The origin of today’s paper markets
In the mid-eighties, a regulatory event occurred in London which was termed Big-Bang. Banks moved into securities markets buying brokers and jobbers: brokers advised investors and managed their portfolios, while jobbers are known today as market makers. The reason that London was the epicentre of this change and not New York is that US banks were still constrained by the Glass Stegall Act which separated commercial from investment banking. This restricted investment banking and stock market trading activities in New York, but the big US commercial banks were free to do so in London.
Futures and options activities boomed both in regulated exchanges and unregulated over the counter markets. This did two things: it introduced limitless capital into securities trading and also bank credit creation provided the necessary capital. The very thing that Glass Stegall banned in the 1930s, which was the expansion of credit for securities trading putting depositors’ funds at risk, returned in London and gradually gained ground in New York until Glass Stegall was finally repealed.
It radically changed the way securities markets operated. Instead of expanding bank credit out of thin air to lend to businesses, bank credit was created for securities trading. And it brought a paper culture into trading which was fundamentally different from the physical securities and commodity markets which operated before.
It was embraced by the US authorities who saw it as the means to suppress commodity prices through paper expansion. That would reduce producer and consumer price inflation while the dollar bedded in as gold’s replacement. And with respect to gold, the expansion of paper supply would ensure that the horrors of the 1970s — for the dollar that is — would not be repeated and gold would be relegated to non-monetary roles.
The current market
Paper markets are just another form of credit. After all, the definition of a bank is that
