Something Old and Something New: Novel and Familiar Drivers of

turn prompt fi nancial innovations in the quest to achieve a better spread and reduction of risks. Regulation may block undesirable developments and undo earlier innovations, and thereby elicit new ones and open up new trajectories.

Finally, the long and winding road of fi nancial development is marked out not only by innovation, crisis and regulation, but also by the fi nancial policies – monetary, fi scal, institutional – pursued by central banks and governments. Th e result of these interlocking, and oft en confl icting, events, infl uences and interests is that the fi nancial system does not develop linearly, but rather along a tortuous, oft en unpredictable, path, with many ups and downs and characterized by sometimes violent pendulum swings between fi nancial repression and fi nancial liberalization.

Th is volume explores a few stretches of this road, highlighting many of the key issues in the dynamic relationship between fi nancial innovations, crises, risk management and regulation. When or under what conditions are fi nancial product innovations most likely to occur? And, equally important, what makes them stick? (Chapter 2) How and when do institutional innovations arise and what is their longer-term eff ect? Do they give rise to alternative models in fi nancial development that tend to lead to a better (or worse?) risk mitigation? (Chapters 3 and 5) Under what circumstances can fi nancial innovations become a threat to fi nancial stability? Does history suggest that there is an almost inevitable sequence from fi nancial innovation to ‘irrational exuberance’ (to borrow Alan Greenspan’s famous phrase) to crisis? Or does one rather have to look to misguided policies and failing oversight to explain why fi nancial crises occur over and over again? (Chapter 6) Finally, once a fi nancial crisis has broken, what strategies have been adopted in the past to deal with it – at company, national and international level? How have companies managed the fall-out of severe fi nancial crises? (Chapter 4) How have national and international authorities reacted, and what has been the longer-term impact of their actions on regulation and, eventually, on further innovation? (Chapters 5, 6 and 7) Most chapters look at historical episodes of fi nancial innovation and crisis, but there is also a conscious attempt, particularly in the fi nal section of this book (Chapters 8 and 9), to refl ect, from a historical perspective, on the current crisis.

In Chapter 2, Lodewijk Petram deals with a fi nancial innovation that has had a durable institutional impact. Petram traces the origins of the secondary shares market to the Dutch Republic in the early seventeenth century. Secondary trading in shares of the Dutch East India Company (VOC) developed in a full-fl edged fi nancial market that allowed investors to actively manage their portfolio and thereby to diversify risks. Th e consistent enforcement of the related contracts through the courts was decisive in making this innovation stick. Th is created a larger measure of legal certainty, which reduced risk and transaction costs and consequently persuaded more investors to become active in this new market. Drawing on extensive research in the original court records,