them the Huguenots also kissed the pillar on which were
engraved the lilies of France, and it seemed for a moment as if they
were back in their own loved homes again, peaceful and happy, and
that all the trouble that the cruel king had caused them was only an
ugly dream.
The next day the chief gave the new-comers a stately reception, for
these Indian chiefs believed just as much in ceremony as did the
great kings of Europe, and the Europeans who came to America
were very much surprised to find such respect paid to rank and
station. But this reception was something very different from any
they had ever seen at a French court, gorgeous as they always
were. Instead of a glittering throne and tapestry of cloth of gold,
they saw a beautiful bower of trees and flowers. Dark pines and
drooping palms formed a great, graceful arch, which was made still
more beautiful with clusters of shining orange blossoms and heavy
white magnolias. All the grass beneath was strewn with flowers, and
the air was sweet with perfume, and thrilled with the songs of birds.
The little Huguenot children, looking on this wonderful scene,
thought it must be very pleasant to live in such a place as this,
where one might have fruits and flowers all the time, and where
even the grown-up men and women had time to take part in such
festivities as they had never shared before, except on very rare fête
days; and they looked shyly at their little dark-colored Indian friends
and held their hands out to them, and they all clasped hands and
stood there a very happy circle. Satournia stood under the shadow
of the arbor and received his guests with great courtesy. He was
clothed in skins so finely dressed that they were as smooth and soft
as satin, and painted with strange pictures in bright colors, and so
well were the pictures drawn and colored that the French said that
no painter, no matter how great he might be, could find fault with
them. And then the Indians gave their guests beautiful gifts, but the
greatest gift of all was a great wedge of silver which was the present
of Athore, the son of Satournia. Athore was a very handsome youth,
and had gentle manners and a noble disposition; and as he stood
there under the trees and offered the silver wedge to Laudonnière,
the Frenchman thought he had never seen a more princely boy than
this Indian lad, who had been brought up in the wilds of Florida.
The sight of gold and silver made the French very eager to leave this
place, in search of the rich mines which the Indians said were in the
interior of the country; and one party after another was sent out to
find the treasures that they so much desired. The Indians were
constantly telling wonderful stories of the wealth of other tribes, and
advising the French to undertake expeditions against them. It was
said that the Indians of one tribe wore complete armor of gold and
silver, and that the women had ornaments and girdles of the same
precious metals; and another tribe was so rich that they had a great
pit full of gold for which they had no use; and above all, far back
from the sea, were the Apalichi Mountains, which were as full of gold
as the trees were full of blossoms.
But by and by the French began to suspect that the Indians were
cheating them, and that they only told these stories in the hope that
they would go away and leave them undisturbed. So fewer parties
were sent out, and it was thought that they might better have
planted corn and wheat than to have wasted so much time in a vain
search for gold. By and by the men became dissatisfied and said that
it was Laudonnière's fault that they had not done differently, and
blamed him for not having provided for the safety of his people; and
one of the men said that he had discovered by magic a mine of gold
and silver which he would lead the rest to if they would kill
Laudonnière, so that they might get the keys of the storehouse and
provide themselves with food for the journey.
But this was not allowed by the officers, who loved Laudonnière too
well to want to see him killed; but it was only the beginning of many
plots and a long time of disappointment and discouragement, and it
would have ended by their all going back to France again, just as the
first Huguenots had done, had not an English fleet appeared,
commanded by Sir John Hawkins, who gave them provisions enough
to last them until they could get back to France. But before they
sailed another fleet appeared, and as the ships came nearer they
saw the French flag floating from the masts, and knew that help had
come at last. This fleet was commanded by Ribault himself, and now
it seemed that all their troubles would be over.
Ribault now took command, and knowing by experience that the
search for gold and silver would only be vain and idle, began,
instead, to make preparations for the coming winter, and to provide
against the attacks of unfriendly Indians. And now it seemed that
having been taught by their sufferings that only honest labor and
good-will among themselves could bring comfort and peace, they
really began this time in the right way.
But hardly had a week passed when the Huguenots learned that
they were now to meet an enemy far more terrible than the Indians,
and that all the trouble they had passed through would not compare
with what was coming. It had been told in Spain that Coligny had
sent out a party to relieve the Huguenots in Florida, and as the
Spaniards were all Roman Catholics the news was received by them
with anger and hatred, and they decided to send immediately a
Spanish force to Florida in hope of reaching there before Ribault
arrived. In this they did not succeed, as Ribault had already brought
hope and comfort to the colonists before the Spanish ships appeared
at the mouth of the River of May.
Ribault had left four of his ships there, and when they saw the
Spaniards they sailed off to sea, knowing that was their only chance
of safety. The Spaniards were commanded by Pedro Menendez. He
told the captains of the French ships that he had come there by
order of the King of Spain to burn and destroy all the Huguenots in
the country. This terrible news reached Ribault, who was at the fort
up the river, at the same time with the information that Menendez
had landed his troops a few miles southward and was preparing to
attack the fort. Ribault immediately decided to take the three ships
he had with him and sail down to the mouth of the river, and with
the help of the other French, who had come back as soon as
Menendez left the River of May, fall upon the Spaniards before they
had time to build a fort and destroy them. Laudonnière did not
approve of this plan, as he said the ships might be scattered by
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