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US Banking History, Civil War to World War II

Richard S. Grossman, Wesleyan University

The National Banking Era Begins, 1863

The National Banking Acts of 1863 and 1864

The National Banking era was ushered in by the passage of the National Currency (later renamed the National Banking) Acts of 1863 and 1864. The Acts marked a decisive change in the monetary system, confirmed a quarter-century-old trend in bank chartering arrangements, and also played a role in financing the Civil War.

Provision of a Uniform National Currency

As its original title suggests, one of the main objectives of the legislation was to provide a uniform national currency. Prior to the establishment of the national banking system, the national currency supply consisted of a confusing patchwork of bank notes issued under a variety of rules by banks chartered under different state laws. Notes of sound banks circulated side-by-side with notes of banks in financial trouble, as well as those of banks that had failed (not to mention forgeries). In fact, bank notes frequently traded at a discount, so that a one-dollar note of a smaller, less well-known bank (or, for that matter, of a bank at some distance) would likely have been valued at less than one dollar by someone receiving it in a transaction. The confusion was such as to lead to the publication of magazines that specialized in printing pictures, descriptions, and prices of various bank notes, along with information on whether or not the issuing bank was still in existence.

Under the legislation, newly created national banks were empowered to issue national bank notes backed by a deposit of US Treasury securities with their chartering agency, the Department of the Treasury’s Comptroller of the Currency. The legislation also placed a tax on notes issued by state banks, effectively driving them out of circulation. Bank notes were of uniform design and, in fact, were printed by the government. The amount of bank notes a national bank was allowed to issue depended upon the bank’s capital (which was also regulated by the act) and the amount of bonds it deposited with the Comptroller. The relationship between bank capital, bonds held, and note issue was changed by laws in 1874, 1882, and 1900 (Cagan 1963, James 1976, and Krooss 1969).

Federal Chartering of Banks

A second element of the Act was the introduction bank charters issued by the federal government. From the earliest days of the Republic, banking had been considered primarily the province of state governments.[1] Originally, individuals who wished to obtain banking charters had to approach the state legislature, which then decided if the applicant was of sufficient moral standing to warrant a charter and if the region in question needed an additional bank. These decisions may well have been influenced by bribes and political pressure, both by the prospective banker and by established bankers who may have hoped to block the entry of new competitors.

An important shift in state banking practice had begun with the introduction of free banking laws in the 1830s. Beginning with laws passed in Michigan (1837) and New York (1838), free banking laws changed the way banks obtained charters. Rather than apply to the state legislature and receive a decision on a case-by-case basis, individuals could obtain a charter by filling out some paperwork and depositing a prescribed amount of specified bonds with the state authorities. By 1860, over one half of the states had enacted some type of free banking law (Rockoff 1975). By regularizing and removing legislative discretion from chartering decisions, the National Banking Acts spread free banking on a national level.

Financing the Civil War

A third important element of the National Banking Acts was that they helped the Union government pay for the war. Adopted in the midst of the Civil War, the requirement for banks to deposit US bonds with the Comptroller maintained the demand for Union securities and helped finance the war effort.[2]

Development and Competition with State Banks

The National Banking system grew rapidly at first (Table 1). Much of the increase came at the expense of the state-chartered banking systems, which contracted over the same period, largely because they were no longer able to issue notes. The expansion of the new system did not lead to the extinction of the old: the growth of deposit-taking, combined with less stringent capital requirements, convinced many state bankers that they could do without either the ability to issue banknotes or a federal charter, and led to a resurgence of state banking in the 1880s and 1890s. Under the original acts, the minimum capital requirement for national banks was $50,000 for banks in towns with a population of 6000 or less, $100,000 for banks in cities with a population ranging from 6000 to 50,000, and $200,000 for banks in cities with populations exceeding 50,000. By contrast, the minimum capital requirement for a state bank was often as low as $10,000. The difference in capital requirements may have been an important difference in the resurgence of state banking: in 1877 only about one-fifth of state banks had a capital of less than $50,000; by 1899 the proportion was over three-fifths. Recognizing this competition, the Gold Standard Act of 1900 reduced the minimum capital necessary for national banks. It is questionable whether regulatory competition (both between states and between states and the federal government) kept regulators on their toes or encouraged a “race to the bottom,” that is, lower and looser standards.

Table 1: Numbers and Assets of National and State Banks, 1863-1913

Number of Banks Assets of Banks ($millions)
National Banks State Banks National Banks State Banks
1863 66 1466 16.8 1185.4
1864 467 1089 252.2 725.9
1865 1294 349 1126.5 165.8
1866 1634 297 1476.3 154.8
1867 1636 272 1494.5 151.9
1868 1640 247 1572.1 154.6
1869 1619 259 1564.1 156.0
1870 1612 325 1565.7 201.5
1871 1723 452 1703.4 259.6
1872 1853 566 1770.8 264.5
1873 1968 277 1851.2 178.9
1874 1983 368 1851.8 237.4
1875 2076 586 1913.2 395.2
1876 2091 671 1825.7 405.9
1877 2078 631 1774.3 506.9
1878 2056 510 1770.4 388.8
1879 2048 648 2019.8 427.6
1880 2076 650 2035.4 481.8
1881 2115 683 2325.8 575.5
1882 2239 704 2344.3 633.8
1883 2417 788 2364.8 724.5
1884 2625 852 2282.5 760.9
1885 2689 1015 2421.8 802.0
1886 2809 891 2474.5 807.0
1887 3014 1471 2636.2 1003.0
1888 3120 1523 2731.4 1055.0
1889 3239 1791 2937.9 1237.3
1890 3484 2250 3061.7 1374.6
1891 3652 2743 3113.4 1442.0
1892 3759 3359 3493.7 1640.0
1893 3807 3807 3213.2 1857.0
1894 3770 3810 3422.0 1782.0
1895 3715 4016 3470.5 1954.0
1896 3689 3968 3353.7 1962.0
1897 3610 4108 3563.4 1981.0
1898 3582 4211 3977.6 2298.0
1899 3583 4451 4708.8 2707.0
1900 3732 4659 4944.1 3090.0
1901 4165 5317 5675.9 3776.0
1902 4535 5814 6008.7 4292.0
1903 4939 6493 6286.9 4790.0
1904 5331 7508 6655.9 5244.0
1905 5668 8477 7327.8 6056.0
1906 6053 9604 7784.2 6636.0
1907 6429 10761 8476.5 7190.0
1908 6824 12062 8714.0 6898.0
1909 6926 12398 9471.7 7407.0
1910 7145 13257 9896.6 7911.0
1911 7277 14115 10383 8412.0
1912 7372 14791 10861.7 9005.0
1913 7473 15526 11036.9 9267.0

Source: U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 3, 5. State bank columns include data on state-chartered commercial banks and loan and trust companies.

Capital Requirements and Interest Rates

The relatively high minimum capital requirement for national banks may have contributed to regional interest rate differentials in the post-Civil War era. The period from the Civil War through World War I saw a substantial decline in interregional interest rate differentials. According to Lance Davis (1965), the decline in difference between regional interest rates can be explained by the development and spread of the commercial paper market, which increased the interregional mobility of funds. Richard Sylla (1969) argues that the high minimum capital requirements established by the National Banking Acts represented barriers to entry and therefore led to local monopolies by note-issuing national banks. These local monopolies in capital-short regions led to the persistence of interest rate spreads.[3] (See also James 1976b.)

Bank Failures

Financial crises were a common occurrence in the National Banking era. O.M.W. Sprague (1910) classified the main financial crises during the era as occurring in 1873, 1884, 1890, 1893, and 1907, with those of 1873, 1893, and 1907 being regarded as full-fledged crises and those of 1884 and 1890 as less severe.

Contemporary observers complained of both the persistence and ill effects of bank failures under the new system.[4] The number and assets of failed national and non-national banks during the National Banking era is shown in Table 2. Suspensions — temporary closures of banks unable to meet demand for their liabilities — were even higher during this period.

Table 2: Bank Failures, 1865-1913

Number of Failed Banks Assets of Failed Banks ($millions)
National Banks Other Banks National Banks Other banks
1865 1 5 0.1 0.2
1866 2 5 1.8 1.2
1867 7 3 4.9 0.2
1868 3 7 0.5 0.2
1869 2 6 0.7 0.1
1870 0 1 0.0 0.0
1871 0 7 0.0 2.3
1872 6 10 5.2 2.1
1873 11 33 8.8 4.6
1874 3 40 0.6 4.1
1875 5 14 3.2 9.2
1876 9 37 2.2 7.3
1877 10 63 7.3 13.1
1878 14 70 6.9 26.0
1879 8 20 2.6 5.1
1880 3 10 1.0 1.6
1881 0 9 0.0 0.6
1882 3 19 6.0 2.8
1883 2 27 0.9 2.8
1884 11 54 7.9 12.9
1885 4 32 4.7 3.0
1886 8 13 1.6 1.3
1887 8 19 6.9 2.9
1888 8 17 6.9 2.8
1889 8 15 0.8 1.3
1890 9 30 2.0 10.7
1891 25 44 9.0 7.2
1892 17 27 15.1 2.7
1893 65 261 27.6 54.8
1894 21 71 7.4 8.0
1895 36 115 12.1 11.3
1896 27 78 12.0 10.2
1897 38 122 29.1 17.9
1898 7 53 4.6 4.5
1899 12 26 2.3 7.8
1900 6 32 11.6 7.7
1901 11 56 8.1 6.4
1902 2 43 0.5 7.3
1903 12 26 6.8 2.2
1904 20 102 7.7 24.3
1905 22 57 13.7 7.0
1906 8 37 2.2 6.6
1907 7 34 5.4 13.0
1908 24 132 30.8 177.1
1909 9 60 3.4 15.8
1910 6 28 2.6 14.5
1911 3 56 1.1 14.0
1912 8 55 5.0 7.8
1913 6 40 7.6 6.2

Source: U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 6, 8.

The largest number of failures occurred in the years following the financial crisis of 1893. The number and assets of national and non-national bank failures remained high for four years following the crisis, a period which coincided with the free silver agitation of the mid-1890s, before returning to pre-1893 levels. Other crises were also accompanied by an increase in the number and assets of bank failures. The earliest peak during the national banking era accompanied the onset of the crisis of 1873. Failures subsequently fell, but rose again in the trough of the depression that followed the 1873 crisis. The panic of 1884 saw a slight increase in failures, while the financial stringency of 1890 was followed by a more substantial increase. Failures peaked again following several minor panics around the turn of the century and again at the time of the crisis of 1907.

Among the alleged causes of crises during the national banking era were that the money supply was not sufficiently elastic to allow for seasonal and other stresses on the money market and the fact that reserves were pyramided. That is, under the National Banking Acts, a portion of banks’ required reserves could be held in national banks in larger cities (“reserve city banks”). Reserve city banks could, in turn, hold a portion of their required reserves in “central reserve city banks,” national banks in New York, Chicago, and St. Louis. In practice, this led to the build-up of reserve balances in New York City. Increased demands for funds in the interior of the country during the autumn harvest season led to substantial outflows of funds from New York, which contributed to tight money market conditions and, sometimes, to panics (Miron 1986).[5]

Attempted Remedies for Banking Crises

Causes of Bank Failures

Bank failures occur when banks are unable to meet the demands of their creditors (in earlier times these were note holders; later on, they were more often depositors). Banks typically do not hold 100 percent of their liabilities in reserves, instead holding some fraction of demandable liabilities in reserves: as long as the flows of funds into and out of the bank are more or less in balance, the bank is in little danger of failing. A withdrawal of deposits that exceeds the bank’s reserves, however, can lead to the banks’ temporary suspension (inability to pay) or, if protracted, failure. The surge in withdrawals can have a variety of causes including depositor concern about the bank’s solvency (ability to pay depositors), as well as worries about other banks’ solvency that lead to a general distrust of all banks.[6]


Bankers and policy makers attempted a number of different responses to banking panics during the National Banking era. One method of dealing with panics was for the bankers of a city to pool their resources, through the local bankers’ clearinghouse and to jointly guarantee the payment of every member banks’ liabilities (see Gorton (1985a, b)).

Deposit Insurance

Another method of coping with panics was deposit insurance. Eight states (Oklahoma, Kansas, Nebraska, Texas, Mississippi, South Dakota, North Dakota, and Washington) adopted deposit insurance systems between 1908 and 1917 (six other states had adopted some form of deposit insurance in the nineteenth century: New York, Vermont, Indiana, Michigan, Ohio, and Iowa). These systems were not particularly successful, in part because they lacked diversification: because these systems operated statewide, when a panic fell full force on a state, deposit insurance system did not have adequate resources to handle each and every failure. When the agricultural depression of the 1920s hit, a number of these systems failed (Federal Deposit Insurance Corporation 1988).

Double Liability

Another measure adopted to curtail bank risk-taking, and through risk-taking, bank failures, was double liability (Grossman 2001). Under double liability, shareholders who had invested in banks that failed were liable to lose not only the money they had invested, but could be called on by a bank’s receiver to contribute an additional amount equal to the par value of the shares (hence the term “double liability,” although clearly the loss to the shareholder need not have been double if the par and market values of shares were different). Other states instituted triple liability, where the receiver could call on twice the par value of shares owned. Still others had unlimited liability, while others had single, or regular limited, liability.[7] It was argued that banks with double liability would be more risk averse, since shareholders would be liable for a greater payment if the firm went bankrupt.

By 1870, multiple (i.e., double, triple, and unlimited) liability was already the rule for state banks in eighteen states, principally in the Midwest, New England, and Middle Atlantic regions, as well as for national banks. By 1900, multiple liability was the law for state banks in thirty-two states. By this time, the main pockets of single liability were in the south and west. By 1930, only four states had single liability.

Double liability appears to have been successful (Grossman 2001), at least during less-than-turbulent times. During the 1890-1930 period, state banks in states where banks were subject to double (or triple, or unlimited) liability typically undertook less risk than their counterparts in single (limited) liability states in normal years. However, in years in which bank failures were quite high, banks in multiple liability states appeared to take more risk than their limited liability counterparts. This may have resulted from the fact that legislators in more crisis-prone states were more likely to have already adopted double liability. Whatever its advantages or disadvantages, the Great Depression spelled the end of double liability: by 1941, virtually every state had repealed double liability for state-chartered banks.

The Crisis of 1907 and Founding of the Federal Reserve

The crisis of 1907, which had been brought under control by a coalition of trust companies and other chartered banks and clearing-house members led by J.P. Morgan, led to a reconsideration of the monetary system of the United States. Congress set up the National Monetary Commission (1908-12), which undertook a massive study of the history of banking and monetary arrangements in the United States and in other economically advanced countries.[8]

The eventual result of this investigation was the Federal Reserve Act (1913), which established the Federal Reserve System as the central bank of the US. Unlike other countries that had one central bank (e.g., Bank of England, Bank of France), the Federal Reserve Act provided for a system of between eight and twelve reserve banks (twelve were eventually established under the act, although during debate over the act, some had called for as many as one reserve bank per state). This provision, like the rejection of the first two attempts at a central bank, resulted, in part, from American’s antipathy towards centralized monetary authority. The Federal Reserve was established to manage the monetary affairs of the country, to hold the reserves of banks and to regulate the money supply. At the time of its founding each of the reserve banks had a high degree of independence. As a result of the crises surrounding the Great Depression, Congress passed the Banking Act of 1935, which, among other things, centralized Federal Reserve power (including the power to engage in open market operations) in a Washington-based Board of Governors (and Federal Open Market Committee), relegating the heads of the individual reserve banks to a more consultative role in the operation of monetary policy.

The Goal of an “Elastic Currency”

The stated goals of the Federal Reserve Act were: ” . . . to furnish an elastic currency, to furnish the means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.” Furnishing an “elastic currency” was important goal of the act, since none of the components of the money supply (gold and silver certificates, national bank notes) were able to expand or contract particularly rapidly. The inelasticity of the money supply, along with the seasonal fluctuations in money demand had led to a number of the panics of the National Banking era. These panic-inducing seasonal fluctuations resulted from the large flows of money out of New York and other money centers to the interior of the country to pay for the newly harvested crops. If monetary conditions were already tight before the drain of funds to the nation’s interior, the autumnal movement of funds could — and did –precipitate panics.[9]

Growth of the Bankers’ Acceptance Market

The act also fostered the growth of the bankers’ acceptance market. Bankers’ acceptances were essentially short-dated IOUs, issued by banks on behalf of clients that were importing (or otherwise purchasing) goods. These acceptances were sent to the seller who could hold on to them until they matured, and receive the face value of the acceptance, or could discount them, that is, receive the face value minus interest charges. By allowing the Federal Reserve to rediscount commercial paper, the act facilitated the growth of this short-term money market (Warburg 1930, Broz 1997, and Federal Reserve Bank of New York 1998). In the 1920s, the various Federal Reserve banks began making large-scale purchases of US Treasury obligations, marking the beginnings of Federal Reserve open market operations.[10]

The Federal Reserve and State Banking

The establishment of the Federal Reserve did not end the competition between the state and national banking systems. While national banks were required to be members of the new Federal Reserve System, state banks could also become members of the system on equal terms. Further, the Federal Reserve Act, bolstered by the Act of June 21, 1917, ensured that state banks could become member banks without losing any competitive advantages they might hold over national banks. Depending upon the state, state banking law sometimes gave state banks advantages in the areas of branching,[11] trust operations,[12] interlocking managements, loan and investment powers,[13] safe deposit operations, and the arrangement of mergers.[14] Where state banking laws were especially liberal, banks had an incentive to give up their national bank charter and seek admission to the Federal Reserve System as a state member bank.

McFadden Act

The McFadden Act (1927) addressed some of the competitive inequalities between state and national banks. It gave national banks charters of indeterminate length, allowing them to compete with state banks for trust business. It expanded the range of permissible investments, including real estate investment and allowed investment in the stock of safe deposit companies. The Act greatly restricted the ability of member banks — whether state or nationally chartered — from opening or maintaining out-of-town branches.

The Great Depression: Panic and Reform

The Great Depression was the longest, most severe economic downturn in the history of the United States.[15] The banking panics of 1930, 1931, and 1933 were the most severe banking disruption ever to hit the United States, with more than one quarter of all banks closing. Data on the number of bank suspensions during this period is presented in Table 3.

Table 3: Bank Suspensions, 1921-33

Number of Bank Suspensions
All Banks National Banks
1921 505 52
1922 367 49
1923 646 90
1924 775 122
1925 618 118
1926 976 123
1927 669 91
1928 499 57
1929 659 64
1930 1352 161
1931 2294 409
1932 1456 276
1933 5190 1475

Source: Bremer (1935).

Note: 1933 figures include 4507 non-licensed banks (1400 non-licensed national banks). Non-licensed banks consist of banks operating on a restricted basis or not in operation, but not in liquidation or receivership.

The first banking panic erupted in October 1930. According to Friedman and Schwartz (1963, pp. 308-309), it began with failures in Missouri, Indiana, Illinois, Iowa, Arkansas, and North Carolina and quickly spread to other areas of the country. Friedman and Schwartz report that 256 banks with $180 million of deposits failed in November 1930, while 352 banks with over $370 million of deposits failed in the following month (the largest of which was the Bank of United States which failed on December 11 with over $200 million of deposits). The second banking panic began in March of 1931 and continued into the summer.[16] The third and final panic began at the end of 1932 and persisted into March of 1933. During the early months of 1933, a number of states declared banking holidays, allowing banks to close their doors and therefore freeing them from the requirement to redeem deposits. By the time President Franklin Delano Roosevelt was inaugurated on March 4, 1933, state-declared banking holidays were widespread. The following day, the president declared a national banking holiday.

Beginning on March 13, the Secretary of the Treasury began granting licenses to banks to reopen for business.

Federal Deposit Insurance

The crises led to the implementation of several major reforms in banking. Among the most important of these was the introduction of federal deposit insurance under the Banking (Glass-Steagall) Act of 1933. Originally an explicitly temporary program, the Act established the Federal Deposit Insurance Corporation (the FDIC was made permanent by the Banking Act of 1935); insurance became effective January 1, 1934. Member banks of the Federal Reserve (which included all national banks) were required to join FDIC. Within six months, 14,000 out of 15,348 commercial banks, representing 97 percent of bank deposits had subscribed to federal deposit insurance (Friedman and Schwartz, 1963, 436-437).[17] Coverage under the initial act was limited to a maximum of $2500 of deposits for each depositor. Table 4 documents the increase in the limit from the act’s inception until 1980, when it reached its current $100,000 level.

Table 4: FDIC Insurance Limit

1934 (January) $2500
1934 (July) $5000
1950 $10,000
1966 $15,000
1969 $20,000
1974 $40,000
1980 $100,000

Additional Provisions of the Glass-Steagall Act

An important goal of the New Deal reforms was to enhance the stability of the banking system. Because the involvement of commercial banks in securities underwriting was seen as having contributed to banking instability, the Glass-Steagall Act of 1933 forced the separation of commercial and investment banking.[18] Additionally, the Acts (1933 for member banks, 1935 for other insured banks) established Regulation Q, which forbade banks from paying interest on demand deposits (i.e., checking accounts) and established limits on interest rates paid to time deposits. It was argued that paying interest on demand deposits introduced unhealthy competition.

Recent Responses to New Deal Banking Laws

In a sense, contemporary debates on banking policy stem largely from the reforms of the post-Depression era. Although several of the reforms introduced in the wake of the 1931-33 crisis have survived into the twenty-first century, almost all of them have been subject to intense scrutiny in the last two decades. For example, several court decisions, along with the Financial Services Modernization Act (Gramm-Leach-Bliley) of 1999, have blurred the previously strict separation between different financial service industries (particularly, although not limited to commercial and investment banking).


The Savings and Loan crisis of the 1980s, resulting from a combination of deposit insurance-induced moral hazard and deregulation, led to the dismantling of the Depression-era Federal Savings and Loan Insurance Corporation (FSLIC) and the transfer of Savings and Loan insurance to the Federal Deposit Insurance Corporation.

Further Reading

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression.” American Economic Review 73 (1983): 257-76.

Bordo, Michael D., Claudia Goldin, and Eugene N. White, editors. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998.

Bremer, C. D. American Bank Failures. New York: Columbia University Press, 1935.

Broz, J. Lawrence. The International Origins of the Federal Reserve System. Ithaca: Cornell University Press, 1997.

Cagan, Phillip. “The First Fifty Years of the National Banking System: An Historical Appraisal.” In Banking and Monetary Studies, edited by Deane Carson, 15-42. Homewood: Richard D. Irwin, 1963.

Cagan, Phillip. The Determinants and Effects of Changes in the Stock of Money. New York: National Bureau of Economic Research, 1065.

Calomiris, Charles W. and Gorton, Gary. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by Glenn R. Hubbard, 109-73. Chicago: University of Chicago Press, 1991.

Davis, Lance. “The Investment Market, 1870-1914: The Evolution of a National Market.” Journal of Economic History 25 (1965): 355-399.

Dewald, William G. “ The National Monetary Commission: A Look Back.”

Journal of Money, Credit and Banking 4 (1972): 930-956.

Eichengreen, Barry. “Mortgage Interest Rates in the Populist Era.” American Economic Review 74 (1984): 995-1015.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford: Oxford University Press, 1992.

Federal Deposit Insurance Corporation. “A Brief History of Deposit Insurance in the United States.” Washington: FDIC, 1998.

Federal Reserve. The Federal Reserve: Purposes and Functions. Washington: Federal Reserve Board, 1994.

Federal Reserve Bank of New York. U.S. Monetary Policy and Financial Markets.

New York, 1998.

Friedman, Milton and Anna J. Schawtz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Goodhart, C.A.E. The New York Money Market and the Finance of Trade, 1900-1913. Cambridge: Harvard University Press, 1969.

Gorton, Gary. “Bank Suspensions of Convertibility.” Journal of Monetary Economics 15 (1985a): 177-193.

Gorton, Gary. “Clearing Houses and the Origin of Central Banking in the United States.” Journal of Economic History 45 (1985b): 277-283.

Grossman, Richard S. “Deposit Insurance, Regulation, Moral Hazard in the Thrift Industry: Evidence from the 1930s.” American Economic Review 82 (1992): 800-821.

Grossman, Richard S. “The Macroeconomic Consequences of Bank Failures under the National Banking System.” Explorations in Economic History 30 (1993): 294-320.

Grossman, Richard S. “The Shoe That Didn’t Drop: Explaining Banking Stability during the Great Depression.” Journal of Economic History 54, no. 3 (1994): 654-82.

Grossman, Richard S. “Double Liability and Bank Risk-Taking.” Journal of Money, Credit, and Banking 33 (2001): 143-159.

James, John A. “The Conundrum of the Low Issue of National Bank Notes.” Journal of Political Economy 84 (1976a): 359-67.

James, John A. “The Development of the National Money Market, 1893-1911.” Journal of Economic History 36 (1976b): 878-97.

Kent, Raymond P. “Dual Banking between the Two Wars.” In Banking and Monetary Studies, edited by Deane Carson, 43-63. Homewood: Richard D. Irwin, 1963.

Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1978.

Krooss, Herman E., editor. Documentary History of Banking and Currency in the United States. New York: Chelsea House Publishers, 1969.

Minsky, Hyman P. Can ‘It” Happen Again? Essays on Instability and Finance. Armonk, NY: M.E. Sharpe, 1982.

Miron , Jeffrey A. “Financial Panics, the Seasonality of the Nominal Interest Rate, and the Founding of the Fed.” American Economic Review 76 (1986): 125-38.

Mishkin, Frederic S. “Asymmetric Information and Financial Crises: A Historical Perspective.” In Financial Markets and Financial Crises, edited by R. Glenn Hubbard, 69-108. Chicago: University of Chicago Press, 1991.

Rockoff, Hugh. The Free Banking Era: A Reexamination. New York: Arno Press, 1975.

Rockoff, Hugh. “Banking and Finance, 1789-1914.” In The Cambridge Economic History of the United States. Volume 2. The Long Nineteenth Century, edited by Stanley L Engerman and Robert E. Gallman, 643-84. New York: Cambridge University Press, 2000.

Sprague, O. M. W. History of Crises under the National Banking System. Washington, DC: Government Printing Office, 1910.

Sylla, Richard. “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863-1913.” Journal of Economic History 29 (1969): 657-686.

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: Norton, 1976.

Temin, Peter. Lessons from the Great Depression. Cambridge: MIT Press, 1989.

Warburg,. Paul M. The Federal Reserve System: Its Origin and Growth: Reflections and Recollections, 2 volumes. New York: Macmillan, 1930.

White, Eugene N. The Regulation and Reform of American Banking, 1900-1929. Princeton: Princeton University Press, 1983.

White, Eugene N. “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks.” Explorations in Economic History 23 (1986) 33-55.

White, Eugene N. “Banking and Finance in the Twentieth Century.” In The Cambridge Economic History of the United States. Volume 3. The Twentieth Century, edited by Stanley L.Engerman and Robert E. Gallman, 743-802. New York: Cambridge University Press, 2000.

Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996.

Wicker, Elmus. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000.

[1] The two exceptions were the First and Second Banks of the United States. The First Bank, which was chartered by Congress at the urging of Alexander Hamilton, in 1791, was granted a 20-year charter, which Congress allowed to expire in 1811. The Second Bank was chartered just five years after the expiration of the first, but Andrew Jackson vetoed the charter renewal in 1832 and the bank ceased to operate with a national charter when its 20-year charter expired in 1836. The US remained without a central bank until the founding of the Federal Reserve in 1914. Even then, the Fed was not founded as one central bank, but as a collection of twelve regional reserve banks. American suspicion of concentrated financial power has not been limited to central banking: in contrast to the rest of the industrialized world, twentieth century US banking was characterized by large numbers of comparatively small, unbranched banks.

[2] The relationship between the enactment of the National Bank Acts and the Civil War was perhaps even deeper. Hugh Rockoff suggested the following to me: “There were western states where the banking system was in trouble because the note issue was based on southern bonds, and people in those states were looking to the national government to do something. There were also conservative politicians who were afraid that they wouldn’t be able to get rid of the greenback (a perfectly uniform [government issued wartime] currency) if there wasn’t a private alternative that also promised uniformity…. It has even been claimed that by setting up a national system, banks in the South were undermined — as a war measure.”

[3] Eichengreen (1984) argues that regional mortgage interest rate differentials resulted from differences in risk.

[4] There is some debate over the direction of causality between banking crises and economic downturns. According to monetarists Friedman and Schwartz (1963) and Cagan (1965), the monetary contraction associated with bank failures magnifies real economic downturns. Bernanke (1983) argues that bank failures raise the cost of credit intermediation and therefore have an effect on the real economy through non-monetary channels. An alternative view, articulated by Sprague (1910), Fisher (1933), Temin (1976), Minsky (1982), and Kindleberger (1978), maintains that bank failures and monetary contraction are primarily a consequence, rather than a cause, of sluggishness in the real economy which originates in non-monetary sources. See Grossman (1993) for a summary of this literature.

[5] See Calomiris and Gorton (1991) for an alternative view.

[6] See Mishkin (1991) on asymmetric information and financial crises.

[7] Still other states had “voluntary liability,” whereby each bank could choose single or double liability.

[8] See Dewald (1972) on the National Monetary Commission.

[9] Miron (1986) demonstrates the decline in the seasonality of interest rates following the founding of the Fed.

[10] Other Fed activities included check clearing.

[11] According to Kent (1963, pp. 48), starting in 1922 the Comptroller allowed national banks to open “offices” to receive deposits, cash checks, and receive applications for loans in head office cities of states that allowed state-chartered banks to establish branches.

[12] Prior to 1922, national bank charters had lives of only 20 years. This severely limited their ability to compete with state banks in the trust business. (Kent 1963, p. 49)

[13] National banks were subject to more severe limitations on lending than most state banks. These restrictions included a limit on the amount that could be loaned to one borrower as well as limitations on real estate lending. (Kent 1963, pp. 50-51)

[14] Although the Bank Consolidation Act of 1918 provided for the merger of two or more national banks, it made no provision for the merger of a state and national bank. Kent (1963, p. 51).

[15] References touching on banking and financial aspects of the Great Depression in the United States include Friedman and Schwartz (1963), Temin (1976, 1989), Kindleberger (1978), Bernanke (1983), Eichangreen (1992), and Bordo, Goldin, and White (1998).

[16] During this period, the failures of the Credit-Anstalt, Austria’s largest bank, and the Darmstädter und Nationalbank (Danat Bank), a large German bank, inaugurated the beginning of financial crisis in Europe. The European financial crisis led to Britain’s suspension of the gold standard in September 1931. See Grossman (1994) on the European banking crisis of 1931. The best source on the gold standard in the interwar years is Eichengreen (1992).

[17] Interestingly, federal deposit insurance was made optional for savings and loan institutions at about the same time. The majority of S&L’s did not elect to adopt deposit insurance until after 1950. See Grossman (1992).

[18] See, however, White (1986) for

Citation: Grossman, Richard. “US Banking History, Civil War to World War II”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

World Insurance: The Evolution of a Global Risk Network

Reviewer(s):Clark, Geoffrey

Published by EH.Net (August 2013)
Peter Borscheid and Niels Viggo Haueter, editors, World Insurance: The Evolution of a Global Risk Network. Oxford: Oxford University Press, 2012. xvi + 729 pp. $180 (hardcover), ISBN: 978-0-19-65796-4.

Reviewed for EH.Net by Geoffrey Clark, Department of History, State University of New York at Potsdam.

This massive volume on the spread and integration of insurance services internationally comes on the heels of two much less comprehensive collections of essays about insurance globalization during the past two centuries.[1]? Those earlier studies were self-consciously pioneering efforts to descry the contours of a convoluted and sprawling historical landscape that scholars had scarcely explored hitherto. Now, with the appearance of World Insurance: The Evolution of a Global Risk Network, the development and diffusion of insurance worldwide has received a definitive, although hardly final, treatment. For the first time, historians working across a range of subjects from finance and economic modernization to social welfare and even religion have access to a systematic account of how the insurance industry has transformed the risk environment faced by billions around the world and how that process has knit together the economies and fortunes of far flung societies and cultures.

That said, few readers will possess the fortitude to read this book cover to cover, an expectation that the editors wisely seem to have anticipated in their format. Peter Borscheid provides an admirably concise summary of the overarching themes in a general introduction, which is followed by six parts successively devoted to Europe, North America, Sub-Saharan Africa, the Middle East and Northern Africa, the Far East and Pacific, and Latin American and Caribbean. Each of those regional sections begins with another of Borscheid?s introductory overviews, followed by a number of essays focused on specific countries. This organization allows readers to easily survey the broad features of the international insurance business or to bore down into the experience of one region or nation. The geographical coverage is not uniform ? nor could it possibly be given the fact that in the modern era insurance services radiated largely from the UK and were taken up earliest and most strongly in Europe and North America. The vast disparities in global wealth and insurance penetration that persist to the present are reflected narratively in the eight chapters that cover individual European countries while only one chapter examines the national history of sub-Saharan nations, namely the quite exceptional case of South Africa. That telltale gap is also illustrated in Borscheid?s astonishing observation that (leaving South Africa aside) the total of insurance premiums currently paid in all of sub-Saharan Africa is just 1.5 times that spent in tiny Liechtenstein (p. 324).

One of the central themes running through the essays of World Insurance, and forcefully argued by Borscheid, is that the spread of insurance around the globe was closely tied to the migration of Europeans themselves rather than simply to the export of the insurance idea alone. In the nineteenth and early twentieth centuries insurance services were focused mainly on the property and lives of Europeans settled abroad. As late as 1950, to cite an extreme example, 99 percent of insurance policyholders in Ethiopia were foreign residents (p. 316). These essays offer several explanations for the slow adoption of the insurance habit by indigenous peoples. Widespread poverty in many regions simply made insurance policies unaffordable, while the persistence of community- and kin-based networks of mutual aid reduced the need for European-style insurance facilities. On the other hand, as G. Balachandran points out, colonial prejudices made Western insurers wary of extending insurance coverage to native populations. One insurance trade journal from 1891 objected that Indians were bad risks because they were prone to early death and were difficult to identify positively, a fact that invited fraud since ?as a rule, the native is … devoid of moral sense in the matter of truth? (p. 447). Finally, religious scruples have sometimes prevented the acceptance of insurance, especially in conservative Arabian Peninsula, because Sharia law does not recognize insurance contracts and forbids speculation on human life. In a move reminiscent of earlier European attempts to circumvent prohibitions on usury, insurers in Muslim lands have devised Takaful, a mutualized form of insurance that is Sharia-compliant.
Although one of the stated aims of World Insurance is to provide a cultural context to the rapid spread of insurance around the world (p. 1), the preponderance of attention is given to the economic and political dimensions of that development. The first wave of insurance globalization was carried out in the era of high liberalism as European powers established underwriting facilities in settler enclaves and then began to cultivate a local market in fire, property and casualty, and to a much lesser extent, life insurance. Towards the close of the nineteenth century European countries began to erect protectionist barriers to foreign insurers, a move replicated in following decades by Asian, African, and Latin American nations, who variously imposed reserve requirements, currency regulations, and discriminatory taxes on foreign companies in order to prevent capital outflows and to foster domestic insurance industries. In many cases these efforts succeeded in cultivating a home market, but at a price: many entrants into these fledgling markets were undercapitalized and poorly managed, prompting governments both in Europe and around the world to initiate periodic regulatory shakeouts of weak companies. In any case, the extent to which national insurance markets could truly be isolated from the global economy was limited by the excess risks ceded by domestic insurers to international reinsurers like Swiss Re (the company that, not coincidentally, sponsored this historical study of insurance internationalization). This protectionist era came to an end in the 1980s and 90s with the inauguration of what Jer?nia Pons Pons describes as the second wave of insurance globalization, which involved a relaxation of restrictions on foreign insurers; a string of mergers, acquisitions, and the creation of foreign subsidiaries; and the realization of greater efficiencies as the result of keener competition.
Opportunities for the spread of insurance have also fluctuated with the ebb and flow of programs either to socialize or to privatize insurance risks. The creation of the Soviet Union and the People?s Republic of China furnish the most dramatic examples of the wholesale transfer of insurance services to state control. But whether done in the name of socialism, fascism, social democracy, or anti-colonial nationalism, the assumption by the state of responsibility for the provision of health care and pensions, or compensation for losses due to fire, flood, or loss of life, all diminished or eliminated the latitude of insurance businesses operating across national boundaries. The recent return to an emphasis on less regulated private enterprise in providing insurance cover, as well as the more integrated delivery of financial services exemplified by bancassurance, is just the latest swing of the pendulum toward private control, now in the guise of multinational corporate power and a neo-liberal ideology. Whether the post-2008 financial debacle will induce a return to a more stringent regulatory environment and a new generation of statist approaches to insurance is a question that must await a sequel to Borscheid and Haueter?s imposing and standard-setting World Insurance.

1. Peter Borscheid and Robin Pearson, editors, Internationalisation and Globalisation of the Insurance Industry in the 19th and 20th Centuries (Marburg: Philipps-University, 2007); Robin Pearson, editor, The Development of International Insurance (London: Pickering & Chatto, 2010).

Geoffrey Clark is Professor of History at the State University of New York at Potsdam. He is the author of Betting on Lives: The Culture of Life Insurance in England, 1695-1775 and co-editor of The Appeal of Insurance. He is working on a study of slavery insurance in the late medieval Mediterranean.

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Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System

Author(s):Eichengreen, Barry
Reviewer(s):Toniolo, Gianni

Published by EH.NET (August 2011)

Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. New York: Oxford University Press, 2011. iii + 215 pp. $28 (cloth), ISBN: 978-0-19-975378-9.

Reviewed for EH.Net by Gianni Toniolo, Departments of Economics and History, Duke University.

?We are seeing the government of a global sport (cricket) passing from west to east for the first time. The shift is unique and irreversible. The east can now take something western and make the west a supplicant. We had better get used to it? (M. Bose, Financial Times, 7/21/2011, p.11).? How long will it take before the main reserve currency will be added to the list of ?something western? passing east?? The main tenet of Barry Eichengreen?s book is that it will take a long time before the dollar follows the fate of cricket, not so much because of the dollar?s strength but because of the weakness of the alternatives.

The book, written for the general public, is useful and pleasant to read also by the so-called professionals. Those used to Eichengreen?s clear and fluent prose will find here a particularly light touch obtained by dropping here and there a good dose of anecdotal hints to lessen the weight of serious history and rigorous economics: this is particularly appreciated by those like me who write on monetary history and know how heavy a meal it is to digest — both by undergraduates and the educated public.

A brief introduction sketches the main argument of the book, namely that there is a ?fallacy behind the notion that the dollar is engaged in a death race with its rivals? (p. 9): rather than getting used to money moving, with cricket, from west to east we should prepare to a world ?in which several international currencies coexist,? as they did for most of the past two centuries.

Chapter 2 traces a brief history of the dollar, from its humble and foreign origin (it even got its name by assonance with the silver thaler coming from the south) to the turning point of the 1930s.? The main question here is why the dollar didn?t become the leading international currency by the end of the nineteenth century when American economy and trade were already larger than Britain?s, the producer of the most important among the international currencies of the day. The answer, for Eichengreen, is to be found in the underdevelopment of the U.S. money market vis ? vis Britain?s.? As long as acceptances were more efficiently traded in the liquid London market, the dollar could not aspire to the status of international currency. Had Jackson not vetoed the renewal of the Second Bank of the United States, things might have been different; as it was, the international rise of the dollar was checked by the absence of a central bank. Things changed after 1919 when the pound remained inconvertible and the United States became the main lender to Europe: by 1925, when London resumed convertibility, the dollar had already overtaken the sterling in the reserve portfolios of the world?s central banks. One might add that, had the Congress ratified the Versailles Peace Treaty, giving America a more decisive role in European affairs, by 1930 the dollar?s weight as international currency might have been more decisive.

Chapter 3 deals with the time when ?the dollar reigned supreme,? much to De Gaulle?s chagrin (hence the title of the book). Everything of course began at Bretton Woods where Keynes?s bancor never stood a chance. Brains or no brains, industrial might and military power had already decided in favor of the American currency. The history of the rise and fall of the Bretton Woods system has been told so many time, including by Eichengreen, that relatively few pages are devoted to the quarter-century following 1945. There were, of course, good reasons for the continued dominance of the dollar much beyond the demise of Bretton Woods: Eichengreen stresses both the strength of the American economy and the lack of alternatives.

Chapter 4 outlines the history of the euro, potentially the only credible rival to the dollar. An outstanding expert on European monetary history and economics, Eichengreen provides a lively account of the long gestation of the single currency from the road leading to the Warren Report of 1970, up to the present. The chapter will be my suggested reading to those in need a short briefing on the politics of European monetary union, an object still largely misunderstood not only by the American public and press but by academic experts as well. Eichengreen?s conclusion is that the euro would have made a formidable rival to the dollar had the UK opted in. This may be true from a technical point of view but, as Eichengreen knows only too well, for good or bad, Continental ways are not British ways. British participation has arguably weakened the progress towards a more politically integrated Europe (a prerequisite for the health of the euro in the long run) and one may wonder how British and German cultures would be integrated in running the ECB.

Chapter 5 provides a masterful user?s manual for the crisis that began in 2007. Interestingly, in fact, each chapter of this book can be read in its own right as a synopsis for relevant international monetary issues, regardless of their bearing on the book?s theme: the future of the dollar. The manuscript was given to the publisher when the Great Recession (the terminology might look awkward a few years hence) was on its way to being slowly overcome. The events of Summer 2011, unfolding while I write this review, might oblige at least a partial change the overall interpretation of the past eventful years. They might also impact on the prospects of the dollar-euro relation. It is, however, impossible to say to what extent this will be the case. Economic history stops at the end of the cycle previous to the one when it is written: economic historians need the perspective of the full cycle in order to explain both its origins and consequences.

Chapters 6 and 7 can be read together: they discuss the end of the dollar?s monopoly as reserve currency and ask whether the dollar will (relatively) soon crash or just slowly lose weight, sharing its reserve currency role with other means of international payment. History shows ? and this is one of the themes of the book ? that the ?normal? case is one where several reserve currencies coexist, with one of them in more or less dominant but not monopolistic position. Monopoly, in the post- Second World War years, was an exception due to both economic and geopolitical reasons. We are now back to ?normal? times but, for all the economic and political weakness of the United States, we shall not witness a precocious move away from the dollar. For one thing, the American economy is still the world?s largest and, at market exchange rates, it is destined to remain such for another while.? For the rest, alternatives don?t look very promising: the euro has problems of its own, the renminbi is not convertible, the Swiss franc is backed by too small an economy, the Indian and Brazilian currencies might in the future qualify for limited diversification but are no match to the dollar, gold is not used for current transactions, timber is illiquid, and so on. International trade is still largely invoiced in dollars and this is a powerful incentive for central banks to hold dollar reserves. All these conditions may, and probably will, change: the future will look like the early twentieth century when a number of reserve currencies coexisted with the leading one. What we saw after the publication of this book tends to reinforce its conclusions: the demand for T Bonds and other dollar-denominated assets increased in spite of Standard & Poor?s.

As I said, this is a book aimed to a large audience of non-specialists. Its chapters make superb assignments to undergraduate classes (most economics Ph.D. students would hugely benefit from reading it but I doubt that many of them ever will.). It contains a lot of details that will interest specialists as well. There is only one question the reader, specialist or otherwise, finds unanswered: what about geopolitical factors? Eichengreen brings them explicitly to the fore in discussing, with a wealth of details, the impact of the unfortunate Anglo-Franco expedition to Egypt in 1956. For the rest, there are here and there hints that politics matters for the international status of leading currencies and Eichengreen states that the leading world power also tends to own the leading currency but one remains a bit unsatisfied by the relative paucity of elaboration on this theme, particularly regarding future scenarios. Jeffrey Sachs recently stated the obvious when writing: ?For at least two decades the U.S. has been unable to provide monetary stability, financial regulation and fiscal rectitude? (Financial Times, May 31, 2011). Are we, in this respect, back to the interwar years? Eichengreen seems to agree that similarities exist. If so, will weak international leadership have no impact on the dollar?s status in any plausible scenario? The dollar might even get stronger in cases of looming international military or political crises, as it did in the late 1930s: by bringing geopolitical considerations more to the fore Eichengreen would have probably strengthened his own conclusions.

Gianni Toniolo is Research Professor of Economics and History, Duke University, Contract Professor of Political Science at the Libera Universit? delle Scienze Sociali (Roma) and Research Fellow at CEPR, London

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2011). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Trade and Poverty: When the Third World Fell Behind

Author(s):Williamson, Jeffrey G.
Reviewer(s):Roy, Tirthankar

Published by EH.NET (July 2011)

Jeffrey G. Williamson, Trade and Poverty: When the Third World Fell Behind. Cambridge, MA: MIT Press, 2011. xii + 301 pp. $35 (hardcover), ISBN: 978-0-262-01515-8.

Reviewed for EH.Net by Tirthankar Roy, Department of Economic History, London School of Economics and Political Science.

Through a process of unprecedented market integration, a world economy emerged in the nineteenth century. Trade barriers fell, trade costs came down, and empires unified territories. Commodities were traded on a larger scale than ever before; labor, capital, and knowledge joined the basket of tradable; and new land frontiers opened up in order to feed industrial cities. In an earlier work with Kevin O?Rourke (Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy), Jeffrey Williamson has shown that increasing trade led to specialization and factor-price convergence on both sides of the Atlantic. Trade was not only an engine of economic growth but also aided transmission of growth until a ?backlash? began to form in the interwar period. Yet, if trade induced convergence of standards of living in the Atlantic world, it seemed to make the whole world more unequal in the nineteenth century. Did ?globalization? cause ?divergence??

Trade and Poverty argues that globalization increased world inequality by causing ?deindustrialization? in the commodity exporting third world. On the eve of the trade boom, the Industrial Revolution had begun in Europe. Other regions of Western Europe followed Britain?s lead. The trade boom was driven by a large fall in the prices of manufactured goods produced in Western Europe, and a rise in the demand for primary commodities available in the tropics. So large was the rise in demand and so large the technological leap that they jointly led to a long-term increase in the terms of trade, or the price of tropical exports as a ratio of the price of its imports. W. Arthur Lewis among others considered that the rise in the terms of trade was one of the drivers of tropical development. Williamson agrees, but adds to the picture the negative deindustrializing effects of relative price changes.

Chapters 1-5 of the book demonstrate, with facts and theory, the link between trade and inequality; place the timing of the terms of trade movement earlier than the conventional date, that is, in the first half of the nineteenth century rather than the second half; and with reworked datasets compares the major third world regions on the extent of terms of trade changes. Chapters 6-8 conduct three case-studies of deindustrialization ? India, Mexico, and the Ottoman Empire. Chapter 9 asks whether inequality within the commodity exporting regions increased, and if so, whether the increase was due to the terms of trade changes. Chapter 10 shows that price volatility in commodity export was relatively high, adding to the growth depressing effects of terms of trade changes. Chapters 12-14 add afterthoughts and draw out the ?morals of the story.?

Deindustrialization is the main moral of the story, and it is necessary to discuss the idea fully. The terms of trade boom had comparable effects upon the Atlantic economy and the rest of the world. In both cases, there was specialization and economic growth. The tropics experienced a better utilization of idle land and mining capacity, and could buy manufactured goods in increasing quantity and increasingly better quality over time for an unchanging bundle of primary products. But then, industrialization entailed greater prospects of endogenous growth, human capital accumulation, and increasing returns to scale; land-intensive growth faced diminishing returns. The tropics were deprived of the spill-over benefits of industrialization. Furthermore, the tropics experienced a decimation of its own artisan manufactures. There was ?Dutch disease? or a shift of resources away from other sectors towards exportable goods, and more exposure of the export economies to commodity price fluctuations. These effects could reduce the gains from trade for the commodity exporters compared with the gains that accrued to the manufactured goods exporters. This is how trade led to more inequality. Williamson is silent on ?poverty,? which figures in the title of the book but not in the index. Did trade cause poverty, or fail to remove it?

To show how the mechanism works, a model of a third world economy is developed. The economy has three sectors, grain, exportable commodity, and import-competing textiles. The real wage in grain units is set at the subsistence level. A fall in textile price (domestic producers are price takers) implies a rise in own wage in textile production, and consequently, a fall in labor demand in textile production. This is classic deindustrialization, and the effect is stronger the greater are the specialization and terms of trade shifts. The model allows for another pattern of deindustrialization, however. A rise in grain prices due to ?war, pestilence or the absence of the monsoon? (p. 56) would raise the nominal wage in textiles and again impart a depressing effect on labor demand there. War, pestilence and failure of monsoon live uneasily with the main thrust of the book, namely globalization. But Williamson needs them, as we shall see.

For the most part, the empirical-illustrative section of the book is persuasive. Given the economical yet versatile analytical frame, the reader never loses sight of the point of the numbers. Williamson?s own previous work, singly or with others, has been seminal in establishing the empirical foundations of globalization and world inequality. This book benefits from that accumulation of statistics and analytical insight. The three case studies ? India, the Ottoman Empire, and Mexico ? are excellently researched and executed. Above all, the book is mindful of the exceptions to the rule.

Over half of the population of the third world does not fit the predicted mechanism of divergence neatly. In East Asia, terms of trade fell in the long run. In South Asia, the rise happened earlier and to a much smaller extent than in Southeast Asia, Latin America, the Middle East, and the European periphery. In India, a large deindustrialization coexisted with moderate terms of trade gains, whereas the theory predicts that big specialization entails big changes in terms of trade. How does the book handle these exceptions? China?s trend is only briefly discussed. And chapter 6 handles the Indian situation with originality, but not sufficient persuasive power.

Williamson?s solution to the Indian paradox is war, pestilence, and failure of the monsoon. The disintegration of the Mughal Empire and more frequent droughts caused agricultural productivity to fall and grain prices to rise in India, which ushered in a deindustrialization. The evidence for any of this is ?particularly thin? (p. 81). The wage and price statistics quoted are not detailed enough for a part of the world where regional differences were large. Historians of India have long known that Mughal collapse and economic dislocation did not go together. For example, the regions that led cotton textile production in the eighteenth century were located near the seaboard or within easy access from it, whereas imperial collapse affected regions that were located hundreds of miles into the interior. Anarchy in Rohilkhand, which is discussed, should not affect the weaver in Bengal. The peninsula by and large did not form a part of the Mughal Empire. In textile producing seaboard states, such as Bengal, which broke away from the Empire about 1715, there was agrarian expansion and clearing of the forests. It is not definitively known if the frequency of droughts did in fact increase; where in India it did; whether the droughts were a random risk or a systemic one; if a systemic one, why environmental change affected only India; and why the failure of rains should reduce land yield permanently.

If we remove war-pestilence-drought from the analysis, does the analysis lose bite? Not necessarily. One possible response to the paradox is that India did not deindustrialize as much as the book claims, and as much as the other regions did. After all, in 1911, four million artisanal textile workers earned a living in India. Williamson thinks India was exceptional in suffering an acute deindustrialization; in fact, India was exceptional on the point of survival of artisanal textiles on a gigantic scale. Such survival can be explained by (a) adding to the story a differentiated consumption pattern in the textile importing countries, and (b) making a distinction between cotton yarn, where price effects were devastating, and cotton cloth, where they were not. The upshot is that the extent of the fall in textile employment was of a comparatively moderate order in India. Recent scholarship on craft history has followed these roads; the book seems unaware of the literature.

More fundamentally, it remains questionable how much of world development globalization explains after all. The world is actively trading now. And poverty persists too. Clearly, some poverty and some poor regions are immune to globalization. Because they are, the big challenge that the present pattern of economic growth poses in India, China, or Africa is emerging regional inequality. Likewise in the tropical trading world of the nineteenth century, globalization transformed some regions and left others untouched. Bombay narrowed its gap with the Atlantic world, Bundelkhand fell further behind. Seen from the third world perspective, the so-called ?great divergence? would seem to be a trivial issue. The really useful question is not why ?India? fell behind Britain ? ?India? did not ? but why Bundelkhand fell behind Bombay. Williamson?s method of explaining inequality, with reference to the wage-rental ratio, does not answer the question. A simpler model would note the persistence of high trade costs and the availability of too little tradable surplus over subsistence in large parts of the arid tropics, where land yield continued to be very low.

A further problem with the approach is anticipated in the book. It takes industrialization as a given. But why did industrialization have to start in Europe in the first place? What factors prevented the third world from industrializing first? Why did the industrializing impulse cross some borders but not others? These questions the book wisely does not engage in save a few customary citations from the institutionalist literature, which does not offer much on the institutional history of the five and a half billion people who live in the poorer world today. But then, a very important part of the phenomenon of forging ahead and falling behind remains outside the model.

Still, Trade and Poverty is undoubtedly an important and authoritative work, one that should take the current discourse on globalization and divergence to a new level. It shows the utility of thinking about world development in terms of patterns of trade, and also shows the pitfalls, thanks to Williamson?s cautious and reliable handling of the data. It justifies the reputation of its author as one of the architects of neoclassical economic history.

Tirthankar Roy is the author of The Economic History of India, 1857-1947 (Oxford University Press, Third Edition, 2011), and India in the World Economy from Antiquity to the Present (Cambridge University Press, forthcoming).

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2011). All EH.Net reviews are archived at

Subject(s):Economywide Country Studies and Comparative History
International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
Latin America, incl. Mexico and the Caribbean
Middle East
Time Period(s):19th Century
20th Century: Pre WWII

Getting Better: Why Global Development Is Succeeding and How We Can Improve the World Even More

Author(s):Kenny, Charles
Reviewer(s):Garces-Voisenat, Juan-Pedro

Published by EH.NET (June 2011)

Charles Kenny, Getting Better: Why Global Development Is Succeeding and How We Can Improve the World Even More. New York: Basic Books, 2011. x + 246 pp. $27 (hardcover), ISBN: 978-0-465-02015-7.

Reviewed for EH.Net by Juan-Pedro Garces-Voisenat, Department of Economics, Wake Forest University.

What is human progress about? If well-being could be measured simply by average income per person, this book could well be titled ?Getting Richer.? It is quite clear that the last two centuries have seen a widespread increase in income per capita across the globe, as has been well documented by Angus Maddison (2001) among others. Even the poorest countries? — with some notable exceptions — have managed to improve, however slowly, in this indicator. But the main point of Charles Kenny in his book is that improvements in the quality of life have surpassed the increase in income by far, particularly in poor countries. Advances in infant mortality, school enrollment, life expectancy and communications are taken almost for granted in developing countries with relatively low income per capita, but they show a level that could have not even been imagined by the currently rich countries back when they had that same income per capita, as Kenny points out.

So what is the cause for the worldwide outcry about poverty nowadays? Kenny seems to find it somewhat unjustified, even though he realizes that they are referring basically to relatively low income in poor countries. And this is the main reason for the universal concern: the income gap between rich and poor countries has been widening in recent decades. It is worth noting that this has happened mainly because the rich have got extremely rich, while the poorer ones have not managed to grow at the same pace. If you add to that the fact that modern communications have made the reality of poor countries more accessible to the general public, then the circle is complete. People all over the world have opened their eyes to the reality of poverty in less materially advanced countries. In ages past, the disparity in global standards of living was simply unknown and unheard of for the common people.

It is this focus on income that Kenny finds misleading. Income cannot account for many components of the standard of living, starting with those that are provided by public services (health, education, etc.). Is the author?s argument something novel in the literature? Not really. Almost thirty years ago, Amartya Sen (1983) had already written about this misleading focus, when he introduced his capabilities approach to development, which would later serve as a basis for the design of the Human Development Index of the United Nations Development Program. The novelty of Kenny?s book is its factual character. All his arguments are backed by facts about the development experience of different countries. And this gives the book a certain liveliness which you rarely find in works about economic development.

In the first three chapters of the book, Kenny establishes the premises of his argument. He abounds on observations of the real world — especially developing countries — that tend to confirm the astonishing progress in standards of living throughout the world over the last century and a half or so; for example, some readers might be surprised to learn that life expectancy was lower in many countries of western Europe just over a century ago than it is today in most African countries. Kenny argues that this progress is due to the rapid spread of technologies and ideas. But he has to admit that, contrary to what could have been expected from the traditional Solow model of growth, there has been divergence in income per capita among rich and poor countries. There are many factors that could explain this, among which the difficult diffusion of process technologies — which greatly affect productivity — is one that particularly prevents convergence.

Chapters 4, 5 and 6 are devoted to showing how the countries of the world are converging in every aspect of modern life but income. The ?good news? announced by Kenny is that the world has escaped the Malthusian trap of overpopulation. Rapid technological advance and diffusion have overcome the trap. If there is any constraint that modern civilization faces, adds the author, it is not given by the carrying capacity of the Earth (which he estimates rather whimsically at a little over 13 billion people) but rather by the consumption patterns of the more affluent societies. He sounds particularly witty in his message to social planners: ?Sterilize the world?s billionaires first, then move on to a one-child policy for Switzerland, Luxembourg and the United States? (p. 67). As for Africa, there is a trap, but it is a trap of institutional history, not of overpopulation.

Kenny has yet ?better news? to announce; levels of education and health are converging around the world; political and civil rights are converging; everything that matters for quality of life is being driven to convergence in the steady state of the Kenny model, where the equation of motion describes the effective growth (generation and diffusion) of technology and ideas, to put it –loosely speaking — in a Solow-model framework. Income is neither an endogenous nor an exogenous variable in this model, because ?the best things in life are cheap? (p. 93). And this is the ?great news?: income is not a necessary condition to achieve a high quality of life. There doesn?t seem to be a causal relation from growth in income to improvements in basic education and health, nor to an increase in civil and political rights, and not even to subjective happiness, according to modern surveys. The message is clear and hopeful: the patterns of consumption and pollution of richer countries are not the only way –not even the most desirable way — to ensure quality of life.

The rest of the book deals with policy recommendations to maintain the progress in quality of life for developing countries. Even though Kenny is, no doubt, a friend of the free market, he is not to be confused with a libertarian. He flirts with the idea that a big government might be a good thing for poor countries if it provides the basic services in health, education and those necessary to achieve full civil participation in society. And even though — according to him — convergence in quality of life seems almost guaranteed in our world today, there is still room for a policy agenda. In Kenny?s view, the government should be a provider of public goods, a facilitator of the diffusion of technology and ideas, an educator (through modern means of communication) and a protector of civil liberties.

Finally, the author tackles the issue of the responsibility of rich countries in the task of development. He espouses neither the view of Easterly (2006) — that foreign aid to poor countries does more harm than good — nor that of Sachs (2005) — who proposes a sort of gigantic bailout of poor countries by rich ones to achieve a messianic ?end of poverty.? For Kenny, aid can be helpful and efficient if delivered to small local communities rather than to national governments, especially when these lack the support of solid institutions. Aid should also be directed to specific projects of quality-of-life improvement. One specific way in which richer countries could help is to allow worker immigration from poor countries; the author presents some evidence of the benefits of such policy. One should add that such a policy is not only of help for poor countries but also very beneficial for the richer ones, which experience an acute ageing of their populations.

At the end of this book, the lay reader might wonder in a state of confusion: What is development? From an intellectual point of view, the book has presented a thesis and an antithesis, for which it has provided ample evidence. But it seems to lack a synthesis. Perhaps the purpose of the author is to stimulate the search for that synthesis. But it is more likely that he knows the job is already done. One feels inclined to paraphrase Sen in stating that development is basically freedom; freedom from material poverty, freedom from hunger, freedom from marginalization, freedom from harassment and freedom to be able to live a full life, one that satiates the most profound aspirations of the human soul. Quality of life might be a step in the right direction, provided it is not sold to poor countries as a package of predetermined patterns of consumption, as Kenny rightly warns us against.

All in all, Kenny?s work is a balanced and fair view of the state of development in the world at the beginning of the twenty-first century. It is by no means a blind proclamation of the inevitable advent of terrestrial bliss. The author clearly states that there are many areas of development policy that need to be mended, not least those that impinge on the unequal distribution of world income. He is also conscious of the fact that the use of resources in the process of development requires some policy guidance and strict rules when the market is not able to solve the problems created by externalities, as it happens with global warming. But the central message remains a powerful and hopeful one: ?The success of development has been to reduce the cost and to spread the reach of the good life? (p. 111). May we enjoy it.


Easterly, W. (2006), The White Man?s Burden: Why the West?s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, New York: Penguin Press.

Maddison, A. (2001), The World Economy: A Millennial Perspective, Paris: OECD.

Sachs, J. (2005), The End of Poverty: Economic Possibilities for Our Time, New York: Penguin Press.

Sen, A. (1983). ?Development: Which Way Now?? Economic Journal, Vol. 93, Issue 372: 745-62

Juan-Pedro Garces-Voisenat is Visiting Assistant Professor of Economics at Wake Forest University.?? His most recent research explores the influence of education on institutional development and the measurement of the quality of education in developing countries, with particular reference to South America.? Email:

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2011). All EH.Net reviews are archived at

Subject(s):Economic Development, Growth, and Aggregate Productivity
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Unsettled Account: The Evolution of Banking in the Industrialized World since 1800

Author(s):Grossman, Richard S.
Reviewer(s):White, Eugene

Published by EH.Net (March 2011)

Richard S. Grossman, Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Princeton, NJ: Princeton University Press, 2010. xx +384 pp. $39.50 (cloth), ISBN: 978-0-691-13905-0.

Reviewed for EH.Net by Eugene White, Department of Economics, Rutgers University.

Another history of banking?? Isn?t the shelf crowded enough? Not quite. While there are thoughtful and not-so-thoughtful books that attempt to explain the origins of the current crisis, Unsettled Account provides us with a new and welcome history of the last three centuries of banking.?

Who should read this book?? A lot of people.? For the legions of political, social and cultural historians, if they have to read one book on the historical evolution of banking, this is it.? It will provide them with the needed theoretical background without an equation in sight, useful country studies, and the insights needed to instruct their students.? For the legions of economic theorists, if they have to read one book on the historical evolution of banking, this is it.? The book is a guide to every key stylized fact they might use for a model, identifying the broad parameters of institutions and history.? For the legions of policy makers, if they have to read one book on the historical evolution of banking, this is it.? Distanced from the crisis of the moment, Grossman nicely hits the key issues and distills some relevant lessons.? What about the specialists, those of us who also write financial history?? Well, we have a worthy successor to older histories of world banking — a subject so large that recent scholars have shied away from attempting a new synthesis.? The last comprehensive history is H. Parker Willis and B. H. Beckhart?s now ancient Foreign Banking Systems (1929). For us, Grossman has sifted through the vast literature (his bibliography is 55 pages) and produced a new and balanced synthesis.?

Given the vastness of the subject, Grossman must be selective and he will not please everyone.? Incorporated banks that were the premi?re financial institution (with important exceptions like the Rothschilds) from the late seventeenth century until the mid-twentieth century have center stage. Investment banks, insurance companies, savings banks, and the multitude of new organizations that grew up in the second half of the twentieth century are set aside.? Furthermore, financial markets that complement and substitute for financial institutions are outside the scope of his inquiry, although he provides a good account of the growth of universal banking.? His focus is on Western banking — with special attention for England, Sweden and the U.S. One might complain that Germany, France, Italy, and Japan should also be case studies, but the overview that Grossman gives us in less than 300 pages requires some hard choices.? Lastly, his focus on the formation of our modern banking systems up to the Great Depression will leave some unsatisfied.

How to approach the seemingly unapproachable topic of banking?? Grossman employs a historical or ?narrative? approach.? As such his book is a logical successor to Charles Kindleberger?s much read and admired books, but while the narrative sufficed for Kindleberger, Grossman guides us by introducing some useful taxonomies to create a structure for analysis.? His comparison of banking systems is arranged according to four key issues: crises, rescues, merger movements and regulation.? It is these elements that combine together to generate the life cycle of the banking industry.

Grossman defines crises occurring when either a very prominent bank or a high proportion of banks are on the brink of failure. These events are enormously costly, sometimes reaching 20 percent of GDP.? While it is generally believed that it is difficult to relate banking crises to fundamentals because of the self-fulfilling character of bank runs, Grossman points to three underlying causes of banking crises: boom-bust cycles, shocks to confidence (often from wars), and weaknesses (usually regulation-induced) in the structure of the banking system.? These three forces, sometimes combined together, enable him to categorize and analyze crises.? He shows that inflation and growth of real GDP were higher during cyclical expansions that were followed by crises, as one would expect in a boom-bust cycle.? For the Great Depression, countries with larger more diversified banks were much less likely to suffer banking crises.? The subprime crisis of 2008-09, which emerged as Grossman was writing his book, serves as an out-of-sample forecast — nicely fitting the story of a boom-bust cycle, exacerbated by regulatory distortions.?

Grossman defines a ?rescue? as ?an intervention by a party not directly involved in a crisis to extend some sort of crisis-averting or crisis-ameliorating assistance to those that are directly involved? (p. 84). His definition is purposely vague in order to encompass the response of bailouts, lender of last resort activity, and ?more extreme measures.? While these actions may reduce the losses suffered by affected financial institutions? stakeholders, their costs are apportioned by political economy.? Lurking behind all such rescues is the danger of moral hazard, potentially inducing worse behavior in the next crisis.? For those who think bailouts are a new phenomenon, the book is an eye-opener, describing rescues of this type in Australia in 1826, Belgium in 1838, and Cologne in 1848.?? Grossman chronicles the development and spread of lender of last resort responses, studying the limitations of the American clearing houses in contrast to the growing effectiveness of the Bank of England.? More extreme actions range from bank holidays and moratoria on payments to nationalizations and deposit insurance.? He analyzes the trade-offs involved in these responses, including the risks of an economic collapse versus moral hazard.

An unmistakable trend over the past 200 years has been consolidation of the banking industry propelled by occasional merger waves. The result may be better diversified banks with economies of scale and scope and increased stability.? Merger movements have been generated by changes in banking technology, general economic growth, and often financial crises when the government invites takeovers of weaker by stronger institutions?? This chapter might also point out the possibility that mergers may have created institutions that are so big that they become ?Too Big to Fail,? increasing their ability to obtain favorable rescue packages from the government.

The dialectic between crisis and regulation makes an analysis of the ills of a banking system particularly difficult.? Crises usually call forth new regulations that may be imposed by a wise government to correct for market failures and improve financial and monetary stability or may be obtained by rent-seeking special interests tilting the playing field in their favor.? Unfortunately, regulations may also sow the seeds of a new disaster.? This problem is amplified by the difficulty of understanding the interactions between various regulations and their consequences.??

Given these complexities, Grossman faces a challenge in describing the evolution of banking?s regulatory attributes and picks out four key types of intervention.? The control of entry first focused on the question of whether one or many banks would have the right of note issue.? Once note issue was monopolized by a central bank, freer entry by competitors was generally permitted, although he finds a pattern where the first countries to centralize note issue were the last to enact a banking code that made entry easy.? His second type of regulation governs capital requirements.? Typically, these regulations initially specified minimum requirements, also limiting entry.? Above these minimums, the market was the key determinant of capital-to-asset ratios for most of the nineteenth and twentieth centuries.? Increased banking sophistication led to a drop in the average ratio for all countries from around 40 percent in the mid-nineteenth century to under 10 percent by 1920. What was the effect of government-imposed capital requirements?? Grossman offers a graph showing that countries without these regulations had higher ratios before 1913 and that haves and have-nots converged after World War I.? Interpreting this is daunting but he posits that more conservative banking systems may not have tempted government regulation.?? The third regulation — whether universal banking should be permitted, is certainly one of the most hotly debated issues today.? Grossman finds that universal banking came into existence without government sanction or encouragement often responding to the pace at which securities markets developed.?? In contrast, its demise in the U.S., Italy, and Belgium during the Great Depression was the result of government response to the alleged contribution of universal banking to the economic collapse — although this remains highly contested.? Who will police or supervise government-imposed rules constitutes his last dimension of regulation.? Sometimes this authority was placed within a central bank and sometimes in one or more independent agencies.?? Grossman finds an intriguing regularity that should stimulate future research: younger central banks were more likely to be made bank supervisors than their older counterparts.? He hypothesizes that this may because younger central banks were more adaptable in their approach to operations and able to manage a dual role.

The next three chapters offer case studies of England, Sweden and the U.S., which Grossman feels exemplify three distinctive evolutions.? For England, it was the fiscal needs of the state that started joint stock banking, creating the Bank of England in 1694 to provide a large loan to the government.? It was rewarded with the privilege of note issue and limits on competition.? By 1826, the needs of finance for the country?s rapid industrialization led to easier entry, temporarily reversed following crises in 1844.? While the Bank of England ultimately obtained a monopoly of note issue, competition came from deposit-creating joint stock banks. At the same time, recurrent crises and? increasing concentration of banking brought the Bank of England to recognize its role as a lender of last resort,?? While it failed to adequately manage the Overend, Guerney crisis in 1866, it quickly handled the Baring failure in 1890, ensuring that it did not lead to a full-scale panic.??

Grossman uses Sweden?s history as a counterpoint to England?s evolution.? In Sweden, joint stock banking arose not from the fiscal needs of the state but from the need for a useful means of exchange — paper money was a vital substitute for the weighty copper coinage.? Easy entry and competition was ultimately ensured because of the struggle between the Diet and the King over control of the banking system. The founding of the Riksbank in 1656 was modeled on the banks of Amsterdam and Hamburg, permitting it to take deposits, effect transfers and make collateralized loans.? Modern banking took off after the repeal of interest rate ceilings and the permission of limited liability in the 1860s.? Following the English pattern, liberalization brought both mergers and instability that led to increased supervision and regulation, particularly after the World War I slump and the collapse of Ivar Kreuger?s industrial empire in 1932.

In contrast to England and Sweden, the U.S. experience was heavily shaped by the federal nature of U.S. government.? Grossman views the origins of U.S. central banking as lying between England and Sweden with the First and Second Banks of the U.S being partly private and partly government owned.? The strictly limited 20-year charters helped to politicize banking and led to the ultimate demise of these proto-central banks.?? But, their rivals, the state-chartered banks did not survive with their privileges intact.? The demand for finance and open entry in democratic Jacksonian America led to the ?free banking? era.? Grossman also highlights as particularly American the early detailed banking codes imposed by the Congress and states.? As is well known, the consequence of these regulations was a fragmented banking system prey to frequent panics with no lender of last resort.? The response, the Federal Reserve Act of 1913, was to create a federal central bank — reflecting the political fears of concentrating power.? Unfortunately, the design of this institution weakened its capacity to act as a lender of last resort at critical moments during the Great Depression.

Grossman?s last chapter leaps through the vastly complicated remainder of the twentieth century.? Across all countries, he sees events as governed by the ?lockdown? during World War II and the slow postwar deregulation that was accelerated by the breakup of the Bretton Woods System.? ?Lockdown? is an apt word for the corset of regulations imposed on banks during the Second World War.? Interest rates, entry, mergers and activities were controlled; yet the anti-competitive nature of these regulatory regimes kept banks profitable, stable, and safe.? However, the growing demand for finance and unexpected inflation guaranteed that these systems could not endure.? The individual character of each national regime produced very different implosions, including the U.S. savings and loan collapse, the Nordic crises and Japan?s prolonged banking disaster.? The regulatory responses, notably Basel I and II, did not enhance stability; and he briefly touches on the crisis of 2008, perhaps saving that for a future historian to place in its proper historical context.? In the end, there are no parting policy recommendations.? Instead, Grossman sees a continuing pas de deux between regulator and regulated.? Regulators will attempt to correct weaknesses in the system after each crisis, while the regulated institutions will struggle to circumvent the constraints that limit their ability to meet the demands for finance.

Eugene N. White is a Professor of Economics at Rutgers University and is currently visiting the Paris School of Economics.? He is co-author (with Andrew Crockett, Trevor Harris and Frederic Mishkin) of Conflicts of Interest in the Financial Services Industry: What Should We Do About Them? (CEPR, 2003).

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (March 2011). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Bourgeois Dignity: Why Economics Can?t Explain the Modern World

Author(s):McCloskey, Deirdre N.
Reviewer(s):Rubin, Jared

Published by EH.Net (February 2011)

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can?t Explain the Modern World. Chicago: University of Chicago Press, 2010. xvi + 571 pp. $35 (hardcover), ISBN: 978-0-226-55665-9.

Reviewed for EH.Net by Jared Rubin, Department of Economics, California State University, Fullerton.

Bourgeois Dignity, the second part of Deirdre McCloskey?s (University of Illinois, Chicago) four-volume magnum opus, is a daring, innovative, extremely well-researched, and important addition to ?big think? economic history. McCloskey provides a new answer to the question, ?Why did Western incomes grow from an average of $3 a day prior to the Industrial Revolution to anywhere between 16 and 100 times that amount today while the rest of the world (for the most part) lags behind?? McCloskey suggests, as in the first volume (Bourgeois Virtues) that it was the changing of attitudes and rhetoric towards the bourgeois, markets, and innovation — first in northwestern Europe and then in the rest of Europe — that heralded the changes in incentives and production necessary for the emergence of the modern economy.

The book is broken into forty-six short chapters. The first thirteen chapters set the stage for the argument — noting that there has been indeed a staggering jump in income in the West since the Industrial Revolution, this growth has been transmitted to all classes, and it commenced in England and the Netherlands. This opening salvo provides a nice overview of recent (and not-so-recent) work done on this period and should not be too controversial to most economic historians. It is the second section of the book, chapters 14 through 38, where McCloskey is at her best and at times most controversial. Like the excellent and honest social scientist she is, McCloskey presents in these chapters the various alternative theories that have emerged to explain the rise in Western income by at least a factor of sixteen. A short list of the explanations she takes on includes the Protestant ethic (Weber), accumulation (Marx), geography (Diamond), eugenic materialism (Clark), science (Mokyr) and institutions (North), among many, many others. In each chapter, she takes on these alternatives and explains why they cannot explain the ?factor of sixteen.? Some of these explanations are more convincing than others — for example, her criticism of Gregory Clark?s Farewell to Alms is particularly devastating. McCloskey remains honest in criticisms of each of the alternatives, many of which are quite brilliant. She never states that any of them cannot account for some degree of economic growth, merely that they cannot account for the degree of growth seen in the West since the Industrial Revolution.

McCloskey presents her own thesis in the final eight chapters. In McCloskey?s words, ?it was words.? It was the rhetoric concerning the bourgeois and the ensuing dignity and liberty bestowed on them that elevated the financiers, innovators, marketers, merchants, and others to a place where a broader swath of society had incentive to aspire to become bourgeois. This change in values was a necessary precondition for modern economic success — where there is a rise in bourgeois dignity (including recently in China and India) — economic success follows. Indeed, McCloskey goes to great length to show that these changes in values and dignity arose in northwestern Europe in the period preceding the massive changes associated with the Industrial Revolution. McCloskey?s argument is a cultural one at heart, but one with substantially more nuance than most of the cultural, Eurocentric arguments proposed over the last century.

I believe that this book is an important addition to the ?big question? literature and any criticism that focuses on the specifics of McCloskey?s argument misses the big picture. That said, there are two aspects of McCloskey?s argument that leave me wanting. The first (and less important) problem is that McCloskey seems to be a bit quick in trivializing the possible impact of the alternatives. Many of the chapters conclude with something along the lines of ?explanation x may account for a rise of incomes of a factor of y, but not sixteen.? There are three reasons why this is unsatisfying. First, the empirical evidence provided for these assertions varies dramatically — some cases are much less convincing than others that a factor of sixteen cannot be accounted for. Second, McCloskey does not consider (in depth) the possibility that a confluence of the many influences presented as alternatives could account for the big leap — perhaps a monocausal (or even duocausal) solution is not the one we should seek. Finally, McCloskey does not provide empirical evidence that a change in values, words, or dignity favoring the bourgeois can account for the factor of sixteen. Though this is undoubtedly due to the difficulties of quantifying culture, as McCloskey readily admits, it is difficult to uphold McCloskey?s argument using the same methodology which is used to deconstruct alternatives.

More importantly, McCloskey does not provide an account of where the change in bourgeois dignity came from. This is a shortcoming that she does not deny, and the reader is left to believe that she has an answer somewhere, but may be holding her cards for a future volume. McCloskey does provide a model (p. 409) which suggests that the Renaissance, Reformation, European fragmentation, free cities, printing, English liberties, and other events could have led to a ?bourgeois dignification.? In theory, these are intriguing possibilities that provide a nice causal pathway leading from historical events to bourgeois dignity to economic growth. The problem is that McCloskey spends too few pages making the causal connections. This is a problem since bourgeois dignity could have arisen from one of the alternatives that McCloskey downplays earlier in the book. Indeed, this is where the institutional crowd will likely leave unsatisfied — why, they will ask, are changes in institutions (such as those protecting property rights) not the root cause of changes in perceptions of the bourgeois? Are cultural attitudes not endogenous to broader economic, political, religious, and social institutions and interactions? It is not clear — in this tome at least — that McCloskey provides a full-throated answer to such questions.

This should by no means, however, denigrate the importance of Bourgeois Dignity. The reader will undoubtedly leave this book thinking that words matter and attitudes towards the bourgeois matter even more. This book absolutely cannot be ignored by economic historians. For those predisposed to disagree with McCloskey?s conclusions, the task is clear — explain the shortcomings of her argument. This is such a well-researched, thoughtful book that this is an extremely tall task. For those economic historians (among whom I would include myself) who believe that McCloskey is on to something big, the task is more muddled — explain where her arguments substitute and complement others. This too is no small task. For these reasons, Bourgeois Dignity (and the entirety of the Bourgeois tetralogy) is bound to live a very long life and play an important role in shaping ?big think? works for decades to come.

Jared Rubin is an assistant professor of economics at California State University, Fullerton. His work focuses on the institutional roots of the economics divergence between the Middle East and Western Europe. His recent publications on this topic include ?Institutions, the Rise of Commerce, and the Persistence of Laws: Interest Restrictions in Islam and Christianity? (Economic Journal, forthcoming) and ?Bills of Exchange, Interest Bans, and Impersonal Exchange in Islam and Christianity,? (Explorations in Economic History, 2010).

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (February 2011). All EH.Net reviews are archived at

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

On Trans-Saharan Trails: Islamic Law, Trade Networks, and Cross-Cultural Exchange in Nineteenth-Century Western Africa

Author(s):Lydon, Ghislaine
Reviewer(s):Daddi Addoun, Yacine

Published by EH.NET (February 2011)

Ghislaine Lydon, On Trans-Saharan Trails: Islamic Law, Trade Networks, and Cross-Cultural Exchange in Nineteenth-Century Western Africa. New York: Cambridge University Press, 2009. xxviii + 468 pp. $95 (hardcover), ISBN: 978-0-521-88724-3.

Reviewed for EH.Net by Yacine Daddi Addoun, Harriet Tubman Institute for Research on the Global Migrations of African Peoples, York University.

In a period when the Sahara is mentioned only in relation to terrorism, it is a breath of fresh air to read Ghislaine Lydon’s On Trans-Saharan Trails. The author uses the unfortunate succession of deaths, between 1848 and 1850, of four W?d N?n network traders, who were operating between the two shores of the Sahara, to illustrate and test the strengths and weaknesses of what she terms the ?paper economy of faith?: the complex relationships between literacy, the corpus of Islamic law, its clerks, and trade. This study of trans-Saharan long-distance exchange economy can be studied thanks to numerous private collections and archives holding all kinds of commercial contracts, correspondence between traders, as well as judicial opinions deeply rooted in the M?lik? school of law. The author visited no less than 35 private collections in four countries: Mauritania, Mali, Morocco, and Libya, demonstrating the span of her research, a trans-Saharan enterprise in itself. In addition, Lydon collected more than 200 oral interviews, in a conscious effort to complement information available in written documents, especially colonial archives, and to seek for explanation of legal, judicial, and social concepts and practices, names of merchandise, and location of places — using at least six languages. This book is in fact a manifesto for the centrality of orality, even in a context studying ?paper economy.? The result is a well-informed study that shows a trans-Saharan trade network at work.

The book is an attempt to bridge the gap between North Africa and sub-Saharan Africa. It succeeds in establishing the place of the Sahara desert in the center of events and not just as a mere space of passage, and its inhabitants as active agents in the transformation of this region as a whole. The first two chapters focus on the longue dur?e. They lay out the transformations and introduction of new elements (camels, Islam, Arabs) that made this space an important node of commerce and communication. These chapters also contain a much-appreciated presentation of primary and secondary sources. Lydon is quite exhaustive in presenting works on trans-Saharan networks. She, however, leaves out Pierre-Philipe Rey and his disciples, such as Faouzia Belhachemi and Olivier Meunier[1] — important scholars who have tried to ?bridge the African divide.? The two subsequent chapters concentrate mainly on nineteenth-century developments. While the third chapter is a general overview putting the developments of market centers and their shift within the general framework of jihads, the fourth chapter concentrates more on the W?d N?n network, and its components, mainly Guelmim, Tikna and Awl?d B? Siba?. The author highlights the heterogeneous nature of the trade network because it was composed of Jews and Muslims, but also because it was ethnically diverse, including Berbers and Arabs. In common, they shared a certain kind of cosmopolitanism and transnational identity. The remaining chapters concentrate more specifically on trade and issues relating to paper economy. An important contribution of Lydon’s study is the emphasis on the role of women as agents on their own rights. Women not only contributed to the social reproduction of the network (which other historians have already acknowledged), but they also held the shore-side institutions and acted as immobile caravanning partners, besides supervising domestic and enslaved workers. Lydon stresses the role of some women in financing caravans and acting as shareholders. Indeed, others, such as the M?sna women of Tish?t, participated in caravans as traders and cross-cultural brokers. Lydon highlights the Muslim and patriarchal institutional weight on women in a way to appreciate their active role even further. As a female historian in a conservative society, Lydon had the unique opportunity to interview women (at least 60) and thus is able to bring out their voices as active participants in the trans-Saharan trade and counteract the androcentric paradigm that is prevalent especially in the history of African Islamic societies.

Lydon takes us into the details of trans-Saharan trade including contracts, currencies, and weights and measures in a well written book, accessible to non-specialist. In chapter six she brings out what I think is her major contribution in the historiography. By exploring the dialectics between commerce and literacy, she demonstrates how written contracts ordered by the Qur??n were instrumental in the development and consolidation of the trans-Saharan trade. Paradoxically, at the same time, those written contracts, even when authenticated by witnesses, were invalid as evidence in courts, in case of a conflict where the witnesses were far away or dead. The author considers this fact, as well as the absence of legal personality in Islam along with inheritance laws, as the causes for lack of capital accumulation over generations and thus the underdevelopment of the Muslim world. This argument expands our knowledge about the limits of Islamic economic practices and the ways traders tried to circumvent them by creating their own set of practices and rules. In chapter seven she illustrates this issue through a meticulous examination of a complex inheritance case triggered by the death of the four network traders mentioned above. She also highlights, through Shaykh b. Brah?m al-Khal?l, who had to resolve the case, how network structure could be so heavy that it forced out some of its best members. In an interesting competition between legal service providers over who were liable to pronounce a judgment on the case, it turned out that in conflict situations there was not always good-faith and certainly not much faith in the ?paper economy of faith.?

I am not sure, however, to what extent the invalidity of contracts in courts was widespread in practice. Even if M?lik was accredited to this opinion, Ibn al-Qayyim al-Jawziyya, states that it was rather an exception.[2] Also, the author acknowledges that she is writing about the fringes of Islamic world, in the sense that she deals with a space where no centralized state existed. So it is not clear to what extent this constraint on development can be generalized. Arguably, Lydon has a major argument that deserves to be investigated further.

On Trans-Saharan Trails is a great addition to African history, Islamic legal history, and the history of trade networks and diasporas. Lydon gives us a refined and nuanced analysis of the theory and practice of long-distance trade. It is an exceptionally well researched and crafted book and cannot be ignored by anyone interested in these topics. Lydon raises important questions and any future study on the trans-Saharan trade networks, and financial transaction in Islam will have to consider her contribution.

1. Maxime Haubert and Pierre-Philippe Rey, Les soci?t?s civiles face au March?: Le changement social dans le monde postcolonial (Paris: Karthala, 2000); Olivier Meunier, Les routes de l’islam: Anthropologie politique de l’islamisation de l’Afrique de l’ouest en g?n?ral et du pays Hawsa en particulier du VIII? au XIX? si?cle (Paris: L’Harmattan, 1997), Faouzia Belhachemi, ?Anthropologie ?conomique et historique des Touareg du Hoggar,? Doctoral dissertation, Universit? de Paris VIII Vincennes, 1992.

2. Ab? ?Abd Allah Mu?ammad b. Ab? Bakr b. Ayy?b, Ibn al-Qayyim al-Jawziyya (751-691 H.), Al-?uruq al-?ukmiyya f? ‘l-siy?sa ‘l-shar?iyya, (Jaddah: D?r al-Faw?’id, 2007), 544-560.

Yacine Daddi Addoun is a post-doctoral fellow at the Harriet Tubman Institute for Research on the Global Migrations of African Peoples, at York University, Toronto, Canada. He is interested in the history of slavery and its abolition in Algeria, the Maghrib and the Muslim world. His latest publication is ?`So that God Free the Former Master from Hell Fire:’ Salvation through Manumission in Nineteenth-century Ottoman Algeria,? in Ana Lucia Araujo, Mariana P. Candido and Paul E. Lovejoy, Crossing Memories: Slavery and African Diaspora (Trenton, NJ: Africa World Press, 2011), 237-260.

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (February 2011). All EH.Net reviews are archived at

Subject(s):Government, Law and Regulation, Public Finance
International and Domestic Trade and Relations
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Africa
Middle East
Time Period(s):19th Century

Doing Well and Doing Good: Ross & Glendining ? Scottish Enterprise in New Zealand

Author(s):Jones, Stephen R.H.
Reviewer(s):Roberts, Evan

Published by EH.NET (October 2010)

Stephen R.H. Jones, Doing Well and Doing Good: Ross & Glendining ? Scottish Enterprise in New Zealand. Dunedin, New Zealand: Otago University Press, 2010. 422 pp. $50NZD (paperback), ISBN: 978-1-877372-74-2.

Reviewed for EH.Net by Evan Roberts, Department of History, University of Minnesota.

Stephen Jones — now a research fellow at the University of Dundee, but formerly Director of the Centre for Business History at the University of Auckland — has written a well-researched history of what was once the largest manufacturer in New Zealand. Of course, ?in New Zealand? is a significant qualification to ?largest manufacturer? since establishment size in New Zealand manufacturing was low. At the peak in 1945, Ross & Glendining employed approximately 2500 people in its factories, and no single factory had more than a thousand employees (p. 324). Ross & Glendining produced clothing, shoes, and sundry woolen products exclusively for the New Zealand domestic market, after beginning life as an importer and distributor of foreign textiles. Since few readers of this review will have ever heard of the company, foreign interest in the book has to be motivated by something more academic than familiarity with the firm. Happily there is more to learn from this book than its specific and remote subject might suggest.

More general interest in this book is merited because of the clarity of its discussion of some common business and economic problems: managing and motivating dispersed employees, vertical integration (and disintegration) as a business strategy, and succession from the first generation of a tightly managed family firm to a limited liability company in the second generation. By highlighting these economic issues and discussing them for a couple of pages when they arise, Doing Well & Doing Good overcomes some of the limitations of the ?case study? or ?firm biography? genre. Jones is able to step back and be more critical, in part, because the firm failed. Writing more than forty years after Ross & Glendining was split up in 1966, Jones owes no one any favors in his account.??

The eponymous firm founded by John Ross and Robert Glendining — both Scottish migrants to New Zealand — began as a drapery importing and distribution firm during the New Zealand gold rush of the early 1860s in the Otago province. The parable that the riches to be found on nineteenth century gold fields were from provisioning rather than prospecting holds true in New Zealand too. Ross & Glendining was founded in Dunedin, the major center for Scottish migrants in New Zealand, and at the time the largest city in the country.? Being the closest city to the Otago goldfields and having a natural sheltered deep-water port contributed to Dunedin?s status as the largest city in the 1860s. Jones shows that the Dunedin headquarters were at first an advantage to the firm. After the Otago gold rush ended, being based in Dunedin was, at least, no barrier to success through the end of the nineteenth century. Dunedin, however, is the southern-most of New Zealand’s major cities. Being on the way to the gold fields gave it an early locational advantage. As gold declined in importance, and the center of New Zealand’s population and economy moved northward, by the early twentieth century Dunedin was clearly the [relative] laggard of New Zealand’s major cities. Although Ross & Glendining had opened its own manufacturing plants in the late 1880s, more than 90% of the firm?s profits between 1900 and 1914 came from warehousing and distribution of local and imported textile products (p. 227). Jones shows clearly how the import and distribution business was tied to where population and income were growing. The firm had to be on the ground in many different places far from the company?s headquarters.

Ross & Glendining faced a microeconomic problem: motivating and monitoring employees who worked hundreds of miles from the firm?s founders, owners and managers. Jones gives a clear exposition of how the well-known principal-agent problem works in practice (pp. 69-71, 142-43). Clearly grounded in theory, yet tractable to the general reader, Jones makes the story of Ross & Glendining?s employee-management problems relevant to a wider audience of economic and business historians than the title and subject of the book would suggest.

After the Otago gold rush ended in 1863 it was clear to the firm?s founders that profits could not keep growing by merely servicing the rush of migrants to the area. The search for alternative profit centers led Ross & Glendining into a range of vertical integration (and then disintegration) strategies over the firm?s life. The first of these was the establishment in the late 1870s of their own manufacturing plant, the Roslyn mill near Dunedin. The Roslyn mill remained part of the company to the end in the 1960s, and in the late nineteenth century with just under a thousand employees it was New Zealand’s largest single factory. A much less successful investment was the purchase of a large sheep farm (or ?station? to use the New Zealand parlance) in the Otago highlands in 1878. While profitable, Lauder Station demanded a disproportionate share of the owners? time, and required them to develop yet another set of skills beyond what they were already doing. When the reforming Liberal government came to power in 1890 with the intention of ?busting up? the great estates, the prospect of any capital gain from selling the station diminished too. Ross & Glendining held onto the station until 1909, but had been trying to exit without losing too much money since the turn of the century.

Again, the virtue of Doing Well & Doing Good is that it makes clear how an economic concept, in this instance vertical integration, works in practice. Jones shows how the firm repeatedly struggled with how to price the output of constituent parts of the business when transferring goods between each other. A perennial problem was how to price the output of the Roslyn Mills for sale to the warehouses that Ross & Glendining operated around New Zealand. Ross & Glendining did not want to give their own goods an unfair advantage by transferring the goods at cost, so that the warehouses would continue to sell a wide range of imported goods. Being seen as selling primarily ?inferior? New Zealand-made products would be a disadvantage in competition against other textile distribution companies. (One might note here that although parts of Ross & Glendining were in the fashion business, this history rarely touches on the colorful, fashionable side of the story. This is resolutely a history of balance sheets.) Jones suggests in his understated way that internal pricing was an issue the firm never properly resolved.

Controlled by its founders for decades, it was not until 1900 that the firm became a joint stock limited liability company. Yet even after the transition John Ross and Robert Glendining — assisted by their accountant in Dunedin, Charles Hercus — remained tightly in control of the firm. The change in structure was largely nominal, and not substantive. John Ross remained central to the firm?s management until 1922. Robert Glendining retreated from active involvement in the firm as he became senile before his death in 1917. Despite the transition to a limited liability company, on John Ross?s death the firm?s management passed largely to Ross and Glendining?s children. While the firm remained nominally profitable through the Depression, and was boosted by government spending on uniforms in World War II, the rate of return on capital fell steadily. Manufacturing became even more central to the firm when the first Labour government, elected in 1935, imposed strict import controls. As a long-established firm Ross & Glendining was able to obtain import licenses relatively easily. Jones downplays the costs of the import-licensing regime to the firm, and the wider economic distortions they caused. A fillip to demand in the Korean War again boosted Ross & Glendining, but the long-term problems of poor management remained. Jones tells the story of the firm?s decline as one of the second generation being poorer managers than their fathers. Again, Jones makes clear in the particulars a familiar issue in business history, the difficulties faced by a family firm in displacing poorly performing managers who have their surname on the letterhead.

The relevance of this book to a wider audience comes from its effective illustration of common economic and business issues: designing contracts for a dispersed workforce, pricing goods for internal sale, and making the transition from family ownership and control to a joint stock company employing managers who can be fired. Jones makes relatively few explicit connections to the economic history of New Zealand. What can a single firm tell us about a whole economy? Jones shows how Ross & Glendining grew prodigiously in line with growing incomes for the whole New Zealand economy. On the eve of World War I per-capita incomes in New Zealand were among the highest in the world. Operating in a business sensitive to consumer incomes, Ross & Glendining rode the wave of extensive and then intensive growth in the New Zealand economy before World War I. From the 1920s though, the oft-told story of New Zealand’s economy is of decline relative to its peers in North America, western Europe and ?across the ditch? in Australia. Since at least the 1960s there has been a debate in New Zealand about how to make the economy less reliant on simply exporting untransformed agricultural products. For half a century New Zealand has been trying to do better than being good at transforming grass into butter or wool. The importance of ?staples theory? and the ?external balance constraint? in New Zealand economic debate will ring familiar in other countries.? On the face of it the history of Ross & Glendining, an importing company that manufactured for the domestic market only, may seem irrelevant to that debate.? Yet Ross & Glendining tried to create value by manufacturing woolens in New Zealand, rather than shipping textiles abroad. What Doing Well & Doing Good illuminates is the struggle of New Zealand firms to adopt practices and structures that survive the individual management talents of founders, and allow them to add more value. Recent research suggests that the quality of management in New Zealand firms lags compared to management in comparable countries. Poor management acts as a brake on firms growing beyond their family origins. Ross & Glendining was one of the largest firms in the country, but it did well enough with an outdated organizational structure and management dominated by the reprobate children of the founders, that it did not restructure, and was unable to respond to changing conditions in the early 1960s. The eminent New Zealand historian Keith Sinclair suggested in 1950 that New Zealand history required a ?generation of pedants? because there was so much of New Zealand’s history that lay untold by historians. This is still largely true of the country?s business history. Stephen Jones has mined the archival gold of Ross & Glendining?s records to tell its story. He does well and does good himself by going beyond the specific history of this one firm and speaking to larger issues in business and economic history.

Evan Roberts is Assistant Professor of History at the University of Minnesota, and lectured in History at Victoria University of Wellington (New Zealand) from 2007-2010. He has written about the business history of New Zealand (?Don?t Sell Things, Sell Effects,? Business History Review, 77(2): 265-290), and is currently researching living standards in New Zealand since the nineteenth century. Forthcoming work from this project includes Kris Inwood, Les Oxley and Evan Roberts, ?Physical Stature in Nineteenth Century New Zealand: A Preliminary Interpretation? in the Australian Economic History Review.

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2010). All EH.Net reviews are archived at

Subject(s):Business History
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The World of Private Banking

Author(s):Cassis, Youssef
Cottrell, Philip
Reviewer(s):Austin, Peter

Published by EH.NET (June 2010)

Youssef Cassis and Philip Cottrell, editors, The World of Private Banking. Aldershot, UK: Ashgate Publishing, 2009.? xxv + 302 pp.? $115 (hardcover), ISBN: 978-1-85928-432-2.

Reviewed for EH.NET by Peter Austin, Department of Interdisciplinary Studies, St. Edward?s University.


Occasionally, one has the chance to look simultaneously at something historical and something very much still with us.? This applies to the business of money that, if all goes well, is almost invisible to everyday life.? Today issues of finance are more visible than usual and a realm that prides itself on discretion is under scrutiny. The World of Private Banking represents a time when discretion and reputation were all.? This edited volume contains fifteen chapters that group and connect in a sensible manner, so that reading the whole creates an impression of something greater than the sum of its parts.? It is hugely descriptive though, for the most part, it is not new scholarship.? It covers various aspects of private banking from the late eighteenth century to the First World War, and a bit beyond.? It has an expansiveness that belies the simplicity of its title.

If there is one name associated with private banking, it is Rothschild, and it is with this five-tentacled bank that the collection begins.? In his ?Rise of the Rothschilds,? Niall Ferguson portrays the bank as it was — a sort of multinational.? He is most concerned with origins, the rise of the organization between 1810 and 1836 — that is, before the great banking changes of the mid-nineteenth century.? Derived from his two-volume history, this essay is the collection?s one case study and concerns itself with Rothschild?s size, its bond-dominated business, the partnership structure, the family itself, and reasons for the bank?s success, including its well-known communications network.

In its role as ?The World Pump,? the Rothschild House might today be called a ?non-state actor,? and like today, myths grow up around the inclinations and capabilities of such organizations.? As Ferguson describes, Rothschild was indeed powerful, even in its early decades, based on a number of factors — not least of which was its great geographical reach, and its reliance not on a single market.? Ferguson?s account is florid with personalities and comments about the ingredients of Rothschild?s operations.? One of the most interesting aspects here is Ferguson?s revelation that the House often improvised in its operations, had no systematic accounting, and lost track of considerable amounts of money.? If there is a weakness to this excellent essay, it is that the Ferguson does not choose or prioritize the most important elements of Rothschild?s success.? Was it superior communication, ruthlessness toward rivals, Jewish solidarity??? In the end, for Ferguson, it appears that Rothschild?s performance came from a combination of things, but the bank remained at heart a family concern, from which emanated its intensity and its methods.

In the three decades after 1815, Rothschild?s closest rival was Barings, and John Orbell?s comment on the British house complements Ferguson well.? Rothschild was much larger than Barings, but in his ?Private Banks and International Finance in the Light of the Archives of Baring Brothers,? Orbell highlights the unparalleled range of Barings? financial activities that assured it greater profitability.? Ferguson?s lens focuses squarely and powerfully on one large piece of the private banking puzzle: Rothschild.? By contrast, I believe Orbell does in exemplary fashion what this collection does as a whole so well: reviews and explains the vocabulary, mechanics, and roles associated with the international finance generally; the merchant/private banking enterprise specifically.?

Orbell?s primary assignment here is to articulate the private banks? source of greatest strength and longevity: its international scope.? From Calcutta, Canton and Madrid to Rio de Janeiro, New Orleans and Moscow, Barings was active, and this remained an advantage that private banks maintained over their joint-stock rivals even after these began to eclipse private bankers in home markets after about 1850.? Not only does this chapter locate Barings? activities geographically, it places them in relation to Baring rivals.? Perhaps of all chapters, Orbell?s is unique for its weaving together of merchant banking themes with archival resources.? The gaps are most interesting.? In my own work on Barings in Canada, Massachusetts and England, I can indeed confirm the perplexing absence of material in the Barings record to do with trade finance before 1900.? But in all, the Barings archive is complete and quite well-managed.? It is an orderly record of one of the most important merchant banks to fuel modernization and growth around the world, particularly in the nineteenth century.? Orbell illustrates this process magisterially.

Barings was one of the nineteenth century?s great international financial enterprises.? In the United States, however, it had no peer before 1840, and Edwin Perkins takes a look at Barings? operations there, along with snapshots of five other major banks in the United States in his essay, ?The Anglo-American Houses in the Nineteenth Century.?? A scholar whose early work focused on the House of Brown, Perkins describes the activities of banks in the antebellum United States when it was an emerging market in the way we think of China, Brazil, or India today.? Perkins reminds us that the American market exploded with activity after the Civil War, and that it was European capital flowing increasingly to maturing American financial institutions that helped to settle and develop the enormous home market of the United States — a home market so large and rich that the United States has historically deemphasized exports since independence. The largest theme in Perkins? work is this transition to American financial control on its own soil.

In the 150 years or so before 1914, private banks were exclusive entities.? Today, they are most often found within larger public companies as in the so-called ?private banking? division of a Wells Fargo Bank or even a Charles Schwab.? The salience of Perkins? essay is that we know that the development of a mature American banking system gained traction with the withdrawal of Barings after the financial difficulties of the Andrew Jackson years; that the reasons for withdrawal by Barings were varied, but in part had to do with the disagreeable style, pace, and practices of American finance.? In the portraits of a Brown, a Seligman, a Kuhn Loeb, or a Morgan, this essay previews the rise of raw American financial power released in the 1840s, and subsequently developed.? The fortunes of discrete patrician private banking of the kind described here, particularly British, correspond inversely with the development of the American market and the spread of American democracy and values.? Perkins? essay describes the transition from a time when Anglo-American houses prioritized Britain and British finance to a time when they prioritized business on the western side of the Atlantic.?

International themes continue with Alain Plessis? interesting article on the ?eccentric, quasi-magical world? of the so-called ?Haute Banque? — a very ?small group of powerful houses? in Paris, usually partnerships, international in orientation, whose membership was unofficial, changeable, and difficult to define.? Their mystery was increased because (with the exception of Rothschild) Plessis finds these French banks left few records compared to their British and American counterparts.? Unraveling events in business history is notoriously difficult — in financial history, particularly so.? In contrast to other fields, personalities attracted to commerce and money tend not to be expressive, impressionistic or prone to lengthy description since they tend to see more value in action rather than thinking and writing.? There are exceptions here of course, but the haute banque?s secrecy is in line with Pierpont Morgan?s French aphorism of ?pense moult, parle peu, ?cris rien? (?think a lot, say little, write nothing?).

International operations were the lifeblood of many private banks.? But in the phrase of Alain Plessis, the Parisian haute banque was ?a world open to foreigners? in a manner unlike others in private banking.? Plessis describes cosmopolitan organizations ?incompletely assimilated? into French elite society since they had roots of foreign origin and desired to keep connection with family members outside France.? To be sure, origins and loyalties were by country.? They were also by faith.? He describes wedlock alliances among Christians and among Jews in order to build banking organizations; of major Jewish and Protestant bankers and their children married off to foreign wives and husbands, to people established in France but with foreign origins, often of the same religion as themselves.? Here was international banking with a vengeance.? Here was the source of the Rothschild mystique, a combination of myth and reality mentioned by Ferguson, made more mercurial and (for those so inclined) more mysterious by family members moving around from country to country for intelligence to find new markets and to keep family ties current.?

Plessis on the haute banque introduces the reader to the general phenomenon of religious and ethnic minorities in trade and finance.? Armenians in Turkey, Chinese in Malaya, Greeks in Cairo, and Lebanese in Buenos Aires come to mind.? Here, authors Ginette Kurgan-van Hentenryk and Martin K?rner concentrate on the idea of financial solidarity along religious lines with their chapters on Jewish and Protestant banking.

Kurgan-van Hentenryk broadens aspects of Plessis? essay as she covers the origins of the haute banque at the time of the Bourbon Restoration, a closed circle of twenty banks of Protestant and Jewish financiers that placed loans for Europe?s conservative monarchies after 1815.? But she does so much more.? Here is the story of Jewish private banking and its spread across Europe in the nineteenth century with imminent names like Stern, Bischoffsheim, Bleichr?der, Fould, Oppenheim, Goldschmidt, Cassel, Lazard, Mendelssohn, Seligman, and Rothschild; and later in the United States with Warburg, Schiff, Goldman, and Soros.

Kurgan-van Hentenryk divides Jewish banking activity into four phases: the Hofjuden period, the nineteenth century through the First World War, the interwar/Nazi period, and the post-1945 years.? At all times, she says, Jewish private banking based itself on trade — whether in commodities, capital, or most recently in ideas and services.? It is a fascinating journey in many respects.? The author emphasizes that, particularly before the 1850s, much of the Jewish private banking story took place in Austria and the German states (Vienna, Frankfurt-am-Main, Cologne, Hamburg, Berlin), from which it ramified to other parts of Europe, the United States, and Europe?s colonial possessions.?

It is the story of financial diaspora.? It is also the story of risk-taking in the face of adversity.? Much of Kurgan-van Hentenryk?s essay discusses Jewish participation in projects many non-Jewish private bankers spurned: railroads and early industrial finance.? In this regard, Jewish private bankers, as described, were integral to the early development and promotion of joint-stock banks that culminated in the creation of the Cr?dit Mobilier in France, and the so-called D-banks in Germany.? Kurgan-van Hentenryk illustrates the quick changes to finance during the middle decades of the nineteenth century with the new ?mixed? banking or joint-stock instruments.? Joint-stock banks were, after all, as key to the finance of the 1871 Franco-Prussian War indemnity as private banks (Barings, Rothschild) had been to the Napoleonic indemnity of 1815.? The shift of instruments so profound over just a few decades seems worthy of the phrase ?Big Bang.?

What did not change was a certain anti-Semitism that persisted on the Continent, of course, well into the twentieth century.? It was a prejudice, according to Kurgan-van Hentenryk, not easily mitigated by wealth, accomplishment, or education.? In this regard, she describes a defensive and fascinating kind of clannish behavior, the important role of women for family ties, and a historical pattern of strict endogamy with a goal to deepen networks, and to conserve and increase wealth among families.? Weaving through her account is the presence of the Rothschilds, and it is unclear if the general fortunes of Jewish bankers were hurt or helped by the blossoming of the Rothschild house after 1815.? In this excellent account, the differences, if any, between Sephardic, Ashkenazi, and even Hasidim Jews in their associations, networks, or business successes are also unclear.? After musing on the influence of Jewish financiers in politics, Kurgan-van Hentenryk ends with a question ?what path is next for Jewish private bankers: integration or some sort of innovation?? Whatever the path, she implies adaptability and survival for Jewish bankers, private or not.

Following this account, Martin K?rner turns our attention to Protestant financiers, who he says operated ?from Lisbon to St. Petersburg? by the eighteenth century.? Though a minority, the place of Protestant bankers was historically much less clear for K?rner than Jews are for Kurgan-van Hentenryk, even in the wake of the Reformation.

K?rner describes solidarity among Protestant bankers in the sixteenth century, and the financial networks that started to form — first in several parts of Switzerland, later between various European Protestant groups in the German states and between Huguenot factions in France.? This said, K?rner devotes most space to the growth of Swiss (Calvinist) financial power, particularly in relation to France.? He recounts in highly technical terms the money transfer routes of Protestant bankers who used Geneva as a financial hub, and, like several essays in this collection, K?rner?s account is useful for explaining the mechanics of government loan finance.? But the chapter remains in large measure a description of Swiss Protestant bankers? influence on the French crown.? Starting with the reign of Louis XIII, K?rner depicts the start of a sort of Huguenot haute banque which only grew in influence with the French court as demand for capital increased under the ambitious Louis XIV.? What is fascinating to see here is Catholic monarchs who elevated Protestant bankers to positions of social and political power in Catholic countries in periods of inter-denominational pressure.? This is particularly arresting when the pattern survived in France even after the 1685 revocation of the Edict of Nantes.?

It is indeed interesting to see K?rner explain how Huguenots fled France during her wars of religion and set up shop as merchants and bankers in all the economic centers of Europe.? The difficulty here is that, except for Paris, these other ?economic centers of Europe? are, in the main, given short attention.? And while this essay has clear strengths, it leaves significant areas tantalizingly unaddressed.? Lutherans, Anglicans, Anabaptists, and Methodists are unmentioned, as well as the regions in which they operated.? Did they form networks?? Even if this essay?s focus were only Swiss/Calvinist?French relations, one large weakness would remain.? K?rner does not provide a reason why Catholic monarchs and princes did not employ Catholics bankers.? It is true that Catholics at times accepted Protestants to avoid the services of Jews, as K?rner mentions, but were Catholic bankers inadequate to solve the financial exigencies that befell France, for example, after her Religious Wars?? Were the financial troubles of the pre-Revolutionary decades so unusual that His Most Catholic Majesty Louis XVI could only summon the services of the talented and Protestant Jacques Necker?? K?rner is frustratingly mute.?

If Ferguson (Rothschild), Orbell (Barings), and Perkins (Brown et al.) treat the overarching development of the private bank, the volume?s editors, Youssef Cassis and Philip Cottrell, treat its crisis in two substantial contributions.

In his masterful ?Private Banks and the Onset of the Corporate Economy,? Cassis describes the emergence of a ?new bank? between 1835 and 1865 which he says represented a seismic change in savings and financial participation by the populations of Europe.? This joint-stock, deposit, and investment banking vehicle presaged the onset of unprecedentedly large capital accumulations demanded by a rapidly-industrializing European society in the half-century before the First World War.?

Cassis? essay is a description of slow change across time, not decline and quick fall.? It first reviews what a private bank was — its character, purpose, legal form, and pedigree.? Cassis then describes the great advantage of the private bank in the long term: not the servicing of small and medium-sized businesses in its various domestic locales, but the financing of international trade and the issuance of foreign loans — that is, the exclusive world of the haute banque.? Though a French term, Cassis touches this idea of the haute banque from Paris and Brussels to Berlin and Vienna, and the discussion is a good complement to Plessis? chapter.? However, if there is an emphasis here, it is Britain where one can see the effect of joint-stock banking on private bankers most clearly.? The decline of the private banker, says Cassis, was no steeper than in Britain, ?yet nowhere did private bankers flourish more than in the City of London.?? Here he presents the central paradox of the nineteenth century related to joint-stock ascendancy: while private bankers lost ground as domestic deposit institutions throughout Britain as a whole, they redoubled their commitment to international activities which strengthened financiers in the City, particularly in short-term acceptances.

Philip Cottrell drives home Cassis? case of Britain with his study of the actual mechanisms that changed finance in the City of London: by legislation of 1826, the arrival of limited liability laws and the explosion of domestic limited joint-stock banking in the early 1860s, measures he calls collectively ?London?s First ?Big Bang.?? In addition, Cottrell surveys the competition to private banks, particularly in the international sphere after the growth of joint-stock banks.? Written about so well by Geoffrey Jones, these limited-liability laws followed by the 1862 Companies Act greatly expanded overseas corporate banks and colonial banking, and even spurred the formation of myriad varieties of finance companies.? ?The ?Big Bang? largely sounded the death knell of personal private enterprise within most of London?s financial markets,? writes Cottrell.? ?Private banking persisted in the City, but its days were numbered.?? As Cottrell and Cassis comment, the decline would take time, and David Kynaston also contributes to this discussion of decline (see below).? Cassis and Cottrell (among others in this collection) voice the central irony that private bankers themselves sowed the seeds of their own destruction by sometimes creating joint-stock banks as vehicles to finance industrial projects that, in the end, despite the private bankers? best efforts at control, ultimately replaced them, certainly domestically.

Dieter Ziegler gives us a look at Germany.? Specifically, he asserts that Alexander Gerschenkron?s explanation for the first capital driver of nineteenth-century German industrialization should be private banks, not universal banks.? Here we have a specific substantiation of Kurgan-van Hentenryk?s account (?Jewish Private Banks?) of the origins of the D-banks.? We also have a substantiation of both Jewish and private inputs to railroad and industrial finance before the full onset of joint-stock banking, which was resisted with few exceptions (e.g., Bavaria) throughout the German states, including Prussia.? Inspired by the Credit Mobilier after 1852, nevertheless, Ziegler finds that innovative consortiums assembled by private bankers in the German states and Hapsburg empire ?proved to be the decisive factor for the nascent universal banks? that financed the earliest railroad projects (e.g. 1836, from Vienna to Bochnia in Galicia).

Of course, one of the facts of banking is that joint-stock banks began to trump private bank capital in Europe and the United States after 1850.? Nevertheless, Ziegler is concerned with timing.? Gerschenkron neglected to show that the first successful joint-stock banks were founded by experienced private bankers.? Thus the start of Gerschenkron?s leading sector take-off had a private bank ?spark-plug.?? By the mid-1850s when the first stock credit banks were founded, the basic railway net connecting almost all important Zollverein States was already built.?

Ziegler says that historians should tweak Gerschenkron to include the input of private bankers in the German industrial story.? What of Italy?? Do we need to adjust Gerschenkron?? Luciano Segreto thinks so.? In his ?Private Bankers and Italian Industrialization,? Segreto describes a pre-unification Italy with few consequential financial institutions, a peninsular quilt of regions and cities through which a few private bankers threaded their way often as Protestants or Jews, and who had the strongest financial contacts with interests outside Italy itself.? He finds no competence or inclination to cooperate on anything like an Italian Zollverein.?

At times, Segreto gives the impression of impatience with the historical circumstances he describes before the birth of the Kingdom of Italy.? In the pre-unification period, for example, Segreto describes attempts to form Italian financial organs based on sericulture or shipbuilding in the manner of Belgium?s Soci?t? G?n?rale, or the later Cr?dit Mobilier and Credit Anstalt.? He laments, however, that these enterprises were ?too advanced for the times and above all for the socio-economic context in which [they] operated, [which were before unification] still loath to make a coherent commitment to industrial development.?

Many things changed in the 1870s.? Suddenly, there were national projects and private bankers who had once individually identified only with particular states or with foreign interests were called on to underwrite large projects with a nationwide scope such as railroads — so that bankers from Genoa, Turin, Livorno, and Florence were brought together for a common purpose.? Cooperation also occurred on a regional basis with no banking center more active than Milan, now free from Austrian surveillance.? Segreto points out that, by the 1880s, Milanese commercial banks had joined forces with banks in Turin and Genoa.? The assembly of an Italian credit system led to a national banking system and Segreto parallels the fever of bank establishment with that of antebellum American or Meiji Japan.? In this expansive environment, Segreto implies, private bankers with political ties were active in such sectors as foodstuffs, petroleum, textiles, mining, transport, and real estate but they were, in Segreto?s words, ?flanked by the large commercial banks.??

Unfortunately parts of this essay are quite difficult and vague, making it unclear until the last section what exactly private bankers? roles were in post-unification Italy.? Moreover, Segreto presents mixed banks as a feature of Italy by 1914.? But it is far from clear how we got here.? Whatever the path, however, the destination emerges from Segreto?s essay.? He asserts that private bankers played a particular role after 1890 — something Segreto calls ?functional ?re-specialization.??? After several decades in which ?all operators in the sector? (I assume financial) were kind of industrial-financial generalists, Segreto finds that private bankers switched to the role of facilitator and smooth point of contact between industry and the mixed bank.? He sees? the private banker as the subtle deal-closer in a mixed bank venue, and substantiates his assertion with a persuasive chart that? lists private banker involvement in 31 major industrial enterprises in Italy from 1884 to 1913.? Segreto also reports the decline of private banker ranks in the years after the First World War.? He implies that the less-than-subtle events of the 1920s and 1930s had something to do with this.

J.P. Morgan?s motto may have been to ?write nothing? (ecrit rien).? When carried out, this makes business history research difficult.? However, written archives do exist and readers will find four sections (five authors) on archives of various family businesses and banks in this collection — two British, one Continental, and the Rothschilds that straddled both.? These essays break up The World of Private Banking nicely and provide updates, insights, and personnel connected to research collections.? They also tease researchers with leads to plug holes in the financial history literature.

Except perhaps for John Orbell?s chapter on the well-established Barings, the archive chapters remind the reader that the nature of archives is fluid.? Even with the oft-studied House of Rothschild, Melanie Aspey points out that a large portion of records of the Vienna branch were retrieved from Moscow less than a decade ago.? Aspey?s partner on the Rothschild archive chapter, Victor Gray, corroborates Niall Ferguson?s comment that the papers remain split among the French, Austrian, English, German and the Italian (Naples) branches.? Of these, London is most complete.? But according to Gray, we may never know what we are truly missing since all the Houses of Rothschild were subject to what all private banks are subject: periodic purging by family members.?

Still, millions of letters need cataloguing due to volume, difficulty of categorization, and language — of which six are used in the Rothschild papers.? Language is a barrier also to what Victor Gray sees as the treasure trove of the House: the Judeo-German (Judendeutsch) correspondence in German using Hebrew letters.? These are Rothschild family and business letters used to skirt competitors and to survive as Jews in the police state of Metternich.? As of 1998, only one in seven of these letters was translated.? Additionally, there are hundreds of thousands of international letters from Rothschild correspondents and agents which are starting only now to get scholarly attention, but remain largely unexplored.? John Orbell mentions something similar about Barings? London Wall accounting records which (I can attest) are vast, complete, yet seldom used; and await the eyes a scholar of a certain temperament.?

As Gray and Aspey?s archive discussion complements Ferguson?s Rothschild chapter, so Gabriele Teichmann?s discussion of the papers of Salomon Oppenheim Jr. & Company complements Ziegler?s chapter on private bankers and German industrialization.?? For that matter, one could sensibly pair it with Kurgan-van Hentenryk?s ?Jewish Private Banks.?

Teichmann?s chapter is useful as an advertisement for an archive of intrinsic importance.? Oppenheim was an institution active in the many industrial sectors of a country which, upon unification, proved the most potent in twentieth-century Europe: Germany.? In her discussion of archive resources and the Oppenheim family, Teichmann highlights Cologne, a pivotal city for the history of the industrial Rhineland, and hence for the history of twentieth century Europe.? And it is not without irony that this contributor to German vitality was a Jew.

The last part of Teichmann?s account called ?Social Studies? explores family related topics of the Oppenheims.? This is the exclusive focus of Fiona Maccoll?s ?Banking and Family Archives? in this fourth of four archives chapters.? Here, Maccoll reinforces the idea of family as a cardinal difference between private and other bank types.? Initially, I found Maccoll too prolix with step-by-step family data — that is to say, who said what, to whom, and when.? This task is for the researcher to discover and present.? However, the archivist can be the handmaiden in this endeavor, and Maccoll does this.? Her chapter steers the reader to archival materials that involve people, family, and relationships.? Seemingly banal, the idea of family was one of the distinguishing entrance criteria for private bankers until its twilight in the late twentieth century.? And it is the potential for personal information relevant to operations that is so seductive about the Rothschild Judendeutsch letters, according to Gray and Aspey.? For Maccoll, though, family papers provide data on private banking operations — sometimes indirect, sometimes oblique — that simply does not exist in other banking venues.

Some material in these chapters will not be as useful to those familiar to archives as to those newer to the field.? Still, the range presented here from French (Gray and Aspey) to German (Teichmann) to British (Maccoll and Orbell) has something for everyone, regardless of experience.? Finally, the internet has transformed so many things, and private bank archives are no exception. Gray addresses these issues at some length in regard to the Rothschild archives.

I suppose it could be said that a banker spends half his life making money, the other half giving it away.? Pat Thane touches on the issue of ?giving it away? in her chapter ?Private Banking and Philanthropy: the City of London, 1880s-1920s.?? It is one of the half dozen essays one should read here if pressed for time, not for its superiority per se, but because it bears on a dimension of money-making not touched elsewhere in the collection.? Thane?s chronological focus is tight, her themes limited for the most part to the British Royals and Jewish philanthropy, and her essay is effective as it stands.? Readers may grow impatient with Thane?s dependence on Frank Prochaska?s work for her Edwardian discussion.? And though there is rich coverage of Baron and Baroness de Hirsch, the Bischoffsheims, and Ernest Cassel, some will likely find the account less than satisfying with Schroeder?s the sole House outside the Jewish sphere.? What of Barings, Hambro, and Coutts, or the Quaker legacy?? To say nothing of moving the chronology to the earlier decades of the nineteenth century?? These queries aside, I suspect that the ambition of the essay was deliberately and ruthlessly limited, and, for what it does, it does quite well.? My complaints are meant to inspire others to complete the task that Thane has begun.? She has whetted appetites terrifically.

David Kynaston closes this collection with thoughts on the years in the City after private banking?s ?moment? has passed: its denouement from 1914 to 1986.? He depicts a vocation aware of its decline — a ?closed world, in which family, wealth and social connections counted for more than industry or ability.?? He describes a world anchored to a past ideal, a pre-1914 order of Old Etonians, ill-suited to compete in a time that was starting to see nothing irregular or wrong with the rise of a clerk to bank president.? One example of Kynaston?s idea of nebulous decline? is Edmund de Rothschild?s 1998 memoir, A Gilt-Edged Life.? Here, Kynaston describes a floating comfortable life; a scion of a rather laconic, somewhat frivolous dying breed — reminiscent of the exhaustion of Thomas Mann?s Buddenbrooks — without the animal spirits needed to survive in the rough and tumble world of the later twentieth century.??? Kynaston? illustrates this sense of floating among private banking families with other convincing anecdotes of the 1950s, 1960s, and 1970s.? The second ?Big Bang?? (see Cottrell for the first) made this intangible sense of? drift and decline abruptly concrete for the private City banker in 1986, as the Houses of Lazard, Warburg,? Hill Samuel, and others — once financial whales — became minnows, and new whales arose with names like Citibank, Chase Manhattan, and Banker?s Trust.? My own work on Barings illustrates this well.? Its conservative principles allowed the partnership to weather the Panic of 1837 brilliantly.? Unfortunately, Barings? culture learned the wrong lessons from these successes, and it failed to adapt and innovate in later years.? Indeed, the first time Sir Peter Baring had heard of the ?clerk? Nicholas Leeson, it was too late.? Certainly in its classic form, Kynaston artfully declares the demise of private banking in the City, for only after death can one call for obituaries, which he does.? In the main, the private banks are gone.? Long live the private banks, Kynaston says — in house histories!

One need not read this book chapter by chapter in order.? I recommend the reader start anywhere in the book and fan out.? I have followed this free course in my remarks above.

In closing, one of the virtues of this collection is the overlapping explanations by several authors of the same terms of trade and finance.? Multiple mentions of acceptances, bills of exchange, country banks, merchant banking in different contexts, as well as key dates in the financial history of the period that this volume represents provide a review for the expert, a primer for the novice.

Technically, I appreciated the publisher?s choice to choose footnotes over less convenient endnotes.? Wherever located though, the citations and bibliography present a fantastic tour of current and classical literature on finance and banking with lacunae only of Peter Temin, W.W. Rostow, John McCusker, and Peter Rousseau.

This is not easy material.? However, the level of writing in this volume is high, no doubt made higher by skilled editing.? The uses of this collection are many, not least as a tonic for the current American fashion to present globalization as something new.? On most every page, one finds accounts of men and organizations working in the business of international affairs, indeed global since the start of the nineteenth century.? Part research guide, part family history and part financial/trade primer, this collection is, finally, part museum-piece — for the world of the private banker is largely gone.? Nonetheless, like good museums, this book repays a visit, has much to teach about the present, and presents important things knowledgably and with style.


Peter E. Austin is a historian at St. Edward?s University in Austin.? He is the author of Baring Brothers and the Birth of Modern Finance (Pickering & Chatto, 2007).? He is currently at work on a book on the 1960s.

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century
20th Century: Pre WWII