merchant bank

Definition
BritishA financial institution that specializes in services such as acceptance of bills of exchange, hire purchase orinstallment buying, international trade financing, long-term loans, and management of investment portfolios. Merchant banks also advise on (and invest own funds in)acquisitions, mergers, and takeovers. The nearest USequivalent is an investment bank.

MER CHA N TB

ANKI

NG

HIST ORY

In lat e 17th

ande arly 1 8th

centu ryEur ope,

the large st

comp anies of

the w orld was

merc hant

adve nturer s.Sup

porte dbyw ealth

ygrou psof peopl

e and a netwo

rkofo verse as

tradin g p os ts,

theco llecte d larg

e amou ntsof

mone y to fi nanc

e trade acros

s parts of

thewo rld.Fo r

exam ple, TheE

astIn dia Tradi

ng Co mpan y sec

ured aRoy al

Warr a nt from

Engla nd, provi

ding t he

firmwi th

officia l rights

tolucr ative tradin

gactiv ities i nIndi

a. Thisc ompa

ny was the

foreru nner i ndev

elopin g the crown

jewel of the Engli

sh Empir e.

The Engli sh

colon y was starte

dby what wewo

u l d to da y c all

merc hantb anker

s,bec ause of the

firm's involv emen

t infin ancin g, ne

gotiati ng,

and imple menti

ng tra de trans

action s. The

coloni esofo ther

Europ ean c ountri

eswe re starte

d in the

same mann er.For

exam ple, theDu

tch merc hant

adve nturer swer

e active in

what areno w

Indon esia; the Fr

ench and P ortug

uese acted simil

arly in thei r

respe ctive coloni

es. The A

meric an

coloni es also r

epres e nt the

produ ctof merc

hantb ankin g, as

evide nced by th

e activit

iesof the

famo us Huds

on Ba y Co mpan

y.One does not

typica lly loo k at

these count ries'

econ omic

devel opme nt as

havin gbee nfuel

edby merc hantb

anka dvent urers.

Howe ver, the

coloni es and

their progr ess

stem from thebu

sines s of merc

hantb anks, accor

ding t o tod ay's

acce pted sens

eofth ewor d.Mer

chant banks ,now

so cal led, arein

fact theori ginal

" b an k s". Thes

ewer einve nted

inthe middl eAge

s by It alian grain

merc hants .As

the L om b ardy

merc hants andb

anker sgrew instat

ureon theb ackof

the L om b ard pl

ains cerea l

crops many of

thedi splac ed Je

w sw h o had fledp

ersec ution after

613 enter ed th

e trade. They

broug htwith them

to the grain trade

ancie ntpra ctices

that hadg r own t

o norm alcy

in the middl e

and f ar east,

along theSi lkRoa

d, for thefin ance

of long distan

cego ods

trade s.

The Jews could

not hold l and

inItaly , so th

e y en tered thegr

eat tradin g piaz

zas and h allsof

L om b ardy, along

side the local

trader s, and s

etup theirb ench

es to tra dein c

rops. They

had one

great adva ntage

over the

locals .

Christ iansw ere

strictl y forb idden

the sin ofusu

ry. The Jewis

h n ew come rs,on

theot her hand,

could lend t o far

mers again st

crops in the field,

a highrisk

loan atwh atwou

ld hav ebee ncons

idere dusur ious

rates by th e

Chur ch,bu t did

notbi nd th e

Jews. In this w ay t

hey c ould s ecure

thegr ain s ale

rights again st the

e ve n t ual harve

st. They thenb

e g an t o ad vance

again st

thede livery

of gra inship pedto

distan tports .Inbot

h cases they

made their profit

from the prese

nt dis count

again st the future

price. This two-

hand ed tra dewa

s time consu

ming and s oon t

here arose of