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Unsettled Account

Unsettled Account: The Evolution of Banking in the Industrialized World since 1800

Richard S. Grossman
Copyright Date: 2010
Pages: 400
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  • Book Info
    Unsettled Account
    Book Description:

    Commercial banks are among the oldest and most familiar financial institutions. When they work well, we hardly notice; when they do not, we rail against them. What are the historical forces that have shaped the modern banking system? InUnsettled Account, Richard Grossman takes the first truly comparative look at the development of commercial banking systems over the past two centuries in Western Europe, the United States, Canada, Japan, and Australia. Grossman focuses on four major elements that have contributed to banking evolution: crises, bailouts, mergers, and regulations. He explores where banking crises come from and why certain banking systems are more resistant to crises than others, how governments and financial systems respond to crises, why merger movements suddenly take off, and what motivates governments to regulate banks.

    Grossman reveals that many of the same components underlying the history of banking evolution are at work today. The recent subprime mortgage crisis had its origins, like many earlier banking crises, in a boom-bust economic cycle. Grossman finds that important historical elements are also at play in modern bailouts, merger movements, and regulatory reforms.

    Unsettled Accountis a fascinating and informative must-read for anyone who wants to understand how the modern commercial banking system came to be, where it is headed, and how its development will affect global economic growth.

    eISBN: 978-1-4008-3525-6
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-xii)
  3. List of Illustrations
    (pp. xiii-xiv)
  4. List of Tables
    (pp. xv-xvi)
  5. Preface
    (pp. xvii-xxii)
  6. CHAPTER 1 Introduction
    (pp. 1-27)

    A fundamental challenge faced by economies for centuries has been to efficiently channel—“intermediate” in economic terminology—society’s aggregate savings toward productive enterprise. Ancient and modern economies alike have devised facilities for intermediating between savers and investors. In ancient Babylon, palace and temple officials loaned their own funds and, in time, deposits that were entrusted to them. In medieval Italy and Spain, institutions were established for the purpose of funneling private savings toward public use, in particular to fund the government’s debt. The roughly contemporaneous development of financial instruments, such as the bill of exchange, helped to channel savings toward...

  7. CHAPTER 2 The Origins of Banking
    (pp. 28-52)

    The modern commercial bank dates from the late eighteenth and early nineteenth centuries. Early examples include the Bank of New South Wales (Australia, 1817), Société Générale (Belgium, 1822), the Bank of Montreal (Canada, 1820), Fyens Discontokasse (Denmark, 1846), A. Schaaffhausen’scher Bankverein (Germany, 1848), Christiana Bank og Kreditkasse (Norway, 1848), and the Bank of North America (United States, 1782). In England, joint stock banks other than the Bank of England were first established in 1826; in Sweden, commercial banks were first chartered in 1830.¹

    Although these institutions and their successors differed in many ways from each other, they were united—and...

  8. CHAPTER 3 Banking Crises
    (pp. 53-82)

    According to Charles Kindleberger (1996: 1), “There is hardly a more conventional subject in economic literature than financial crises.” This is not surprising, given his catalogue of thirty-four financial crises during 1618–1990, or about one every eleven years. For the period 1800–1990, Kindleberger catalogues twenty-six crises, or about one every seven years. Despite the fact that the majority (seventeen out of twenty-six) of these crises took place before 1900, financial crises cannot be classified as relics of the nineteenth century: the Great Depression of the 1930s was, at least until 2009, widely considered to be by far the...

  9. CHAPTER 4 Rescuing the Banking System: Bailouts, Lenders of Last Resort, and More Extreme Measures
    (pp. 83-109)

    Crises can have profound effects on the structure of the banking system. First, crises typically lead to an immediate—and sometimes substantial—reduction in the number of banking institutions, as failed banks exit the system. Second, crises may lead to mergers, as banks that survive crises in a weakened state are absorbed by stronger firms. Third, crises frequently encourage governments to intervene in the banking sector by enacting stability-enhancing rules and regulations. Mergers and regulatory changes typically take place in the weeks, months, and years, following a crisis. Merger movements in Germany (1901–13) and Finland (1929–35), for example,...

  10. CHAPTER 5 Merger Movements
    (pp. 110-127)

    Few trends in modern banking have been more pronounced than that toward consolidation. Steele’s observation was as appropriate in 1997 as it had been in 1897. According to the Bank for International Settlements (1996: 86), during 1980–95, the numbers of depository institutions in fifteen advanced industrialized countries fell from their peak numbers by amounts ranging from 8 to 81 percent. Although some of this reduction in bank population was the result of failures, the majority was due to merger activity: the United States lost more than four times as many banks to mergers as it did to failures during...

  11. CHAPTER 6 Regulation
    (pp. 128-168)

    Governments have long played an important—and varied—role in shaping the banking system.¹ From defining the specie content of the monetary unit, to the establishment of government banks, to setting the rules and regulations under which commercial banks operate, governments have influenced the shape of the financial landscape for centuries. Nor has that influence waned in recent years: governments and regulatory authorities in the industrialized, not to mention the industrializing, world are hard at work building up, altering, and tearing down various facets of regulation in what is already one of the world’s most heavily regulated activities (Möschel 1991:...

  12. CHAPTER 7 Banking Evolution in England
    (pp. 169-196)

    Previous chapters have taken a comparative approach to banking evolution, focusing on the forces generating banking crises, bailouts, merger movements, and regulatory reform across the industrialized world. Broadly speaking, this is akin to what economists call “crosssection” analysis: comparing similar events across countries. The strength of this approach is that the same phenomena can be compared in different settings and common elements can be isolated. Its weakness is that it may ignore important “time-series” elements: since developments may be causally connected to preceding and subsequent events, an exclusive focus on cross-section analysis may overlook important temporal interactions. For example, if...

  13. CHAPTER 8 Banking Evolution in Sweden
    (pp. 197-220)

    If early industrialization is the sole criterion for conducting a case study of banking evolution, England is an obvious choice. Sweden is not.

    . . . in Sweden so many developments appear to come late: by western standards the whole history of Sweden seems to be retarded. Man came late to Sweden; the Romans never came at all; Christianity did not finally triumph till half a millennium after St. Augustine came to Britain. The founding of the University of Uppsala comes more than two centuries after the time when Oxford had emerged as one of the great centres of European...

  14. CHAPTER 9 Banking Evolution in the United States
    (pp. 221-250)

    In some ways, banking in the United States is considerably younger than in England and Sweden. The Bank of England and Riksbank were founded during the second half of the seventeenth century, predating the first attempt at establishing a government bank in the United States by a century. London private banking emerged even earlier, an additional half-century prior to the establishment of the Bank of England and well before such institutions emerged in the United States. In other ways, banking in the United States is not so young. Aside from the Riksbank and Bank of England, commercial banks did not...

  15. CHAPTER 10 Constrained and Deregulated Banking in the Twentieth Century and Beyond
    (pp. 251-290)

    No matter where banking systems were within their evolutionary life cycle, the Great Depression and World War II stopped the process dead in its tracks. In response to financial devastation and wartime needs, governments enacted strict rules and regulations aimed at stabilizing the banking system and directing credit toward favored sectors. These constraints—a sort of financial “lockdown”—combined with low, stable interest rates and robust economic growth, led to a period of unprecedented banking stability. The gradual rise in market interest rates that began in the 1960s, the liberalization of banking regulation during the 1970s and 1980s, and the...

  16. Appendix to Chapter 2
    (pp. 291-296)
  17. Appendix to Chapter 3
    (pp. 297-316)
  18. Appendix to Chapter 5
    (pp. 317-320)
  19. Bibliography
    (pp. 321-374)
  20. Index
    (pp. 375-384)