Why did modern banking and credit systems emerge in some countries before others? Abhishek Chatterjee's concise book, an extension of his dissertation, marks an innovative contribution to addressing this question, building on Douglass North and Barry Weingast's theory of “credible commitments.” As per that theory, the development of modern public and private credit systems in seventeenth-century England took place along with the establishment of parliamentary supremacy and judicial independence that constrained unilateral executive action and enhanced the credibility of financial commitments. Chatterjee seeks to probe this relationship further and argues that what matters ultimately is the balance of power between the rulers and capital in making policy choices on financial development.
The extant literature had noted that in seventeenth-century England, the rulers or parliamentarians were often investors, facilitating credible commitments in securing government debt. Chatterjee's contribution is to study this phenomenon in the context of two erstwhile British colonies—the United States and India—between the late eighteenth and early nineteenth centuries. In colonial India, public finance revolved around land taxes and a strong relationship was cemented between the rulers and landholders, bypassing native financiers. Despite suggestions by an economic advisor to engage with local financiers to gain control over local money supply, the colonial state acted otherwise. Its superior bargaining power supported by military might perpetuated the financial links between London and Calcutta, retarding the possibility of wide-ranging financial development within India. That is, easy access to land revenues and foreign borrowing limited the need to develop local financial institutions that potentially empowered native or domestic capital. In the case of the United States, the situation was similar to India in the prerevolutionary era, but after the declaration of independence, the terms between rulers and capital or merchants changed. Due to the infeasibility of exacting large land revenues or borrowings from abroad, the state had to engage with merchants to form a system of public credit and, along with it, private credit.
These arguments are supported by an assortment of secondary sources in eloquent prose and are certainly thought-provoking if not always convincing. For instance, an alternative narrative that the book does not delve into is the difference in legal institutions between the United States and India and the importance of that difference for financial development. The much earlier adoption of corporate law in the United States could, for instance, partly explain the earlier adoption of the private banking system, outside the ruler-merchant interface that the book focuses on.
An additional chapter in the book uses the theoretical framework of bargaining power between rulers and capital to explain the development of banking in the United States between 1790 and 1836. In particular, it deals with the proliferation of banks, the limited incursion of the federal government in banking regulation, and the factors behind the rise and fall of two large banks. While the arguments are persuasive for the United States, one wonders why India has been left out of the analysis, especially when it experienced similar events at the end of the nineteenth century, under the tight grip of the colonial state with arguably little change in the relationship between rulers and capital. Despite differing ruler-capital relationships, it is interesting to note that both India and the United States formed their central banks only in the early twentieth century.
The book could also have benefited by engaging with the literature on agency or the ability of specific individuals to shape financial policy. Richard Sylla has drawn attention to the role of financial leadership in explaining the financial revolutions of the United States and Japan (“Financial Systems and Economic Modernization,” Journal of Economic History [2002]). Indeed, it would be hard to explain the rise of Japan's financial system in the late nineteenth century using Chatterjee's framework. Similarly, Thomas McCraw outlined the critical importance of a few European immigrants in shaping American financial policy in the late eighteenth century (The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy [2012]).
A comparative study of the United States and India in historical perspective is fairly unique, and within this genre, a study on financial history extremely rare, though not entirely without precedent. More than three decades ago, Raymond Goldsmith set the ball rolling with a study—curiously, not cited by Chatterjee—based on painstakingly collected historical statistics going back to the middle of the nineteenth century (The Financial Development of India, Japan, and the United States [1983]). Goldsmith observed how the financial systems of Japan and the United States had pulled substantially ahead of India in the century after 1850. Chatterjee's creative scholarship will now inform the debate on this divergence between India and the United States and will hopefully stimulate more interest in comparative studies on financial development across more regions of the world. That would ultimately test the validity of this book's theoretical propositions.
