Category Archives: Money & Banking

A New Take on Sovereign Debt and Gunboat Diplomacy

Going multilateral? Financial Markets’ Access and the League of Nations Loans, 1923-8

By

Juan Flores (The Paul Bairoch Institute of Economic History, University of Geneva) and
Yann Decorzant (Centre Régional d’Etudes des Populations Alpines)

Abstract: Why are international financial institutions important? This article reassesses the role of the loans issued with the support of the League of Nations. These long-term loans constituted the financial basis of the League’s strategy to restore the productive basis of countries in central and eastern Europe in the aftermath of the First World War. In this article, it is argued that the League’s loans accomplished the task for which they were conceived because they allowed countries in financial distress to access capital markets. The League adopted an innovative system of funds management and monitoring that ensured the compliance of borrowing countries with its programmes. Empirical evidence is provided to show that financial markets had a positive view of the League’s role as an external, multilateral agent, solving the credibility problem of borrowing countries and allowing them to engage in economic and institutional reforms. This success was achieved despite the League’s own lack of lending resources. It is also demonstrated that this multilateral solution performed better than the bilateral arrangements adopted by other governments in eastern Europe because of its lower borrowing and transaction costs.

Source: The Economic History Review (2016), 69:2, pp. 653–678

Review by Vincent Bignon (Banque de France, France)

Flores and Decorzant’s paper deals with the achievements of the League of Nations in helping some central and Eastern European sovereign states to secure market access during in the Interwar years. Its success is assessed by measuring the financial performance of the loans of those countries and is compared with the performance of the loans issued by a control group made of countries of the same region that did not received the League’s support. The comparison of the yield at issue and fees paid to issuing banks allows the authors to conclude that the League of Nations did a very good job in helping those countries, hence the suggestion in the title to go multilateral.

The authors argue that the loans sponsored by the League of Nation – League’s loan thereafter – solved a commitment issue for borrowing governments, which consisted in the non-credibility when trying to signal their willingness to repay. The authors mention that the League brought financial expertise related to the planning of the loan issuance and in the negotiations of the clauses of contracts, suggesting that those countries lacked the human capital in their Treasuries and central banks. They also describe that the League support went with a monitoring of the stabilization program by a special League envoy.

Unknown

Empirical results show that League loans led to a reduction of countries’ risk premium, thus allowing relaxing the borrowing constraint, and sometimes reduced quantity rationing for countries that were unable to issue directly through prestigious private bankers. Yet the interests rates of League loans were much higher than those of comparable US bond of the same rating, suggesting that the League did not create a free lunch.

Besides those important points, the paper is important by dealing with a major post war macro financial management issue: the organization of sovereign loans issuance to failed states since their technical administrative apparatus were too impoverished by the war to be able to provide basic peacetime functions such as a stable exchange rate, a fiscal policy with able tax collection. Comparison is made of the League’s loans with those of the IMF, but the situation also echoes the unilateral post WW 2 US Marshall plan. The paper does not study whether the League succeeded in channeling some other private funds to those countries on top of the proceeds of the League loans and does not study how the funds were used to stabilize the situation.

InterWar-League-Of-Nations-USA-Cartoons-Punch-Magazine-1919-12-10-483

The paper belongs to the recent economic history tradition that aims at deciphering the explanations for sovereign debt repayment away from the gunboat diplomacy explanation, to which Juan Flores had previously contributed together with Marc Flandreau. It is also inspired by the issue of institutional fixes used to signal and enforce credible commitment, suggesting that multilateral foreign fixes solved this problem. This detailed study of financial conditions of League loans adds stimulating knowledge to our knowledge of post WW1 stabilization plans, adding on Sargent (1984) and Santaella (1993). It’s also a very nice complement to the couple of papers on multilateral lending to sovereign states by Tunker and Esteves (2016a, 2016b) that deal with 19th century style multilateralism, when the main European powers guaranteed loans to help a few states secured market access, but without any founding of an international organization.

But the main contribution of the paper, somewhat clouded by the comparison with the IMF, is to lead to a questioning of the functions fulfilled by the League of Nations in the Interwar political system. This bigger issue surfaced at two critical moments. First in the choice of the control group that focus on the sole Central and Eastern European countries, but does not include Germany and France despite that they both received external funding to stabilize their financial situation at the exact moment of the League’s loans. This brings a second issue, one of self-selection of countries into the League’s loans program. Indeed, Germany and France chose to not participate to the League’s scheme despite the fact that they both needed a similar type of funding to stabilize their macro situation. The fact that they did not apply for financial assistance means either that they have the qualified staff and the state apparatus to signal their commitment to repay, or that the League’s loan came with too harsh a monitoring and external constraint on financial policy. It is as if the conditions attached with League’ loans self-selected the good-enough failed states (new states created out of the demise of the Austro-Hungarian Empire) but discouraged more powerful states to apply to the League’ assistance.

Unknown

Now if one reminds that the promise of the League of Nations was the preservation of peace, the success of the League loans issuance was meager compared to the failure in preserving Europe from a second major war. This of course echoes the previous research of Juan Flores with Marc Flandreau on the role of financial market microstructure in keeping the world in peace during the 19th century. By comparison, the League of Nations failed. Yet a successful League, which would have emulated Rothschild’s 19th century role in peace-keeping would have designed a scheme in which all states in need -France and Germany included – would have borrowed through it.

This leads to wonder the function assigned by their political brokers to the program of financial assistance of the League. As the IMF, the League was only able to design a scheme attractive to the sole countries that had no allies ready or strong-enough to help them secure market access. Also why did the UK and the US chose to channel funds through the League rather than directly? Clearly they needed the League as a delegated agent. Does that means that the League was another form of money doctors or that it acts as a coalition of powerful countries made of those too weak to lend and those rich but without enforcement power? This interpretation is consistent with the authors’ view “the League (…) provided arbitration functions in case of disputes.”

In sum the paper opens new connections with the political science literature on important historical issues dealing with the design of international organization able to provide public goods such as peace and not just helping the (strategic) failed states.

References

Esteves, R. and Tuner, C. (2016a) “Feeling the blues. Moral hazard and debt dilution in eurobonds before 1914”, Journal of International Money and Finance 65, pp. 46-68.

Esteves, R. and Tuner, C. (2016b) “Eurobonds past and present: A comparative review on debt mutualization in Europe”, Review of Law & Economics (forthcoming).

Flandreau, M. and Flores, J. (2012) “The peaceful conspiracy: Bond markets and international relations during the Pax Britannica”, International Organization, 66, pp. 211-41.

Santaella, J. A (1993) ‘Stabilization programs and external enforcement: experience from the 1920s’, Staff Papers—International Monetary Fund (J. IMF Econ Rev), 40, pp. 584–621

Sargent, T. J., (1983) ‘The ends of four big inflations’, in R. E. Hall, ed., Inflation: Causes and Effects (Chicago, Ill.: University of Chicago Press, pp. 41–97

Debt forgiveness in the German mirror

The Economic Consequences of the 1953 London Debt Agreement

By Gregori Galofré-Vilà (Oxford), Martin McKee (London School of Hygiene and Tropical Medicine), Chris Meissner (UC Davis) and David Stuckler (Oxford)

Abstract: In 1953 the Western Allied powers implemented a radical debt-relief plan that would, in due course, eliminate half of West Germany’s external debt and create a series of favourable debt repayment conditions. The London Debt Agreement (LDA) correlated with West Germany experiencing the highest rate of economic growth recorded in Europe in the 1950s and 1960s. In this paper we examine the economic consequences of this historical episode. We use new data compiled from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s. These reports not only provide detailed statistics of the German finances, but also a narrative on the evolution of the German economy on a monthly basis. These sources also contain special issues on the LDA, highlighting contemporaries’ interest in the state of German public finances and public opinion on the debt negotiation. We find evidence that debt relief in the LDA spurred economic growth in three main ways: creating fiscal space for public investment; lowering costs of borrowing; and stabilising inflation. Using difference-in-differences regression models comparing pre- and post LDA years, we find that the LDA was associated with a substantial rise in real per capita social expenditure, in health, education, housing, and economic development, this rise being significantly over and above changes in other types of spending that include military expenditure. We further observe that benchmark yields on long-term debt, an indication of default risk, dropped substantially in West Germany when LDA negotiations began in 1951 and then stabilised at historically low rates after the LDA was ratified. The LDA coincided with new foreign borrowing and investment, which in turn helped promote economic growth. Finally, the German currency, the deutschmark, introduced in 1948, had been highly volatile until 1953, after which time we find it largely stabilised.

URL: http://EconPapers.repec.org/RePEc:nbr:nberwo:22557

Distributed by NEP-HIS on 2016-09-04

Review by Natacha Postel-Vinay (LSE)

The question of debt forgiveness is one that has drawn increased attention in recent years. Some have contended that the semi-permanent restructuring of Greece’s debt has been counterproductive and that what Greece needs is at least a partial cancellation of its debt. This, it is argued, would allow both faster growth and a higher likelihood of any remaining debt repayment. Any insistence on the part of creditors for Greece to pay back the full amount through austerity measures would be self-defeating.

One problem with this view is that we know very little about whether debt forgiveness can lead to faster growth. Reinhart and Trebesch (2016) test this assumption for 45 countries between 1920-1939 and 1978-2010, and do find a positive relationship. However they leave aside a particularly striking case: that of Germany in the 1950s, which benefited from one of the most generous write-offs in history while experiencing “miracle” growth of about 8% in subsequent years. This case has attracted much attention recently given German leaders’ own insistence on Greek debt repayments (see in particular Ritschl, 2011; 2012; Guinnane, 2015).

Eichengreen and Ritschl (2009), rejecting several popular theories of the German miracle, such as a reallocation of labour from agriculture to industry or the weakening of labour market rigidities, already hypothesized that such debt relief may have been an important factor in Germany’s super-fast and sustained post-war growth. Using new data from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s, Gregori Galofré-Vilà, Martin McKee, Chris Meissner and David Stuckler (2016) attempt to formally test this assumption, and are quite successful in doing so.

By the end of WWII Germany had accumulated debt to Europe worth nearly 40% of its 1938 GDP, a substantial amount of which consisted in reparation relics from WWI. Some already argued at the time that these reparations and creditors’ stubbornness had plagued the German economy, which in the early 1930s felt constrained to implement harsh austerity measures, thus contributing to the rise of the National Socialists to power. It was partly to avoid a repeat of these events that the US designed the Marshall Plan to help the economic reconstruction of Europe post-WWII.

versailles-hitler

 

Marshall aid to Europe between 1948 and 1951 was less substantial than is commonly thought, but it came with strings attached which may have indirectly contributed to German growth. In particular, one of the conditions France and the UK had to fulfil in order to become recipients of Marshall aid was acceptance that Germany would not pay back any of its debt until it reimbursed its own Marshall aid. Currency reform in 1948 and the setting up of the European Payments Union facilitated this process.

Then came the London Debt Agreement, in 1953, which stipulated generous conditions for the repayment of half the amount due from Germany. Notably, it completely froze the other half, or at least until reunification, which parties to the agreement expected would take decades to occur. There was no conference in 1990 to settle the remainder.

just-wanted-to-point-out

Galofré-Vilà et al. admit not being able to directly test the hypothesis that German debt relief led to faster growth. Instead, making use of simple graphs, they look at how the 1953 London Debt Agreement (LDA) led to lower borrowing costs and lower inflation, which comes out as obvious and quite sustained on both charts.

Perhaps more importantly, they measure the extent to which the LDA freed up space for social welfare investment. For this, they make use of the fact that Marshall aid had mainly been used for infrastructure building, so that the big difference with the LDA in terms of state expenditure should have been in terms of health, education, “economic development,” and housing. Then they compare the amount of spending on these four heads to spending in ten other categories before 1953, and check whether this difference gets any larger after the LDA. Perhaps unsurprisingly, it does, and significantly so.

This way of testing the hypothesis that the LDA helped the German economy may strike some as too indirect and therefore insufficient. This is without mentioning possible minor criticisms such as the fact that housing expenditure is included in the treatment, not control group (despite the 1950 Housing Act), or that the LDA is chosen as the key event despite the importance of the Marshall Plan’s early debt relief measures.

Nevertheless testing such a hypothesis is necessarily a very difficult task, and Galofré-Vilà et al.’s empirical design can be considered quite creative. They are of course aware that this cannot be the end of the story, and they are careful to caution readers against hasty extrapolations from the post-war German case to the current Spanish or Greek situation. Some of their arguments have somewhat unclear implications (for instance, that Germany at the time represented 15% of the Western population at the time, whereas the Greek population represents only 2%).

germany-wwii-debts

Perhaps a stronger argument would be that Germany’s post-war debt was of a different character than Greek’s current debt: some would even call it “excusable” because it was mainly war debt; it was not (at least arguably) a result of past spending excesses. For this reason, one may at least ask whether debt forgiveness in the Greek context would have the same — almost non-existent — moral hazard effects as in the German case. Interestingly, the authors point out that German debt repayment after the LDA was linked to Germany’s economic growth and exports (so that the debt service/export revenue ratio could not exceed 3%). This sort of conditionality is strangely somewhat of a rarity among today’s sovereign debt contracts. It could be seen as a possible solution to fears of moral hazard, thereby mitigating any differences in efficiency of debt relief emanating from differences in the nature of the debt contracted.

 

References

Eichengreen, B., & Ritschl, A. (2009). Understanding West German economic growth in the 1950s. Cliometrica, 3(3), 191-219.

Guinnane, T. W. (2015). Financial vergangenheitsbewältigung: the 1953 London debt agreement. Yale University Economic Growth Center Discussion Paper, (880).

Reinhart, C. M., & Trebesch, C. (2014). A distant mirror of debt, default, and relief (No. w20577). National Bureau of Economic Research.

Ritschl, A. (2011). “Germany owes Greece a debt.” in The Guardian. Tuesday 21 June 2011.

Ritschl, A. (2012). “Germany, Greece and the Marshall Plan.” In The Economist. Friday 15 June.

Keynes and Actual Investment Decisions in Practice

Keynes and Wall Street

By David Chambers (Judge Business School, Cambridge University) and Ali Kabiri (University of Buckingham)

Abstract: This article examines in detail how John Maynard Keynes approached investing in the U.S. stock market on behalf of his Cambridge College after the 1929 Wall Street Crash. We exploit the considerable archival material documenting his portfolio holdings, his correspondence with investment advisors, and his two visits to the United States in the 1930s. While he displayed an enthusiasm for investing in common stocks, he was equally attracted to preferred stocks. His U.S. stock picks reflected his detailed analysis of company fundamentals and a pronounced value approach. Already in this period, therefore, it is possible to see the origins of some of the investment techniques adopted by professional investors in the latter half of the twentieth century.

Source: Business History Review (2016), 90(2,Summer), pp. 301-328 (Free access from October 4 to 18, 2016).

Reviewed by Janette Rutterford (Open University)

This short article looks at Keynes’ purchases of US securities in the period from after the Wall Street Crash until World War II. The investments the authors discuss are not Keynes’ personal investments but are those relating to the discretionary fund (the ‘Fund’) which formed part of the King’s College, Cambridge endowment fund and which was managed by Keynes. The authors rely for their analysis on previously unused archival material: the annual portfolio holdings of the endowment fund; the annual report on discretionary fund performance provided by Keynes to the endowment fund trustees; correspondence between Keynes and investment experts; and details of two visits by Keynes to the US in 1931 and 1934.

120419_keynes_wuerker_328

The authors look at various aspects of the investments in US securities made by Keynes. They first note the high proportion of equities in the endowment fund as a whole. They then focus in detail on the US holdings which averaged 33% by value of the Fund during the 1930s. They find that Keynes invested heavily in preferred stock, which he believed had suffered relatively more than ordinary shares in the Wall Street Crash and, in particular, where the preference dividends were in arrears. He concentrated on particular sectors – investment trusts, utilities and gold mining – which were all trading at discounts to underlying value, either to do with the amount of leverage or with the price of gold. He also made some limited attempts at timing the market with purchases and sales, though the available archival data for this is limited. The remainder of the paper explores the type of investment advice Keynes sought from brokers, and from those finance specialists and politicians he met on his US visits. The authors conclude that he used outside advice to supplement his own views and that, for the Fund, as far as investment in US securities was concerned, he acted as a long-term investor, making targeted, value investments rather than ‘following the herd’.

Unknown
This paper adds a small element to an area of research which is as yet in its infancy: the analysis of actual investment decision making in practice, and the evolution of investment strategies over time. In terms of strategies, Keynes used both value investing and, to a lesser extent, market timing for the Fund. Keynes was influenced by Lawrence Smith’s 1925 book which recommended equity investment over bond investment on the basis of total returns (dividends plus retained earnings) rather than just dividend yield, the then common equity valuation method. Keynes appears not to have known Benjamin Graham but came to the same conclusion – namely that, post Wall Street Crash, value investing would lead to outperformance. He experimented with market timing in his own personal portfolio but only to a limited extent in the Fund. He was thus an active investor tilting his portfolio away from the market, by ignoring both US and UK railway and banks securities. Another fascinating aspect which is only touched on in this paper is the quality of investment advice at the time. How does it stack up compared to current broker research?

images

The paper highlights the fact that issues which are still not settled today were already a concern before WWII. Should you buy the market or try to outperform? What is the appropriate benchmark portfolio against which to judge an active strategy? How should performance be reported to the client (in this case the trustees) and how often? How can one decide how much outperformance comes from the asset allocation choice of shares over bonds, from the choice of a particular sector, at a particular time, whilst making allowance for forced cash outflows or sales such as occurred during WWII? More research on how these issues were addressed in the past will better inform the current debate.

Coinucopia: Dealing with Multiple Currencies in the Medieval Low Countries

Enter the ghost: cashless payments in the Early Modern Low Countries, 1500-1800

by Oscar Gelderblom and Joost Jonker (both at Utrecht University)

Abstract: We analyze the evolution of payments in the Low Countries during the period 1500-1800 to argue for the historical importance of money of account or ghost money. Aided by the adoption of new bookkeeping practices such as ledgers with current accounts, this convention spread throughout the entire area from the 14th century onwards. Ghost money eliminated most of the problems associated with paying cash by enabling people to settle transactions in a fictional currency accepted by everyone. As a result two functions of money, standard of value and means of settlement, penetrated easily, leaving the third one, store of wealth, to whatever gold and silver coins available. When merchants used ghost money to record credit granted to counterparts, they in effect created a form of money which in modern terms might count as M1. Since this happened on a very large scale, we should reconsider our notions about the volume of money in circulation during the Early Modern Era.

URL: https://ideas.repec.org/p/ucg/wpaper/0074.html

Distributed by NEP-HIS on: 2015-11-21

Review by Bernardo Batiz-Lazo

In a recent contribution to the Payments Journal, Mira Howard noted:

It’s no secret that the payments industry has been undergoing a period of enormous growth and innovation. Payments has transformed from a steadfast, predictable industry to one with solutions so advanced they sound futuristic. Inventions such as selfie-pay, contactless payments, crypto currency, and biotechnology are just examples of the incredible solutions coming out of the payments industry. However, many payments companies are so anxious to deliver “the future” to merchants and consumers that they overlook merchants that are still stuck using outdated technologies.

The paper by Gelderblom and Jonker is timely and talks to the contemporary concerns of Mira Howard by reminding us of the long history of innovation in retail payments. Specifically, the past and (in their view) under appreciated use of ledger technology (you may want to read its current application behind Bitcoin inThe Economist Insights).

Gelderblom and Jonker set out to explain high economic growth in the Low Countries during the 17th and 18th centuries in a context of scarce media to pay by cash given low coinage, recurrent debasements and devaluations. Their argument is that scarcity of cash did not force people to use credit. Instead silver and gold coins were used as a store of value while daily transactions were recorded in ledgers while translated into a “fictional” currency (“a fictive currency, money of account or ghost money”, p. 7). This provided a common denominator in the use of different types of coin. For instance they cite a merchant house in Leiden transacting in 28 different coin types.

images

Gelderblom and Jonker build their argument using different sources including a re-examination of relevant literature, probates and merchant accounts. Together they build a fascinating and thought provoking mosaic of the financial aspects everyday life in the Early Modern age. One can only praise Gelderblom and Jonker for their detail treatment of these sources, including a balanced discussion on the potential limitations and bias they could introduce to their study (notably their discussion on probate data).

Comment

The use of a unit of account in a ledger to deal with multiple currencies was by no means unique to the Low Countries nor to the Medieval period. For instance, early Medieval accounting records of the Cathedral of Seville followed the standard practice of keeping track of donations using “maravadies” while 19th century Kuwaiti merchant arithmetic of trade across the Indian Ocean and the Persian Gulf was expressed in Indian rupees [1]. Gelderblom and Jonker, however, go a step beyond using trends in probate data to explore whether there was widespread use of credit and also, extant literature to determine the scarcity of different coins and precious metals.

As part of their arguments Gelderblom and Jonker also question the “efficiency” of the so called “stage theory of money”. This echoes calls that for some time economic anthropologist have made, as they have provided empirical support questioning notion of the barter economy prior to the emergence of money and thus pointing to the illusion of the “coincidence of and wants” (for a quick read see The Atlantic on The Myth of the Barter Economy and for an in depth discussion see Bell, 2001). The same sources agree that the Middle Ages was a second period of demonetization. Moreover, systems of weight and measures, both being per-conditions for barter, were in place by the Early Modern period in Europe then a barter or credit economy rather than the gift economy that characterized pre-monetary societies was a possible response to the scarcity of cash. Gelderblom and Jonker provide evidence to reject the idea of a credit economy while conclude that “barter was probably already monetized” (p. 18) and therefore

“we need to abandon the stage theory of monetization progressing from barter via chas to credit because it simply does not work. … we need to pus the arguments of Muldrew, Vickers, and Kuroda further and start appreciating the social dimensions of payments”.(pp. 18-19)

I could not agree more and so would, I presume, Georg Simmel, Bill Maurer, Viviana Zelizer, Yuval Millo and many others currently working around the sociology of finance and the anthropology of money.

References and Notes

Bell, Stephanie. 2001. “The Role of the State in the Hierarchy of Money.” Cambridge Journal of Economics 25 (149-163).

[1] Many thanks to Julian Borreguero (Seville) and Madihah Alfadhli (Bangor) for their comments.

images

A Pre-Protestant Ethic?

Breaking the piggy bank: What can historical and archaeological sources tell us about late‑medieval saving behaviour?

By Jaco Zuijderduijn and Roos van Oosten (both at Leiden University)

Abstract

Using historical and archeological sources, we study saving behaviour in late-medieval Holland. Historical sources show that well before the Reformation – and the alleged emergence of a ‘Protestant ethic’ – many households from middling groups in society reported savings worth at least several months’ wages of a skilled worker. That these findings must be interpreted as an exponent of saving behaviour – as an economic strategy – is confirmed by an analysis of finds of money boxes: 14th and 15th-century cesspits used by middling-group and elite households usually contain pieces of money boxes. We argue this is particularly strong evidence of late-medieval saving strategies, as money boxes must be considered as ‘self-disciplining’ objects: breaking the piggy bank involved expenses and put a penalty on spending. We also show that the use of money boxes declined over time: they are no longer found in early-modern cesspits. We formulate two hypotheses to explain long-term shifts in saving behaviour: 1) late-medieval socioeconomic conditions were more conducive for small-time saving than those of the early-modern period, 2) in the early-modern Dutch Republic small-time saving was substituted by craft guild insurance schemes.

URL: EconPapers.repec.org/RePEc:ucg:wpaper:0065

Circulated by NEP-HIS on 2015-06-20

Review by Stuart Henderson (Queen’s University Belfast)

Thrift is a central tenet of Max Weber’s Protestant-ethic thesis. That is, characterised by a new asceticism, Protestantism, and specifically Calvinism, encouraged capital accumulation by promoting saving and limiting excessive consumption. However, a recent paper by Jaco Zuijderduijn and Roos van Oosten, and distributed by NEP-HIS on 2015-06-20, challenges this notion. It suggests that a saving ethic was already evident in Holland in the late‑medieval period – well before the Reformation years, and then actually diminished with the coming of Protestantism.

“De geldwisselaar en zijn vrouw (The Moneychanger and his wife)”, by Marinus van Reymerswaele (1497- c. 1546)

Such contradiction with the Weberian thesis is common in the literature, with recent scholarship finding no Protestant effect (Cantoni, forthcoming) or proposing an alternative causal mechanism (Becker and Woessmann, 2009). However, Zuijderduijn and van Oosten’s work adds a fresh perspective by focusing on savings and saving behaviour, and by employing a pre‑versus‑post investigation strategy. Notably, in relation to saving, the literature has generally been more sympathetic to the Weberian thesis, with Delacroix and Nielsen (2001) finding a positive Protestant saving effect, and more recent work by Renneboog and Spaenjers (2012) suggesting that Protestants have a heightened awareness of financial responsibility. Furthermore, the idea of a pre-Protestant ethic, as raised in this paper, has also been advocated in other inquiry. For example, Anderson et al. (2015) suggest that the Catholic Order of Cistercians propagated a Weberian-like cultural change in the appreciation of hard work and thrift before the coming of Protestantism – an analogy which Weber himself noted, and highlight how this had a long‑run effect in development.

Bernard of Clairvaux, (1090–1153 C.E.) belonged to the Cistercian Order of Benedictine monks.

Bernard of Clairvaux, (1090–1153 C.E.) belonged to the Cistercian Order of Benedictine monks.

In their novel approach, Zuijderduijn and van Oosten utilise both historical and archaeological sources to examine savings and saving behaviour over a period which envelopes the coming of the Reformation. This enables them to deal with two principal issues: first, the size and social distribution of savings by utilising tax records for the Dutch town of Edam and its surrounding area, and secondly, whether saving was strategic (or instead due to an inability to spend) by utilising archaeological evidence on the prevalence of money boxes in cesspits for several Dutch towns. Both sources yield complementary results.

The tax records reveal that middling groups were generally accumulating savings in excess of several months of a skilled worker’s wage well in advance of the Reformation. However, between 1514 and 1563, with the coming of Protestantism, the proportion of households holding cash actually fell, despite a rise in average sums held. Unsurprisingly, cash holding was consistently more common among the wealthier groups in society across all years. See figure 3 from the paper below.

Figure 3

While these tax records reveal the extent of saving, it is the archaeological evidence on money box prevalence which provides a means to link this cash holding with saving behaviour due to the disciplining process involved. Breaking the money box meant incurring an expense, and thus penalised spending. Complementing the historical evidence, Zuijderduijn and van Oosten find that, despite their early prevalence, money boxes decline and eventually disappear by the early‑modern period. Moreover, wealthier households, as gauged from the type of material lining the cesspit, tended to save more than poorer households. See figure 6 from the paper below. (Note: brick-lined cesspits were relatively expensive, wood-lined cesspits were less expensive, and unlined cesspits were least expensive.)

Figure 6

Though Zuijderduijn and van Oosten place considerable emphasis on religion in their work, they posit two alternative explanations for the transition in saving behaviour. First, they suggest that a shrinking share of middling groups in conjunction with prices rising quicker than wages (and even possibly a shortage of small change) may have reduced the ability of persons to engage in saving. In addition, they note the rise of craft guild insurance schemes which could have acted as a cushion against sickness or old age much in the same way that saving would have functioned in their absence. Given this, more work needs to be done on ascertaining the role of religion versus these other hypotheses, or alternatively making religion a less central theme in the paper. One potential avenue could be to attempt to identify if households were more likely Protestant or Catholic, or by utilising an alternative source where religious affiliation could be linked with financial holdings. While difficult, this would help to clarify the statement posed by Zuijderduijn and van Oosten in their introduction – “saving behaviour does not come naturally, and requires discipline. Did a Protestant ethic help converts to find such discipline?” Moreover, Zuijderduijn and van Oosten write in their conclusion that their evidence “suggests that the true champions of saving behaviour were the late-medieval adherents to the Church of Rome, and not the Protestants that gradually emerged in sixteenth‑century Holland” – a statement on which I need further convincing.

Further elaboration is also needed on historical context. In particular, the paper would benefit from further clarity on the evolution of finance in Holland during this period. For example, van Zanden et al. (2012, p. 16) suggest that cash holdings fell between 1462 and 1563, but due to investment in other financial asset alternatives. Furthermore, they comment that the capital markets were used a great deal during this period for investing savings (as well as obtaining credit) – in what would surely be a more profitable pursuit for rational Protestants as opposed to earning zero return holding cash.

Nonetheless, the interdisciplinary and natural-experiment-type approach adopted in this paper has provided inspiration for economic historians on how we can potentially use alternative methodologies to further our understanding of important questions which have previously gone unanswered. While this has been refreshing, the use of such sources demands a comprehensive understanding of historical context for accurate inference, and especially to differentiate between correlation and causation. Zuijderduijn and van Oosten have provided initial persuasive evidence pointing to a decline in saving behaviour in Holland at a time when Weber’s Protestant ethic should have been fostering thrift, but more work needs to be done to disentangle the effect of religious transition from an evolving capital market.

References

Anderson, Thomas B., Jeanet Bentzen, Carl-Johan Dalgaard, and Paul Sharp, “Pre‑Reformation Roots of the Protestant Ethic,” Working Paper (July 2015): http://www.econ.ku.dk/dalgaard/Work/WPs/EJpaper_and_tables_final.pdf.

Becker, Sascha O., and Ludger Woessmann, “Was Weber Wrong? A Human Capital Theory of Protestant Economic History,” Quarterly Journal of Economics, 124 (2009), 531–596.

Cantoni, Davide, “The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands,” Journal of the European Economic Association, forthcoming.

Delacroix, Jacques, and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (2001), 509–553.

Renneboog, Luc, and Christophe Spaenjers, “Religion, Economic Attitudes, and Household Finance,” Oxford Economic Papers, 64 (2012), 103–127.

van Zanden, Jan L., Jaco Zuijderduijn, and Tine De Moor, “Small is Beautiful: The Efficiency of Credit Markets in the Late Medieval Holland,” European Review of Economic History, 16 (2012), 3–23.

Weber, Max, The Protestant Ethic and the Spirit of Capitalism (London, UK: Allen and Unwin, 1930).

Northern Lights: Computers and Banks in Nordic Countries

ICT the Nordic Way and European Savings Banks

by J. Carles Maixé-Altés (maixe@udc.es) Universidad da Coruña

Abstract: This paper discusses the world industry of savings banks, a genuine world collaborative consortium, through which, from the 1950s, the International Savings Banks Institute (nowadays, the World Savings Banks Institute and European Savings Banks Group) was highly active in introducing ICT to retail banking. In this environment, Nordic savings banks, Sweden, Norway, Finland and Denmark, their Central Savings Banks and their industry associations occupied a separate place in European movements around developments of computerization and automation in retail financial services. The synergies in Nordic countries were superior to the rest of Europe and collaboration was intense. This paper highlights the leadership and the influence that the ICT development models of Nordic savings banks had on their European retail banking associates.

URL http://econpapers.repec.org/paper/pramprapa/58252.htm

Review by Bernardo Bátiz-Lazo

Introduction

In today’s world Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups. Swedish success stories include familiar names such as file sharing site The Pirate Bay (established 2003), video chat and calls Skype (established 2003) and music streaming Spotify (established 2008). These developments have not gone unnoticed by the media (see article by Forbes) nor by historians. There is a growing and vibrant body of systematic studies on the economic, business and technological history of Nordic computing as reflected by the fourth edition of History of IT in the Nordics (HiNC4) confrence on August, 2014. All of these HiNC conferences have been followed by an edited book of accepted papers, published by Springer’s increasingly succcessful History of Computing series (a series under the stewardship of Martin Campbell-Kelly (Warwick)).

Nordic-Startup-Awards

Summary

The paper by Joan Carles Maixé-Altés contributes to above mentioned literature and was distributed by Nep-His on 2014-11-1. In it he succesfully intertwined topics of great importance which, with the exception of Scott & Zachariadis (2012 and 2013), have been dealt in isolation, namely: not for profit financial institutions, technological innovation in the late 20th century and international competitive collaboration.

Maixé-Altés gained access to previously unexplored archival material from the International Savings Banks Institute (nowadays the World Savings Banks Institute and European Savings Banks Group). The focus of this first instalment of Maixé-Altés’ research deals with the efforts by Nordic savings banks (i.e. Denmark, Finland, Norway and Sweden) to gain scale in information and comunication technology (ICT) through co-operation. Savings banks were born in 1810 in Rothwell, Scotland as part of the 19th century “thrift movement”. This organizational form was replicated across Europe and British colonial dominions. Today savings banks have dissapeared from Australia, New Zealand, the USA and most European countries. This regardless of whether they had narrow (e.g. UK) or broad operations (e.g. Sweden, Spain). However, they remain important players in retail banking in Germany, Norway and Portugal.

Denmark, Norway and Sweden are considered to be the Scandinavian countries and the Nordic Countries are these three plus the Åland Islands, the Faroe Islands, Finland, Iceland and Greenland.

Denmark, Norway and Sweden are considered to be the Scandinavian countries and the Nordic Countries are these three plus the Åland Islands, the Faroe Islands, Finland, Iceland and Greenland.

Analytically, this paper proposes a double point of view. Firstly, Nordic countries are considered early adopters of computer technologies and, simultaneously, ingintegral to the processes of dissemination and appropriation of foreign business models. Secondly and whilst detailing the efforts by Nordic savings banks on computarisation, Maixé-Altés reminds us of the heteregoneity of organizatonal forms in retail finance during the 20th century. Also how the democratic principles behind these particular form of corporate governance led to an “open door” policy for the sharing of best organizational practice as well as to collaborate across borders with “sister institutions” to faclitate their economic and social objetives. But as was pretty much the case across retail banking in the 1960s and 1970s, savings banks in Nordic countries adopted computer technology with the twin hope of increasing efficiency of operation and counter attack the growth of commercial banks within the market for retail deposits.

With those analytical aims in mind the paper structures in four main sections while preceeded by an introduction and finalised by a concluding section. Maixé-Altés starts his story with the first steps of co-operation within national borders. These led, for instance, to the establishment of “central savings banks” or institutions that help gain critical mass in whole sale financial markets. This to substantiate his claim that collaboration is well embeded within savings banks. He then moves to explore co-operation within electronic data processing in general while providing details of an “emblematic case” of this collaboration: Nordisk Spardata.

J. Carles Maixé-Altés

J. Carles Maixé-Altés

Critique / Comentary

I very much liked the paper. However, I will advance a couple of ideas which future work on these archives could bear in mind.

First, Maixé-Altés’ emphasis on changes in hardware as an index for co-operation in data processing suffers from a common shortcoming in this literature (an issue shared by many econometric studies of technological change in financial institutions), namely its focus on back-office transaction processing and an over reliance in hardware and central processing units while “missing .. the choices being made between operating systems, programming languages, network technologies, databases, or the source of application software.” (Gandy 2013: 1228). More could then be said about these choices and the formation of standards and computer networks.

Secondly, I fundamentally disagree with Maixe-Altes’ claims around the use of “real time” computing. As I have argued in Bátiz-Lazo et al. (2014) as well by Martin (2012) (and evidence in Scott & Zachariadis (2012 and 2013)), in the late 1960s and throughout the 1970s distant devices and computers could be connected but the nature of the banking business meant that form of “on line” communitation still required human intervention and therefore it was not “real time”. Moreover, Haigh’s (2006) seminal contribution documents how database and database management systems were still in its infancy in the 1970s. This effectively meant there was no random access to electronic data. Updates had to be run in “batches”. Full digitalization of customer accounts was “work in progress” and very much an effort that starts in the late 1950s in Sweden (as documented by Bátiz-Lazo et al., 2014) but doesnt materialise until at least the late 1980s.

There is some indirect evidence of this in, for instance, the fact that in the 1980s, human tellers at retail branches supplied indiviuals with balance of available funds “as of last night”, that is, once a central processing unit had been able to gather and sort through all the transactions earlier in the working day (Indeed, I have personal recollections of programming with COBOL in the mid 1980s and having to script sorting programmes). Another telling example is that automated teller machines (ATM) relied on combination of information stored on the activation token’s magnetic stripe and a list of overdrawn or otherwise delinquent and cancelled accounts stored on a cassette tape inside the machine itself (see image below). In short, Maixe-Altes’ claims around the use of “real time” computing’could be tone down a notch.

Back of RT650 by Burroughs Corp. (undated)

Back of RT650 by Burroughs Corp. (circa 1980). Source: Charles Babbage Institute (Ascension 90, Series 75, Box 44, Folder 2).)

In summary, Maixe-Altes’ is an interesting part of the history of computing, banking and financial history. It points out there is much more to be said about understanding the technologies of the late 20th century as well as the economic history of competition, cross-border collaboration and not-for-profit financial institutions. On top of this Maixe-Altes ventures into histories of networking and real-time computing, and, more importantly, puts the historical discussions in the context of banking strategy. As such, an intersting new addition to this growing literature.

References

Bátiz-Lazo, B., Karlson, T. and Thodenius, B. (2014) “The Origins of the Cashless Society: Cash Dispensers, Direct to Account Payments and the Development of On-line, Real-time Networks, c. 1965-1985”, Essays in Economic and Business History 32(May): 100-137.

Gandy, A. (2013) “Book Review: Technological Innovation in Retail Finance (2012, Routledge)”, Economic History Review 66(4): 1227-12278.

Haigh, T. (2006) “’A Veritable Bucket of Facts’:Origins of the Data Base Management System”, ACM SIGMOD Record 35(2): 33-49.

Martin, I. (2012) “Too Far Ahead of Its Time: Barclays, Burroughs and Real-Time Banking”, IEEE Annals of the History of Computing 34(1): 2-16.

Scott, S., Zachariadis, M. (2012) “Origins and Development of SWIFT, 1973–2009” Business History 54(3): 462-483.

Scott, S., Zachariadis, M. (2013) The Society for Worldwide Interbank Financial Telecommunication (SWIFT): Cooperative Governance for Network Innovation, Standards, and Community. London: Routledge (Global Institutions Series).

Coming back to @PostOffice #Savings? The #east-west comparative.

Postal financial services, development and inclusion: Building on the past and looking to the future

By

Gonzales d’Alcantara (gonzales.dalcantara@ua.ac.be) Emeritus Professor of Econometrics at the University of Antwerp and d’Alcantara Economic Consulting

Paul H. Dembinski (pawel.dembinski@unifr.ch ) University of Fribourg, Switzerland

Odile Pilley, (odile.pilley@blueyonder.co.uk) International Consultant, formerly with International Bureau of the Universal Postal Union

Abstract: Post offices, inherited from the Industrial Revolution, were monolithic telephone and postal administrations. They were intimately linked to the fabric of nations and made significant contributions to state finances. From the 1960s onwards, integrators, such as UPS and FEDEX, started offering end-to-end express services, thus challenging the postal monopoly in new high added value services. Gradually, the liberalization paradigm gained ground. Telecommunications and sometimes financial services were spun off from postal operations. More recently, new policies and priorities started to emerge especially on the development agenda where financial inclusion has become a top priority in the developing world. The question to be addressed is which role, if any, the posts play or could play in ensuring inclusion. Despite an exceptionally scarce research in the field, this paper provides an overview of how these shifts in paradigm have affected postal policy, the postal financial services regulatory framework, the status of the organizations delivering those services and the offerings themselves in developing as well as in developed countries. After a research review, including the regulatory dimension, the paper focuses on how postal financial services institutions in their legal framework have developed bringing to the fore a panorama of a dozen of promising transformations of financial postal services in developing countries.

URL http://EconPapers.repec.org/RePEc:fri:fribow:fribow00451

Review by Mark Crowley

This paper by d’Alcantara, Dembinski and Pilley was circulated byNEP-HIS on 2014-09-12. The approach is unique in the sense that it seeks to compare the nature of Post Offices in Europe and the developing world, focusing primarily on their role in the savings movement. Its historical approach shows how the western Post Offices developed as a movement that sought to encourage thrift among a profligate working class, whereas in the developing world, the development of a Postal Savings movement was more in line with the growing financial markets across these nations, and the desire for individual customers to express choice in their banking processes. Moreover, it effectively shows how, following a crisis in trust experienced in the banking industry, more people across both the developed and developing world are turning to the government-backed Post Office as a safe haven for their savings in response to the perceived dangers of investing in private banks.

Summary

Citing the latter nineteenth century as the beginning of the Post Office savings movement, with British Prime Minister William Gladstone’s initiative to open a Post Office Savings Bank, this paper demonstrates that the influence of the government over consumer spending has long roots. The authors deftly show that certainly in its embryonic stages, the Post Office savings movement in developed countries focused on the provision of a secure place for working-class savings, while also encouraging thrift. Building on the lack of trust displayed by the working-class towards other alternatives, such as friendly societies, and their exclusion from private sector banks, the savings option offered by Post Offices had fertile ground on which it could flourish.              
 
gladstone 2

The paper also documents the differences between the supervisory natures of the Post Office Savings activities in developing countries, comparing them to that in the developed world. Citing the Asian and Latin American examples, the authors show that the levels of government control over the activities of postal savings banks were significantly more than that in the developed world, with the respective central banks exerting a supervisory role over postal and financial affairs. In the developed world, following with the liberalisation of financial services, the level of central government control over deposits made in postal savings banks has significantly diminished, with initiatives to delegate the administration of post office banking activity to private banks. Although responsibility is still being underwritten by central government (with Bank of Ireland UK as the example for postal savings in the UK) the level of micro-management previously present has now diminished.

d’Alcantara, Dembinski and Pilley also document the necessity of a world legal framework and understanding to evolve with the growing influence of the postal savings movement, especially in the developed world. Citing the aim for legal and financial autonomy to be awarded to postal savings institutions as part of the United Nations millennium goals, it effectively demonstrates the challenges that both the developed and the developing world face in terms of striking the right balance to facilitate the effective supervision of the financial system at a time when the role of private investment banks have been criticised for their excessive risk taking. While many countries in the west still pride themselves on liberal nature of their governments and markets, the definition of this is likely to change in the name of ensuring proportionality and responsibility concerning financial affairs in an age when consumer confidence in private banks is at an all-time low.

imgres

While seeking to emphasise the differences between the postal savings movement in the developed and developing world, this paper also draws on examples of convergence. In the period after the 2008 world financial crisis, there has been evidence that consumers, once more, have come back to the government-backed Post Office savings banks in response to not only their anger about the actions of private banks, but also the perception that government-backed savings institutions are safer in terms of securing deposits during periods of financial crisis. For example, in 2008, much resentment was created in the UK when the government bailed out banks deemed “too big to fail”, costing the taxpayer billions of pounds. While such action ensured that the deposits of savers were guaranteed, many responded angrily that taxpayer’s money was being used to save banks that had shown financial irresponsibility on such a grand scale.

post office uk

The paper ends on an optimistic note for the savings movement in Asia, with particular reference to China. In noting that the Chinese Postal Savings Bank is the fourth largest in China, with its customer base expanding beyond the traditional labouring classes to include students and businesspeople, the authors argue that this has been a triumph for the postal savings movement in the world’s most populous country. While it is worth noting that the level of central government control over all banks in China is possibly significantly more than in any other developed nation, it is a point well made that in a country with a flourishing middle class population, it is the postal savings movement that seems to be gaining the biggest traction.

posb china

Critique

d’Alcantara, Dembinski and Pilley covered a huge chronological and geographical period in their analysis, and have effectively compared the nature of the postal savings movement in the developed and developing world. Perhaps an area that could be explored further is the western government’s ideas of financial liberalisation as a principle that stops short of a full-scale privatisation of Post Office counters (which include financial services)? For example, Margaret Thatcher, despite pursuing a very ambitious privatisation programme in the 1980s, stopped short of privatising Post Office counters, despite taking steps to remove the ‘Giro’ from government control. Deeming the issue to be too much of a political hot potato, Thatcher left financial services at the Post Office largely untouched, encouraging only the intervention of private banks to compete for the option of underwriting (with the support of government) Post Office financial services. Today, both in the US and the UK, Post Office counters, and individual postmasters complain vehemently about their struggle for survival in the face of growing competition from private banks that now include the offers of financial services by supermarkets, and initiatives that have reduced the numerous functions of Post Office counters, including direct debit payments. Perhaps the question the authors could explore is why do western governments, while taking efforts to remove services from the Post Offices (such as bill payments) do not embark on a full scale privatisation, whereas in developing countries, where the extent of government control over the savings movement, including postal savings, is significantly stronger, the movement appears to be going from strength to strength?

Further Reading

Booth, Alan and Mark Billings, ‘Techno-nationalism, the Post Office and the creation of Britain’s National Giro’ in B Bátiz-Lazo, J.C. Maixé-Altés and P. Thomes Technological Innovation in Retail Finance: International Historical Perspectives (Abingdon: Routledge, 2011).

Campbell-Kelly, Martin, ‘Data Processing and Technological Change’ Technology and Culture, 39, 1 (Jan. 1998), pp. 1-32.

Campbell Smith, Duncan, Masters of the Post: The Authorized History of Royal Mail (London: Penguin, 2011).

Crowley, Mark J. Saving for the Nation: The Post Office and National Consumerism, c1860-1945’ in Erika Rappaport, Sandra Dawson and Mark J Crowley (eds.), Consuming Behaviours: Identity, Politics and Pleasure in Twentieth Century Britain (forthcoming Bloomsbury, 2015).