Burhop on Fohlin, _Finance Capitalism and Germany's Rise to Industrial Power_

[eh.net-review at eh.net]

Published by EH.NET (September 2007)

Caroline Fohlin, _Finance Capitalism and Germany's Rise to Industrial 
Power_. Cambridge: Cambridge University Press, 2007. xii + 392 pp. 
$85 (cloth), ISBN: 0-521-81020-5.

Reviewed for EH.NET by Carsten Burhop, Max Planck Institute.


Over the past decade Caroline Fohlin (Research Professor of Economics 
at Johns Hopkins University, Baltimore) has been one of the most 
productive researchers in the field of Germany's financial history. 
In her most recent book, _Finance Capitalism and Germany's Rise to 
Industrial Power_, Fohlin summarizes the results of her previous 
research and defends her major arguments. In addition, she adds 
significant research to the history of German stock markets. Fohlin's 
monograph is highly readable, but potential readers should be aware 
of its limits. The monograph has a clear focus on the history of 
joint-stock banks and their relationship to industrial joint-stock 
companies during the three decades preceding World War I. Other types 
of financial institutions and the developments inside the banks are 
more or less neglected. In addition, Fohlin uses a cliometric 
approach throughout, whereas more qualitative results from business 
history are largely ignored.

In chapters 1 and 3, Fohlin states the major themes of the book -- 
drawing a detailed and balanced picture of the German financial 
system by presenting and interpreting well-known and new results. 
More specifically, she aims to contribute to a set of controversies 
about the impact of the large German banks on industrialization and 
on industrial corporations. Chapter 2 interrupts the flow of the 
argument somewhat by providing a review of current theories regarding 
the role of banks and markets in financial systems. Nevertheless, 
this chapter is very useful for readers who are not aware of the 
recent developments in banking theory. Readers with a basic knowledge 
of those theories can skip this chapter.

Chapters 4, 5, and 6 are the core of the monograph. A large number of 
hypotheses regarding the role of joint-stock credit banks during the 
German industrialization are put forward, the major arguments from 
the literature are presented and new tests are performed. In Chapter 
4, Fohlin analyzes the structures of the aggregate balance sheets and 
profit-and-loss accounts of the joint-stock banks. Her exposition is 
very well structured and highly informative. Yet, the results are not 
new, since the data employed were already published in 1976 by the 
Deutsche Bundesbank. A second point analyzed in this chapter is the 
industrial organization of banks in Germany between 1883 and 1913. 
Concentration ratios increased over time, but that concentration 
ratios were lower in Germany than in England. Finally, Fohlin 
investigates the dynamic relationship between the growth of bank 
assets and economic growth. She concludes that banks were not causal 
for economic growth in Germany between 1895 and 1913. A major 
drawback of this chapter is that Fohlin restricts her analysis to the 
period after 1883, the starting year of the statistical data 
published by the Bundesbank. Comparable data for the period since 
1848 are available, but these were not used by Fohlin.

In Chapter 5 Fohlin investigates the relevance of banks for the 
corporate governance of industrial joint stock companies. The basic 
argument put forward in this chapter boils down to an analysis of 
bank-industry relationships via the supervisory board. Nevertheless, 
it is a valuable piece of research since many facets of this 
relationship are analyzed. First of all, Fohlin figures out that the 
ownership of industrial corporations by banks was very limited and 
that the major source of power of banks was proxy voting. Moreover, 
the fact that bankers took up positions in the supervisory board of 
an industrial corporation was unrelated to the financial structure of 
the industrial corporation. On the other hand, industrial 
corporations with stock market listings were more likely to have a 
banker in the supervisory board. Chapter 6 evaluates the impact of 
bank monitoring, via the supervisory board, on profits and liquidity 
constraints of industrial corporations. Fohlin does not find any 
statistically significant relationship between monitoring by bankers 
and performance of industrial corporations. However, she shows that 
industrial corporations listed on the stock market performed better 
than other industrial corporations.

The main results of Chapters 5 and 6 highlight the importance of 
stock markets in a supposedly bank-based financial system. 
Consequently, Fohlin analyzes the relationship between government 
regulation, the banking sector, and stock market development in 
Chapter 7. This chapter is clearly the most innovative part of the 
book. Surprisingly, neither the regulation of stock markets, nor the 
taxation of stock market activities, nor the structure of the banking 
sector influenced the development of stock markets in Germany. Banks 
and markets mutually developed in late nineteenth and early twentieth 
century Germany. A well-developed banking sector did not restrict the 
development of the stock market. More specifically, the decisions of 
industrial corporations to get listed on a stock market were 
significantly influenced by the size of the firm, but not by close 
connections to a bank.

Chapter 8 is a short and superficial review of Germany's financial 
history from World War I to the 1950s. Putting the events of this 
period into fifty pages is just too ambitious. Nevertheless, the 
chapter is still a useful introduction to this part of Germany's 
financial history.

A final remark regarding the data employed by Fohlin is in order. It 
is not always possible to figure the data sources out since the 
documentation of the tables and figures is incomplete. Moreover, some 
of the results are based on outdated data. For example, Fohlin still 
uses a stock market index published in 1934 and not the more recently 
calculated market indices by Eube or Ronge, which show a different 
behavior than the old data. Despite some shortcomings, the monograph 
can be recommended to scholars interested in financial history and to 
readers interested in the economic history of the German Empire.


Carsten Burhop is Heisenberg-Fellow at the Max Planck Institute for 
Research on Collective Goods, Bonn. Recent work includes "Did Banks 
Cause the German Industrialization?" _Explorations in Economic 
History_ 43, 2006.

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