U.S. Bank Deregulation in Historical Perspective

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:

0-521-58362-4.

Reviewed for EH.NET by John A. James, Department of Economics, University of

Virginia.

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

(pp. 238-9).

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.