This volume arose from a conference organized by the European Association for Banking and Financial History (EABH) in 2010. It consists of two kinds of essays. First is a group of articles written by mostly younger European financial historians, some of whom were in the process of turning dissertations into books at the time the conference took place. Some of these essays are excellent, although the topics are disparate and they scarcely address a set of overarching themes. Second is a section reflecting on the great financial crisis of 2007–2009. This section includes essays by two leading public officials: Adair Turner, chairman of the Financial Services Authority in Britain from September 2008 to March 2013, and William R. White, economic adviser to the Bank for International Settlements (BIS) from 1995 to 2008. It also includes an essay by Niall Ferguson, the Harvard historian and prominent conservative public intellectual. This section of the book is uneven in quality.
Among the first set of essays, three stand out. Lodewijk Petram describes the birth of financial regulation in Holland in the decades following the founding of the Dutch East India Company (VOC) in 1602. An active secondary market soon developed in the company’s shares. An active market presupposed confidence in contract enforcement. In search of the legal underpinnings of this market, Petram searched the archives of the Court of Holland, in The Hague. For 1610–1630 he found 30 lawsuits dealing with share trading, about 1 percent of the cases the court considered in this period. After 1640, the rate declined to about one in every 500 lawsuits; Petram infers that this is because by that time the court had essentially pronounced judgment on all pertinent issues concerning the share trading, creating a legal regime. This promoted the growth of the market. However, there was a ban in short selling in 1610, and traders knew that the courts would not enforce contracts of this nature. Petram argues that they developed private enforcement mechanisms as a substitute. The main mechanism was the creation of trading clubs, where reputations could be ruined by reneging on contracts. In these clubs Dutch Protestants built relationships of trust with Portuguese Jews, which carried over into other financial dealings. Petram sees the two processes as related: Merchants allowed the courts to establish a legal regime in the areas where the courts were willing to intervene, and then developed their own private enforcement mechanisms to supplement them.
Tobias Straumann is co-author of a recent history of the reinsurance giant Swiss Re. In his essay, he asks how Swiss Re survived the Great Depression without missing or even diminishing a dividend payment or experiencing a major decline in the market price of its shares. He points out that the company was less fortunate in the recent recession; in 2008 it reported its first loss in 140 years. It had to find to new capital, and turned to Warren Buffett, a major competitor. In February and May 2009, the chief executive and the chairman of the board of directors, respectively, resigned. Was the firm more skillfully managed during the 1930s? Straumann has determined that this was not at all the case. Swiss Re was buffeted by the great macroeconomic shocks of that era. According to Straumann, the company staved off bankruptcy and maintained its traditional dividend payments only because of its enormous hidden reserves. Management also used these reserves to support the company’s share price on the stock market. By May 1934, Swiss Re had run out of hidden reserves, but it staved off ruin by merging with its subsidiary Prudentia, permitting it to draw on the hidden reserves of that company. We have long known that hidden reserves were substantial and important for central European financial institutions in the late nineteenth and early twentieth centuries, and that published statements tell us little about them, but this story is striking. Ironically, the greater transparency of Swiss Re’s balance sheets in the 2000s precluded it from carrying enormous hidden reserves and made its difficulties in 2008 manifest.
Federico Barbiellini Amidei and Claire Giordano, two economists working for the Bank of Italy, compare and contrast the 1933 U.S. Glass-Steagall Act and the 1936 Italian Banking Act. It is commonly assumed, they note, that this legislation responded to similar imperatives, to separate commercial from investment banking. In both countries, the authors allow, the authorities wanted to prevent banks from employing deposits in risky undertakings. However, there were important differences. In Italy, deposits had been used to invest directly in industrial enterprises; in the United States, deposits had been used to gamble on financial markets. Italian bankers had become entrepreneurs; U.S. bankers had become stock market players. This reflected differences in the development of financial markets. In the United States, the authorities were out to restore confidence in the securities markets; in Italy, the stock markets had ceased to be important institutions in corporate finance already by 1907; the authorities were out to restore confidence in the banking system. All of this is on the mark and ably argued.
The section of the book dedicated to the recent financial crisis is less satisfying. Adair Turner offers a succinct and characteristically intelligent review of the crisis and of possible avenues of regulatory redress. He wonders whether the financial sector has not assumed excessive dimensions relative to the real economy, especially in Britain. He notes that banks have operated in the past with far higher capital and liquidity ratios than are common now, and suggests that we should at least consider radical change. He argues that central bankers must intervene to prevent bubbles from developing in asset markets in the future, something they were notably reluctant to do prior to 2008. William R. White is celebrated for having predicted important dimensions of the financial crisis of 2007–2009 in a series of papers he prepared at the BIS well before the downturn. He has been among the most acute analysts of what went wrong in the crisis, in retrospect. The brief paper in this volume is not, however, the best place to turn as an introduction to his thought.
Niall Ferguson understood his remit to be to mount a conservative defense of financial innovation. He does so by drawing upon research he was doing at the time for a book on Sigmund Warburg. Ferguson describes the crisis of the so-called fringe banks, which lost money in real estate in Britain in the 1970s. This was an era in which finance was highly regulated, Ferguson points out, yet the country still experienced its worst banking crisis since 1866. The problem, in his view, “then as in our time,” was “imprudently low interest rates and unjustifiably large public borrowing.” There was no pre-1979 Eden of regulated finance. A reader might well read the piece and conclude that it scarcely constitutes a strong defense of financial innovation, as the fringe banks were themselves a classic example of financial innovation, meant to evade existing regulation. Even Ferguson is reluctant to press his conclusions too far; he writes that he is taking “a somewhat less negative view of financial innovation” than Turner here, and others elsewhere.
To summarize, there is some good material in this volume, but little in the way of overarching themes or sustained analysis of a common set of questions.
