Anthony Hotson worked in the Bank of England in the 1970s and 1980s and later in other financial institutions in the City of London. After early retirement he went to the University of Oxford and did a doctorate on the subject of banking and the London money and credit markets. He is thus well qualified by experience and education to produce a book such as this, and indeed the book is essentially his doctoral thesis.

The book is ambitious in its coverage. It ranges over the early beginnings of banking in England in the late seventeenth century all the way through to the recent financial crisis and beyond. He advances explanations for the recent financial crisis, and sets out proposals for a safer system in the future.

The book's thesis is that any kind of money (from gold coins to digital or whatever) is made up of two elements. One is the monetary instrument with a given value and the other is a counterpart asset that supports the money's nominal value. So gold coins had a nominal value and had a “highly visible collateralisation” in gold bullion. A risk was that these two values would diverge. The “monetary instruments could become over- or under-collateralised relative to their nominal values” (p. 2) and that would lead to problems. Over-collateralisation would lead to hoarding and under-collateralisation to counterfeiting. The pursuit of monetary stability has been one of finding ways of keeping nominal values and asset counterparts from diverging too far. This seems to be the same as saying that when confidence in a money falls the money will fail.

A sub-thesis is that although the lender of last resort doctrine as conceived by Bagehot has been given great credit for the stability that prevailed in the banking sector from the 1870s to the 1970s this view should be substantially modified. Hotson argues that the stability that prevailed in London's money markets after the 1870s was attributable to the market practices that were emerging rather than the “silver bullet supposedly delivered by Bagehot's LOLR” (p. 8). (Why it worked well in France or Italy to name just two countries is not discussed.) More than that, he argues, the idea that maturity transformation can be managed through the lender of last resort facility is wrong. (Was that ever part of the doctrine?)

This then is the argument that runs through the book. A chapter sets out the principles and practices in banking as they developed through the period with heavy emphasis on the nineteenth century. This is done in part with reference to the many texts of the time, often written by bankers: Gilbart, Rae, Leaf, Sykes, and others. This is an extensive coverage of the developing practices and institutional changes across the years from the late seventeenth century but mainly in the eighteenth century (currency reform) and in the nineteenth century (banking reform).

The question of keeping the two elements of money aligned begins with that of minted currency. A chapter is devoted to analysing this relationship across several centuries. It is argued that the ultimate stabilisation of bullion prices—the close connection between bullion price and Mint price—protected the Bank of England from the risk between its precious metals assets and its sterling liabilities. And finally, that the “big problem of small change” had been solved (by technology) by minting fully collateralised gold coins together with a subsidiary coinage of silver and copper coins that were under-collateralised.

The same questions are then asked of the credit markets and the clearing banks and of the liability management era that followed. One further chapter reminds us of the defence that the clearing banks made of the classical system that obtained roughly from the mid- nineteenth century until 1970. And then the argument reaches its final point in the explanation of the recent financial crisis and its origins in the disturbance of the collateralisation that came with changes in 1971. Deregulation, particularly removing the restriction on liability management by allowing banks to compete on price for deposits, he argues, removed the ability to stabilise the money and credit markets.

Although for much of the time the book has the appearance and feel of a textbook for the history of banking student packed with details on the changing practices in the system, in fact all that material is well-martialled in addressing the basic thesis. As ever there can be quibbles and mine would centre on the interpretation of the lender of last resort function and changes in leverage ratios.

The case presented then is essentially that the deregulation of 1971, the abandonment of the old regime, led inevitably to the crisis. However, there is no mention of the socialisation of risk. Belief had taken hold in the twentieth century and was then later widely accepted, that no bank of any significant size would ever be allowed to fail. With that considerable incentive to take risk, reckless behaviour was, if not guaranteed, certainly encouraged. Neither is there any mention of the equally compelling case that can be made that regulation was the prime cause of the crisis, that it was the imposition of specified capital asset ratios from the 1980s onwards that was a principal culprit in the debacle.

Nevertheless, Hotson has made a case for his basic thesis that must be taken into account and in the process provided us with a ton of detailed information on the working of the system. Perhaps we can accept that all these elements played a part and the discussion can focus on their relative importance.