Tag Archives: financial history

By failing to prepare, you are preparing to fail

The European Crisis in the Context of the History of Previous Financial Crisis

by Michael Bordo & Harold James

Abstract – There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis –a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fuelled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.

URL: http://EconPapers.repec.org/RePEc:bog:spaper:18

Circulated by NEP-HIS on: 2015-01-26

Reviewed by: Stephen Billington (Queen’s University of Belfast)


In this paper Bordo and James seek to analyse the impact of the financial crisis of 2007-8 in the context of previous crisis. Specifically by comparing the experience of periphery countries of the Eurozone with those of the “classic” Gold Standard.


In their paper Bordo and James give a synopsis of the similarities which emerged between both monetary regimes. By adhering to a gold parity there was an expansion in the banking system, through large capital inflows, which was underpinned by a strong effective state to allow for greater borrowing. A nation was effective if it held an international diplomatic commitment, which in turn required them to sign into international systems, all the while this played into the hands of radical political parties who played on civilian nationalism[1]; these events combined lead to great inflows of capital into peripheral countries which inevitably led to fiscal instability and a resulting crisis. Similar dilemmas occurred within the EMU, but much more intensely.


This brings me to the main point that the authors emphasize, that of the contingency rule of the classic gold standard. The latter allowed member countries a “safety valve for fiscal policy”. Essentially this was an escape clause that permitted a country to temporarily devalue its currency in an emergency, such as the outbreak of war or a financial crisis, but would return to normalcy soon after, that is, they would return to previous levels. Bordo and James’ argument is that this lack of a contingency within the EMU allowed for a more severe financial crisis to afflict the periphery countries (Greece, Ireland and Portugal) than had affected gold standard peripheries (Argentina, Italy and Australia) as modern day EMU countries did (and do) not have to option to devalue their currency.


Bordo and James point out that crisis during the gold standard were very sharp, but did not last as long as the 2007-8 crisis. This because the exclusion clause during the gold standard enabled a “breathing space” and as a result most countries were back to growth within a few short years. The EMU story is quite different, say Bordo and James. Mundell (1961) argued that a successful monetary union requires the existence of a well-functioning mechanism for adjustment, what we see in the EMU are a case of worse dilemmas due primarily to this absence of an escape clause.

“Gold outflows, and, with money and credit growth tied to gold, lower money and credit growth. The lower money and credit growth would cause prices and wages to fall (or would lead to reductions in the growth rates of prices and wages), helping to restore competitiveness, thus eliminating the external deficits”

The above quote provided by Gibson, Palivos and Tavlas (2014) highlights how the gold standard allowed a country to adjust to a deficit. This point reinforces how Bordo & James argue that due to the constricting nature of the EMU there is no “safety valve” to allowed EU countries to release the steam from increasing debt levels. With respect to the Argentine Baring Crisis of 1890, while the crisis was very sharp in terms of real GDP, pre-crisis levels of GDP were again reached by 1893 – clearly a contrast with the Euro as some countries are still in recession with very little progress having been made as suggested by the following headline: “Greece’s current GDP is stuck in ancient Greece” – Business Insider (2013).

The following graph highlights the issue that in Europe most countries are still lagging behind the pre-crisis levels of GDP.


Bordo and James clearly support this argument. Delles and Tavlas (2013) also argue that the adjustment mechanism of core and periphery countries limited the size and persistence of external deficits. They put forward that the durability of the gold standard relied on this mechanism. This is reinforced by Bloomfield (1959) who states it “facilitated adjustments to balance of payments disequilibrium”.

Vinals (1996) further supports the authors’ sentiments by arguing that the Treaty of Maastricht restricts an individual member’s room to manoeuvre as the Treaty requires sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP – meaning a member cannot smooth over these imbalances through spending or taxation.

Gibson, Palivos and Tavlas (2014) state “a major cost of monetary unions is the reduced flexibility to adjust to asymmetric shocks”. They argue that internal devaluations must occur to adjust to fiscal imbalances, but go on to argue that these are much harder to implement than in theory, again supported by Vinals (1996).


Bordo and James focus primarily on three EU periphery countries which are doing badly, namely Greece, Ireland and Portugal. However they neglect the remaining countries within the EU which can also be classed as a periphery. According the Wallerstein (1974) the periphery can be seen as the less developed countries, these could include further countries such as those from eastern Europe[2]. By looking at a more expansive view of peripheral countries we can see that these other peripherals had quick recoveries with sharp decreases in GDP growth, as in the case of the Gold standard countries, but swiftly recovered to high levels of growth again while the main peripheral countries the authors analyse do lag behind.

Untitled2See note 3

Bordo and James do provide a strong insight into the relationship between an adjustment mechanism to combating fiscal imbalances as a means of explaining the poor recovery of certain peripheral countries (i.e. Greece, Ireland, Portugal) and highlight the implications of this in the future of the EMU. If the EMU cannot find a contingency rule as the gold standard then recessions may leave them as vulnerable in the future as they are now.


1) This process can be thought of as a trilemma, Obstfeld, Taylor and Shambaugh (2004) give a better explanation. In the EU the problem was intensified as governments could back higher levels of debt, and there was no provision for European banking supervision, the commitment to EU integration let markets believe that there were no limits to debt levels. This led to inflows in periphery countries where banks could become too big to be rescued.

2) Latvia, Lithuania, Slovakia, Slovenia, and even Cyprus can be included based on low GDP per capita which is equivalent to Greece.

3) Data taken from Eurostat comparing real GDP growth levels of lesser developed countries within the Eurozone who all use the euro and would be locked into the same system of no adjustment.


Bloomfield, A. (1959) Monetary Policy under the International Gold Standard. New York: Federal Reserve Bank of New York.

Business Insider (2013). Every Country in Europe Should be Glad it’s Not Greece. http://www.businessinsider.com/european-gdp-since-pre-crisis-chart-2013-8?IR=T [Accessed 19/03/2015].

Eurostat, Real GDP Growth Rates http://ec.europa.eu/eurostat/tgm/graph.do?tab=graph&plugin=1&pcode=tec00115&language=en&toolbox=data [Accessed 21/03/2015].

Dellas, Harris; Tavlas, George S. (2013). The Gold Standard, The Euro, and The Origins of the Greek Sovereign Debt Crisis. Cato Journal 33(3): 491-520.

Gibson, Heather D; Palivos, Theodore; Tavlas, George S. (2014). The Crisis in the Euro Area: An Analytic Overview.Journal of Macroeconomics 39: 233-239.

Mundell, Robert A. (1961). A Theory of Optimum Currency Areas. The American Economic Review 51(4): 657-665.

Obstfeld, Maurice. Taylor, Alan. Shambaugh, Jay C. (2004). The Trilemma in History: Trade-Offs among Exchange Rates, Monetary Policies and Capital Mobility. National Bureau of Economic Research (NBER working paper 10396).

Vinals, Jose. (1996). European Monetary Integration: A Narrow or Wide EMU?. European Economic Review 40(3-5): 1103-1109.

Wallerstein, Immanuel (1974). The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press.

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).

Technology and Financial Inclusion in North America

Did Railroads Make Antebellum U.S. Banks More Sound?

By Jeremy Atack (Vanderbilt), Matthew Steven Jaremski (Colgate), and Peter Rousseau (Vanderbilt).

Abstract: We investigate the relationships of bank failures and balance sheet conditions with measures of proximity to different forms of transportation in the United States over the period from 1830-1860. A series of hazard models and bank-level regressions indicate a systematic relationship between proximity to railroads (but not to other means of transportation) and “good” banking outcomes. Although railroads improved economic conditions along their routes, we offer evidence of another channel. Specifically, railroads facilitated better information flows about banks that led to modifications in bank asset composition consistent with reductions in the incidence of moral hazard.

URL: http://econpapers.repec.org/paper/nbrnberwo/20032.htm

Review by Bernardo Bátiz-Lazo

Executive briefing

This paper was distributed by NEP-HIS on 2014-04-18. Atack, Jaremski and Rousseau (henceforward AJR) deal with the otherwise thorny issue of causation in the relationship between financial intermediation and economic growth. They focus on bank issued notes rather deposits; and argue for and provide empirical evidence of bi-directional causation based on empirical estimates that combine geography (ie GIS) and financial data. The nature of their reported causation emerges from their approach to railroads as a transport technology that shapes markets while also shaped by its users.


In this paper AJR study the effect of improved means of communication on market integration and particularly whether banks in previously remote areas of pre-Civil War USA had an incentive to over extend their liabilities. AJR’s paper is an important contribution: first, because they focus on bank issued notes and bills rather than deposits to understand how banks financed themselves. Second, because of the dearth of systematic empirical testing whether the improvements in the means of communication affected the operation of banks.


In 19th century north America and in the absence of a central bank, notes from local banks were substitutes among themselves and between them and payment in species. Those in the most remote communities (ie with little or no oversight) had an opportunity to misbehave “in ways that compromised the positions of their liability holders” (behaviour which AJR label “quasi-wildcatting”). Railroads, canals and boats connected communities and enabled better trading opportunities. But ease of communication also meant greater potential for oversight.


ACJ test bank failure rates (banks that didn’t redeem notes at full value), closed banks (ceased operation but redeem at full value), new banks and balance sheet management for 1,818 banks in existence in the US in 5 year increments between 1830 and 1862. Measures of distance between forms of communication (i.e. railroads, canals, steam navegable river, navegable lake and maritime trade) and bank location emerged from overlapping contemporary maps with GIS data. Financial data was collected from annual editions of the “Merchants and Bankers’ Almanac”. They distinguish between states that passed “free banking laws” (from 1837 to the early 1850s) and those that did not. They also considered changes in failure rates and balance sheet variance (applying the so called CAMEL model – to the best of data availability) for locations that had issuing banks before new transport infrastructure and those where banks appear only after new means of communication were deployed:

Improvements in finance over the period also provided a means of payment that promoted increasingly impersonal trade. To the extent that the railroads drew new banks closer to the centers of economic activity and allowed existing banks to participate in the growth opportunities afforded by efficient connections.(p. 2)


Railroads were the only transport technology that returned statistically significant effects. It suggested that the advent of railroads did indeed pushed bankers to reduce the risk in their portfolios. But regardless of transport variables, “[l]arger banks with more reserves, loans, and deposits and fewer bank notes were less likely to fail.” (p.20). It is thus likely that railroads impact banks’ operation as they brought about greater economic diversity, urbanisation and other measures of economic development which translated in larger volume of deposits but also greater scrutiny and oversight. In this sense railroads (as exogenous variable) made banks less likely to fail.

But ACJ note that means of transportation were not necessarily exogenous to banks. Reasons for the endogeneity of transport infrastructure included bankers promoting and investing in railroads to bring them to their communities. Also railways could find advantages to expand into vigorously active locations (where new banks could establish to capture a growing volume of deposits and serve a growing demand for loans).

Other empirical results include banks decreased the amount of excess reserves, notes in circulation and bond holdings while also increased the volume of loans after the arrival of a railroad. In short, considering railroads an endogenous variable also results in transport technologies lowering bank failure rates by encouraging banks to operate more safely.


The work of AJR is part of a growing and increasingly fruitful trend which combines GPS data with other more “traditional” sources. But for me the paper could also inform contemporary debates on payments. Specifically their focus is on banks of issue, in itself a novelty in the history of payment systems. For AJR technological change improves means of payment when it reduces transaction costs by increasing trust on the issuer. But as noted above, there are a number of alternative technologies which have, in principle, equal opportunity to succeed. In this regard AJR state:

Here, we describe a mechanism by which railroads not only affected finance on the extensive margin, but also led to efficiency changes that enhanced the intensity of financial intermediation. And, of course, it is the interaction of the intensity of intermediation along with its quantity that seems most important for long-run growth (Rousseau and Wachtel 1998, 2011). This relationship proves to be one that does not generalize to all types of transportation; rather, railroads seem to have been the only transportation methods that affected banks in this way.(p4)

In other words, financial inclusion and improvements in the payment system interact and enhance economic growth when the former take place through specific forms of technological change. It is the interaction with users that which helps railroads to dominate and effectively change the payments system. Moreover, this process involves changes in the portfolio (and overall level of risk) of individual banks.

The idea that users shape technology is not new to those well versed in the social studies of technology. However, AJR’s argument is novel not only for the study of the economic history of Antibellum America but also when considering that in today’s complex payments ecosystem there are a number or alternatives for digital payments, many of which are based on mobile phones. Yet it would seem that there is greater competition between mobile phone apps than between mobile and other payment solutions (cash and coins, Visa/Mastercard issued credit cards, PayPal, Bitcoin and digital currencies, etc.). AJR results would then suggest that, ceteris paribus, the technology with greater chance to succeed is that which has great bi-directional causality (i.e. significant exogenous and endogenous features). So people’s love for smart phones would suggest mobile payments might have greater chance to change the payment ecosystem than digital currencies (such as Bitcoin), but is early days to decide which of the different mobile apps has greater chance to actually do so.

Wall Street (1867)

Wall Street (1867)

Another aspect in which AJR’s has a contemporary slant refers to security and trust. These are key issues in today’s digital payments debate, yet the possibility of fraud is absence from AJR’s narrative. For this I mean not “wildcatting” but ascertaining whether notes of a trust worthy bank could have been forged. I am not clear how to capture this phenomenon empirically. It is also unlikely that the volume of forged notes of any one trusted issuer was significant. But the point is, as Patrice Baubeau (IDHES-Nanterre) has noted, that in the 19th century the technological effort for fraud was rather simple: a small furnace or a printing press. Yet today that effort is n-times more complex.

AJR also make the point that changes in the payments ecosystem are linked to bank stability and the fragility of the financial system. This is an argument that often escapes those discussing the digital payments debate.

Overall it is a short but well put together paper. It does what it says on the can, and thus highly recommended reading.

Does Bank Competition Lead to Higher Growth?

Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience

By Philipp Ager (University of Southern Denmark) and Fabrizio Spargoli (Erasmus University Rotterdam)


We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic
growth. As governments were not concerned about systemic stability in this period, we are
able to isolate the effects of bank competition from those of state implicit guarantees. We find
that the introduction of free banking laws stimulated the creation of new banks and led to
more bank failures. Our empirical evidence indicates that states adopting free banking laws
experienced an increase in output per capita compared to the states that retained state bank
chartering policies. We argue that the fiercer bank competition following the introduction of
free banking laws might have spurred economic growth by (1) increasing the money stock
and the availability of credit; (2) leading to efficiency gains in the banking market. Our
findings suggest that the more frequent bank failures occurring in a competitive banking
market do not harm long-run economic growth in a system without public safety nets.

URL: http://d.repec.org/n?u=RePEc:hes:wpaper:0050&r=his

Circulated by NEP-HIS on: 2013-12-29

Review by Natacha Postel-Vinay

In this paper, Philipp Ager (University of Southern Denmark) and Fabrizio Spargoli (Erasmus University Rotterdam) ask two very topical questions. Does increased bank competition lead to higher economic growth? And, if so, how? Following the recent crisis, many have wondered whether the alternative to “too-big-to-fail” — having many smaller banks competing with each other — would necessarily be a better one. Clouding the debate has been the difficulty of finding appropriate historical settings in which to test the hypothesis that more competition leads to greater growth. In their paper, Ager and Spargoli focus on what they consider the best instance of intense bank competition without any implicit government bail-out guarantee: the American free banking era.

Between 1837 and 1863 new laws were passed in a number of states allowing just about anyone to set up a bank, with very few requirements to fulfill. Until then, banks wanting to open needed a charter from their state, for which they had to meet relatively stringent criteria. As the authors show using a new quantitative analytical framework, the new laws greatly increased the creation of new banks in the states which passed them. As competition increased, however, a higher proportion of banks ended up failing. Could it still be the case that the introduction of free banking laws led to greater growth in those states?

A satire on Andrew Jackson's campaign to destroy the Bank of the United States and its support among state banks, 1836. It was partly to fill this gap that states allowed free banking.

A satire on Andrew Jackson’s campaign to destroy the Bank of the United States and its support among state banks, 1836. It was partly to fill this gap that some states allowed free banking.

The paper’s most important finding is that increasing competition among banks did lead to higher economic growth. Jaremski and Rousseau’s 2012 paper (previously reviewed in NEP-HIS here) found that a new “free” bank, as opposed to a charter bank, did not have a positive effect on the local economy. While this is an important finding in itself, it is also important to look at the effect of the introduction of free banking laws on aggregate bank behaviour, if only because the new entry of free banks may alter the willingness of charter banks to enter the market and their behaviour once in the market. Charter banks’ behaviour may in turn alter free banks’ behaviour, and so on. Interestingly, Ager and Spargoli’s study finds that in the aggregate, the acceleration in bank entry and resulting greater competition among all types of banks had a positive effect on economic growth.

To arrive at this conclusion, the authors are careful to include a number of controls. First, there is the possibility that growth opportunities led some states to adopt free banking laws, in which case the authors would face a reverse-causality problem. Hence they conduct a county-level analysis in which they include time-invariant county characteristics and state-specific linear output trends (although perhaps it would be nice to see these output trends going further back in time than 1830). Second, they also control for other laws that states might have introduced at the same time as the free banking ones, which could potentially bias the results. Finally, they control for unobserved heterogeneity between states by examining contiguous counties lying on the border of states that introduced free banking. Their results are robust to these different specifications.

Private Bank Note, Drover’s Bank, Salt Lake City, Utah, $3, 1856

Private Bank Note, Drover’s Bank, Salt Lake City, Utah, $3, 1856

Ager and Spargoli are of course also interested in where this growth came from. They find a positive relationship between the introduction of free banking laws and lending, and conclude that one of the main channels through which this increase in growth occurred was the increase in the availability of credit that greater competition fostered. This story is consistent with the finance-growth nexus literature, which argues that greater (and safer) access to credit is conducive to economic development.

Although this seems perfectly reasonable, it would perhaps have been interesting to see when most of the failures occurred. If, for instance, they mainly occurred towards the end of the period under study, say around the 1857 panic, then it is possible that the negative effects of such failures on subsequent growth would not have been picked up by this study, since it ends in 1860. This leaves open the possibility that the positive relationship between free banking and increased access to credit was not a beneficial one for the economy in the long run. Loan growth (and asset growth more generally) is not always a good thing, as the recent crisis has tended to show.

Private Bank Note, Mechanics Bank, Tennessee, $10, 1854

Private Bank Note, Mechanics Bank, Tennessee, $10, 1854

Overall however, Ager and Spargoli’s paper asks a very important question and offers a solid analysis. A natural next step would be to include output data on the periods preceding and following the free banking era, although the occurrence of the Civil War is an obvious obstacle to this study.



Jaremski, M., and P. L. Rousseau (2012): “Banks, Free Banks, and U.S. Economic Growth,” Economic Inquiry, 51(2), 1603–21.

Accounting for Deception in the Industrial Revolution

Creative accounting in the British Industrial Revolution: Cotton manufacturers and the ‘Ten Hours’ Movement

By Steve Toms and Alice Shepherd (both at the University of Leeds Business School)


The paper examines an early case of creative accounting, and how, during British industrialization, accounting was enlisted by the manufacturers’ interest to resist demands, led by the ‘Ten hours’ movement, for limiting the working day. In contrast to much of the prior literature, which argues that entrepreneurs made poor use of accounting techniques in the British industrial revolution, the paper shows that there was considerable sophistication in their application to specific purposes, including political lobbying and accounting for the accumulation of capital. To illustrate lobbying behaviour, the paper examines entrepreneurs’ use of accounting to resist the threat of regulation of working time in textile mills. It explains why accounting information became so important in the debate over factory legislation. In doing so, it shows that a significant element was the accounting evidence of one manufacturer in particular, Robert Hyde Greg, which had a strong impact on the outcome of the parliamentary process. The paper uses archival evidence to illustrate how accounting was used in Greg’s enterprise and the reality of its economic performance. The archival evidence of actual performance is then contrasted with the figures presented by Greg to the Factories Inquiry Commission, convened by the House of Commons in 1833-1834 to hear witnesses from the manufacturing interest. These sets of figures are compared and contrasted and discrepancies noted. Conclusions show that the discrepancies were substantial, motivated by Greg’s incentives to present a particular view of low profits, high fixed costs, and the threat of cheaper overseas competition. The figures appeared to lend some credibility to the apparent plight of manufacturers and to Nassau Senior’s flawed argument about all profit being earned in the ‘last hour’ of the working day. The consequence was a setback for the Ten Hours movement, leading to a further intensification of political struggles over working conditions in the 1840s.

URL: http://econpapers.repec.org/paper/pramprapa/51478.htm

Review by Masayoshi Noguchi

The paper by Toms and Shepherd was distributed by NEP-HIS on 2013-11-22. It makes a welcomed contribution to researching the role of accounting information within the British Industrial Revolution, as great debate still continues over the extent to which accounting technology was used for management decision making during that period.

The aim of Toms and Shepherd is to examine “the use of accounting by entrepreneurs to resist the threat of regulation of working time in textile mills in the early 1830s” (p. 2). This by analyzing the extent of “anti-regulation lobbying on working hours and child labour was influenced by accounting manipulation” (p. 2).

Archival evidence was sourced in the business records of the partnerships of Samuel H. Greg and Sons. As is well known, one distinctive feature of accounting system of partnerships until present day is profit-sharing amongst principals. Toms and Shepherd also examines in detail the level of “sophistication in recording capital appropriations and accumulations” (p. 4) among partners. This as the partnerships’ accounting system recognised implied interest charges of capital and used them to arrive at the balance carried forward. However, this criteria sharply contrasted with the absence of any other criteria for accounting for fixed assets (including depreciation). Fixed assets were treated as part of “[Greg’s] private estate and not assigned to the partnership” (p. 14). The practice at Greg and Sons thus provides a further case to support Pollard’s critical assessment of the limited use of accounting information for decision purposes (p.14).

Business records recording the actual performance of the business are then contrasted with evidence submitted by Robert Hyde Greg to the Factories Inquiry Commission of 1833. Toms and Shepherd then argue that the latter accounting evidence was distorted by the manufacturer’s interest to oppose the introduction of regulation stipulating the working day in textile factories. In particular, Greg manipulated accounting evidence submitted to the Factories Inquiry Commission by exaggerating “the importance of wages as an expense” (p. 22). This by assuming that most of the production costs in general, and wages in particular, were fixed costs and thus “reducing the working day would increase the burden of fixed charges” (p. 21) on profit.

Robert Hyde Greg (1795-1875)

Using the information recorded in Greg’s accounts of the partnership, Toms and Shepherd offer some factual and contra-factual exercises, including the calculation of “implied” rate of return on capital (pp.32-33). They then compare these results with the evidence provided by Greg to the Commission thus providing clear evidence of the manufacturer’s accounting manipulation. However, as the authors themselves admit, the concept of “return on capital is not referred to specifically in Greg’s evidence (only ratios of profit to output)” (p. 31), even though “the committee (sic) could easily draw conclusions from his tabulated appendices” (p. 31). Personally I would like to know more about the effect of writing-off the asset values exercised in 1832 (pp. 27, 30) on Greg’s submission of the accounting evidence to the commission in 1933.

With the skilled manipulation, the evidence submitted by Greg was successful to achieve a political effect with the final report of the Commission incorporated the entrepreneurs’ argument against the regulation on working hours. The authors conclude that accounting information could be used “not so much as an aid to [rational] management decisions, but as a [opportunistic] means of influencing others” (p. 36).

A History of Japanese Audit Firms, 1965–2010

Integrating Personal Expertise: A History of Japanese Audit Firms, 1965–2010


Masaru KARUBE (Institute of Innovation Research, Hitotsubashi University, Japan)

Hironori FUKUKAWA (Graduate School of Commerce and Management, Hitotsubashi University, Japan)


To examine empirically the knowledge integration process of professional expertise that individuals have in a professional firm, this paper examines the emergence and growth of four large audit firms (ShinNihon, Azusa, Tohmatsu, and ChuoAoyama) in Japan over a period from the mid-1960s to 2010. Known as the Big Four, these firms—the product of a series of mergers between more than 70 audit firms—handled the vast majority of audit services for listed companies during this period. After the dissolution of ChuoAoyama in 2006, the remaining three audit firms have dominated the market.

A longitudinal case study documents how these professional service firms were successful in providing nationwide services through mergers with domestic competitors and the provision of global services in alliance with large international firms, even though they did not sufficiently realize the systematic attainment of individual expertise. The historical account of this process suggests that the two driving forces underpinning the merger growth of the Big Four were strategic intent in (1) systematizing individual expertise and (2) establishing nationwide and global service networks in response to the increase in size and growing diversity and complexity of their client base. Finally, this paper discusses the knowledge tension between localized individual expertise and organizational knowledge in a global context.

URL: http://econpapers.repec.org/paper/hitiirwps/13-07.htm

Review by Masayoshi Noguchi

This paper is an interesting piece of work that intertwines management and accounting history with a focus on post-war developments in Japan. The paper was distributed by NEP-HIS on 2013-04-06.

The main issue is ‘how knowledge workers collaborate and create new knowledge through collaboration’ in general, and ‘how professional knowledge workers collaborate between themselves and how collaboration is organized’ (p. 2) in particular. Then the authors state the research question in this study as follows:

‘Our basic research question concerns why large audit firms through a series of mergers have replaced audit services, as initially provided by a single or limited number of individual accountants’ (p. 2).

The fieldwork in Karube and Fukukawa’s paper moves forward by exploring the official history of accounting firms while, at the same time, looking for stated motivations of mergers during the post-war period. As a result, they state the following views as motivation for mergers amongst accounting firms:

‘(1) to overcome the intrinsic contradiction between economic dependency and the independence of audit opinion,

(2) to enhance their systematized audit capabilities to meet the growing and diverse need for audit services by client firms, and

(3) to acquire new client firms by establishing a reputation for audit services’ (p. 2).

Point (3) above is the most interesting, particularly given the stated aim of Karube and Fukukawa. Point (3) seems to be an important driver that helps to explain the mergers between major large-scale firms, according to the authors; who also state that:

‘…such explicit differences did not exist between major firms in terms of the substance of competence. Rather, it seems that no explicit difference in terms of the substance of competence promoted further competition for scale expansion. In other words, scale itself came to serve as a symbol of competence in the competition process between audit firms, especially large major firms. Scale expansion through merger then emerged as a reflection of the intense competition for the social proof of competence’ (p. 27).

According to Karube and Fukukawa, audit firms expanded through the acquisition of the audit services for the Nippon Telegraph and Telephone Public Corporation, Japan National Railways and the Japan Tobacco & Salt Public Corporation. In this regard, greater detail as to the process and selection of these acquisitions would provide interesting case material and warrant further examination in order to deepen the business history of Japanese corporation. In this regard Karube and Fukukawa state that:

‘…these firms were all large, the expectation was that the designated auditor or auditors would have sufficient human resources to provide audit services for such large firms. Moreover, many audit corporations shared the understanding that audit service was in essence difficult to differentiate, so that the size of the audit firm mattered for gaining these sorts of clients’ (pp.17-18).

A key concept in this study is ‘the social proof of competence’, where acquiring reputation, social status and symbolic outputs is more important than actual results/outputs. Therefore, for Karube and Fukukawa during the post-war period Japanese professional auditors:

‘…are more concerned about gaining social proofs of competence than the substance of competence. To do this, they pursue strategies that win reputation from clients, acquire good clients regarded as having high status, and produce symbolic outputs that are visibly appealing to clients. Reputation also derives from each client’s own experience of audit services, or is inferred from the provider’s past experiences, including their courses of action and results. Thus, past courses of action and experience for providers matter in gaining reputation from clients’.

In spite of this profound understanding, the authors develop the following proposition:

‘…in contrast to consulting services, as audit services derive more from the formal audit procedures decided by government, it is more difficult to differentiate services. Thus, the most symbolic output is the scale of services, as exemplified by the number of clients, the number of good clients, revenues from audit services, and the geographic coverage in providing services’ (pp. 6-7).

To be sure, the author will also consent to the other elements, such as recognition from influential others, such as government, being important, though size is one of the important elements for acquiring reputation.

Finally Karube and Fukukawa find no evidence that expansion through mergers contributed to an improvement in organizational competence nor that it improved the quality of audit services (and reduce accounting fraud. Specifically the authors state that:

‘…in the light of the substantial integration of organizational competence, there should be efforts to remove such weak integration as soon as possible after the merger. In the case of Asahi-kaikeisha Audit Corporation, it took nearly 10 years to dissolve the personalized audit system and to systematize the job and client rotations of junior professionals among audit offices within the firm. … As a result, Japanese audit firms succeeded in gaining social proofs of competence by way of scale expansion through mergers rather than realizing the substance of competence, in that they still faced difficulties with the internal integration of the merged firms’ (pp. 25-26).

‘The fact that this mobility [of accountants caused by the demise of Misuzu Audit Corporation] was observed six years later when Chuo and Aoyama merged in 2000 implies not only the existence of insufficient integration but also the presence of strong relationships between clients and accountants in their operations, suggesting the possibility of insufficient systematization of the substance of organizational competence’ (p. 28).

If the social proof of competence and substance of competence are completely different and scale expansion pursues the former objective, this result of the merger of the audit firms is quite natural. Probably, the relationship of both would not be so simple. The merger between the audit firms should have offered an important opportunity to enhance organizational competence, such as wider risk diversification, enhanced economic independence, strengthened bargaining power, improvement through scale merit, nationwide services, etc. Rather it largely depends on the management after the merger whether this opportunity can be exploited or not. In this sense, the authors’ following indication is appropriate:

‘[w]hile merger can be the “easiest” way for a firm to grow, the process of post-merger integration remains a critical and ongoing issue for management’ (p.29).

The Origins of the Modern Concept of Money

French economists and the purchasing power of money

by Alain Béraud (alain.beraud@u-cergy.fr), THéorie Economique, Modélisation et Applications (THEMA), Université de Cergy-Pontoise (France)


When French economists read The Purchasing Power of Money, they were primarily interested in the equation of exchange and the reformulation that Fisher proposed regarding the quantity theory of money. This reading led them to ponder the meaning that should be given to this theory and to study its empirical significance. Some of them, namely Rueff and Divisia, went further still and considered Fisher’s work as a starting point for their own analyses, which were related in particular to the monetary index, the integration of money into general equilibrium theory and the analysis of monetary phenomena in an open economy.

Keywords: quantity theory of money; price index; theory of purchasing power parity; marginal utility of money; integration of money into general equilibrium.

URL http://econpapers.repec.org/paper/emaworpap/2013-10.htm

Review by Bernardo Bátiz-Lazo

This paper was circulated by NEP-HIS on 2013-03-30. Alain Béraud, its author, offers a detailed account of how many French economist criticised Irving Fisher’s (1867–1947) quantity theory of money while others supported it. In particular, he explores the extent to which Firsher’s ideas appear within the work of two great French economists, namely François Divisia (1889-1964) and Jacques Rueff (1896-1978).

Alain Béraud – Professeur de Sciences Économiques
(Université de Cergy-Pontoise)

Fisher’s formulation of the equation of exchange (where the total price of commodities sold equals the total value of the money that was given in exchange) is now part and parcel of every undergraduate programme in economics. It is integral and fundamental to the current understanding of macroeconomic management. Given this plus the rise of digital payments, mobile-phone wallets and crypto-currencies like Bitcoin, it is important to remember and indeed timely, to have an in depth discussion about how our conception of money – then measured as notes and coins – came to be and how it was shaped by dissenting views. In this regard says Béraud:

From the time of its publication through to the 1930s, The Purchasing Power of Money was the reference work for French economists who interpreted it as the modern, rigorous version of quantity theory. But this theory was hardly popular. It is therefore not surprising that many French economists, while recognising its merits, fiercely criticised it. It was only in the 1920s that Rueff and Divisia, both graduates of the École Polytechnique where they had been students of Clément Colson, used this book to develop their own analyses of monetary phenomena. Here, I have defended the idea that their contributions were certainly original but were nonetheless based on ideas that Fisher had supported.

Front of French frank coin (1996), commemorating the life of Jacques Rueff

As noted above, through his narrative Béraud compares and contrasts how the work of Fisher was incorporated into the ideas of French economists. He also offers a rich discussion of the reasons why there was dissent and why many took exception and actively criticised Fisher’s work.

The picture that emerges from Béraud’s work allows us to see how economist of the early 20th century on both sides of the Atlantic are engaging in a type of debate that now dominates the discipline, namely highly quantitative and empirically based. Something that, I thought, only took place after World War II – and thus, happy to be set straight. Moreover, this sort of debate was something that, according to Walter Friedman’s brief biography of Fisher, characterised Fisher’s early contributions to our understanding of macroeconomic phenomena. However, we are not provided by Béraud with enough detail to ascertain if a debate with such characteristics was widespread in France or whether it is Béraud’s reconfiguration of the debate between monetary factors and prices, that which leads us to emphasise its quantitative, formal, empirical aspects.

It was also interesting to know that the contemporary discussion of Fisher’s ideas was hampered by lack of available data. For instance, Béraud notes that at this point in time: “data on bank deposits [was unavialble]. Only some establishments published monthly statements.” Here, in my view, some more context as to how and when such measures came to be mainstream and a brief reference to the overall construction of macroeconomic statistics in France would have given a bit more sense of perspective to the discussion.

In the same vein, I would have liked, as a manner of introduction, some context as to why, how relevant and how widespread the debate of Fisher’s ideas was in France during the interwar period. It seems French economists are very concerned with determining exchange rates and the future of the Gold Standard at the end of the First World War. But this is only mentioned in passing. For the international reader it would have also been helpful to have an introduction as to the broad configuration of French economists groups or lines of work at this point in time.

But for all my comments and on balance, this paper makes an interesting read.

François Divisia (1889-1964) – a founding member of the “Econometric Society”