State and Financial Systems in Europe and the USA: Historical Perspectives on Regulation and Supervision in the Nineteenth and Twentieth Centuries

Published by EH.NET (September 2010)

Stefano Battilossi and Jaime Reis, editors, State and Financial Systems in Europe and the USA: Historical Perspectives on Regulation and Supervision in the Nineteenth and Twentieth Centuries.? Aldershot, UK: Ashgate, 2010.? xiv + 223 pp. $100 (hardcover), ISBN: 978-0-7546-6594-6.

Reviewed for EH.Net by Christopher Hoag, Department of Economics, Trinity College, Hartford, CT.

This volume, edited by Stefano Battilossi (Universidad Carlos III Madrid) and Jaime Reis (University of Lisbon), collects papers presented at the European Association for Banking and Financial History Annual Conference in May, 2006.? Eminent scholars in nineteenth- and twentieth-century financial history prepared papers that were reviewed by anonymous referees.? Each article relates to government intervention in historical western financial markets, though the country and time period varies.? Although the conference occurred before the recent financial upheaval, a few papers investigate issues that rose to prominence during the crisis.? In addition, several papers consider financial regulation after World War II, explicitly connecting historical and modern institutions.

After a careful introduction by the editors, Philip L. Cottrell opens Chapter 1 with a description of bank charter regulation in England from 1820 to 1890.? The English Act of 1826 allowed only lightly regulated entry by joint-stock banks.? After experience with chartering colonial banks and a domestic banking crisis in the 1830s, the Joint Stock Banking Act of 1844 heavily regulated new bank formation.? The Company Act of 1862 removed these restrictions.

In Chapter 2, Paolo Di Martino questions why the Italian and American legal systems delayed or declined to adopt the practice of ?officialism? in England, where public officials managed bankruptcy proceedings including possible debt-discharge.? The author suggests that the Italian system inherited a strong anti-debtor bias from the Napoleonic codes, while the American bankruptcy revision of 1898 was not pro-debtor (as it is commonly viewed) because creditors retained decision-making authority.

In Chapter 3, Eugene N. White hypothesizes that real productivity growth causes information asymmetries which require additional financial regulation.? White then provides a masterful synthesis of American financial regulation from 1863 to the present, with special attention to periods of high productivity growth.? Large productivity increases roughly coincide with major financial reform, so I look forward to empirical evaluation of the hypothesis in future work.

Chapter 4, by Ranald C. Michie, traces government regulation of the London Stock Exchange (LSE) after World War I.? The government used the LSE to maintain exchange rates and to channel investment towards domestic or government securities during the interwar period.? After World War II, the London Stock Exchange submitted to informal regulation from the British government to prevent more intrusive regulation.? But increasing international competitive pressure on the LSE to offer benefits and not costs to membership meant that the LSE could no longer take on a substantial enforcement role.

In Chapter 5, Laure Quennouelle-Corre and Andre Straus recount the relation of the French state to its financial markets over the period 1880-1970.? France restricted financial markets more forcefully than other European powers.? The French government channeled investment into public savings banks, government bonds, and eventually state-influenced commercial bank loans at the expense of private issues and foreign securities.? While the authors acknowledge the difficulty of producing national estimates for France, they use some aggregate point estimates for comparison within France across time as well as cross-country comparison with Britain and Germany.

In a timely Chapter 6, Richard S. Grossman employs a sample of eighteen mostly European central banks to show that central banks that obtained legal supervisory authority over commercial banks were founded about 20 years on average after those banks that did not acquire such authority.? In a subsample of ten banks with supervisory authority, younger banks acquired their powers earlier than older banks.? Current financial reforms grant central banks, such as the Federal Reserve and the Bank of England, additional supervisory authority over commercial banking, continuing the trend toward the unification of bank oversight and monetary authority.

In Chapter 7, Pablo Martin-Acena and Teresa Tortella discuss the development of the research departments of central banks, with a focus on Italy and Spain.? Research departments organized statistical information, created central bank libraries, and hired economists.? I would be interested in learning more about how the institutional structure of research departments influenced monetary policy.

In a prescient Chapter 8, Catherine R. Schenk outlines the reluctance of national regulators to oversee the Euromarket since 1960.? The Federal Reserve and the Bank of England attempted to use the Euromarket to achieve exchange rate goals during the 1960s.? Yet central banks, including the Federal Reserve, extended lender of last resort facilities to the Euromarket without substantial additional regulatory scrutiny.? National central banks remain unwilling to cede oversight of or information about multinational banks to other central banks or to a supernational regulator.? Emergency dollar funding facilities for Euromarkets remain an important modern policy concern, as the lack of regulation assures another future crisis.

Chapter 9, by Piet Clement, reviews the development of the Bank for International Settlements and notes the lack of access to the BIS archives due to a 30 year time lock.? Yet the lack of primary sources provides an opportunity for historians, economists, and policy experts to speculate about the political motivations of the regulatory maneuvers of central banks.? Unfortunately, researchers can probably expect additional delays to access to the BIS archives in order to prevent the dissemination of politically sensitive information.

In Chapter 10, Peter Englund and Vesa Vihriala document the banking and currency crises of Finland and Sweden in the early 1990s.? Using aggregate level macroeconomic data, they suggest that strong macroeconomic shocks and recent deregulation helped to exacerbate the crisis.? They also detail the policy actions of the government and the reactions of the market both before and during the crisis.

Readers interested in qualitative financial historical will enjoy the volume.? The introduction by the editors places each of the chapters in the context of economic research and modern policy, and the individual chapters emphasize presenting novel hypotheses or uncovering important details in financial history.?? With a few exceptions, articles limit data analysis to comparative aggregate statistics.?? These articles remain useful to researchers seeking to understand the institutions discussed by the authors.? The wide range of time periods and institutions means that most readers will come to the volume for a specific chapter, though on perusal most readers will find more than one chapter of interest.? The editors assemble the references conveniently at the end of the volume, rather than after each chapter.

Christopher Hoag, Assistant Professor of Economics at Trinity College, Hartford, recently completed a study of individual bank borrowing under the Aldrich-Vreeland Act of 1914.

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