Capital Market Internationalization 7 Relying on more volatile resources (deposits)to finance less liquid assets (over- drafts),banks were caught in a liquidity squeeze.They became aware of it in the wake of a string of banking crises,during which deposits were withdrawn in ex- change for coin and central bank notes.Hence,Michael Collins notes that after each crisis in England and Wales,the most severe being the crash of the City of Glasgow Bank in 1878,the banks tended to maintain a higher proportion of very liquid as- sets.22 Jean Bouvier notes that the crash of 1882 in France served to disqualify loans to industry in the eyes of Henri Germain,the director of the Credit Lyonnais.2 The standard response to the liquidity crisis was for banks to move to a form of banking that was safer.This meant developing standard lending procedures and thus more interchangeable and negotiable instruments,which could be used as secondary forms of liquidity.But since standardization could more easily be achieved in short- term lending than in long-term lending,standardization amounted to shortening the maturity of most assets:commercial banks would abandon their initial universality, specializing instead in short-term lending.24 Short,standardized assets had the advan- tage of being readily disposable in periods of crisis.But they had two drawbacks. First,they yielded lower profits.Second,safe paper was hard to find,especially now that overdrafts were displacing trade bills.In London,Paris,Milan,and Berlin,bank- ers complained about a persistent shortage in"good"paper,increasingly limited to international acceptances,that is,to bills generated by the settlement of international trade.25 The important role played by good paper in the smooth functioning of the monetary market placed these international centers into competition for the natural- ization of the market for acceptances.2 This shortage was also responsible for the revival of competition,noted in several countries,between the central bank and the deposit banks.27 The higher demand for good paper elicited new profit-making strategies amalgamation,centralization,and internationalization.All three aimed at relieving the need for good paper through greater productivity and higher volume.Amalgam- ation allowed banks to take advantage of the internal scale economies released by the move toward standardization.It is important to note that no such economies of scale existed during the first half of the century,when banking was still a matter of per- sonal connections and when profits sanctioned investments in high-yield,low- volume loans to local industries.Only after banks had been forced to abandon their long-term positions in local firms and to compensate for low yield through high volume did amalgamation become a profitable strategy.Amalgamation reduced bank capital requirements,improving earning potential.Amalgamation also allowed merg- 22.Collins1991,41. 23.Bouvier 1968,221.See also Levy-Leboyer 1976.462. 24.See Bouvier 1968,162;and Lamoreaux 1994.89. 25.See Conti 1993,311:Polsi 1996.127;and Riesser 1911,306. 26.The Deutsche Bank was organized in 1870 by a group of private bankers to capture a greater share of the foreign short-term credit and payments business:Tilly 1991.93.Broz argues that the Federal Reserve Bank was established to develop a market for acceptances in New York:Broz 1997. 27.On Britain,see De Cecco 1974,101;and Ziegler 1990,135;on France,see Bouvier 1973.160:and Lescure 1995,318;and on Belgium,see Kauch 1950,235,260.Relying on more volatile resources (deposits) to Ž nance less liquid assets (over- drafts), banks were caught in a liquidity squeeze. They became aware of it in the wake of a string of banking crises, during which deposits were withdrawn in ex- change for coin and central bank notes. Hence, Michael Collins notes that after each crisis in England and Wales, the most severe being the crash of the City of Glasgow Bank in 1878, the banks tended to maintain a higher proportion of very liquid as￾sets.22 Jean Bouvier notes that the crash of 1882 in France served to disqualify loans to industry in the eyes of Henri Germain, the director of the Cre´dit Lyonnais.23 The standard response to the liquidity crisis was for banks to move to a form of banking that was safer. This meant developing standard lending procedures and thus more interchangeable and negotiable instruments, which could be used as secondary forms of liquidity. But since standardization could more easily be achieved in short￾term lending than in long-term lending, standardization amounted to shortening the maturity of most assets: commercial banks would abandon their initial universality, specializing instead in short-term lending.24 Short,standardized assets had the advan￾tage of being readily disposable in periods of crisis. But they had two drawbacks. First, they yielded lower proŽ ts. Second, safe paper was hard to Ž nd, especially now that overdrafts were displacing trade bills. In London, Paris, Milan, and Berlin, bank- ers complained about a persistent shortage in ‘‘good’’ paper, increasingly limited to international acceptances, that is, to bills generated by the settlement of international trade.25 The important role played by good paper in the smooth functioning of the monetary market placed these international centers into competition for the natural￾ization of the market for acceptances.26 This shortage was also responsible for the revival of competition, noted in several countries, between the central bank and the deposit banks.27 The higher demand for good paper elicited new proŽ t-making strategies— amalgamation, centralization, and internationalization. All three aimed at relieving the need for good paper through greater productivity and higher volume. Amalgam- ation allowed banks to take advantage of the internal scale economies released by the move toward standardization. It is important to note that no such economies of scale existed during the Ž rst half of the century, when banking was still a matter of per- sonal connections and when proŽ ts sanctioned investments in high-yield, low- volume loans to local industries. Only after banks had been forced to abandon their long-term positions in local Ž rms and to compensate for low yield through high volume did amalgamation become a proŽ table strategy. Amalgamation reduced bank capital requirements, improving earning potential. Amalgamation also allowed merg- 22. Collins 1991, 41. 23. Bouvier 1968, 221. See also Le´vy-Leboyer 1976, 462. 24. See Bouvier 1968, 162; and Lamoreaux 1994, 89. 25. See Conti 1993, 311; Polsi 1996, 127; and Riesser 1911, 306. 26. The Deutsche Bank was organized in 1870 by a group of private bankers to capture a greater share of the foreign short-term credit and payments business; Tilly 1991, 93. Broz argues that the Federal Reserve Bank was established to develop a market for acceptances in New York; Broz 1997. 27. On Britain, see De Cecco 1974, 101; and Ziegler 1990, 135; on France, see Bouvier 1973, 160; and Lescure 1995, 318; and on Belgium, see Kauch 1950, 235, 260. Capital Market Internationalization 7