Tag Archives: business history

A New Take on Sovereign Debt and Gunboat Diplomacy

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


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.


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.


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.


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.


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


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.


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’.

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?


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.

Medieval History and its Relevance to Modern Business

Joint publication review with The Long Run Blog


Title: The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions

The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions


By: Carmine Guerriero (ACLE, University of Amsterdam)

Abstract: This paper evaluates the relative importance of a “culture of cooperation,” understood as the implicit reward from cooperating in prisoner’s dilemma and investment types of activities, and “inclusive political institutions,” which enable the citizenry to check the executive authority. I divide Europe into 120 km X 120 km grid cells, and I exploit exogenous variation in both institutions driven by persistent medieval history. To elaborate, I document strong first-stage relationships between present-day norms of trust and respect and the severity of consumption risk-i.e., climate volatility-over the 1000-1600 period and between present-day regional political autonomy and the factors that raised the returns on elite-citizenry investments in the Middle Ages, i.e., the terrain ruggedness and the direct access to the coast. Using this instrumental variables approach, I show that only culture has a first order effect on development, even after controlling for country fixed effects, medieval innovations, the present-day role of medieval geography, and the factors modulating the impact of institutions. Crucially, the excluded instruments have no direct impact on development, and the effect of culture holds within pairs of adjacent grid cells with different medieval climate volatility. An explanation for these results is that culture, but not a more inclusive political process, is necessary to produce public-spirited politicians and push voters to punish political malfeasance. Micro-evidence from Italian Parliament data supports this idea.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:70879

Circulated by NEP-SOC on 2016-05-14

Reviewed by Catherine Casson (University of Manchester) and Mark Casson (University of Reading)

This paper takes a long-run approach to an investigation of the importance of a ‘culture of cooperation’ and ‘inclusive political institutions’. The author defines a ‘culture of cooperation’ as the behavioural characteristics of ‘trust, respect, control and obedience’, while the term ‘inclusive political institutions’ is defined as institutions which ‘enable the citizenry to check the executive authority’.

Analysis is focused on Europe and on the agrarian economy. The author suggests that cooperation in the middle ages was particularly associated with the monastic orders of the Cistercians and Franciscans. Their houses were generally located, the author argues, in areas with unpredictable climates. The ability of the monks to farm the land in a way that put such unproductive land to productive use attracted the support and cooperation of the local community. In addition these monastic orders also introduced new financial practices, including improvements in access to credit, which also fostered local community cooperation. Inclusive political institutions, the author suggests, were especially associated with the success of long-distance trade. This created a shared goal between the elite and citizens.


The paper suggests that contemporary cultures of cooperation and inclusive political institutions are influenced by medieval ones. The medieval data used for ‘culture’ is climate data and the modern data is the 2008 European Value Study. For inclusive political institutions the medieval data is ‘the discounted number of years Cistercian and Franciscan houses were active per square km over the 1000-1600 period’ (p. 9) while the modern data is on prosecutions of members of parliament in Italy in 1948-87.

Later in the paper some more specific hypotheses are presented as controls for change over time:

  1. That Atlantic trade impacted on modern economic development
  2. That micro-credit systems introduced by the Franciscan order strengthened contemporary credit markets
  3. That monastic orders influenced religious beliefs in general, and that this influence may have had other, less defined, influences, on economic practice
  4. That distance to Wittenberg, where Protestantism began, influenced the development of a ‘culture of cooperation’
  5. Early transition to agriculture led to ‘higher inequality in gender roles’
  6. That genetic diversity in a country had a negative impact on cooperation
  7. That the suitability of soil for potato growing contributed to the development of institutions
  8. That the Black Death raised standards of living
  9. That education influenced the development of institutions and economic growth

The paper argues that the impact of the medieval culture of cooperation originating in the Cistercian and Franciscan monastic houses can be seen today. It also argues that this culture of cooperation has had a greater influence as a check on executive authority than inclusive political institutions.

Conflict, rather than cooperation, is often the term most associated with the middle ages. One of the benefits of this paper is that it highlights the presence of, and impact of, collaboration. Monastic orders are recognised in both history and economics literature for their important economic, as well as religious, impact. Their use to assess a culture of cooperation is therefore helpful, but they are perhaps a less obvious choice for an assessment of inclusive political institutions. One potential way in which the paper could be developed would be by expanding the scope to cover both urban and rural locations. Such an extension would retain the presence of monastic orders (and indeed extend it to cover urban ones) and, more significantly, allow urban political institutions to be considered. The presence of these institutions is briefly discussed on p. 12 but the issue is not developed further. Many of these town governments had as a shared goal the long-distance trade alluded to in the paper. They also offer more equivalent data to the contemporary data used as a proxy for inclusive political institutions.


Continuity and change over time is a key focus on the paper and the author shows an awareness of some key developments that occurred from the medieval to the modern period. The selection of the controls shows an engagement with recent secondary literature but does introduce additional time periods (such as the Neolithic), specific events (for example the Black Death) and general trends (for example the expansion of education). The paper could be strengthened by more clearly outlining the chronology of these events, and perhaps by narrowing the list of controls used.

Connections between contemporary and historic business have been increasingly recognised and explored in academic literature. The subject of this paper is therefore related to a growing trend to examine the medieval origins of many economic processes. Monasteries have been identified as key players in the ‘multinational enterprise’ of medieval pilgrimage and as originations of sophisticated forms of financial transactions (Bell and Dale, 2011; Bell, Brooks and Dryburgh, 2007). They were also important speculators in the property market (Baker and Holt, 2004; Bouchard, 1991; Casson and Casson, 2016).


Financial crises are a further topic that can be examined through the surviving qualitative and quantitative sources from the middle ages. In the light of the financial crisis of 2008 there has been a recognition that a long-run perspective, starting as early as the middle ages, provides the opportunity to study cycles of growth and decline. Surviving medieval records from the English government, for example, provide detailed data that can be subjected to statistical analysis, as shown in the work of Bell, Brooks and Moore (Bell, Brooks and Moore, 2014; Bell, Brooks and Moore, 2013). The importance of medieval data has also been highlighted in recent work on historic GDP (Broadberry et al, 2015).

Innovation and knowledge acquisition in the middle ages have recently been examined using both modelling approaches from economics, and historical case studies. De la Croix, Doepke and Mokyr (2016) have shown, using their combined expertise in the fields of economics and history, the important foundation that medieval guilds provided in the transmission of knowledge across Europe before the Industrial Revolution. Meanwhile Davids and de Munck’s edited collection on Innovation and Creativity in Late Medieval and Early Modern European Cities has used historical case studies to demonstrate that medieval cities saw a clear connection between the skills of their population and the overall economic performance of their city, and developed strategies that were intended to make their city economically resilient (Davids and De Munck, 2014; Casson, 2012).

Entrepreneurship can also be examined in a long-run context. Business records, letters, literary sources and government records all demonstrate that, contrary to popular belief, the origins of enterprise lie in the middle ages rather than the Industrial Revolution. Medieval entrepreneurs were involved in a range of activities, including infrastructure developments, property speculation and factory foundation (Casson and Casson, 2013a; Casson and Casson, 2013b; Landes, Mokyr and Baumol, 2012)

Overall, one of the key strengths of this paper is the contribution that it makes to this broader research agenda on the parallels between medieval and modern business.



Baker, N. and R. Holt (2004), Urban Growth and the Medieval Church: Gloucester and Worcester (Routledge, Aldershot).

Bell, A. R.Brooks, C. and Moore, T. K. (2014), ‘The credit relationship between Henry III and merchants of Douai and Ypres, 1247-70’, Economic History Review, 67 (1), 123-145. doi: 10.1111/1468-0289.12013.

Bell, A.Brooks, C. and Moore, T. (2013), ‘Medieval foreign exchange: A time series anaylsis’ in M. Casson and N. Hashimzade (eds.) Large Databases in Economic History: Research Methods and Case Studies (Routledge, Abingdon), 97-123.

Bell, A. R. and Dale, R. S. (2011), ‘The medieval pilgrimage business’, Enterprise and Society, 12 (3), 601-627. doi: 10.1093/es/khr014.

Bell, A. R., C. Brooks, C. and P. R. Dryburgh, P. R. (2007), The English Wool Market, c.1230-1327 (Cambridge University Press, Cambridge).

Broadberry, S., B. Campbell, A. Klein, M. Overton and B. van Leeuwen (2015), British Economic Growth, 1270-1870 (Cambridge: Cambridge University Press).

Bouchard, C. B. (1991), Holy Entrepreneurs: Cistercians, Knights, and Economic Exchange in Twelfth-century Burgundy (Ithaca, NY).

Casson, C. (2012), ‘Reputation and Responsibility in Medieval English Towns: Civic Concerns with the Regulation of Trade’, Urban History 39 (3), 387-408. doi:10.1017/S0963926812000193.

Casson, C. and Casson, M. (2016), ‘Location, Location, Location? Analysing Property Rents in Medieval Gloucester’ Economic History Review 69: 2 pp. 575-99 DOI:10.1111/ehr.12117.

Casson, M. and Casson C. (2013), The Entrepreneur in History: From Medieval Merchant to Modern Business Leader (Basingstoke: Palgrave Macmillan).

Casson, M. and Casson C. eds. (2013), History of Entrepreneurship: Innovation and Risk Taking, 1200-2000 (Cheltenham: Edward Elgar, 2 vols).

Davids, K. and B. de Munck, eds. (2014), Innovation and Creativity in Late Medieval and Early Modern European Cities (Ashgate: Farnham).

De la Croix, D., M. Doepke and J. Mokyr (2016), ‘Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy’ NBER Working Paper No. 22131, circulated by NEP-HIS on 2016-04-16.

Landes, D. S., J. Mokyr & W. J. Baumol (2012), The Invention of Enterprise:Entrepreneurship from Ancient Mesopotamia to Modern Times (Princeton, Princeton University Press).

Lessons from ‘Too Big to Fail’ in the 1980s

Can a bank run be stopped? Government guarantees and the run on Continental Illinois

Mark A Carlson (Bank for International Settlements) and Jonathan Rose (Board of Governors of the Federal Reserve)

Abstract: This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental’s outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and more distant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental’s liabilities was a key dynamic in the run and was importantly linked to Continental’s systemic importance.

URL: http://EconPapers.repec.org/RePEc:bis:biswps:554

Distributed on NEP-HIS 2016-4-16

Review by Anthony Gandy (ifs University College)

I have to thank Bernardo Batiz-Lazo for spotting this paper and circulating it through NEP-HIS, my interest in this is less research focused than teaching focused. Having the honour of teaching bankers about banking, sometimes I am asked questions which I find difficult to answer. One such question has been ‘why are inter-bank flows seen as less volatile, than consumer deposits?’ In this very accessible paper, Carlson and Rose answers this question by analysing the reality of a bank run, looking at the raw data from the treasury department of a bank which did indeed suffer a bank run: Continental Illinois – which became the biggest banking failure in US history when it flopped in 1984.


For the business historian, the paper may lack a little character as it rather skimps over the cause of Continental’s demise, though this has been covered by many others, including the Federal Deposit Insurance Corporation (1997). The paper briefly explains the problems Continental faced in building a large portfolio of assets in both the oil and gas sector and developing nations in Latin America. A key factor in the failure of Continental in 1984, was the 1982 failure of the small bank Penn Square Bank of Oklahoma. Cushing, Oklahoma is the, quite literally, hub (and one time bottleneck) of the US oil and gas sector. The the massive storage facility in that location became the settlement point for the pricing of West Texas Intermediate (WTI), also known as Texas light sweet, oil. Penn Square focused on the oil sector and sold assets to Continental, according the FDIC (1997) to the tune of $1bn. Confidence in Continental was further eroded by the default of Mexico in 1982 thus undermining the perceived quality of its emerging market assets.

Depositors queuing outside the insolvent Penn Square Bank (1982)

Depositors queuing outside the insolvent Penn Square Bank (1982)

In 1984 the failure of Penn would translate into the failure of the 7th largest bank in the US, Continental Illinois. This was a great illustration of contagion, but contagion which was contained by the central authorities and, earlier, a panel of supporting banks. Many popular articles on Continental do an excellent job of explaining why its assets deteriorated and then vaguely discuss the concept of contagion. The real value of the paper by Carlson and Rose comes from their analysis of the liability side of the balance sheet (sections 3 to 6 in the paper). Carlson and Rose take great care in detailing the make up of those liabilities and the behaviour of different groups of liability holders. For instance, initially during the crisis 16 banks announced a advancing $4.5bn in short term credit. But as the crisis went forward the regulators (Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency) were required to step in to provide a wide ranging guarantee. This was essential as the bank had few small depositors who, in turn, could rely on the then $100,000 depositor guarantee scheme.


It would be very easy to pause and take in the implications of table 1 in the paper. It shows that on the 31st March 1984, Continental had a most remarkable liability structure. With $10.0bn of domestic deposits, it funded most of its books through $18.5bn of foreign deposits, together with smaller amounts of other wholesale funding. However, the research conducted by Carlson and Rose showed that the intolerance of international lenders, did become a factor but it was only one of a number of effects. In section 6 of the paper they look at the impact of funding concentration. The largest ten depositors funded Continental to the tune of $3.4bn and the largest 25 to $6bn dollars, or 16% of deposits. Half of these were foreign banks and the rest split between domestic banks, money market funds and foreign governments.

Initially, `run off’, from the largest creditors was an important challenge. But this was related to liquidity preference. Those institutions which needed to retain a highly liquid position were quick to move their deposits out of Continental. One could only speculate that these withdrawals would probably have been made by money market funds. Only later, in a more protracted run off, which took place even after interventions, does the size of the exposure and distance play a disproportionate role. What is clear is the unwillingness of distant banks to retain exposure to a failing institution. After the initial banking sector intervention and then the US central authority intervention, foreign deposits rapidly decline.

It’s a detailed study, one which can be used to illustrate to students both issues of liquidity preference and the rationale for the structures of the new prudential liquidity ratios, especially the Net Stable Funding Ratio. It can also be used to illustrate the problems of concentration risk – but I would enliven the discussion with the addition of the more colourful experience of Penn Square Bank- a banks famed for drinking beer out of cowboy boots!


Federal Deposit Insurance Corporation, 1997. Chapter 7 `Continental Illinois and `Too Big to Fail’ In: History of the Eighties, Lessons for the Future, Volume 1. Available on line at: https://www.fdic.gov/bank/historical/history/vol1.html

More general reads on Continental and Penn Square:

Huber, R. L. (1992). How Continental Bank outsourced its” crown jewels. Harvard Business Review, 71(1), 121-129.

Aharony, J., & Swary, I. (1996). Additional evidence on the information-based contagion effects of bank failures. Journal of Banking & Finance, 20(1), 57-69.

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.


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).


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.


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


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)).



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.


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).

Putting Round Pegs in Square Holes

Economía Neoinstitucional: Prueba Falsable a las Hipótesis de Douglass North en Colombia
(Neoinstitutional Economics: The Falsification of Douglas North Hypothesis in Colombia)

by Fernando Estrada (Universidad Externado de Colombia)

Abstract: This article aims to propose a reading of political (dis) order in Colombia, using as a theoretical source Douglass North’s reflections on the economic formation of political institutions. The contributions of this letter are very preliminary in nature and can better be understood taking into account two objectives of the research project: (1) explain why, in Colombia there are very limited conditions for coordinating collective action, (2) what direct and indirect effects has the armed conflict and civil war had on the political (dis) order.

URL: http://econpapers.repec.org/paper/pramprapa/58515.htm

Revised by Stefano Tijerina

This paper was distributed by NEP-HIS on 2014-11-17. In it Fernando Estrada argues that a historically weak state, the prolonged civil war, political corruption, institutional failure, the lack of political accountability, a culture of dishonesty, and the numerous armed conflicts currently succumbing Colombia have led to citizen’s loss of credibility on its institutions, thus today’s “political (dis) order.” He uses the case of Colombia to test the falsifiability of the theory on political order developed by Douglass North, William Summerhill, and Barry R. Weingast in Order, Disorder, and Economic Change, concluding that there is an urgent need for political and institutional structural change, accountability, and an effective and firm implementation of the rule of law, in order to achieve the political and economic stability necessary for the effective implementation of a market economy. If these positive initiatives are achieved, says Estrada, then it will be possible for Colombians to construct a long-term political order that will “foment credible commitments” between citizens and their political institutions.

Throughout the paper Estrada focuses on current issues that illustrate why Colombia is suffering from a systemic political (dis) order. Through the use of commentaries from Colombian public and academic figures, he points out that private-public relations within the market system have failed due to political corruption and institutional failure, and that there is an urgent need for social, political, and institutional reform that sets the course for what North, Summerhill, and Weingast refer to as consensus based political order that provides the necessary conditions for the advancement of a market economy.

Fernando Estrada

Fernando Estrada

Implicitly, Estrada reveals that the theory of political order withstood the falsifiability test since his conclusions on citizenship rights, the absence of economic, political and judicial guarantees, the predominance of political corruption and dishonesty, and the lack of “productive and entrepreneurial” incentives, have resulted in a complete loss of credibility on the political system. Colombia, according to the theory on political order, is not democratic or able to effectively function within a market economy, it is a country with an “authoritarian” political order where “political officials cannot sustain a set of universal rights, and instead abuse the rights of a major portion, if not all of the citizenry.”

Estrada however does not question the reasons why the nation’s economic, social, and political development has followed the “authoritarian” path for the construction of political order. His disregard for historical evidence impedes him from better understanding and explaining the realities of the development of Colombia’s political order. An analysis on Path Dependency would have allowed Estrada to center on the historic constrains imposed on the definition of citizenship, why economic, political and judicial status quo has prevailed over time, why political corruption and dishonesty has been perpetuated over time, and why economic and political regional elites have opposed the expansion of the market economy. The historical analysis would have provided a local explanation to a local reality and would have allowed Estrada to move away from the generalizations of imported models and theories that only partially explain the outer layers of the nation’s realities.

Douglass North

Douglass North

A historical analysis would have provided clarity that seems to be missing in Estrada’s argument. This would have provided empirical evidence that showed that Colombian citizens distrust their institutions because they were never part of the process of creating them in the first place. It was the case of democracy, policy, and the majority of the key institutions that have shaped the national distributive, financial, and security policies, including the Departamento Nacional de Planeación (DNP), Banco de la República, and the Departamento Administrativo de Seguridad (now known as Agencia Nacional de Inteligencia Colombiana – ANIC); all the result of foreign mandates to fit the needs of both domestic “power individuals” and the international system.

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

It is important to look at theoretical models but it is more important to contextualize the theory and situate it within its local reality. There is a need to develop local theoretical models and explanations based on a self-evaluation of the nation’s particular historical trajectory and experiences. The solution lies in analyzing the uniqueness of Colombia’s institutional and programmatic development and the historical implementation of the idiosyncratic definition of democracy and capitalism.

Political (dis) order has been one of the pillars of nation building since independence. It has been the political and economic elite’s way of securing their own personal sources of livelihood, and it has been the formula used by foreign capitalist interests to secure resources and influence in Colombia. Their preservation over the control of the political order has relied on the state, its institutions, and policies that throughout the twentieth century achieved a high level of sophistication and arte now capable of disenfranchising sectors of society and limiting the rights of citizenship and personal security vis-à-vis one of the most progressive and pluralist constitutions in the international system.

Contrary to North, Summerhill, and Weingast fundamental requirements for the creation of political order within a market economy, Colombia’s historical trajectory shows that political order may also be achieved by constricting and limiting citizen’s access to institutions that guarantee their personal security, economic security, and that of their families, yet capable of guaranteeing institutional security to local elites and foreign interests. For example the land use policies of the 1920s that guaranteed access of the Colombian subsoil to Tropical Oil or the current mining policies and the supportive institutions and programs that provide access to foreign transnational corporations while at the same time limiting the rights of local artisan miners; past and present realities that allow the effective operation of the market system while at the same time limiting the actions of citizens within the political order.

Colombia’s founding fathers, the leaders that carried the nation into modernity, and those of the present time have never had as their central objective the construction of an open society or political order based on consensus. Citizen’s credibility on the political system and its institutions never impeded economic and political elites from insisting on the implementation of their own and unique political order, even after the emergence of guerrilla movements in the 1950s, the escalating pressure of labor unions throughout the Cold War, the indigenous movements, the emergence of narcotics trafficking as a parallel economy, the emergence of highly sophisticated criminal organizations, and the current array of armed conflicts that are asphyxiating Colombia’s society. Surprisingly, what seems to have mounted pressure on Colombia’s elites to consider moving toward a political order based on consensus has been the international system and their demand for a change in the political order that will allow Colombia to effectively integrate itself into the market system.

Foreign investors, transnational corporations, global resource extraction companies, and the powers of the global market system require new nurturing grounds for the expansion of capitalism, narrowing in on nations such as Colombia. It is these forces that are pushing for changes in the structural nature of the nation’s political order. Aware or unaware, Estrada advocates for changes that could transform Colombia’s political and institutional system into North, Summerhill, and Weingast’s consensual based political order.

Following a neoliberal line of thought, Estrada concludes that Colombia needs to move toward the consensus model in order to effectively navigate the international system and fully immerse in the complexities of a market economy, and that it must bring to an end the civil war and the numerous other armed conflicts that impede the nation from moving forward. What is ultimately recommended is that Colombia finds its own unique ways of establishing and securing political order, even it if means constructing a reality that projects institutional and programmatic order, and that generates civil credibility under a system that favors the interests of the international system.

The problem of constructing realities that project institutional and programmatic order.

The problem of constructing realities that project institutional and programmatic order.

Estrada uses the falsifiability test on North, Summerhill, and Weingast’s theory on political order to justify the promotion of neoliberal institutional change in Colombia. He suggests changes that apply to the particular idiosyncrasies of Colombia, including greater accountability, eliminating clientelism from political relations, the establishment of a system that fosters political and economic competition, consensus among elite groups, society’s unquestionable trust on the consensus based political order, a decreasing role of the state in economic and social matters, cultural change toward a model of meritocracy and self-discipline, and judicial, programmatic, and institutional adjustments aimed at improving investor’s confidence. These changes however do not guarantee the “creation of credible commitments” that, according to North, Summerhill, and Weingast, are necessary for the transition from an authoritarian political order to a consensus based political order.

The theorists suggest that in order to achieve this transition, citizens’ own belief systems must “translate into the institutions that shape performance.” Legitimacy and credibility may only be achieved if constructed by the majority; in other words, if Colombian’s collectively decide to move forward with a market economy. However this is impossible to achieve under current distributive realities. Politicians, representatives, and the bureaucracy must “honor” the rights and norms that regulate the consensus based political order, leading to the “self-enforcement” of the model. This, in the Colombian context, is impossible based on current realities and it would require a revision of the status quo, something that has historically lead to armed conflict. According to the theory, credibility on political and economic policies and institutions may only be achieved if the system guarantees citizens the rights and freedoms to prosper economically; security of income and investment become the crucial drivers of national economic growth. This again would require political and economic elites to accept a change in the status quo as well as the international system’s acceptance of a non-commodity supply role for Colombia, changes that seem utopic at this time.

The implementation of consensus based political order in Colombia seems unrealistic today. The foreign model does not fit with the nation’s current reality. Estrada’s approach forces us to question how effective is the implementation of foreign models and theories to explain local phenomena, knowing well that theorists like North are developing ideas and solution to complex problems that depart from their own cultural and social biases? Why rely on foreign solutions and explanations to resolve and transform local realities when it is clear that they are not a perfect fit? As in the case of Colombian political institutions, the dependency on foreign models at the end result in a frustrating experience of “putting round pegs in square holes.” The falsifiability test fails when one does not compare apples with apples; when one tries to force external realities into local contexts. The consensus-based model of political order fits well with the realities of the United States but not in Colombia. This is a country in the early stages of nation building, in the one hand closing the long chapter of a civil war while on the other juggling the complex realities of the market system.

The problems of importing foreign models to solve local problems of economic development.

The impact of importing foreign models to solve local economic development problems.

Further Readings

North, Douglass C.; William Summerhill, and Barry R. Weingast. (2000) ‘Order, Disorder, and Economic Change: Latin America Versus North America’. In Bruce Bueno de Mesquita and Hilton L. Root (eds) Governing for Prosperity. New Haven: Yale University Press, pp. 17-59.

North, Douglass C.; John Joseph Wallis, and Barry R. Weingast. (2012) Violence and Social Order: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.

Page, Scott E. (2006) ‘Path Dependence’ Quarterly Journal of Political Science, 1: 87-115.