Financial systems and development

over. Even so, bankers and industrialists (foundry cepted deposits, made long-term loans, issued and
owners, brewers, textile manufacturers, and so on) underwrote corporate securities, and took equity
developed close relationships, mainly through positions in industry. Universal banking first apcross
partnerships.
peared in Belgium and France, but it was more
successful in Germany and Switzerland, where its
The impact of large-scale industrialization
introduction coincided with the expansion of technologically
advanced industries. In these coun-
Financial development accelerated with the expan- tries, the leading commercial banks developed
sion of the railways and, especially, with the ad- close links with industry and played a crucial role
vent of large-scale industrialization in the second in raising long-term industrial finance and promothalf
of the nineteenth century. Advances in me- ing industrial concentration and efficiency.
chanical and electrical engineering and the increas- In Japan, major legal and regulatory reforms
ing scale of production of electricity and chemicals were implemented after the Meiji Restoration in
meant that industrial enterprises needed more 1868. The aim was to modernize Japan's economy
capital. This required a big change in industrial and promote industrialization. Traditional trading
finance.
houses, such as Mitsui and Sumitomo, were able
The possibility of incorporating joint-stock com- to develop into large banks alongside newly estabpanies
with limited liability made it easier for en- lished banking groups. The emergence of zaibatsu
terprises to attract the capital they needed to grow. groups-family-based conglomerates with wide-
Stock exchanges evolved to facilitate the issue and ranging interests in industry, commerce, banking,
trading of debentures and shares. Banks and in- and finance-speeded economic development. Inisurance
companies expanded their operations. tially, leading banks within zaibatsu groups pro-
Several new types of institution were formed, in- vided long-term finance to their partner entercluding
occupational pension funds and invest- prises and only short-term credit to others. Later
ment companies, although these were small to be- on, as the zaibatsu firms became more selfgin
with. Savings banks, credit cooperatives, and sufficient financially, their banks provided longfarmer
banks, mortgage banks, building societies, term finance to other enterprises and in effect beand
savings and loan associations began to meet came universal banks like those in Germany.
the financial needs of farmers, traders, savers, and In Britain, the preference of the big joint-stock
homeowners, all of whom had been neglected by banks for short-term self-liquidating investments
the commercial banks. Most of the financial insti- limited their provision of long-term finance for intutions
that we are familiar with today appeared dustry. A relatively high concentration of private
before the end of the past century.
wealth fueled equity and bond finance, initially
Different institutional structures and financial through informal channels but later through orgapractices
emerged among the industrializing coun- nized securities markets. But weaknesses in the
tries. These have had a pervasive impact on the British securities markets (and especially the use of
functioning of financial systems and have given misleading prospectuses by undercapitalized and
rise to a persistent debate about the role of finan- often unscrupulous company promoters) undercial
systems in promoting industrialization and mined investors' confidence in new industries
economic development. But except in the United such as electricity and chemicals. This delayed
States, where chartering provisions prohibited in- large-scale industrialization. Traditional industries
terstate banking and prevented the emergence of that could finance their investment from internal
nationwide banking, governments' involvement funds continued to prosper, however.
in shaping the organization of financial systems As noted above, chartering restrictions prewas
limited to changing the legal framework to vented commercial banks from developing into naallow
the creation of joint-stock banks and nonfi- tionwide institutions in the United States. As a
nancial corporations and enacting subsequent reg- result, the New York Stock Exchange became a
ulatory changes to govern the operations of large substantial source of finance for industry. The recorporations
(see Chapter 6).
payment of the federal debt after the American
In Germany, several other continental European Civil War and the accumulation of bank balances
countries, and Japan, the banking sector became and trust funds in New York increased the supply
an important source of finance for industry. Banks of investment funds. Private banks, which were
operated as "universal" banks, engaging in both allowed to operate as universal banks, maintained
commercial and investment banking: they ac- considerable influence well into the twentieth cen-
44