Finance, Intermediaries, and Economic Development

Published by EH.NET (September 2004)

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Stanley L. Engerman, Philip T. Hoffman, Jean-Laurent Rosenthal, and Kenneth L. Sokoloff, editors. Finance, Intermediaries, and Economic Development. New York: Cambridge University Press, 2003. ix + 350 pp. $70 (hardback), ISBN: 0-521-82054-5.

Reviewed for EH.NET by Timothy W. Guinnane, Department of Economics, Yale University.

The ten essays that comprise this volume all study intermediaries in the markets for capital, for labor, and for inventions. Intermediation is now a central issue in the economics and economic history literature: how do economic agents find each other, and how do the problems of finding each other affect economic growth? This constellation of questions not surprisingly has been an area in which conversations between economists and economic historians have been especially fruitful. The essays collected here should be a part of that conversation.

Larry Neal and Stephen Quinn lead off the volume with a discussion of the personal networks at the heart of London’s financial activities in the seventeenth century. Such networks were especially important in London, they stress, because London lacked a public bank that processed bills of exchange. This imposed a cost, as defaults in London were harder to observe, and London bills less secure; but the authors stress that the recycling of gold reserves through fractional-reserve banks helped fuel London’s dynamic, market-oriented financial system in this period.

Eugene N. White traces the efforts to devise a set of rules to govern the Paris bourse in the eighteenth and early nineteenth centuries. The competing (and complementary) goals are familiar to us today: the government wanted a thick, liquid market in its own securities, wanted to earn revenue by taxing the market directly or indirectly, and was concerned about fair securities pricing (or at least the perception of fairness). Before the Revolution a very highly regulated market provided low-cost trades to investors, but this system died with the financial ruin of the intermediaries who made it work. Napoleon had little love for financiers, but under his regime the markets recovered.

Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal study the competition between bankers and notaries for the role of intermediary in financial markets in nineteenth-century Paris. (The chapter is entitled “No Exit,” the English title of Jean-Paul Sartre’s meditation on hell, Huis Clos. This play, which deals with three characters who have been shut in together for far too long, includes the famous line “l’enfer, c’est les autres.” Hoffman, Postel-Vinay, and Rosenthal have been working together for a long time … perhaps they are trying to tell us something?) Each type of agent had distinct advantages; the banker enjoyed greater liquidity and less cumbersome bankruptcy proceedings, while the notary could more effectively commit to prudence, since in the event of failure he risked ejection from the notarial corporation forever. Eventually the bankers prevailed, in part because of the nature of the changing financial market, in part because of the government’s concern to preserve the core functions of the notaries.

Angela Redish’s study of the mortgage market in Upper Canada in the early nineteenth century starts from the fact that Canada, like the U.S., had no specialist mortgage banks. This study draws on the mortgage-registration system to estimate the amount of mortgage indebtedness and both the sources and reasons for mortgage debt. Her estimates show a large increase in new mortgages in the latter part of the study (1830-1850), and imply that mortgages were for significant amounts, more than the cost of a fully-stocked farm. Lending patterns suggest the importance of local sanctions for failure to repay; only the elite could borrow outside the local area. Most mortgages appear to have been made to finance purchase of a farm.

John B. Legler and Richard Sylla return to an old and central theme in U.S. economic history, the spatial integration of capital markets. Their focus is the New Orleans stock market in the period 1871-1913. They ask whether southern capital markets were integrated with the national capital markets (here represented by the New York stock exchange). Their answer echoes Howard Bodenhorn’s conclusion that the Southern capital market became less integrated with the national markets after the Civil War.

Kenneth A. Snowden’s contribution traces the transformation of the local Building and Loan associations of the 1880s to the Savings and Loans that collapsed in the 1980s. This is an admirable contribution to American financial and institutional history. Snowden stresses that the Depression-era regulation that probably doomed the Savings and Loan industry was itself a product of the development of the Building and Loan, the predecessor institution.

Naomi R. Lamoreaux and Kenneth L. Sokoloff present an intriguing and important part of their long study of the role of patent rights in the development of U.S. technological leadership in the nineteenth century. Here they focus on the creation of a set of intermediaries, lawyers and patent agents who matched inventors with investors, and thus allowed each side of this market to specialize in what they did best. They emphasize that these intermediaries in turn succeeded because of two features of the U.S. infrastructure, the patent system itself, and the transportation and communication system that facilitated trade in goods and ideas.

Dianne Newell studies a different type of intermediary in Vancouver in the late nineteenth and early twentieth centuries. The historiography has long stressed that British Columbia needed to import both capital and labor to deliver on the promise of its abundant natural resources. We know where the capital and labor came from, but who put it all together? Newell focuses on the amazing careers of two ethnic Chinese entrepreneurs, Chang Toy and Yip Sang. They leveraged their merchant activities and experience to become investors, labor brokers, and, as Newell argues, important but neglected players in the development of the local economy. Efforts to restrict the role of Asians in the British Columbia economy shaped their efforts, but did not frustrate these and other immigrant intermediaries.

Robert C. Allen’s chapter characteristically poses an important puzzle, and uses economic reasoning to flesh out admittedly imperfect evidence. Soviet industrialization in the 1930s clearly required capital accumulation. Where did that capital come from? As Allen notes, “even Stalin balanced his budget,” so that capital must have come from either foreign lending or transfers from other parts of the Soviet economy. For decades a favored account has stressed transfers from agriculture: the state used its control over pricing to extract real resources from farmers. Allen notes that this agricultural surplus hypothesis has undergone attacks both empirical and theoretical. His own account stresses that the actual changes in relative prices were small relative to other sources of accumulation, such as terror-induced migration into cities. Allen’s discussion will certainly not be the last word on the subject, but clarifying lines of his discussion he has certainly advanced understanding of the issue.

Michael Bordo, Michael Edelstein, and Hugh Rockoff ask whether the Gold Standard was a “Good Houskeeping Seal of Approval” during the inter-war period. Partly because of Bordo and Rockoff’s work on the late nineteenth century, many scholars believe that the Gold Standard served precisely this function for the period 1880-1914 or so. But the inter-war gold standard was very different: feeble and short-lived, nobody really knew who was committed to playing by the rules. More important, it was less a Gold Standard than a gold exchange standard, which implied a more fragile situation. Bordo, Edelstein, and Rockoff find, however, somewhat to their surprise, that the Good Housekeeping model applies to the interwar period as well. Countries that appeared to be committed to gold paid less for credit than countries that lacked this commitment. As they note, there are other features of the political and economic situation they do not try to account for, but this chapter as it stands is another useful clue to the performance of the world economies in the 1920s and early 1930s.

The essays published here were all presented at a conference held in honor of Lance Davis. The volume is, in all but name, a Festschrift. (The only clear indication of its real function is an afterword on Davis’s career. This afterword is both a nice appreciation and an interesting overview of the career of one of the original cliometricians.) Academic publishers have decided that they do not like the Festschrift format, presumably on commercial grounds. I have been told that the Festschrift is little more than a dumping grounds for papers unpublishable in journals, and that the honoree’s friends usually bloviate on their pet themes rather than present fresh work. Examples of such collections exist, but it’s an unfortunate generalization, as this book ably demonstrates.

This is an unusually strong and coherent collection of essays, much better than most conference volumes and similar collections that publishers seem only too happy to bring out. Most of the essays here would be good candidates for publication in refereed journals. Some are even better, as the authors put to good use the less stringent space limitations of the chapter format. The Lamoreaux and Sokoloff chapter, to take one example, is an excellent piece of research, and would be accepted enthusiastically by any of the major economic history journals. Many journal editors would balk at a publishing a paper the length of Snowden’s chapter, to take another example, but as it stands the piece is a very fine, self-contained economic and institutional history of the transformation of an important institution. At half the length it could only be superficial and incomplete. Redish’s chapter is primarily descriptive, and might not pass muster in the “hypothesis – test – conclusion” world of cliometrically-oriented journals. Yet both the topic and the quality of her discussion make this a useful paper for anyone interesting in either Canadian economic history or the broader question of mortgage finance. The Festschrift format also helps to place some papers in context. The Legler and Sylla chapter, for example is a fine contribution on its own. But it is best viewed as an elaboration of a theme forcefully argued by Lance Davis, who famously demonstrated the slow and imperfect integration of U.S. investment markets after the Civil War. On commercial grounds alone the publishers would have done well to announce the book as what it is, a Festschrift for Lance Davis, one of the leading economic historians of his generation. The essays do justice to his extensive and wide-ranging body of work, and being frank about what it is would have garnered the volume a wider audience.

This is an excellent collection of essays and will find a welcome place on the shelves of any library, as well as any economic historian who admires the work of Lance Davis.

Timothy W. Guinnane is professor of economics and history at Yale University. His recent publications include “Delegated Monitors, Large and Small: Germany’s Banking System, 1800-1914.” Journal of Economic Literature (2002); and, with John C. Brown, “Fertility Transition in a Rural, Catholic Population: Bavaria, 1880-1910,” Population Studies (2002). He is co-editor, with William A. Sundstrom and Warren C. Whatley, of History Matters: Essays on Economic Growth, Technology, and Demographic Change (Stanford University Press, 2003), which is a Festschrift-in-drag for Paul A. David.

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