In her new book, Caroline Fohlin, research professor at Johns Hopkins University Baltimore, examines the origins of the modern corporate finance systems. The monograph consists of two parts. In the first part, Fohlin compares the evolution of corporate finance and financial systems during the nineteenth and early twentieth centuries in five successful countries – the United States, the United Kingdom, Germany, Italy and Japan. In the second part, Fohlin aims to draw the bigger picture, i.e. to explain the interrelationship between the structure of past and current financial systems and their impact on economic growth in a cross-section of about 20 countries.
To cut a long story short: the monograph is not entirely convincing. In the first part, Fohlin summarises the results of her own research on the evolution of the German and Italian financial systems and their impact on economic growth during the nineteenth century. Beyond her own research, Fohlin augments this part of the book with a review of – more or less – recently published work with respect to the American, British and Japanese financial systems. Thus, this part is a nice literature review with respect to the corporate finance and corporate governance system as well as the origins and structure of the commercial banking sector in the five countries.
To some extent the first part of the book is simply a reproduction of Fohlin's recent monograph on the history of the German financial system. Fohlin seems quite selective with respect to the findings to be included in this part. For example, important monographs published during the last decade in German – in particular the PhD theses of Markus Baltzer, Anja Weigt, Markus Dahlem and Carsten Burhop – have not been included, even if they contain important findings regarding relations between banks and industry or banks and the stock market. Furthermore, Fohlin does not consider financial institutions beyond the large German universal banks as important, thereby neglecting results from more than a decade of research published by Timothy Guinnane on the German credit cooperatives. In addition, the savings banks – which cover about a quarter of financial assets in Germany – are not covered at all by Fohlin, despite a number of monographs published during the last two decades dealing with their role.
Thus, with respect to Germany, the reader gets a familiar story – Fohlin's opinion about the relevance and function of Germany's large universal banks between the 1880s and World War I. In this, Fohlin sometimes relies on obscure references. For example, on page 91 she claims that proxy voting of banks seems to have been important in Germany. Her first reference for this claim is a book dealing with Hegel's philosophy of historical thinking – perhaps not the best reference to make this important point.
In the second part of the book, Fohlin addresses four questions: how can financial systems be classified? What shapes financial structure? Does financial structure drive growth? What is important for long-term growth? In her classification system, Fohlin contrasts financial systems in various dimensions (universal vs specialised, relationship vs arms-length, branching vs non-branching, marked-based vs bank-based). After a ‘careful examination of financial systems’, Fohlin presents her results in table 6.1 (pp. 151–6). This is the key table of the second part of the book – but the reader does not get any idea about how the numbers in the table were allocated. The footnote on p. 155 simply states that ‘the determination of banking characteristics stems from the author's evaluation based on searches of secondary literature as well as discussions with several scholars …’ Based on this information, it seems – at least for this reviewer – quite difficult to check Fohlin's assessment.
After having established a classification of financial systems, Fohlin investigates various economic, legal and political factors shaping financial system design. There are some flaws in the analysis. For example, Fohlin seems to assume that the degree of market orientation of financial systems did not change much between 1913 and 1990 (p. 177) and that economic growth can be captured by Maddison's GDP data (p. 178). The many flaws in Maddison's data were recently outlined by Timothy Guinnane in his review of Maddison's latest monograph in the Journal of Economic Literature. Just one remark on this – Maddison's GDP data refer to current country borders, whereas historical banking data – and historical employment data published by Mitchell and used by Fohlin – refer to historical borders. What do we learn from a regression when the dependent variable and the explanatory variables cover different geographic entities? I really don't know.
Even Caroline Fohlin does not seem to be entirely convinced by her own regressions. On page 188, she points out that ‘quantifiable political forces … provide very little power in explaining banking system design … nonetheless, many individual countries’ histories make it clear that political forces … altered the course of financial institutions and markets'. Regressions point in one direction, but a set of case studies point in another – so what?
At the end of the second part of the book, Fohlin draws three conclusions (p. 229). First, history matters in an idiosyncratic way. Second, causality between finance and growth runs in both directions. Third, there is no one-size-fits-all financial system. Her solution to the conundrum ‘financial systems are important, but I do not know exactly how’ is simple – just set up legal protections for investors and safeguard systemic stability and the financial system is going to ‘evolve in response to emergent needs’.
