|Author(s):||Calomiris, Charles W.|
|Reviewer(s):||James, John A.|
Published by EH.NET (February 2002)
Charles W. Calomiris, U.S. Bank Deregulation in Historical Perspective.
New York: Cambridge University Press, 2000. xxxii + 359 pp. $45 (cloth), ISBN:
Reviewed for EH.NET by John A. James, Department of Economics, University of
This book is a selection of Charles Calomiris’s extensive writings on American
banking and financial history from over the past decade prefaced by a new
introduction, which argues for the relevance of such historical studies to
current policy debates on the nature and extent of financial deregulation. This
is a useful distillation and compendium, pulling together papers most of which
had originally appeared in various conference volumes, some of which may have
been missed by less intrepid readers. There’s an impressive array of theory and
fact on display here, offering some things new to every reader. I’ve already
supplemented my lectures with some of the examples cited here. And it
definitely is not wishy-washy.
If these were the sports pages, Calomiris would undoubtedly be described as a
player who can do it all — an active participant in contemporary policy
debates with extensive knowledge of the intricacies of current and pending
financial legislation, while at the same time a scholar, well versed in
political economy, arcane and abstruse finance theory, as well as, of course,
financial history. Readers who cannot do it all consequently might find one
part or another of the book tough going. Your correspondent, although a regular
reader of the Washington Post, for example, found parts of the current
legislative review in the Introduction rather sticky. So some sections may be a
stretch, but worth it.
Calomiris offers the yin to Richard Sylla’s yang, feel-good interpretation of
U.S. banking and financial history. While Sylla focuses on the remarkable
breadth and depth of the financial system of the early republic, due primarily
to Alexander Hamilton’s almost single-handed efforts, Calomiris concentrates
here on the later and darker side. He weighs the late nineteenth and early
twentieth century banking system and finds it suboptimal, both in terms of
stability and as a promoter of economic growth.
The basic problem in a word, or two, was unit banking. In the antebellum U.S.,
interstate branch banking had been practiced by the Banks of the United States,
and intrastate branch banking was well established – primarily, albeit not
exclusively, in the South. After the demise of the second Bank of the United
States however, interstate branching was dead. And by the end of the Civil War
even intrastate branching was effectively gone with the wind everywhere. Unit
banking had been ensconced by the National Banking Act, and state banking
systems generally followed suit until into the twentieth century.
This unit banking structure and consequent geographical fragmentation of the
industry was primarily responsible for the recurrent financial panics in
nineteenth-century America (Chapter 1 and Chapter 2, written with Gary Gorton).
It underlay the ultimate passage of a federal deposit insurance law which was
not necessary and which responsible bankers and legislators had long resisted
(Chapter 3, written with Eugene White). It precluded, in concert with other
legal restrictions, the development of universal banking, in which banks could
offer a full range of services including securities underwriting and long-term
lending, in the United States as had been so successfully practiced in Germany.
This in turn increased the cost of capital significantly to American firms
during the Second Industrial Revolution in the late nineteenth/early twentieth
century (Chapters 4-6). Those of a more optimistic nature, following Habakkuk,
might think that at times restrictions can ultimately be stimulating, resulting
in the development of new and more efficient forms of organization, such as
investment banking, for example. But not here according to Calomiris.
Investment banking alone couldn’t do the job. Capital-output ratios were much
higher in Germany than in the U.S., although it would be nice to see a
comparison of just the sectors at issue rather than of the economy as a whole
Of course I simplify in this brief review. This is a more nuanced and
comprehensive argument than one that makes simply unit banking the root of all
evil; a number of other legal restrictions get their share of knocks as well.
The author’s indictment of the historical legal restrictions on banking
structure and performance and the woes to which they led is certainly vigorous
and, overall, persuasive. Nevertheless, those of us of a certain age still
remember the glory days of federal deposit insurance, a time when Friedman and
Schwartz, certainly no government interventionists, could identify it as the
principal contributor to monetary stability (1963, 442), and wonder whether its
subsequent problems could have been due more to inept deregulation rather than
to the original regulatory structure itself. Fast forwarding to the present,
the case for universal banking might be a bit more compelling to some readers
had not the melancholy experience of the Japanese banking system in the 1990’s
intervened. In sum, anyone with even the most tangential interest in financial
history can learn something, or several things, from this volume. A copy should
be in (almost) every home.
Reference: Friedman, Milton, and Anna Schwartz (1963), A Monetary History of
the United States, 1867-1960, Princeton: Princeton University Press.
|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: WWII and post-WWII|