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Unsettled Account


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What to do about the banks--tax them, break them up, or leave them alone--is topic number one on the financial reform agenda in the wake of the recent crisis. Understanding where to go requires first understanding how we got here. Richard Grossman's rich description of the historical life cycle of banking systems, not just in the United States but around the world, is the essential guide. If what's past is prologue, then this book should be essential reading for aspiring financial reformers. -- Barry Eichengreen, University of California, Berkeley Unsettled Account details the history of commercial banking from ancient Greece to modern times. Blending history, economics, and politics, this book provides a remarkably thorough, engaging, and readable account of how our financial institutions have developed. Extraordinarily relevant to today's troubled financial affairs, it is essential reading for anyone who wants to understand contemporary banking. -- Jeffry Frieden, Harvard University Richard Grossman has written an excellent treatise on the salient factors explaining the evolution of banking in advanced countries in the past two centuries. His comparative historical study of the banking systems of a number of important countries fills a gap in the literature which has been open for at least four decades. This book is a necessary addition to the libraries of serious scholars of financial history. -- Michael Bordo, Rutgers University Richard Grossman's history of banking is a bold and hugely successful enterprise which could not have appeared at a better time. This is an elegantly written account of the origins, role, and contribution of these institutions through all manner of circumstances. An indispensable guide. -- Forrest Capie, Bank of England This is an exciting panorama of the worldwide evolution of commercial banking during the past two hundred years. Covering a large number of countries, Grossman focuses on four major themes of banking: financial crises, resolution policies, mergers, and bank regulation. Providing a broad and pervasive view of the challenges to banking in the past and present, this is a must-read for all those interested in gaining a thorough understanding of the current problems in the financial system. -- Lars Jonung, European Commission Until now, banking history has stubbornly clung to national boundaries, comparative inquiries being rare. In this book, the author has done an excellent job of synthesizing the large and varied literature, producing a readable and accessible book. -- Joost Jonker, Utrecht University This excellent and well-organized book will be the standard reference on commercial banking history for years to come. -- Michael Bordo, Rutgers University

Table of Contents

List of Illustrations xiii List of Tables xv Preface xvii CHAPTER 1: Introduction 1 The Challenge of Intermediation 1 Banking and Economic Growth 5 Securities Markets, Banks, and Other Intermediators 10 The Scope of This Book 13 The Argument 16 CHAPTER Outline 27 CHAPTER 2: The Origins of Banking 28 Early Banking Functions 30 Credit Creation 32 Medieval Beginnings, Modern Prerequisites 35 Government Debt and the Beginnings of Government Banks 38 Government Banks 41 Private Banks 45 Commercial Banks 48 CHAPTER 3: Banking Crises 53 Financial Crises and Banking Crises 54 The Consequences of Banking Crises 59 The Causes of Banking Crises: Hypotheses 61 Evidence from before 1870 64 Evidence from 1870 to World War I 66 Evidence from the Interwar Period 74 A Durable Pattern 81 CHAPTER 4: Rescuing the Banking System: Bailouts, Lenders of Last Resort, and More Extreme Measures 83 Bailouts 86 Lenders of Last Resort 98 More Extreme Measures 104 Making the Cure Less Costly than the Disease 107 CHAPTER 5: Merger Movements 110 Consequences of Mergers 111 The Urge to Merge 112 Evidence 115 Matching Evidence with Explanations 120 CHAPTER 6: Regulation 128 Motives for Regulation 129 Entry Regulation 134 The Emergence of Charters 134 Banking Codes versus Corporation Law 141 Capital Requirements 145 The Role of Capital 145 Market Capital Requirements 147 Explaining Government Capital Requirements 150 The Impact of Government Capital Requirements 155 Other Regulations 157 Universal Banking 157 Identity of the Banking Supervisor 162 Summary 167 CHAPTER 7: Banking Evolution in England 169 The Bank of England and British Government Finance 170 Private Banking in London and the Provinces 173 Joint Stock Banking Regulation, 1826-57 175 Mergers 183 Crises and Responses 189 Fiscally Driven Evolution 195 CHAPTER 8: Banking Evolution in Sweden 197 The Riksbank and the Beginnings of Swedish Banking 198 Bank Politics and Legislation: Enskilda Banks 202 The Emergence of Modern Banking 207 Mergers, Crises, and Government Intervention, 1903-39 209 Universal Banking 215 Sweden in a Nordic Context 217 CHAPTER 9: Banking Evolution in the United States 221 The First and Second Banks of the United States, 1791-1836 222 From Chartered to Free Banking, 1837-62 229 The National Banking Era, 1863-1913 230 The Crisis of 1907 and the Founding of the Federal Reserve 243 The Great Depression 245 Summary 249 CHAPTER 10: Constrained and Deregulated Banking in the Twentieth Century and Beyond 251 Constrained Banking 251 The Era of Deregulation Begins 260 Crises and Rescues 266 Herstatt and Franklin National 267 The U.S. Savings and Loan Crisis 269 The Nordic Crises 272 Japan's "Lost Decade" 276 Crises and Rescues: Summary 281 Mergers 282 Regulation 284 APPENDIXES Appendix to Chapter 2 291 Appendix to Chapter 3 297 Appendix to Chapter 5 317 Bibliography 321 Index 375

About the Author

Richard S. Grossman is professor of economics at Wesleyan University and a visiting scholar at the Institute for Quantitative Social Science at Harvard University.


"Grossman's is a good read. The book tells you as to how we got to be where we are. There are lessons to be learnt for those who want to go about reshaping reforms in global banking."--BusinessWorld "Grossman weaves an enormous amount of research into an impressive history of the banking industry in many developed countries over the last 200 years. His focuses primarily on changes in the size and structure of the banking industry over time and argues that banks and bank assets rise as a share of overall economic output and then fall as a country moves from developing to developed... [T]his work represents a valuable contribution to the history of banking."--Choice "Professor Grossman has assembled an impressive collection of historical, statistical, and bibliographic data, one that would be extremely difficult to reproduce using other sources. This information will prove invaluable for those conducting intensive research on commercial or international banking, and Unsettled Account will make an excellent addition for libraries that commonly serve such patrons. Academic law libraries at institutions offering specific courses in commercial banking may also want to consider a copy."--Shannon L. Kemen, Law Library Journal "Unsettled Account provides us with a new and welcome history of the last three centuries of banking. Who should read this book? A lot of people. For the legions of political, social and cultural historians, if they have to read one book on the historical evolution of banking, this is it. It will provide them with the needed theoretical background without an equation in sight, useful country studies, and the insights needed to instruct their students. For the legions of economic theorists, if they have to read one book on the historical evolution of banking, this is it. The book is a guide to every key stylized fact they might use for a model, identifying the broad parameters of institutions and history. For the legions of policy makers, if they have to read one book on the historical evolution of banking, this is it. Distanced from the crisis of the moment, Grossman nicely hits the key issues and distills some relevant lessons."--Eugene White, EH.Net "[A] number of books stand out as works of real scholarship written by experts in their fields. Unsettled Account should be numbered among the best of those produced so far."--Ranald Michie, BHR "Richard Grossman has produced a valuable and accessible synthesis of research on some key aspects of banking history in this publication... Students and academics with an interest in financial history, as well as practitioners and regulators, would benefit from reading Unsettled Account."--John Singleton, Australian Economic History Review "Richard Grossman has long been a well regarded figure in the field of financial history, and he has applied his knowledge and analysis to produce a comparative history of banking in Western Europe, North America, Australia, and Japan over the course of the nineteenth and twentieth centuries."--Ranald Michie, Business History Review "What Grossman has done, in drawing our attention to the way in which past banking crises have been dealt with, is a significant contribution to the literature on the problems and difficulties involved in dealing with banks."--Jonathan Warner, European Legacy

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