Published by EH.NET (October 2004)

Daniel Verdier, Moving Money: Banking and Finance in the Industrializing World. New York: Cambridge University Press, 2003. xiv + 312 pp. $65 (hardback), ISBN: 0-521-81413-8; $23.99 (paperback), ISBN: 0-521-89112-4.

Reviewed for EH.NET by Scott A. Redenius, Department of Economics, Bryn Mawr College.

Moving Money by Daniel Verdier, Associate Professor of Political Science at Ohio State, is an ambitious and original contribution to the literature on the historical origin of modern financial systems. The book focuses on the effect the structure of a nation’s political institutions has on financial structure. According to Verdier, politically centralized countries, such as Britain and France, tend to have more concentrated and specialized banking systems, more internationally oriented financial systems, and more developed securities markets than politically decentralized countries, such as Germany and the United States.

These relationships are viewed as outcomes of the interaction of political and economic forces. Because of agglomeration effects, financial development tends to centralize control over financial resources. However, the prospect of centralization generates political resistance from groups that stand to lose from the accompanying redistribution of financial resources. These groups can more easily block financial centralization in politically decentralized states because they have recourse to relatively powerful local governments, which themselves often depend on local intermediaries for public finance.

For evidence, Moving Money draws on the experience of advanced industrial countries during two periods of financial market expansion: 1850-1913 and 1960-2000. The book is informed by a wide range of political science, economics, and economic history literature. Given the scope and comparative nature of the project, the book does not include detailed treatments of individual national financial systems but summarizes relevant developments. The hypothesized relationships between political, economic, and financial variables are illustrated graphically and evaluated with cross-sectional regression analysis. Special cases are identified and discussed in detail. The data used in the analysis are for a 21-country subset of current OECD member states, though much of the analysis, especially for the earlier period, involves fewer countries because of data or other issues. Operationalizing the concepts and assembling consistent cross-sectional data represent significant achievements in themselves.

The material is organized into three sections. The first reviews the literature and presents relevant geographical, financial, and political theory. The second examines the 1850-1913 period. Chapter 3 focuses on concentration in the banking system. Local banking (the proportion of all deposits held with local, non-center banks) and unit banking (the ratio of commercial banks to commercial banks and branches) are found to be negatively related to state centralization (the proportion of government revenues going to the central government). Chapter 4 considers internationalization. International investment (the ratio of the absolute value of the stock of foreign investment to GNP) is found to be positively related to state centralization and negatively related to local banking.

Chapters 5 and 6, which examine securities market development and universal banking, will be of particular interest to those who have been following the economic history literature on financial systems. Controlling for GNP per capita, the relative importance of securities markets (corporate stocks as a percentage of all financial assets) is found to be negatively related to local banking and positively related to state centralization. While the U.S. and British financial systems are commonly viewed as market oriented and the German financial system as bank oriented, the results suggest the development of securities markets in the United States, like Germany, was hindered by lack of political and financial centralization. However, in the U.S. case, this was masked by the positive influence the country’s size and wealth had on market development. The chapter on specialization within the banking system identifies and tests two conditions for stable universal banking: financial segmentation and the existence of a central bank liquidity guarantee.

The third section examines the 1960-2000 period and finds that old patterns have reemerged following financial liberalization. Politically decentralized countries tend to have more local and unit banking. Internationalization and security market development also tend to exhibit their earlier relationships to local banking and state centralization. Ongoing changes in the scope of financial firms are also discussed.

The book makes a compelling case for political centralization as a determinant of financial system structure. And it offers many other insights. However, in some places it would have benefited from more direct connections between the theory and the details of individual country experiences. For example, in decentralized countries, complex relationships developed between peripheral institutions and the center institutions that provided them with liquidity and payment services and facilitated capital flows between them. These relationships are discussed in the later sections of the book, but this institutional material might alternatively have been included with the presentation of the theory in the first section. This would have set up a clearer contrast between the nature of financial centralization in politically centralized and decentralized countries and helped to further operationalize the distinction between core and periphery that is used to organize much of the discussion of financial centralization.

I highly recommend Moving Money to anyone interested in comparative economic history, financial systems, or financial history. The book’s connections between political and financial structure represent an original and important contribution. They also suggest that financial regulation has been shaped not only by regulatory responses to economic crises but by underlying political structures and that these political structures continue to be relevant. But the book offers much more. I am always looking for sources that will help better organize my existing knowledge or place it in a larger context, and this book did that for me. The background discussions in Moving Money contain useful generalizations and connections between financial, economic, and political developments. Topics covered in the second section include the rise of deposit banking and the gold standard. However, I particularly enjoyed the discussion of financial liberalization in the third section, which left me with a much better comparative understanding of postwar national experiences. Anyone interested in an overview of that topic need look no further.

Scott A. Redenius is Assistant Professor of Economics at Bryn Mawr College. His current research focuses on interregional differences in U.S. bank loan, deposit, and profit rates and the evolution of U.S. correspondent banking networks.