Unsettled account : the evolution of banking in the industrialized world since 1800

A sweeping look at the evolution of commercial banks over the past two centuries

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? In Unsettled 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 Account is 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.

Author Notes

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

Reviews 1

Choice Review

Grossman (Wesleyan Univ.) 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. Crises, bailouts, merger movements, and regulation are the triggering events that reshape the banking industry structure. Though the book covers the history of several OECD countries, it devotes full chapters to the UK, Sweden, and the US. This reviewer's only criticism is the disproportionate amount of space devoted to what happened rather than explaining why it happened; the reader is usually required to connect the dots. Nevertheless, this work represents a valuable contribution to the history of banking. Summing Up: Highly recommended. Upper-division undergraduate through research collections. B. B. Andrew Juniata College

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

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