What ties together the traditional commercial banking activities of deposittaking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically. WHAT ARE THE DEFINING CHARACTERISTICS of a bank? Both the legal definition in the United States and the standard answer from economists is that commercial banks are institutions that engage in two distinct types of activities, one on each side of the balance sheet—deposit-taking and lending. More precisely, deposit-taking involves issuing claims that are riskless and demandable, that is, claims that can be redeemed for a fixed value at any time. Lending involves acquiring costly information about opaque borrowers, and extending credit based on this information. A great deal of theoretical and empirical analysis has been devoted to understanding the circumstances under which each of these two activities might require the services of an intermediary, as opposed to being implemented in arm’s-length securities markets. While much has been learned from this work, with few exceptions it has not addressed a fundamental question: why is it important that one institution carry out both functions * Kashyap and Rajan are from the University of Chicago and Stein is from Harvard University. We thank Eric Bettinger, Qi Chen, and Jeremy Nalewaik for excellent research assistance, and Melissa Cunniffe and Ann Richards for help in preparing the manuscript. We are also grateful for helpful comments from Gary Gorton, George Pennacchi, René Stulz, the referee,

For citation please refer to the published article. Abstract: This paper argues against the widely shared assumption that the coordination of markets depends primarily or exclusively on institutions at the level of the nation state. It shows instead that coordination problems of ‘global ’ markets can be addressed through a variety of governance mechanisms combining different forms of private and public authority. This is illustrated through an analysis of long-distance exchange networks and cross-border markets in late mediaeval Europe, which emerged and operated within a polycentric and multilayered transjurisdictional system long before the rise of the nation state. The paper concludes that a comparison of different historical forms of transnational markets can open new perspectives for analyzing the contemporary era of globalization. 1

Most recent draft of this paper is available at: www.wwa.com/~mosers/papers.htm I am indebted to the Chicago Board of Trade for making their archives available for this research and to Owen Gregory for helping my access of these archives. The paper has

This paper considers price setting in pure units of account, linked to the means of payment through managed parities. If prices are sticky in the units in which they are set, parity changes may facilitate equilibrium adjustment of relative prices. The paper derives simultaneously the optimal choice of unit of account by each price setter, and the optimal parity policy. The gains from having multiple units of account are computed for a simple calibrated economy. 1

Abstract: We explore the strategic dynamics of the price setting protocol used by the money-changers guild to set the daily domestic exchange rate between gold and silver coins in early Renaissance Florence. We frame our analysis as a repeat, non-constant sum game of indeterminate length characterized by voluntary participation and asymmetric information. A dynamically stable Nash equilibrium obtains and guild profits maximized if only a few informed players participate, suggesting that the Florentine protocol was an effective price setting mechanism. It is not surprising, therefore, that the protocol was in force for at least 100 years and that some of its characteristics are echoed in modern financial markets.

Abstract: International trade can have profound effects on domestic institutions. We examine this proposition in the context of medieval Venice circa 800–1350. We show that (initially exogenous) increases in long-distance trade enriched a large group of merchants and these merchants used their new-found muscle to push for constraints on the executive i.e., for the end of a de facto hereditary Doge in 1032 and for the establishment of a parliament or Great Council in 1172. The merchants also pushed for remarkably modern innovations in contracting institutions (such as the colleganza) that facilitated large-scale mobilization of capital for risky long-distance trade. Over time, a group of extraordinarily rich merchants emerged and in the almost four decades following 1297 they used their resources to block political and economic competition. In particular, they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long-distance trade. We document this ‘oligarchization ’ using a unique database on the names of 8,103 parliamentarians and their families ’ use of the colleganza. In short, long-distance trade first encouraged and then discouraged institutional dynamism and these changes operated via the impacts of trade on the distribution of wealth and power.