Finance, Intermediaries, and Economic Development (review)

Anyone who ventures to work on the internationalization of capital or financial services since the nineteenth century will at some point have to draw upon the scholarship and meticulous data compilations of Lance Davis. As the short biographical postscript to this volume makes clear, however, Davis's contributions to economic, business, and financial history range far more widely than this. This collection of ten essays derives from a conference held in 1998 at Caltech to honor Davis. It marks a fitting tribute to his achievements.

Tying together the volume is the question, what have financial and other intermediaries contributed to the growth of economies in the past? As several essays demonstrate, different types of intermediation in different institutional circumstances may not only reduce the costs of exchange, but they can also raise the level of social capital, increase the pace of technological change, or improve the efficiency of labor and other resource allocations. Legal and political institutions are important in determining these effects, first, because they help shape the structure of intermediaries and, second, because governments themselves are major consumers of financial resources.

Six chapters examine financial intermediaries. Larry Neal and Stephen Quinn demonstrate the durability of credit networks and the efficiency of international bill arbitrage in late seventeenth-century London, based on mercantile information flows and reputational monitoring via bankers' agents overseas. Eugene White examines the operation of the highly regulated Paris bourse from 1724 to the end of the Napoleonic wars. His calculations of bid-ask spreads reveal varying degrees of liquidity over time, which were in turn the product of market rules, general financial conditions, and changing levels of political stability. Philip Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal explain the failure of notaries in early nineteenth-century Paris to survive competition from banks, largely through the differentiation of clientele and the rise of demand for deposit banking. The latter drove some notaries to enter this risky business, funding long-term loans with short-term liabilities, and bankruptcies tended to recur in the same businesses. Angela Redish measures the extent and structure of mortgage debt in Upper Canada during the first half of the nineteenth century. Mortgages were as important as bank loans, but while banks moved funds within the commercial elite, most mortgagors were small farmers and artisans who borrowed for a variety of purposes. John Legler and Richard Sylla find that rates of return for securities traded in New Orleans and New York before 1914 were higher but less volatile in the former, and they suggest that capital markets may have been more integrated before the Civil War than after, though the explanation for this is not fully explored. Kenneth Snowden contributes a substantial study of the U.S. savings and loan movement from the 1890s to 1940. The Depression brought the rapid demise of the traditional share installment plans of the local mutual building and loans associations. Their replacement with lower risk "direct reduction" plans marked the rise of the new savings and loans industry under federal legislation, a transition which accompanied and was conditioned by regional shifts in house building.

The remaining four chapters are more of a miscellany, though some deal directly with other forms of intermediation. Naomi Lamoreaux and Kenneth Sokoloff explore the positive role played by patent agents in the American market for technology during the half century to 1920. Indicators of rising efficiency include the declining number of secondary assignments of patents, the increasing speed with which patents were sold, the increasing importance of registered agents who handled national rather than geographically restricted contracts, and the increasing use by specialized patentees of specialized, registered agents. Dianne Newell studies the way Chinese contractors on Canada's Pacific coast used networks to create for themselves a multiethnic niche in the salmon-canning and salt herring industries, the latter dominated by Japanese producers. Robert Allen discusses the evidence for and against the thesis...