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History Matters! A review of From Wall Street to Bay Street

Co-author Joe Martin - From Wall Street to Bay Street:
the Origins and Evolution of American and Canadian Finance

History Matters! That's the one key lesson that Joe Martin, author of From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance wants readers of his book to understand in the aftermath of the global Financial Crisis of 2007-2008, whose aftershocks reverberate eleven years following The Great Recession

Joe Martin, Director of the Canadian Business and Financial History at University of Toronto's Rotman School of Management, is the co-author of this important tome along with the late Christopher Kobrak. The genesis for the book was a course the co-authors penned, aimed at students wanting to understand why the Canadian and American financial systems performed disparately during 2007-08. 

As a practitioner on a global bank's treasury desk during this key period in modern financial history, your reviewer humbly submits that Mr. Martin's work should be required reading for not just students of business, finance, and economics, but also for those interested in the history of North American capitalism in general, but particularly members of (new and traditional) media who are sometimes woefully misinformed. 

Clearly written, well researched, meticulously referenced, with detailed exposition of periods from European colonial expansion into North America to the modern day, the book eschews the typical cliometric approach seen in modern economic history texts, in favour of an accessible narrative that stresses cultural differences as one means of understanding what went wrong (and right). These differences have lead to institutional trajectories that resulted in Canada’s system of branch banking nationwide, that has been dominated by the Big 5 oligopoly. In contrast, the United States' system of fragmented banking has seen the number of FDIC insured commercial banks plummet from 7870 in 2002 to 4909 in 2017.  

In contrast to some who have reviewed this book citing (non-critically I must add) "its lack of rigorous theoretical and empirical analyses"(1) I believe there's a strong argument to be made that forgoing the usual scientistic approach that has infected the social sciences, and is usually the remit of peer reviewed journals that no one will actually read, makes From Wall Street to Bay Street a more compelling read. Frankly, if nothing else, the Financial Crisis of 2007-2008 and The Great Recession illustrated the weakness of  economic orthodoxy, the irrelevance of general equilibrium economic models that didn't incorporate the financial sector, and ignobly ignored the reality of financial systems and economies as complex dynamic systems where sometimes the economy isn't simply a self-correcting metronome.

The intent of this review isn't to give away the content of the book, but a major thesis emanating from it was that despite Hamiltonian origins common to both the American and Canadian systems, Canadian culture favoured stability whilst American favoured innovation. Going back to the colonial roots of the two nations' constitutional documents, one can observe that the United States' Declaration of Independence famously has the exhortation to "Life, Liberty and the pursuit of Happiness" while Canada's Constitution Act, 1867 cites "peace, order and good government" as a principle for governance.  

Here is a short excerpt from Chapter 5 The Short Pax Americana: 1945-2000:

Another factor that may explain the different levels of securitization between the two countries is the regulatory environment in Canada since the late 1980s, when the Office of the Superintendent of Financial Institutions (OSFI) was created. Canadian lenders (banks, insurance companies, and mortgage and trust companies) and their investments are regulated by OSFI, who actively restricts securitization. OSFI sets capitalization guidelines for these lenders and supervises risk management. This has been pointed out as a source of fundamental strength in the Canadian system.(2)
A few years following the calamity of 2007-08, I recall a capital markets professional whom I respected greatly quip that Canada and Canadian banks had been spared the blushes because "we were slow to jump on the bandwagon but we had every intention of following the States into those assets."  Indeed, this may have been true, but in retrospect the oversight of OSFI created a brake on the path toward innovation in favour of stability -- consistent with From Wall Street to Bay Street's main theme. 

Similarly, while global banks adhered to Basel II framework during this period, Canadian banks had the added hurdle of being limited in term of how much they could leverage. Consequently, Basel III belatedly introduced the leverage ratio, in addition to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), something that is probably of interest to those with a deep understanding of how the financial system works in practice rather than theory. 

Not to belabour the point but it needs to be reinforced that history matters. From Wall Street to Bay Street will be an invaluable reference for those interested in the evolution of banking and finance in North America. Those interested in matters surrounding past financial crisis typically are introduced to something like Kindelberger's Manias, Panics, and Crashes. While not espousing an overarching theory like a Kindelberger, or more recently a Hyman Minsky, Joe Martin and Christopher Kobrak have expertly reminded readers that institutions are a result of history, culture, and set the stage for delicate ebb and flow of future innovation and stability. 

Recommended ⭐⭐⭐⭐

From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance. Christopher Kobrak and Joe Martin. Toronto: University of Toronto Press, 2018. 


(1) Kam Hon Chu, The Canadian Historical Review, Volume 100, Number 1, March 2019, pp. 131-133 (Review)
(2) Virgine Traclet, "An Overview of the Canadian Housing Finance System," Housing Finance International  25, no. 1 (2010):6  (Endnote citation From Wall Street to Bay Street (p. 336))  
Guest Blog post by @ArijitBanik (Treasury leader, and investment professional who will opine on many topics but is eternally grateful to his Better Half 😄)