Capital Market Internationalization 11 term debt issued by these same governments.The volume of a short-term govern- ment paper depended a lot,in the end,on the popularity of its equivalent long-term debt,since the usual way of repaying the short-term debt was to consolidate it into long-term debt.The more savers would purchase bonds issued by foreign govern- ments,the more bankers would consent advances to foreign governments.Short- term government debt was usually safer than its long-term equivalent,since no trea- sury,even if compelled to default on its long-term debt,could afford to default on its short-term debt,lest it be forced to immediate shutdown. By taking a part in long-term foreign government investment,joint-stock banks thereby gained access in proportional amount to a supply of short-term government debt,which,unlike the market for acceptances,could not be monopolized by Lon- don.It could not be monopolized by The City because of the implicit links just mentioned between long and short government debt imposed by bankers,and be- cause long-term debt,unlike short-term debt,exhibited fewer scale economies.Lon- don bankers largely financed world short-term transactions by the positive current accounts held by traders in London,with the result that any increase in world trade spontaneously yielded an equivalent increase in bank resources.Long-term lending, in contrast,was financed by savings,making the size of domestic savings accumu- lated in any specific country a constraint on how much the banks in that country could lend. The reasoning applies to both creditor and debtor countries.Loans were floated by international syndicates of bankers,including banks from both debtor and creditor countries.The bonds would be issued both in the lending and the borrowing country. Moreover,there was a tendency over time for government bonds and good railway securities issued in Berlin,Paris,or London to return to domestic investors,who held them as chief long-term saving instruments,earning interests in marks,francs,or sterling.As a result,English,French,German,Dutch,Belgian,and Danish govern- ment securities were entirely held at home by the mid-1870s;Austrian and Hungar- ian investors owned two-thirds of their own state debt;U.S.government securities were almost entirely taken and held at home.43 In sum,the gold standard supplied financial centers with a high volume of instru- ments,more liquid,yet no less rewarding,than domestic instruments.Although in- vestors in foreign securities faced an additional currency risk,the function of the gold standard was to nullify that risk. The Redistributional Challenge:Specialization,Centralization,and Interationalization of Capital Markets The two preceding sections together point to two sets of changes that would chal- lenge traditional ways of banking.On the domestic front,first,the deposits revolu- tion precipitated a demand for "shorter"assets.The decline of the bill of exchange, by deteriorating the liquidity of commercial banks,forced banks to abandon the 43.Platt1984.84.92.165.176
term debt issued by these same governments. The volume of a short-term govern- ment paper depended a lot, in the end, on the popularity of its equivalent long-term debt, since the usual way of repaying the short-term debt was to consolidate it into long-term debt. The more savers would purchase bonds issued by foreign govern- ments, the more bankers would consent advances to foreign governments. Shortterm government debt was usually safer than its long-term equivalent, since no treasury, even if compelled to default on its long-term debt, could afford to default on its short-term debt, lest it be forced to immediate shutdown. By taking a part in long-term foreign government investment, joint-stock banks thereby gained access in proportional amount to a supply of short-term government debt, which, unlike the market for acceptances, could not be monopolized by Lon- don. It could not be monopolized by The City because of the implicit links just mentioned between long and short government debt imposed by bankers, and be- cause long-term debt, unlike short-term debt, exhibited fewer scale economies. Lon- don bankers largely nanced world short-term transactions by the positive current accounts held by traders in London, with the result that any increase in world trade spontaneously yielded an equivalent increase in bank resources. Long-term lending, in contrast, was nanced by savings, making the size of domestic savings accumulated in any speci c country a constraint on how much the banks in that country could lend. The reasoning applies to both creditor and debtor countries. Loans were oated by international syndicates of bankers, including banks from both debtor and creditor countries. The bonds would be issued both in the lending and the borrowing country. Moreover, there was a tendency over time for government bonds and good railway securities issued in Berlin, Paris, or London to return to domestic investors, who held them as chief long-term saving instruments, earning interests in marks, francs, or sterling. As a result, English, French, German, Dutch, Belgian, and Danish govern- ment securities were entirely held at home by the mid-1870s; Austrian and Hungarian investors owned two-thirds of their own state debt; U.S. government securities were almost entirely taken and held at home.43 In sum, the gold standard supplied nancial centers with a high volume of instru- ments, more liquid, yet no less rewarding, than domestic instruments. Although in- vestors in foreign securities faced an additional currency risk, the function of the gold standard was to nullify that risk. The Redistributional Challenge: Specialization, Centralization, and Internationalization of Capital Markets The two preceding sections together point to two sets of changes that would challenge traditional ways of banking. On the domestic front, rst, the deposits revolution precipitated a demand for ‘‘shorter’’ assets. The decline of the bill of exchange, by deteriorating the liquidity of commercial banks, forced banks to abandon the 43. Platt 1984, 84, 92, 165, 176. Capital Market Internationalization 11
12 International Organization intermediation of unsafe industrial paper and specialize instead into the intermedia- tion of shorter paper.On the international front,simultaneously,the gold standard enabled the expansion of a global market for short government paper with the poten- tial to supply new depositors'and banks'increasing demand for short assets. Although the need for clarity somewhat forced the argument into a causal,linear, and perhaps excessively deterministic mode,it is important to appreciate that the "push"exerted by the technological changes happening in mid-nineteenth-century banking structures was supplemented by the "pull"of internationalization.Market players do not ride structural changes blindly;they make them happen by anticipat- ing future payoffs and choosing profit-maximizing strategies through backward in- duction.Had the demand for short assets found no supply,savers and banks would have had to be content with existing long-term opportunities;deposits may not have grown as fast,nor may have banks found amalgamation a solution to illiquidity. This mutually reinforcing dynamic upset established ways of banking.Bank spe- cialization in short loans threatened the estrangement of bank and industry,the latter being left to its own means and to the security market for the provision of long-term capital.The same specialization also threatened a centralization of domestic capital markets through the concentration of banking around a handful of gigantic,tentacu- lar banks,draining local savings to the financial center and investing its proceeds into government and foreign securities.An increase in the trading of foreign assets threat- ened the internationalization of capital markets and a greater dependence on external events. Specialization,centralization,and internationalization of banking occurred in Brit- ain and France.We also know that many other countries experienced an evolution quite different from that of Britain and France.The fact is that there was more than the British or French ways of responding to this challenge,and that each country chose the way that best suited its institutional setting.To this differential response we will turn once we have identified the micro-wealth effects of late-nineteenth-century globalization. Potential Winners and Losers The challenge that we have so far identified-the specialization,centralization,and internationalization of banking-is "macro";yet politics,as we know,is mediated by individuals,who join producer groups-sector,class,or locale-to press their individual preferences on their respective governments.To be able to account for a government's response to the broad challenge thus identified,that challenge needs to be made relevant to individuals'welfare;the challenge must be disaggregated and its potential wealth effects mapped.44 The surge in capital flows across borders would have,within each nation,two intersecting distributional consequences:(1)between savers and borrowers,and(2) between the financial center and the peripheries.The first cleavage,in accordance 44.For pioneering work along these lines,see Gourevitch 1977
intermediation of unsafe industrial paper and specialize instead into the intermediation of shorter paper. On the international front, simultaneously, the gold standard enabled the expansion of a global market for short government paper with the potential to supply new depositors’ and banks’ increasing demand for short assets. Although the need for clarity somewhat forced the argument into a causal, linear, and perhaps excessively deterministic mode, it is important to appreciate that the ‘‘push’’ exerted by the technological changes happening in mid-nineteenth-century banking structures was supplemented by the ‘‘pull’’ of internationalization. Market players do not ride structural changes blindly; they make them happen by anticipating future payoffs and choosing pro t-maximizing strategies through backward in- duction. Had the demand for short assets found no supply, savers and banks would have had to be content with existing long-term opportunities; deposits may not have grown as fast, nor may have banks found amalgamation a solution to illiquidity. This mutually reinforcing dynamic upset established ways of banking. Bank spe- cialization in short loans threatened the estrangement of bank and industry, the latter being left to its own means and to the security market for the provision of long-term capital. The same specialization also threatened a centralization of domestic capital markets through the concentration of banking around a handful of gigantic, tentacular banks, draining local savings to the nancial center and investing its proceeds into government and foreign securities. An increase in the trading of foreign assets threat- ened the internationalization of capital markets and a greater dependence on external events. Specialization, centralization, and internationalization of banking occurred in Brit- ain and France. We also know that many other countries experienced an evolution quite different from that of Britain and France. The fact is that there was more than the British or French ways of responding to this challenge, and that each country chose the way that best suited its institutional setting. To this differential response we will turn once we have identi ed the micro-wealth effects of late-nineteenth-century globalization. Potential Winners and Losers The challenge that we have so far identi ed—the specialization, centralization, and internationalization of banking—is ‘‘macro’’; yet politics, as we know, is mediated by individuals, who join producer groups—sector, class, or locale—to press their individual preferences on their respective governments. To be able to account for a government’s response to the broad challenge thus identi ed, that challenge needs to be made relevant to individuals’ welfare; the challenge must be disaggregated and its potential wealth effects mapped.44 The surge in capital ows across borders would have, within each nation, two intersecting distributional consequences: (1) between savers and borrowers, and (2) between the nancial center and the peripheries. The rst cleavage, in accordance 44. For pioneering work along these lines, see Gourevitch 1977. 12 International Organization