The origins of the Dutch financial crisis of the

early 1920s

A presentation for EH590

14 March 2007

Chris Colvin The origins of the Dutch financial crisis of the early 1920s 2

Presentation overview What am I looking at? Why is this interesting? What are my key research questions? How am I going to do this? What is my evidence? My research thus far My short term research plans My medium term objectives

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What am I looking at? A financial crisis in the Netherlands involving

over 35 banks over the period 1920-1925 Dutch historical context:

Late industrialisation Banking expansion and merger wave Neutral during Great War Post-war boom and bust 1920s international comparison

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Why is this interesting? Involved the only banking crisis in the

Netherlands since 1600 Marked the end to the Dutch experiment with

universal banking Changing role of the Nederlandsche Bank Question mark over severity of the Dutch post-

war depression

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What are my key research questions? What caused the crisis?

What is the impact of the expansion and consolidation of the Dutch banking sector?

What are the consequences of the new relationships between banks and industry?

What is the nature of the Dutch post-war depression?

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Where does this fit within existing literature? Modern literature on crisis dominated by: Johan

de Vries and Joost Jonker Three problems with existing literature that I

hope to address: They are “historical” rather than “economic” in nature They focus on large banks, ignoring smaller ones They fail to relate the crisis to the macroeconomic

situation

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How am I going to do this? Construct a new narrative (including an

“empirical narrative”) Address post-war “statistical deficit” Use tools of industrial organisation and

asymmetric information literatures

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What evidence am I going to use? Qualitative:

Bank archives including: ABN AMRO, Rabobank, ING Bank / Postbank, Nederlandsche Bank

Newspapers: financial, general, local and national Personal archives deposited at Dutch municipal /

national archives (e.g. for Colijn, family Müller) Quantitative:

Share prices and dividends Interest rate spreads Bank-client linkages

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My research thus far Examined the experiences of one bank in the

crisis (the Rotterdamsche Bankvereeniging) using new archival sources (see my new working paper published yesterday!)

Developing a new “empirical narrative” of the crisis using Event Study Analysis

Preparing a critical review of the secondary literature for an introductory chapter

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My short term research plans The literature review will have five themes:

The evolution of banking and financial systems The relationship between financial systems and

economic (industrial) development The economic consequences of neutrality The causes and consequences of business

cycles/depressions The causes of financial (including banking) crises

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My medium term objectives Investigating range of clients of different banks,

and the services provided to them Examining “internal” and “external”

management structures, and relationship between

Ex post analysis of merger between two large banks in 1911

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Questions?

Grand opening of the new branch of

the RBV in The Hague, 1923

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Appendix A:Planned thesis structure Thesis structure: three parts, each addressing a

separate (but related) research strand: What is the impact of the expansion and

consolidation of the Dutch banking sector? What are the consequences of the new relationships

between banks and industry? What is the nature of the Dutch post-war

depression?

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Annex B:Event Study Analysis (1) Determining the impact of an event by estimating

abnormal returns. This is the actual ex post return of the security over the

event window minus the normal return over the event window, where the normal return is the return that would be expected if the event did not take place.

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Annex B:Event Study Analysis (2) Was central bank intervention the cause of the

crisis at the Rotterdamsche Bankvereeniging? The event in question is the Nederlandsche Bank

communiqué of 1 July 1924:The various rumours concerning the financial position of the Rotterdamsche Bankvereeniging have motivated the directors of this institution to turn to the president of the Nederlandsche Bank, whom they are providing with all materials regarding the liquidity of the Rotterdamsche Bankvereeniging.

Following an examination of the provided materials, the president of the Nederlandsche Bank has proclaimed that he is prepared to work with the directors of the Rotterdamsche Bankvereeniging, and if necessary to maintain her liquidity.

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60.00

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RBV

Annex B:Event Study Analysis (3)

RBV stock price in 1924:

definitely not a random walk.

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Annex C:Universal banking failure? (1) Universal banking (Gerschenkron)=

deposit/savings banking + investment banking Which is more crisis prone?

Universal banks able to reduce info asymmetries and internalise risk

But they are arguably more fragile during economic downturn and may create a “dual market for lemons”

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Annex C:Universal banking failure? (1) The Dutch case in the 1920s:

Experimentation with universal banking But important differences between banks Comparison of two banks in the crisis:

Rotterdamsche Bankvereeninging (universal and failed) Amsterdamsche Bank (functionally separated and

survived)

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1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930

Equ

ity-

Dep

osit

Rat

io

Big5 AB RBV I-B TB NHMa

Annex C:Universal banking failure? (1)

Equity- deposit ratio for

Big Five, 1916-1930