B30.2392

Spring 2003

M 6-8:50

TUC 65

Prof. Richard Sylla

KMC 7-88, 998-0869

Office Hours: M 4-6 & by app't

email: rsylla@stern.nyu.edu

Course description: Study of the historical development of financial institutions and markets, primarily in a US context, but also in a comparative context. Covers monetary, banking, central banking, and securities market history, as well as pertinent aspects of the history of government finance. Topics include the emergence of modern financial systems in history, including the important roles of public finance and stable moneys, as well as banking, central banking, and securities and insurance markets; the composition, growth, fluctuations, and determinants of the money stock; the development of banking systems and their regulation; the emergence of central banking; monetary policies; major trends and fluctuations in stock, bond, and money markets; and recurring patterns in history’s financial crises.

Readings: For a course such as this there are no ideal texts, despite the richness of the literature in book and article form. As a compromise between ideal and real, I have chosen several books that are comprehensive in treatments of their subjects (and perhaps one or two are worth keeping on your shelf after the course is over).

The books we will use are:

(1) J.B. Baskin and P.J. Miranti, A History of Corporate Finance (Cambridge pbk, 1999). This book covers its subject from the Middle Ages and Renaissance to LBOs and 1990s corporate governance issues (with an appendix on ancient Greece and Rome for those with broad interests). It "confronts" some tenets modern finance theory (e.g., Modigliani-Miller on capital structure and dividend policy—‘dividends don’t matter’) with evidence from history (‘diviends mattered’).

(2) Robert E. Wright, The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850 (Cambridge, 2002). Just out, and perhaps the most detailed account of the US financial revolution at the start of this country’s history, which the author interprets in terms of modern economic and financial concepts.

(3) Edward Chancellor, Devil Take the Hindmost--A History of Financial Speculation (Farrar Straus Giroux, 1999; more recent pbk). A readable account of past financial excesses, from the tulip mania of the 1630s to LTCM of 1998. Interesting account of the Japanese bubble of the 1980s, "Kamikaze Capitalism." Fleshes out Kindleberger (see below).

(4) C.P. Kindleberger, Manias, Panics, and Crashes--A History of Financial Crises, 3rd ed (Wiley pbk, 1996, or the new 4^th, if it’s out). Lays out a model of how financial crises arise, and uses several centuries of history to elucidate and confirm typical patterns. Raises issues of how, if crises cannot be avoided, the damage can be contained.

(5) R.J. Shiller, Irrational Exuberance (Princeton, 2000). Published at the peak of the bull market/’bubble’ in the US in the late 1990s and early months of2000, it attracted considerable attention by arguing that US stocks had become ridiculously overpriced, and explaining how they got that way. Seems he was right!

(6) CoursePack. Readings, class outlines, assignments. A collection that will be supplied to the class.

Also recommended:

(7) S. Homer and R. Sylla, A History of Interest Rates, 3rd ed revised (Rutgers, 1996). This contains most of what a layperson, although perhaps not an MBA, might want to know about the subject. In Fall '97, as Japanese rates tended toward zero, the Wall St. Journal said that in Japan it was the best selling book in English that was not about Princess Diana. We'll use it late in the course to study long-term patterns of interest rates, along with similar materials on stock prices and returns.

(8) Larry Neal, The Rise of Financial Capitalism--International Capital Markets in the Age of Reason (Cambridge pbk, 1993). Neal describes and documents activity in the world's first regular securities markets, Amsterdam and London, in the 18th C., including a century or so of end-of-month price data for leading issues and a study of the famous and influential South Sea Bubble. He tests history with modern finance analysis, and finds that it passes. An earlier version of the course assigned this book. It is still useful, and will be referred to early in the course.

(9) Niall Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700-2000 (Basic Books, 2001). Emphasizes the politics and political economy of finance and financial systems in modern European and world history. The author has joined the Stern faculty; he is teaching a course drawing on this book in the day program this Spring.

(10) Richard H. Timberlake, Monetary Policy in the United States—An Intellectual and Institutional History (Chicago pbk, 1993). Formerly used extensively in this course. It’s a book about central banking in the US, but the author is against central banking. Strong (students said ‘dense’) on legislative developments, debates, etc.

Expectations: Plan on doing assigned readings and participating in class discussions; to help that along, there will be weekly one-page max. (typed) writing assignments that address questions about the readings. Your one-pagers will be read and returned to you, creating an accumulating record of the course as it develops. They will be read, tho’ not be graded; each one not completed reduces your grade by a mark (e.g., a B becomes a B-). One-pagers can be handed in at class, or emailed to the Course TA, George Brumder, grb222@stern.nyu.edu> or me. To get the most out of the course, these assignments should be done for the week they are assigned.

As for graded stuff, there will be (1) a take-home midterm assigned week March 10 and due March 24. (2) A "final" option: EITHER a similar take-home final assigned April 28 and due May 5 (last class), OR a term-paper of 12 pages (3000 words) due May 5, on a financial history topic of your interest and choosing, subject to my advice and consent. For the latter option, you should discuss your topic with me to define a problem/question and get my suggestions, if needed, on sources of information; do this no later than end of March.

Course grades will be a weighted average of midterm (50%) and final option (50%) grades, adjusted if necessary for weekly assignment deficiencies.

Outline and Readings

I. Introduction to course; historical background.

1/27 A. What is a modern financial system? What are its key institutional components? Its key functions? Why do they matter?

B. Medieval and early modern finance. Financial system innovators: The Dutch Republic and Great Britain, 16^th-18^th centuries.

Baskin, Intro. and Chs. 1,2; Chancellor, Preface and Ch. 1

II. The first modern financial systems and their famous bubbles.

2/3 A. Early capital markets and their famous bubbles through 1720.

B. Maturing and integration of 18^th-century capital markets. British financial developments, and financial relationships with the America.

Baskin, Ch. 3; Chancellor, Chs.3-4

III. US financial history: public finance & debt, money, banking, central banking, securities markets and corporate finance.

2/10 A. Creating the American financial system; the role of ‘that bastard brat of a Scotch pedlar.’ The US as an "emerging market."

B. Development and functions of banks and securities markets.

Wright, Chs. 1-4

James and Sylla, “The Changing Nature of American Public Debt, 1690-1835” (CoursePack)

Sylla, "US Securities Markets and the Banking System, 1790-1840" (CoursePack)

2/17 No class—President’s Day holiday

2/24 A. The monetary system: base money and bank money. Early US financial crises: 1792, 1819, 1837-1843.

B. The maturing US financial system: Developments, reversals and transitions, 1830s-1870s.

Guest speaker: Dr. Robert E. Wright

Wright, Chs. 5-8

“Sylla and Wallis, “The Anatomy of Sovereign Debt Crises…State Defaults of the 1840s:” Smith and Sylla, “Capital Markets”, pp1209-14 (both in CoursePack).

3/3 A. Financial Modernization: International comparisons

Guest speaker: Dr. Domingo Cavallo

B. The Gilded Age: Railroad finance and capital formation.

Sylla, "Emerging Markets in History: the US, Japan, and Argentina”; Smith and Sylla, “Capital Markets,” pp. 1214-21; Sylla, “Federal Policy, Banking Market Structure, and Capital Mobilization in the US, 1863-1913”, (all in CoursePack)

Baskin, Ch. 4; Chancellor, Ch. 6

3/10 A. Monetary History, 1860s to 1914: What base: paper, gold, silver? Deflation, resumption, and the ‘Cross of Gold’.

B. The Panic of 1907. The National Monetary Commission. Restoring the central bank: The Fed arrives.

Sylla, “The financial system under stress,” (CoursePack)

Sylla, “The Autonomy of Monetary Authorities: The case of the US Federal Reserve System” (CoursePack)

Spring Break, Midterm Take-home

3/24 A. The Fed’s shaky start (1914-1920), high tide (1920s) and low tide (1930s Great Depression)

B. The rise of securities-market regulation

Baskin, Ch. 5; Chancellor, Ch. 7; Smith and Sylla, “Capital Markets,”

1221-29.

[Optional final paper topics must be set by end March]

3/31 A. Bretton Woods system and the revival of monetary policy, 1940s-60s

B. Stagflation; ‘center-firm’ finance

Baskin, Ch. 6

Sylla, “United States Banks and Europe: Strategies and Attitudes” (CoursePack)

Smith and Sylla, “Capital Markets,” 1229-33

4//7 A. Financial innovation, 1970s-present.

B. Monetary policy innovation and stabilization, 1979-present

Baskin, Ch. 7; Chancellor, Ch. 8

M. Goodfriend, “The Phases of US Monetary Policy: 1987-2001” (CoursePack)

Smith and Sylla, “Capital Markets,” 1233-40

IV. Analyzing financial crises.

4/14 A. Money, credit, and the build-up to financial crises. The 1990s bubble

B. Manias, scandals and swindles

Kindleberger, Chs. 1-6

Shiller, Preface and Chs. 2-6

4/21 A. Financial crises: propagation, resolution, solution (?)

B. Applications of the crisis model.

Kindleberger, Chs. 7-12

Chancellor, Chs. 5, 9, Epilog

V. Asset price and yield history.

4/28 Two centuries of US interest rates, bond yields and returns

Homer & Sylla, Chs. 16-18, 23, 29 (this is almost a book in itself; we’ll hit the high points)

Sylla Wilson & Jones, "US Financial Markets and Long-Term Econ. Growth"

(CoursePack)

[Take-home final option assigned]

5/5 Two centuries of US stock prices and returns

Shiller, Chs. 1, 9-11.

Sylla, “The New Media Boom in Historical Perspective,” Prometheus 19, 1 (2001), 17-26 (CoursePack)

[Final paper option and take-home final option due May 5]

Biographical Summary

RICHARD SYLLA

Richard Sylla is Henry Kaufman Professor of the History of Financial Institutions and Markets, and Professor of Economics and Entrepreneurship at the Stern School of Business, New York University, and in 2002-2003, acting chairman of the Stern Economics Department. He is also a Research Associate of the National Bureau of Economic Research.

Sylla received the B.A. summa cum laude (1962), the M.A. (1965), and the Ph.D. (1969), all from Harvard University.

He is the author of The American Capital Market, 1846-1914 (1975); co-author of The Evolution of the American Economy (1993; 1^st ed., 1980) and, with the late Sidney Homer, A History of Interest Rates, (3^rd ed. Rev.; 3^rd ed., 1991); and co-editor of Patterns of European Industrialization—The Nineteenth Century (1991), and The State, the Financial System, and Economic Modernization (1999), as well as of journal articles, essays, and reviews in economics and economic history.

Sylla is a former editor of The Journal of Economic History and has served as a consultant on institutional history to such firms as Citibank and Chase Manhattan Bank. His current research focus is on the financial history of the United States in comparative contexts. He served as chairman of the board of trustees of the Cliometric Society, 1998-2000.

In 2000-2001, Sylla was president of the Economic History Association, the professional organization of economic historians in the United States. In 2002, he was elected trustee of the Museum of American Financial History, a Smithsonian-affiliate museum in New York City.