Financial intermediation, investment, and industrial development: Universal banking in Germany and Italy from unification to World War I

Economists and historians have long suggested that financial institutions play a vital role in industrial development, and the German universal banks of the Kaiserreich (1871-1914) are often singled out as the prime example. This study presents new evidence on the role of universal banks in Germany and Italy at the turn of the century and, more generally, attempts to shed light on the functions of financial intermediaries in the process of economic development.; The results of the German study indicate that the policies of the credit banks shifted sometime around 1900, with attachments to industrial firms becoming much more prevalent thereafter. With this move toward seemingly closer firm-bank relationships, liquidity constraints were lower in the post-1902 period for old attached finns than for young attached firms and for independents. In contrast, the liquidity sensitivity of investment does not seem to have declined with age for unattached firms. This seems to indicate that information accrues over time and thus financial intermediaries attenuate liquidity constraints only in the long run. The pattern before 1900 is different. Fewer than 10% of the firms in the sample had great-bank representation prior to 1900, but those who did experienced lower liquidity constraints than those who did not--even in the short run.; Changing liquidity sensitivity of investment around the turn of the century suggests that firm-bank relationships, though uncommon in the nineteenth century, were more important for the facilitation of investment during this period than in the ensuing years. The most convincing explanation for this phenomenon seems to be the transformation in firm financial and organizational structure, which coincided with changes in attached and independent firms' relative liquidity constraints.; The findings in the Italian study parallel those for Germany, though the period under consideration is shorter. The results offer weak support for the hypothesis that bank attachment attenuated liquidity constraints but indicate a slightly stronger effect over time.; Together, the German and Italian case studies provide evidence in favor of a dynamic theory of financial intermediation but argue for a conservative interpretation of the role of such institutions in industrial development.