Published by EH.Net (January 2013)

Martijn Konings, The Development of American Finance.? New York: Cambridge University Press, 2011.? xii + 199 pp.? $90 (hardback), ISBN: 978-0-521-19525-6.

Reviewed for EH.Net by Scott A. Redenius, Department of Economics, Brandeis University.

As the blurb on the inside cover notes, the decline of the U.S.-led international financial order has been long predicted.? Yet, despite financial crises and the buildup of debt, the U.S. state retains significant financial flexibility and international influence.? In The Development of American Finance, Martijn Konings, Lecturer in Political Economy at the University of Sydney, looks to U.S. financial history to better understand the nature and origins of this financial order and the position of the U.S. within it.? Starting with the colonial period, Konings describes how U.S. economic conditions, business practices, and politics reshaped transplanted British financial institutions to produce a more dynamic and innovative financial system that has aggressively broadened access to credit.? Since World War II, U.S. financial practices and institutions have spread globally and bolstered the country?s position within the global financial system.

The book is pitched to an international political economy (IPE) audience.? For this audience, Konings offers methodological critiques and distinctions such as that between the U.S. and British versions of Anglo-Saxon finance.? These are used to advance Konings? larger goal: to replace central parts of the current IPE narrative with alternative interpretations that better fit the historical evidence.? That said, the book has much to offer a broader audience.? Most economic historians will be interested in Konings? revised narrative, and his account draws heavily on the work of contemporary economic writers and political and economic historians.? For this broader audience, the book provides an insightful and useful survey of the evolution of the U.S. financial system with a strong emphasis on its international connections.

Konings lays out his thesis and general methodological approach in the introductory chapter.? Chapters 2 through 4 focus on some of the factors that led U.S. finance to evolve away from British practice, including greater demand for agricultural credit, political fragmentation, and political pressure for decentralization.? What emerged was a distinct financial system in which credit was extended on the basis of reputation, not just trade collateral; financial resources were centralized through the correspondent system rather than branch networks; and the call money market, which linked banks and the stock market, assumed the role of the bill market as an outlet for short-term funds.? However, these features, combined with the lack of a central bank, also made the U.S. financial system prone to liquidity crises.

The middle chapters of the book shift between domestic and international financial developments.? Chapter 5 deals primarily with the creation of the Federal Reserve System, and Chapter 7 with the New Deal financial reforms.? Here, Konings argues that the usual interpretations of these reforms are incomplete.? While they did seek to reign in financial excesses, the reforms aided rather than slowed the process of financial expansion ? the postwar portion of this expansion is discussed in Chapter 9 ? by putting in place a government safety net for the financial system and promoting financial innovation.? For example, New Deal financial reforms set the stage for future growth in the residential mortgage market by introducing securitization and making amortization standard for mortgage loans.

Chapters 6 and 8 consider international developments.? Chapter 6 takes aim at the theories of hegemonic succession that blame the U.S. for failing to take the lead in supporting the international system during the interwar period.? Konings points out that there is no reason to expect hegemonic succession to proceed in the manner suggested by the theory.? Britain continued to serve as a major entrepot and therefore, despite its relative decline, still had strong international interests.? By contrast, U.S. interests remained primarily domestic given its limited foreign trade and international financial connections.? This changed with the creation of the Bretton Woods system (Chapter 8), which solidified the dollar?s role as a reserve currency.? While many early IPE scholars identified Bretton Woods as the apogee of U.S. financial power, Konings sees it merely as a step in the expansion of U.S. influence.? The later decision to abandon the system was not a sign of U.S. weakness but a move that eliminated policy constraints without compromising the country?s dominant international position.

The remaining chapters integrate domestic and international developments.? Chapter 10 looks at the Fed?s difficulty in controlling inflation in the face of regulatory arbitrage and the growing Eurodollar market.? Chapters 11 and 12 examine disinflation, neoliberalism, and financial crises.? In Konings? view, the continued fiscal flexibility of the U.S. during and after the 2007-2008 financial crisis suggests that its financial power remains intact and has many years still to run.? However, the rise in household indebtedness in the lead up to the crisis and subsequent deleveraging suggest the financial deepening that has been a hallmark of U.S. finance has reached or surpassed its limit.

The book has many strengths.? Konings provides a skilled synthesis of a wide range of secondary sources and is adept at identifying contrary evidence and logical inconsistencies in existing interpretations.? Most economic historians will find the treatment of neoliberalism and financial crises of less interest than the earlier parts of the book.? Here, the presentation shifts to a more general level as Konings focuses on their implications for the IPE narrative.? Financial historians will also have some quibbles.? There are a few points in the early chapters where direct familiarity with primary sources would have been helpful, and the citations could do a better job of pointing readers to the most relevant sources listed in the bibliography.

It is always interesting to read a financial history written by someone in another field.? It provides a welcome opportunity to get a different perspective and make broader connections.? I am always looking for sources that will better organize my existing knowledge or place it in a larger context, and this book did that for me.? I expect other readers will find this true as well.

Scott A. Redenius is Senior Lecturer in Economics at Brandeis University.? His current research focuses on antebellum branch banking systems and on the evolution of antebellum payment networks in the U.S.
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