Published by EH.NET (January 2010)

Gerald D. Feldman and Peter Hertner, editors, Finance and Modernization: A Transnational and Transcontinental Perspective for the Nineteenth and Twentieth Centuries. Farnham, Surrey, UK: Ashgate, 2008. xviii + 300 pp. $115 (hardcover), ISBN: 978-0-7546-6271-6.

Reviewed for EH.NET by Jeffrey Fear, Department of Business Administration, University of Redlands.

This edited volume is based on a set of papers presented in 2005 at a Vienna conference organized by the European Association for Banking and Financial History. The meeting hosted by the Bank Austria Creditanstalt coincided with the bank?s 150th anniversary. Sadly, the volume is one of the last publications associated with the late Gerald Feldman of the University of California, Berkeley. Peter Hertner of the University of Halle has picked up the proverbial editorial ball to bring this collection of twelve articles to goal. The collection is timely because it reminds us that the period prior to 1914 and the period after the 1980s parallel one another in their trends toward greater liberalization and regionalization. Prior to 1914 Vienna was the fourth largest banking center in Europe behind London, Paris, and Berlin (p. 38). Austrian banks hold a similar position today that they had a century ago (Deiter Stiefel, p. 28). The volume also reminds us that exposure to central eastern European governments and commercial ventures sometimes sparked periodic financial crises that the Viennese financial hub then passed on to global stock exchanges (1873, 1931). Those two crises act as a frame for most of the articles.

The book has four sections. Not surprisingly, the most coherent section centers on banking in Vienna/Austria (Dieter Stiefel, Peter Eigner, Aurel Schubert, and Fritz Weber). The second section has three thematically-oriented articles regarding the efficiency of German stock markets before 1848 (Hartmut Kiehling), Balkan railways and their international financing (Peter Hertner), and the information networks of the Rothschild bank (Rainer Liedtke). The third part consists of three articles on Swedish joint-stock companies (Oskar Broberg), the Holland-based Twentsche Bank (Douwe C.J. van der Werf), and the Ergasias Bank in Greece post-1975 (Margarita Dritsas). The fourth consists of two articles on the Sino-French Banque industrielle de Chine between 1900-1922 (Frank H.H. King) and a short, broad two-century survey of the State Bank of India (Abhik Ray).

This volume highlights some new directions in banking literature that need further research. In line with much historiography on German banking (pp. 42-45), Peter Eigner finds Alexander Gerschenkron?s notion of the universal bank as an institutional substitute for the missing prerequisite of ?original accumulation? wanting. Especially after the 1873 crash, Austrian universal banks were risk-averse, preferring safer public borrowing rather than industrial financing (p. 31) and with an ?aversion to shares? (p. 33). Not until the post-1900 boom did banks turn to industrial lending, but still could not be said to play the role of true venture capitalists (p. 35); more often banks had to rescue industrial firms rather than promote them (p. 47). Aurel Schubert stresses the contradictions during banking crises between monetary and financial stability, whereby the lender-of-last resort policy that might help maintain (short-term) bank and financial stability potentially harms monetary, i.e. currency and price, stability over the long-term ? a dilemma all too real in the crisis of 2009/2010. Schubert argues that during periods of intense crisis, central bankers made decisions under considerable uncertainty so that the risks of lending were often less than the risks of not lending, especially when political pressure comes to bear. With a subtle reading of bank balance sheets, Fritz Weber demonstrates how the 1931 crash that marked a new stage in the Great Depression (unlike the 1873 crash that purified the air); the 1931 crisis was a culmination of a long erosion of bank solvency (a ?creeping crisis,? p. 93) beginning with World War I and the collapse of the Monarchy. Eigner, Schubert, and Weber tend to view the conflation of banking and industry capital not as an efficient solution to informational asymmetries or as a solution to agency problems nor as a way in which banks ?dominated? industry, but as a highly leveraged, inefficient, and downright dangerous institutional arrangement; especially during downturns such bank gearing quickly translated downturns into systemic crises (contagion) and into the domestic ?real economy.? The entwinement of large weakened banks with a deteriorating industrial sector heightened systemic risk levels by the very act of trying to reduce them.

As a whole, the volume lacks a broader theoretical framing and misses a number of opportunities to examine important questions in spite of the virtues of the individual contributions. What might these interlocks and banks at the heart of industrial groups (keiretsu, chaebol, Indian or Mexican family groups with tight ties to banks, or even Swedish Wallenbergs with its myriad interlocks with major industrial firms) mean for understanding financial crises more generally? Did universal banks crowd out or weaken stock exchanges? In spite of/because of (?) the purest forms of universal banking that inspired both Rudolf Hilferding and Joseph Schumpeter, both Berlin and Vienna were important stock exchanges prior to 1914. Hartmut Kiehling tests efficient market hypothesis assumptions and argues that early German stock markets before 1848 began approaching a level of efficiency, broadness, and transparency that enabled a certain volume of fair trading for important stocks. What exactly is the relationship between universal banking and stock exchanges? Vienna would be an important test case.

What ?lessons? does the Vienna story tell us about the rise and fall of financial centers more generally? First, it appears that finance and international diplomacy are important. Vienna could only remain a major financial center as long it was part of the Empire. At most it could become a regional player after the empire collapsed, but its historical importance made it a particularly crucial but weakened player with more potential for crisis than other centers. In spite of the inclusion of two articles on India and China and some references to the 1997/98 Asian financial crisis, more contextualization, theorization, or reflection would have been helpful. Large banks apparently play a special role in the economy as a flywheel between the macroeconomic and microeconomic, most explicit in Fritz Weber?s contribution about the Austrian Creditanstalt (p. 79).

The volume could use greater analytical sharpness on its own themes of modernization and transnationalism. It is stronger on issues of personal and limited liability, systemic risk and contagion. In the concluding remarks, Alice Teichova notes that the contributors made ?no special attempt? to define a concept of modernization (p. 273). Except for Peter Hertner?s contribution on international capital flows into railway corporations of southeastern Europe or Frank King?s on French banking in China, the transnational perspective promised in the subtitle is not highlighted or theorized beyond the individual, local contribution ? somewhat disappointing considering Vienna was one of the most multiethnic cities in Europe with pan-European political and financial connections.

Yet the individual contributions offer many chances to theorize issues of transnational relations ? often within one firm or family. Peter Hertner follows the truly remarkable business ventures of Moritz von Hirsch, whose family connections bridged most of the main western European banking centers, whose business executives were hired all over Europe to promote a railroad to ?European Turkey? ? from Vienna to Constantinople ? that eventually became known as the ?Orient Express.? To help finance it, von Hirsch innovated a new type of Turkish lottery bond that became popular ? and controversial ? all over Europe with small investors. Its directors ranged from Paris, Zurich, and Vienna to Constantinople (Istanbul). Its headquarters lay in Zurich with Credit Suisse handling the day-to-day administration as a ?neutral instance? (pp. 140-142). Hertner?s weaving of financial, business, and diplomatic threads that undergird this venture is impressive. The story of the Orient Express and other Balkan railroads is truly a pan-European one, a European one that we are again seeing today but that was destroyed by increasingly virulent nationalist sentiment, for instance, Macedonian nationalism that targeted the symbol of foreign imperialism ? the railway ? much as terrorists target airlines today.

Frank King focuses on the failed Sino-French joint-venture Banque industrielle de Chine between 1900 and 1922 ? which should have asserted French influence in China. King notes how the ?Powers? attempt to control China?s financial development actually undermined China?s creditworthiness and stunted its modernization. Abhik Ray examines ?two centuries of apex banking? of the State Bank of India, but it had its origins as the Bank of Calcutta/Bank of Bengal by the British. Ray argues that these apex banks built on Scottish banking principles, provided the ?best banking service obtainable in India,? stressing customer service and once going so far as to rebuke a European officer for rudeness vis-?-vis a Indian native clerk who wrote and spoke English (baboo) (p. 265). Douwe C.J. van der Werf, examines the relationship between family succession, legal liability issues, and corporate governance, yet the Twentsche Bank had offices and branches in Amsterdam, Rotterdam, London, Paris, and northwest Germany. What exactly does it mean to operate trans-nationally during this period of globalization? Rainer Liedtke analyzes the pan-European quality of the Rothschilds? network of agents; the Rothschilds needed a multiethnic network of agents to operate in a multi-ethnic world to improve the quality of the information received (p. 158). The Rothschild advantage was not speed ? initially wary about the telegraph ? but the ?precision, the reliability and most importantly the exclusiveness of the information? based on their agents? network. Oskar Broberg examines the rise of the modern joint-stock company with limited liability laws for Sweden, but contextualizes Sweden in the broader pattern of its introduction throughout Europe and America. How exactly did this transnational diffusion process occur? What and how did Sweden learn from these other countries? Broberg?s article highlights that an intellectual-legal history of the diffusion of limited liability throughout Europe is still needed. Margarita Dritsas breaks the general timeframe of the volume yet provides a fascinating account of the Ergasias Bank in Greece since its founding in 1975. Constantinos Kapsaskis conceived of the new bank as one dedicated to small-and-medium sized businesses and drew upon American models of banking, including that of the Small Business Administration, and forced a widely dispersed shareholding (no more than 5% by one person) and transparency based on international accounting standards. Before its merger into Eurobank in 2000, it became one of the largest and most profitable in Greece, if not Europe. In all of these contributions, the transnational element could have been highlighted more.

One remarkable quote taken from Austria Creditanstalt?s 1872 report, written at the height of the speculative wave of company promotions might act as a timely reminder (p. 79): ?It would not have been hard for us to raise our margins through extraordinary profits, had we gone on to found new commercial or industrial enterprises with a laxer method of selection as we had such frequent opportunities, and if we had thought to follow the general mood, only thinking of the momentary advantage to turn our activities to the creation of value that offered only more material for the day-to-day speculation instead of encouraging participation of the public who possessed capital in solidly established corporations.? This volume reminds us how much banks play a special role in the economy between macroeconomics and microeconomics, special intermediaries between depositors and investors, potential guardians of investors on boards of firms, as transmission mechanism between national and international economic developments, and balancing rewards and risks. Woe to those economies whose bankers fail them.

Jeffrey Fear authored Organizing Control: August Thyssen and the Construction of German Management (2005) and ?Cartels? in the Oxford Handbook of Business History, edited by Geoffrey Jones and Jonathan Zeitlin. He is working on a series of comparative articles on German and American banking and corporate governance.