Caroline Fohlin, well-known scholar of banking and financial development, has tackled a most ambitious topic, the structure and organization of national financial systems and their role in promoting industrialization from the second half of the nineteenth century, drawing on both historical and contemporary, both archival and econometric evidence, in a book in the series of Japan-U.S. Center UFJ Bank (formerly Sanwa) Monographs on International Financial Markets. There are two basic approaches in the literature to the study of the relationship between finance, industrialization, and growth—institutional (Alexander Gerschenkron et al.) or econometric (Ross Levine et al.). In this book, Fohlin spans the both. First things first however, let's lay out the two Platonic Forms of financial structure. Universal or relationship banks offered “cradle to grave” services to firms—providing a range of financing options, short-term lending, long-term lending, securities underwriting, etc. The long-term relationships between banks and firms allowed closer monitoring of projects, mitigating moral hazard issues, and sometimes took the form of formal arrangements in which bank agents were placed on client firm's boards of directors. In contrast, the Anglo-American model was more “arms-length” and market oriented. Commercial banks, particularly under the sway of the real-bills doctrine, limited themselves to the provision of short-term loans, while long-term finance was left to securities markets. In the first section of the book (chapters 2 through 5), Fohlin chronicles in detail the development of the financial systems and their role in directing funds to ready borrowers between the second half of the nineteenth century and the beginning of World War I for five countries—Britain, Germany, Italy, Japan, and the United States. France would have been interesting as well, but this is quite an undertaking already, and one has to draw the line somewhere. The exposition here is most interesting although dense. Seekers for clarity in the historical process however might be discomforted. Life in fact is/was complicated. No country fit entirely comfortably into the two Platonic Forms or paradigms. In Germany, for example, many “central features” of universal banking were quite delayed in development, and universal banking wasn't that universal. “Germany had nearly the same number of different types of institutions as England in the pre-World War I era” (p. 65). And indeed even within German universal banking relationship or relational banking was much less common than might have been expected. Indeed, it is later noted (p. 144) that Austria-Hungary was the only country (for which there are data) that did engage in widespread relational banking in this period. Universal banks operated in different ways in different countries. In Japan, for example, banks participated little in equity issues, while in Germany and Italy they did. In the United States, on the other hand, banks were not necessarily so removed from securities markets. There were investment banks of course and, before Glass-Steagall, increasingly commercial banks as well. And so forth. The complexity of interactions recounted here across countries defy succinct description here, so it's best not to try here and to leave that to the reader.

The second section of the book (chapters 6 through 9) expands the coverage set from five to twenty-six countries and the time period to 100 to 150 years. Chapters 6 and 7 reiterate that few banking systems fit the extremes of the universal-relationship or specialized arms-length models. “Most are hybrids.” Moreover, there is overwhelming evidence of historical inertia in the evolutions of financial structures or path dependence. “With some notable exceptions, most countries that industrialized in the pre-World War I period have similar overall financial system structure now as the one they had at the turn of the twentieth century” (p. 140). Econometric evidence is brought to bear on the influence of economic (level of development at the time of industrialization), political (state centralization), and legal factors (common law vs. civil law) on the character of financial system development (financial depth, the level or growth rate of financial assets relative to GDP, or market orientation). Again, as might be suspected, the results defy simple summarization. Quantitative political factors, for example, have little power in explaining banking system design but strongly influence the degree of market orientation. However they “do not consistently impede or encourage financial development” (pp. 188–89). “Economic and legal factors show greater relationships to financial system design, but causality is difficult to establish” (p. 167).

How much difference does financial structure make in promoting economic growth? Chapter 9 addresses that issue over a much longer time period than the extant modern literature. The answer seems to be however, consonant with Levine for the more recent period, not much. While having a well-functioning, strong, and legally protected financial system is important for economic growth over the longer term, the precise type of what system it is seems to be much less important. “Let a hundred flowers bloom [something of an overstatement here] and a hundred schools of thought contend.”

In sum, this volume is a most carefully conceived, judicious, and nuanced examination of the evolution of financial systems and their effects.