Financial History Research Articles

‘Trust is good, control is better’: The 1974 Herstatt Bank Crisis and its Implications for International Regulatory Reform

With its international supervisory and regulatory implications, the failure of Bankhaus Herstatt is one of the landmarks of post-war financial history. This article offers the first comprehensive historical account of the Herstatt crisis, and contributes to the wider discussions on international supervisory and regulatory reform since the mid-1970s, including regulatory capture, markets' self-regulation and resolution of failed banks. In doing so, it first argues that contrary to a widely held view, the German authorities received early and repeated warnings about Herstatt's dealings but this involved only limited and ineffective regulatory/supervisory responses, then it turns to the actual collapse of the bank in June 1974, and finally explores the wider regulatory issues raised by the Herstatt case.

Hansvan de Ven. Breaking with the Past: The Maritime Customs Service and the Global Origins of Modernity in China.

Founded in Shanghai by British diplomats in 1854, the Maritime Customs Service was an ad hoc institution charged with collecting customs on China's foreign trade according to the commercial treaties that the Qing Empire had concluded with a series of Western nations in the wake of the First Opium War (1839–1842). The arrangement later obtained official recognition by the Qing government, and the predominantly foreign-staffed Maritime Customs Service emerged as an important revenue-creating, knowledge-producing, as well as policymaking institution of central importance to the Chinese state. The Maritime Customs Service was the only nationwide institution that survived the frequent political upheavals between 1854 and 1949, thus making “China” into something more than just a cultural or geographic expression. Yet despite its enormous importance to Chinese history, it has warranted very few specialized treatments since John K. Fairbank published his monograph on the early history of the service in 1954. Having gained serendipitous access to previously closed customs archives in China and sometimes drawing on a number of projects emanating from those primary sources, Hans van de Ven is the first in more than a generation to produce a book-length English-language contribution to our knowledge of this peculiar institution. By “follow[ing] the money” (p. 8), van de Ven masterfully rewrites the story of the Maritime Customs Service, demonstrating its perennial relevance not only to late imperial and modern Chinese history, but also to global and financial history. The book is chronologically arranged into seven chapters, each of which emphasizes a different thematic aspect of the Maritime Customs Service and suggests how late imperial Chinese history and Republican history can be fruitfully reperiodized. For instance, van de Ven identifies the 1880s as a watershed, where China finally succumbed to the “new” economic imperialism and was increasingly reduced to a supplier of raw materials to world markets. Similarly, the book makes an important contribution to the financial history of China by showing how the Maritime Customs Service emerged as a debt-collecting agency and issuer of trusted bonds after the collapse of the Qing dynasty in 1912.

Financial Conditions Indexes for Asian Economies

Financial conditions indexes (FCIs) are constructed for five Asian economies, namely, Hong Kong, China; Japan; the Republic of Korea; Malaysia; and Singapore, using a principal component analysis (PCA) methodology from Hatzius et al. (2010) and quarterly data. Various financial stress indicators are included, allowing the constructed Financial Condition Index to capture important episodes in each economy’s financial history. The predictive power of the constructed FCIs is higher than that of benchmark AR models and they generally outperform single financial indicators. A decomposition of the FCIs sheds light on particular sources of financial stress. A regional FCI based on the individual economy FCIs is also constructed.

The Financial Crisis: Lessons from History

Financial crises have regularly afflicted economies throughout history and the United States has been no exception. This paper examines the Panic of 1907, the Crash of 1929 and the Great Depression and the Great Recession of 2007-08 and discusses the responses of the government and regulators. The short version of the story is that the while the government response has varied in terms of monetary and fiscal policy, the regulatory response has remained essentially the same. The typical reactive regulation sounds good and gives the appearance of accomplishing something but, in fact, only serves to sow the seeds of future crises. The ineffective implementation of existing regulation has had a similar result. Indeed, several authors note that most financial innovation in recent years has its origins in circumventing new regulations. Likewise, government monetary and fiscal responses may or may not help the economy and often give the appearance of great arbitrariness. Our conclusion is that there will be unforeseen financial crises in the future, sweeping regulation and promises of recent politicians notwithstanding. Serious study of the unanticipated consequences of this regulation and the development of more robust risk management systems will help us mitigate the effects of future crises but will be of little assistance when it comes to avoiding them. Developing the analyses and risk management systems requires a detailed study of financial history keep both successes and failures fresh in our collective memory.

From Finance Capitalism to Financialization: A Cultural and Narrative Perspective on 150 Years of Financial History

In this article I interpret 150 years of financial history with a focus on shifts in the role of finance in society. I argue that over time the role of finance has shifted twice from that of servant to that of master of society, and that this process has been driven by sense making through narratives that legitimized and shaped these changes. When finance became a master rent seeking, cultural capture and out-of-control financial innovation resulted in financial and social instability. Finance as a master was the characteristic of finance capitalism from around 1900–1931 and of financialization from around 1980 to today. Finance capitalism and financialization were enabled by a dominant narrative that legitimized the power of finance. The shifts in the role of finance happened when crises undermined the meaning of the existing narrative and created for a new narrative able to make sense of the crisis and point society in a new direction. This sense-making process stabilized when a new narrative was established that could explain the crisis and legitimize and shape a new role for finance. The article is based on my presidential address presented at the Business History Conference’s annual meeting in March 2014 in Frankfurt.

From Finance Capitalism to Financialization: A Cultural and Narrative Perspective on 150 Years of Financial History

In this article I interpret 150 years of financial history with a focus on shifts in the role of finance in society. I argue that over time the role of finance has shifted twice from that of servant to that of master of society, and that this process has been driven by sense making through narratives that legitimized and shaped these changes. When finance became a master rent seeking, cultural capture and out-of-control financial innovation resulted in financial and social instability. Finance as a master was the characteristic of finance capitalism from around 1900–1931 and of financialization from around 1980 to today. Finance capitalism and financialization were enabled by a dominant narrative that legitimized the power of finance. The shifts in the role of finance happened when crises undermined the meaning of the existing narrative and created for a new narrative able to make sense of the crisis and point society in a new direction. This sense-making process stabilized when a new narrative was established that could explain the crisis and legitimize and shape a new role for finance. The article is based on my presidential address presented at the Business History Conference’s annual meeting in March 2014 in Frankfurt.

Factors determining authors’ willingness to wait for editorial decisions from economic history journals

In this contribution, we measure how long researchers are willing to wait (WTW) for an editorial decision on the acceptance or rejection of a submitted manuscript. This measure serves as a proxy for the expected value of a publication to a researcher in the field of economic, business and financial history. We analyze how this WTW measure varies with the characteristics of the submitting authors themselves. We distinguish the impact of personal characteristics (including age, gender and geographic location) as well as work-related characteristics (including research discipline, affiliation and academic position). To identify the factors determining economic history authors’ WTW for editorial decisions, we use a valuation technique known as stated choice experiments. Our results show that respondents found the standing of the journal to be at least as important as its ISI impact factor. Moreover, we find differences in publication culture between economic and history departments. Overall, researchers’ willingness to wait is influenced to a greater extent by the research discipline in which the respondents are active (history vs. economics), than by their personal characteristics (e.g. the education or the type of Ph.D. they obtained).

A Crisis of the Overcrowded Future: Shadow Banking and the Political Economy of Financial Innovation

This article focuses on the role the shadow banking system played in the financial crisis of 2007–9. Engaging with emergent theories of shadow banking, I inquire into its structural role in contemporary capitalism. My main premise here is that the crisis of 2007–9 is distinct in financial history because it did not centre on any organised market. Rather, it was crisis of the overcrowded financial channels bridging the present and the future, which have become congested because of the massive concentration of financial values generated, yet not sustained, through the shadow banking network. My analysis suggests that shadow banking has determined the nature of financial crisis of 2007–9 and continues to play a necessary role in financial capitalism based on futurity. Drawing on scholarship in financial Keynesianism, contemporary legal studies and early evolutionary political economy, I argue that shadow banking is best seen as the organic institutional infrastructure of financialised capitalism based on debt and geared towards futurity, a concept originally developed by John Commons.

Impact of Informal Cross Border Trade on Poverty Alleviation in Nigeria: Kotangowa Market [Lagos] in Perspective

27th August 2014: Final corrections were made to this paper as requested by the author - Editor.This work investigates the impact of Informal Cross Border Trade (ICBT) on poverty alleviation in Nigeria using Kotangowa market in Lagos as a case study. While the policy dialogue in Nigeria is driven by the state-centric perception of ICBT as an economic malice, this study analyzes the impact of ICBT including smuggling on the socio-economic development of participants. Also, it examines the role of the state and non-state actors in negotiating the implementation of regulations at the margins and center of the state. The research problem is examined through an assessment of the financial history of informal cross-border traders and customers in the market. The factors considered include income levels, assets acquisition, and expenditure overtime. The approach is qualitative based on descriptive method of data analysis. While ICBT is tainted by state policies as hampering economic development, findings show that it actually alleviates poverty. This paper argues that informality of this nature exemplifies the moderation of arbitrary state policies by non-state actors in Sub-Saharan Africa. DOI: http://dx.doi.org/10.3126/ctbijis.v2i1.10809 Crossing the Border: International Journal of Interdisciplinary Studies Vol.2(1) 2014: 13-22

Superstar technocrats: the celebrity central banker

Imagine a senior Princeton academic writing books on financial history: he is balding, grey bearded, and in his early sixties. He lives in New Jersey with his wife, dines at home, then takes out th...

The Crisis of 1866

The collapse of Overend Gurney and the ensuing Crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. We suggest that the Bank bolstered the resilience of the money market by monitoring leverage-building by money market participants and threatening exclusion from the discount window. When the Bank refused to bailout Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising the Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency.

Physically Active, Low-Income African American Women: An Exploration of Activity Maintenance in the Context of Sociodemographic Factors Associated with Inactivity

Increasing physical activity among low-income African American women is an important target for addressing racial and economic disparities in chronic conditions and related risk factors. While barriers to physical activity for women have been examined empirically, successful strategies for navigating those barriers among physically active, low-income women have not been thoroughly explored. Informed by grounded theory, we conducted in-depth individual interviews between 2007–2010 with 14 low-income African American women who were physically active at nationally recommended levels for one year or more. We analyzed the data using thematic analysis techniques. Key themes emerged in three main categories: motivation for maintaining active lifestyle, strategies for maintaining physical activity, and challenges to maintaining physical activity. Important motivations included getting or staying healthy, social connections, and gratification. Two planning strategies emerged: flexibility and freedom. Critical challenges included financial constraints, physical strain and history of sedentary relapse. The motivations, strategies and challenges reported by low-income African American women who successfully maintained an active lifestyle provided important information for developing effective health promotion strategies for their inactive and underactive counterparts. A qualitative, asset-based approach to physical activity research contributes rich data to bridge the gap between epidemiological knowledge and community health improvement.

Financial crises in historical perspective: Parallels between the past and present

The outbreak of the financial crisis in 2007 has increased the interest in the study of financial history and, mainly, from compared studies on international financial crises. To this end, Investigaciones de Historia Económica-Economic History Research has set out to publish a special issue, welcoming the research on past financial crises into its pages. This issue consists of five papers, summarized in this introduction, that revolve around three large topics: the significance of sources and their use to understand the origin of financial crisis as well as their regulatory consequences; comparisons between major crises, and the study of financial crises’ causes and the measures taken to rise to their challenges. The articles presented here delve into the lessons offered by past crises and provide a good example of Economic History's ability to contribute to a better understanding of past and present economic phenomena.

Recreating the South Sea Bubble: Lessons from an Experiment in Financial History

Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debt-equity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.

The Financial History of Cambridge University, by Robert Neild

The Financial History of Cambridge University, by Robert Neild

Book Reviews

Richard N. Cooper of Harvard University reviews, “The Bretton Woods Transcripts” by Kurt Schuler and Andrew Rosenberg. The Econlit abstract of this book begins: “Presents the verbatim record of meetings of the Bretton Woods Conference, which established the International Monetary Fund and the World Bank. Transcripts focus on Commission I—the International Monetary Fund; the committees of Commission I; and Commissions II and III—the World Bank and other means of cooperation. Schuler is an economist in the Office of International Affairs at the U.S. Department of the Treasury and Senior Fellow in Financial History at the Center for Financial Stability. Rosenberg is a research associate at the Center for Financial Stability.”

The Fox Film Corporation, 1915-1935: A History and Filmography AubreySolomon. Jefferson, NC: McFarland, 2011. Twentieth Century-Fox: The Zanuck-Skouras Years, 1935-1965 PeterLev. Austin: University of Texas Press, 2013.

The Fox Film Corporation, 1915-1935: A History and Filmography Aubrey Solomon. Jefferson, NC: McFarland, 2011.Twentieth Century-Fox: The Zanuck-Skouras Years, 1935-1965 Peter Lev. Austin: University of Texas Press, 2013.Known as the lone eagle of the (9), William Fox (1879-1952) entered film production in 1914, established the Fox Film Corporation in February 1915, and is considered to be one of the pioneers of the film industry. During the decade of the 1910s, he challenged the Motion Picture Patents Company, which, in January 1909, had announced that its partners exclusively owned all rights to photograph, develop, print and exhibit motion (12). Under the Sherman Antitrust Act, Fox sued the General Film Company, which had been established by Motion Picture Patents Company, and the suit was later settled out of court. As a result, in 1913 the Motion Picture Patents Company's stranglehold on the film industry was broken.During the 1920s, William Fox developed interests in pictures, color film, radio, and television. He held patents to the new sound-on-film process called Fox Movietone which the predominant method of re-producing sound (7) and was used successfully in the company's newsreels, which were known as Movietone News. He also experimented with a color process called Fox Nature Color film and almost entered the medium of radio when he considered acquiring a network of thirty radio stations in the West and Midwest. Fox also recognized the potential of television. During the late 1920s he became a leading proponent of a wide-film system, whose patents he co-owned, called Grandeur (123). Fox thought this wide-film system would make it possible for motion pictures to compete with television.Aubrey Solomon, coauthor of The Films of 20th Century-Fox: A Pictorial History (1979, revised 1985) and author of Twentieth Century-Fox: A Corporate and Financial History (1988), notes that William Fox saw the expansion of Fox Films from a small exhibition set-up with six exchanges to a massive integrated corporate structure with a reputed value of $300 million in 1930 (7). He built movie palaces and acquired theater chains until he had an international distribution and exhibition empire that was the envy of every other (7). In February 1929, Fox purchased a controlling interest in Loew's, Inc., the parent company of MGM. As a result of the stock market crash on October 29,1929, he suffered severe financial losses that impacted the value of companies and his ability to raise further cash to cover the interest payments on debts (127).In November 1929, US Attorney General William D. Mitchell requested that Fox, in accordance with the Clayton Antitrust Act, divest himself of Loew's holdings (128). With the Fox Film Corporation in financial trouble, a long and complicated court battle ensued over the control of the company, and William Fox was ousted from company management in April 1930. The company then had several ineffectual presidents until Sidney Kent was named President of the Fox Film Corporation in May 1932.Kent was head of Fox when, in May 1935, the company merged with Twentieth Century Pictures, a production company that had been established in 1933 by Darryl F. Zanuck and Joseph M. Schenck. (207) The companies merged because Fox had theaters, thousands of employees, and studio facilities, and Twentieth Century Pictures had Zanuck, who had experience running a production department. Before the merger, Fox's production system had been unprofitable. After the merger, it was agreed that Kent would remain as president, Zanuck would be made vice-president in charge of production, and Schenck would serve as chairman of the board.Solomon has written the most comprehensive and objective history of William Fox and the Fox Film Corporation, from its founding through the merger with Twentieth Century Pictures. Prior to the publication of this book, titles that had been written about William Fox include Upton Sinclair Presents William Fox (1933), Glendon Allvine's The Greatest Fox of Them All (1969), and William Fox: A Story of Early Hollywood, 1915-1930 (2006) which was coauthored by great-granddaughter Susan Fox and Donald G. …

New York, New York: A Financial History of Two Baseball Teams

In 2012, the New York Mets turned fifty. In March of that year, Forbes magazine published their annual valuations of Major League Baseball (MLB) franchises. They estimated the New York Mets to be worth $719 million and the Yankees $1.85 billion. The value of the Yankees franchise is second only to that of the Dallas Cowboys ($2.1 billion) among North American team sports franchises. (1) In 2011, the Yankees, boasting a roster studded with All-Stars earning a collective $210 million, won the American League Eastern Division title with a record of 97-65. The Mets, meanwhile, finished in fourth place, twenty-five games behind the Phillies. The billion-dollar difference in franchise value between the teams is the greatest it has ever been in the fifty-year existence of the Mets. This is a story about the value of these two franchises. How do they compare over time, and why do they differ by so much? Why do two teams, both located in the biggest baseball market in the country, seem to have experienced such different fates? THE METS AND YANKEES IN NEW YORK On April 11, 1962, the New York Mets made their inauspicious debut, losing to the St. Louis Cardinals, 11-4. Twelve days later, after an 0-9 start, they earned their first victory. Meanwhile, across town the defending World Series champion Yankees opened the season with a victory. The Mets went on to one of the worst seasons in MLB history in 1962, while the Yankees went on to win another World Series title. (2) The history of the New York Mets really begins with the departure of the Giants and Dodgers after the 1957 season. The void left by the transfer of these two NL squads to California begged to be filled. In fact, it was almost filled by another league altogether--the Continental League. The Mets and the Houston Astros were expansion franchises awarded in an effort to thwart the realization of that league. The early Mets were a reflection of the crosstown Yankees, in no small part due to the hiring of disgruntled former Yankee general manager George Weiss as club president. Weiss's hiring was a result of the reluctance of principal owner Joan Payson to meet the demands of first choice Branch Rickey. Ironically, Rickey was the mastermind behind the Continental League that spawned the Mets. Other Yankee personnel to join the Mets included Johnny Murphy, Gil McDougald, Whitey Herzog, and the coup de grace, manager Casey Stengel, the man who came to personify the early Mets. (3) As an expansion franchise, the Mets were certain not to challenge the defending National League champion Cincinnati Reds, so they had to attract fans in some other way. The hiring of the eccentric Stengel was one such move. The Mets stocked their early roster with recognizable names as another way to draw fans to the park. They had aging stars Gil Hodges, Richie Ashburn, Gus Bell, and Gene Woodling, as well as former Brooklyn favorites Charlie Neal, Don Zimmer, Roger Craig, and Clem Labine. Unfortunately, they had to play their first two seasons in the crumbling Polo Grounds, until Shea Stadium could be completed in time for the 1964 season. The 1962 Mets are legendary for their incompetence. They set an MLB record for losses, with a 40-120 record, and en route endured performances from legendary players such as Rod Kanehl, who could play every position but none of them well, and catcher Choo Choo Coleman, whose main skill was chasing passed balls. Shortstop Elio Chacon's lack of English extended to I've got it, resulting in frequent collisions with other players. And then there was Mary Throneberry, the first baseman whose fielding and base-running faux pas became the most enduring emblem of the early Mets. (4) The Mets lost more than one hundred games in five of their first six seasons. Despite this level of futility, however, attendance at Mets games rose dramatically beginning in 1964, when they abandoned the Polo Grounds and started playing at Shea Stadium. …

Graham and Dodd: A Perspective on Its Past, Present, and Possible Future

Value investing generates a great deal of attention from the practitioner community; however, no one has formally categorized the development of this influential school of thought over time. The consequences of this extend beyond the obvious losses to financial history, to a lack of perspective on what the school’s future developments could entail. Those developments could be significant to the investment community given the level of success many value investors have achieved in both traditional and alternative forms of investment. To facilitate inquiry in this area, this article categorizes historical and modern eras of value investing and presents thoughts on what a post-modern era could hold. Two potential developments are discussed: The first extends value investing concepts to corporate management, which could result in a level of financial asset allocation expertise not frequently demonstrated by corporate managers. The second potential development involves integrating insights derived from bottom-up fundamental analysis with those of complexity theory to inform margin-of-safety analysis. <b>TOPICS:</b>Fundamental equity analysis, legal and regulatory issues for structured finance, legal/regulatory/public policy

BUSINESS CYCLES AND FINANCIAL CRISES: THE ROLES OF CREDIT SUPPLY AND DEMAND SHOCKS

This paper explores the hypothesis that the sources of economic and financial crises differ from those of noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and noncrisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.