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Banking Regulation in a Federal System: Lessons from American and German Banking History

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Banking Regulation in a Federal System: Lessons from American and German Banking History The London School of Economics and Political Science Doctoral Thesis Banking Regulation in a Federal System: Lessons from American and German Banking History Niels Frederik Krieghoff A thesis submitted to the Department of Economic History of the The London School of Economics and Political Science for the degree of Doctor of Philosophy Submitted: 23rd of April, 2013 [This version includes minor amendments added in July/August 2013] Declaration of Authorship I, Niels Frederik Krieghoff, certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others. The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgment is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 99,996 words. i ii Abstract This dissertation contrasts the development of the regulatory structure of the American and German banking systems until the mid-20th century. It explains why the countries' regulatory structures diverged into diametrically opposite directions, even though both countries had federal political systems and regularly observed the developments in the other country. Furthermore, after the Second World War, the American military govern- ment was even able to mold the German banking system into an idealized version of the American one. The thesis also provides an explanation why this assimilation attempt ulti- mately failed, and why there was a strong institutional persistency between Nazi Germany and West Germany instead. The original contributions to knowledge are the following: (1) This thesis offers a novel per- spective on the evolution of the structure of American banking regulation by interpreting it as being largely driven by constitutional conflict (2) it shows that prior to the Banking Crisis of 1931 there was no intention to introduce a comprehensive regulatory structure for the banking sector in Germany (3) It provides a reassessment of the origins of the German Credit Act of 1961 as a non-deterministic process (4) It interprets German bank- ing regulation after the Second World War as a failed Institutional Assimilation, which provides evidence that the decentralized regulatory arrangement of the American banking system was held in place by strong states' rights. In the absence of strong states' rights such a system would not persist and, indeed, in Germany it did not (5) It re-interprets German post-war economic history as being driven by the need of the German federal gov- ernment to re-establish supremacy over economic matters. This assigns a new important role for Ludwig Erhard in German post-war competition history, as being an enabler of liberalization rather than being a liberalizing force himself. Keywords: Banking regulation, banking supervision, law and economics, political econ- omy, institutional assimilation, financial crises, financial stability, path dependency, diver- gence, Olson Hypothesis, Weimar Germany, Third Reich, Germany, United States JEL Classification: N20, G28, H77, P16 Acknowledgements My gratitude goes to those who have helped me through this project in both tangible and intangible ways, including the many seminar, workshop and conference participants, as well as my two examiners, Jeffrey Fear and Stefano Battilossi, who gave me invaluable feedback on my work. I especially thank my supervisor Albrecht Ritschl, who has guided me through this project with interest and enthusiasm, and whose intellectual breadth and curiosity is a source of inspiration second to none. Furthermore, I particularly thank Katharina G¨artner,Eric Golson, Monia Man^aa,Sil- vio Petriconi, Natacha Postel-Vinay and Peter Sims for providing me with constructive criticism on parts of this thesis and for their support throughout the PhD process. This thesis grew out of an interdisciplinary research project on German regulatory history (Gestaltung der Freiheit - Regulierung von Wirtschaft zwischen historischer Pr¨agungund Normierung) that was funded by the German Federal Ministry of Education and Research (funding code: 01UB0927) in the time period from 2009{2012. I hope that the reader finds that the investment in this project and me was public money well spent. iii Contents Declaration of Authorshipi Abstract ii Acknowledgements iii Contents iv List of Figures vii List of Tables ix Abbreviationsx 1 Introduction1 1.1 Motivation....................................1 1.2 Theoretical background.............................6 1.3 Research Agenda.................................9 1.4 Methodology & Sources............................. 11 1.5 Structure & Outline............................... 12 2 Americans wanted it. Germans got it. 17 2.1 Introduction.................................... 17 2.2 The United States................................ 22 2.2.1 Early banking regulation (pre-1860).................. 22 iv Contents v 2.2.2 Introduction of the National Banking System (1860-1905)...... 26 2.2.3 Introduction of the Federal Reserve System (1906-1917)....... 35 2.2.4 The regulatory discussion in the 1920s (1918{1929).......... 40 2.2.5 The Glass-Steagall reforms (1930-1935)................ 44 2.3 Germany..................................... 55 2.3.1 Pre nation-state banking regulations (1815-1870)........... 55 2.3.2 Uninhibited growth (1871-1905).................... 57 2.3.3 The first Banking Enqu^ete(1906-1917)................ 65 2.3.4 Corporatist Regulation (1918-1930)................... 71 2.3.5 Compelled to regulate (1931-1932)................... 81 2.3.6 Enter Hjalmar Schacht (1933{1934).................. 89 2.4 Conclusion.................................... 97 3 The long (re-)birth of the German Credit Act of 1961 106 3.1 Introduction.................................... 106 3.2 The regulatory framework prior to 1945.................... 107 3.3 Allied regulatory changes (1945-1948)..................... 109 3.4 First drafts (1948-1953)............................. 113 3.5 Internal Disagreements within the Economics Ministry (1954-1956)..... 119 3.6 A failed centralization attempt (1957)..................... 124 3.7 Labor and (re-)birth (1958-1961)........................ 128 3.8 Conclusion.................................... 138 4 A failed Institutional Assimilation 143 4.1 Introduction.................................... 143 4.2 German and American banking regulation prior to the Second World War. 145 4.3 The Allied reform plans............................. 150 4.3.1 American economic policy towards post-war Germany........ 152 4.3.2 The Dodge plan for the German banking system........... 155 4.3.3 Discussions amongst all four Allies................... 158 4.3.4 Soviet bank reform in East-Germany.................. 159 Contents vi 4.4 The Institutional Assimilation in West-Germany (1945-1949)........ 160 4.4.1 Decentralization of the regulatory institutions............. 161 4.4.2 Branching restrictions and decentralization of banks......... 162 4.4.3 A federal central bank and a new currency.............. 167 4.4.4 Only partial resistance to the assimilation............... 171 4.5 In reverse gear (1949{1961)........................... 174 4.5.1 A new constitution............................ 174 4.5.2 HICOG replaces OMGUS........................ 176 4.5.3 Removal of branching restrictions: Großbanken again......... 178 4.5.4 From Bank deutscher L¨anderto Bundesbank............. 185 4.5.5 The (re-)birth of the Credit Act of 1961................ 191 4.6 Conclusion.................................... 194 5 Epilogue 200 6 Conclusion & Discussion 207 6.1 Conclusion.................................... 207 6.2 Future Research................................. 215 6.3 Lessons for today................................. 217 Bibliography 220 Archival Sources 267 List of Figures 2.1 The number of incorporated banks and bank branches in the United States (1783{1861).................................... 26 2.2 Schematic overview of the regulatory arrangement in the United States (1863{1912).................................... 31 2.3 The evolution of the national and state banking systems compared by the number of banks, and by the amount of assets held.............. 34 2.4 Schematic overview of the regulatory arrangement in the United States (1917{1932).................................... 40 2.5 The evolution of the banking system in the United States (1863{1931)... 42 2.6 Federal Reserve membership rates (1914{1941)................ 44 2.7 Schematic overview of the regulatory arrangement in the United States in 1938........................................ 53 2.8 The principal regulatory responsibilities for commercial banks in the United States in 1938................................... 54 2.9 Schematic overview of the regulatory arrangement of the German banking sector (1900{1930)................................ 63 2.10 The key developments in the German banking sector between 1913 and 1929 77 2.11 Evolution of the German banking Sector from 1900 until 1931........ 82 2.12 The German banking sector and its regulatory arrangement by balance sheet size in 1930................................. 83 2.13 The key developments in the German banking sector in 1930{1938..... 90 2.14 Schematic overview of the German regulatory structure as introduced by the Credit Act of 1934.............................
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