Current Scholarship
State Building for a Free Market: The Great Depression and the Rise of Monetary Orthodoxy

Author: David M. P. Freund

The U.S. government transformed American finance between 1913 and 1935 by assuming extraordinary new powers over the banking sector and the money supply. And the government’s actions were reliably controversial. Beginning soon after the Federal Reserve began operations and lasting through the reforms that restructured the institution during the New Deal, critics warned that federal overreach in financial markets posed an existential threat to the free-enterprise system.

Current Scholarship
Money and modernization in early modern England

Author: Nuno Palma

Classic accounts of the English industrial revolution present a long period of stagnation followed by a fast take-off. However, recent findings of slow but steady per capita economic growth suggest that this is a historically inaccurate portrait of early modern England. This growth pattern was in part driven by specialization and structural change accompanied by an increase in market participation at both the intensive and extensive levels. These, I argue, were supported by the gradual increase in money supply made possible by the importation of precious metals from America. They enabled a substantial increase in the monetization and liquidity levels of the economy, hence decreasing transaction costs, increasing market thickness, changing the relative incentive for participating in the market and allowing agglomeration economies to arise. By making trade with Asia possible, precious metals also induced demand for new desirable goods, which in turn encouraged market participation. Finally, the increased monetization and market participation made tax collection easier. This helped the government to build up fiscal capacity and as a consequence to provide for public goods. The structural change and increased market participation that ensued paved the way for modernization.

Current Scholarship
Are Bank Fiduciaries Special?

Author: Robert Hockett

A growing body of post-crisis legal and economic literature suggests that future financial crises might be averted by tinkering with the internal governance structures of banks and other financial institutions. In particular, contributors to this literature propose tightening the fiduciary duties under which officers and directors of the relevant financial institutions labor. I argue in this symposium article that such proposals are doomed to failure under all circumstances save one - namely, that under which the relevant financial institutions are in whole or in part treated as publicly owned. The argument proceeds in two parts. I first show that the financial dysfunctions that culminate in financial crises are not primarily the products of defects in individual rationality or morality, ubiquitous as such defects of course always are. Rather, I argue, fragility in the financial markets stems from what I elsewhere dub recursive collective action problems, pursuant to which multiple acts of individual rationality aggregate into instances of collective calamity. This form of vulnerability is endemic to banking and financial markets. I next show that the best understanding of fiduciary obligation is that pursuant to which she who is subject to the obligation minimizes the 'space,' or separateness, that subsists between her and the beneficiary of her obligation.

Current Scholarship
John Law’s Capitalist Violence

Author: Joan DeJean

The year 2019 marks a milestone in the history of finance and of capitalism: the three hundredth anniversary of John Law's spectacular take-over of France's economy. Between December 1718 and December 1719, Law established the first national bank in French history, the Banque Royale or Royal Bank, as well as Paris' original stock exchange, on the rue Quincampoix. At the same time, Philippe d'Orléans, the Regent governing France during Louis XV's minority, fused several older trading companies in order to create a giant conglomerate known as the Indies Company that enjoyed an absolute monopoly over the country's overseas trade. The Regent gave Law control first over the newly powerful Indies Company, then over the Royal Mint, and in the end over the regulation of all government finance and expenditure. Finally, also in 1719, Law introduced the French to two financial instruments with which they had had no prior experience: paper money and publicly traded stock in the form of shares in the new Indies Company. One man controlled the most important economy in Europe.

Current Scholarship
Money and the ‘Level Playing Field’: The Epistemic Problem of European Financial Market Integration

Author: Troels Krarup

Financial market integration processes in the European Union (EU) are characterised by an epistemic problem of economic theory. This problem encompasses what ‘the market’ is, how it is to be ‘integrated’, and the nature and role of ‘money’ as infrastructure of the fully integrated market. The EU’s legal framework has imported this epistemic problem along with the competitive conception of the market as described in economic theory – as a ‘level playing field’ for private exchange, under free, fair and ideally unrestrained competition. It manifests itself in European financial market integration processes, as exemplified in the article, via two otherwise disconnected areas of European Central Bank (ECB) activity: (a) the provision of central bank credit for the purpose of financial transaction settlement in the Eurozone; and (b) the conduct of ordinary monetary policy in the Eurozone. While the problem can be stabilised through legal, technical and other means, it remains latent, and may manifest itself again in unexpected ways, as happened in the wake of the 2008 financial crisis. Thus, contrary to ideologies that are widely understood as more or less coherent systems of doctrines, epistemic problems are characterised by specific tensions, contradictions and conceptual uncertainties.

Current Scholarship
The (impossible) repo trinity: the political economy of repo markets

Author: Daniela Gabor
In its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stability with liquid government bond markets and free repo markets. It further reinforced the dominance of the US government bond market as institutional template for states adjusting to a world of independent central banks, market-based financing and global competition for liquidity. Central banks and the Financial Stability Board recognized the impossible nature of the trinity after 2008, attributing cyclical leverage (financial instability) and elusive liquidity in collateral markets to deregulated repo markets, markets systemic to shadow banking. The new approach triggered radical changes in crisis central banking but has not powered significant regulatory interventions in the absence of an alternative mode of organizing government bond markets.

Daniela Gabor (2016) The (impossible) repo trinity: the political economy of repo markets, Review of International Political Economy, 23:6, 967-1000

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Current Scholarship
Border Crossing

Author: Marc Flandreau
A NEW ECONOMIC HISTORY is emerging. It needs a new journal. Capitalism: A Journal of History and Economics finds its roots in the resurgence of interest for the economic past that has been a characteristic feature of recent years, accelerating after the outbreak of the global financial crisis in 2008. The crisis, and the recession that ensued, brought to the forefront the centrality of the capitalist economy as a powerful historical factor. Popular and intellectual perceptions of the instability of the capitalist economy and of the inherent inequality which it may breed, not to mention the corollary of political and social problems that accompanied the subprime crisis, reopened old and important debates. Entrenched assumptions pertaining to the efficiency of the capitalist system came under scrutiny. This perception transcends the value judgment on the system under discussion and, transcending as well political cleavages, history has been called to make sense of the times. At the onset of the crisis, the “precedent” of the interwar economic crisis became the template against which new events were read, and central banks were asked to make sure there would be no repetition of the interwar disasters. The conversation is far from over and it has already succeeded in inspiring the formation of a new school of thought in American history, known as the “New History of Capitalism.”

Flandreau, Marc. “Border Crossing.” Capitalism: A Journal of History and Economics, vol. 1 no. 1, 2019, p. 1-9. Project MUSEdoi:10.1353/cap.2019.0004.

Current Scholarship
Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure

Author: Saule T. Omarova
This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms’ internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market-on a macro- rather than micro- level-would profoundly, and far more effectively, alter individuals’ and firms’ normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound – and to do so on a systemic level.

Saule T. Omarova. “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure” (2018) p. 797 – 839
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Current Scholarship
Between the ‘Bank Screw’ and ‘Affording Assistance’: Rules, Standards and the Bank Charter Act of 1844

Author: Iain Frame
This article explores a dilemma at the centre of the monetary order: how to counter inflation eroding the value of money and simultaneously allow bank‐created credit to meet the needs of an expanding economy. Building on recent scholarship on the history of money, the article analyses the Bank Charter Act of 1844 and the financial crisis of 1847 to reveal a response to this dilemma which continues to shape the modern context. That response relies on ex ante restrictive measures in a bid to limit the discretion of the monetary authorities and cultivate financially prudent behaviour. Yet the history of the mid‐nineteenth century exposes the challenges faced by those who enforce such rules, challenges which tie the mid‐nineteenth century to the post 2008 reforms in both the US and the Eurozone, and reveal the ongoing force of the dilemma: that simultaneous desire for both expansive credit and sound money.

Iain Frame, Between the ‘Bank Screw’ and ‘Affording Assistance’. Rules, Standards, and the Bank Charter Act of 1844, The Modern Law Review,