Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

HIERARCHICAL METAPHORSBanking and the law: an illustrationA quick overview of the relationship between the growth offinancial intermediaries and the evolution of the relevant portions ofthe law can illustrate the complex and varied relationships amonginstitutions and the difficulties of viewing them as hierarchical. Theevolution of banking provides some excellent examples ofcomplementarity and specificity and the flexibility/coherencebalance. 14It is generally argued that what we now understand as financialintermediaries probably grew out of earlier institutions that weresimply warehouses for storing precious metals. Traders who did notwish to undertake the risk of holding large stocks of gold could storethem for safekeeping with goldsmiths or others who offered securityfor a fee. At first, transferring these gold ‘balances’ was cumbersomeas the law often required the presence of both parties to the transferand perhaps their legal representatives in order to execute theexchange of gold. At this point, the proto-banks were acting withinthe given legal order and using the accepted processes of transfer.However, entrepreneurial gold storers realised that transferscould be made more easy by issuing receipts to gold in storage andallowing traders to simply exchange those receipts (viaendorsement) rather than by actually meeting at the storage facilityand signing the relevant paperwork. The issue facing this innovationwas how the legal order would interpret those receipts and the use ofsignature endorsements to transfer them. This uncertainty reflects amissing complementarity between two institutions. In most cases,the law recognised the receipts as contractual obligations andendorsement as an acceptable transfer process.This issue also illustrates a limit of hierarchical metaphors. To theextent that the popularity of this banking innovation put pressureon the legal system to decide on their status, it reflects the degree towhich legal institutions were ‘internal’ to financial institutions andpractices. However, once such a decision was made, banks couldtreat the legal status of such receipts as given and move to innovatefurther, thus treating the legal order as ‘external’. The metaphor ofcomplementarity seems much more appropriate here.One of the next major steps in the evolution of banking was themove to fractional reserve banking. Once again, entrepreneurialwarehousers realised they could profit by lending out depositedspecie at interest to the extent that depositors had no direct use forit. The transferring of receipts had diminished the actual amount of155