Financial Innovation, Regulation and Crises in History ed. by Piet Clement, Harold James, and Herman Van der Wee (review)

This volume arose from a conference organized by the European Association for Banking and Financial History (EABH) in 2010. It consists of two kinds of essays. First is a group of articles written by mostly younger European financial historians, some of whom were in the process of turning dissertations into books at the time the conference took place. Some of these essays are excellent, although the topics are disparate and they scarcely address a set of overarching themes. Second is a section reflecting on the great financial crisis of 2007–2009. This section includes essays by two leading public officials: Adair Turner, chairman of the Financial Services Authority in Britain from September 2008 to March 2013, and William R. White, economic adviser to the Bank for International Settlements (BIS) from 1995 to 2008. It also includes an essay by Niall Ferguson, the Harvard historian and prominent conservative public intellectual. This section of the book is uneven in quality.

Among the first set of essays, three stand out. Lodewijk Petram describes the birth of financial regulation in Holland in the decades following the founding of the Dutch East India Company (VOC) in 1602. An active secondary market soon developed in the company’s shares. An active market presupposed confidence in contract enforcement. In search of the legal underpinnings of this market, Petram searched the archives of the Court of Holland, in The Hague. For 1610–1630 he found 30 lawsuits dealing with share trading, about 1 percent of the cases the court considered in this period. After 1640, the rate declined to about one in every 500 lawsuits; Petram infers that this is because by that time the court had essentially pronounced judgment on all pertinent issues concerning the share trading, creating a legal regime. This promoted the growth of the market. However, there was a ban in short selling in 1610, and traders knew that the courts would not enforce contracts of this nature. Petram argues that they developed private enforcement mechanisms as a substitute. The main mechanism was the creation of trading clubs, where reputations could be ruined by reneging on contracts. In these clubs Dutch Protestants built relationships of trust with Portuguese Jews, which carried over into other financial dealings. Petram sees the two processes as related: Merchants allowed the courts to establish a legal regime in the areas where the courts were willing to intervene, and then developed their own private enforcement mechanisms to supplement them.

Tobias Straumann is co-author of a recent history of the reinsurance giant Swiss Re. In his essay, he asks how Swiss Re survived the Great Depression without missing or even diminishing a dividend payment or experiencing a major decline in the market price of its shares. He points out that the company was less fortunate in the recent recession; in 2008 it reported its first loss in 140 years. It had to find to new capital, and turned to Warren Buffett, a major competitor. In February and May 2009, the chief executive and the chairman of the board of directors, respectively, resigned. Was the firm more skillfully managed during the 1930s? Straumann has determined that this was not at all the case. Swiss Re was buffeted by the great macroeconomic shocks of that era. According to Straumann, the company staved off bankruptcy and maintained its traditional dividend payments only because of its enormous hidden reserves. Management also used these reserves to support the company’s share price on the stock market. By May 1934, Swiss Re had run out of hidden reserves, but it staved off ruin by merging with its subsidiary Prudentia, permitting it to draw on the hidden reserves of that company. We have long known that hidden reserves were substantial and important for central European financial institutions in the late nineteenth and early twentieth centuries, and...