Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (The Princeton Economic History of the Western World)
Charles W. Calomiris, Stephen H. Harber
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Why are banking systems unstable in so many countries--but not in others? The United States has had twelve systemic banking crises since 1840, while Canada has had none. The banking systems of Mexico and Brazil have not only been crisis prone but have provided miniscule amounts of credit to business enterprises and households. Analyzing the political and banking history of the United Kingdom, the United States, Canada, Mexico, and Brazil through several centuries, Fragile by Design demonstrates that chronic banking crises and scarce credit are not accidents due to unforeseen circumstances. Rather, these fluctuations result from the complex bargains made between politicians, bankers, bank shareholders, depositors, debtors, and taxpayers. The well-being of banking systems depends on the abilities of political institutions to balance and limit how coalitions of these various groups influence government regulations.
Fragile by Design is a revealing exploration of the ways that politics inevitably intrudes into bank regulation. Charles Calomiris and Stephen Haber combine political history and economics to examine how coalitions of politicians, bankers, and other interest groups form, why some endure while others are undermined, and how they generate policies that determine who gets to be a banker, who has access to credit, and who pays for bank bailouts and rescues.
relative calm, during which crony banking systems comprising a small number of banks allocated scarce credit among politically influential insiders. This pattern has only been broken since 1997, after Mexico began to democratize and the government opened up the banking system to foreign entry. When fundamental political institutions change, the Game of Bank Bargains changes. There is perhaps no better case to test this proposition than Brazil, the subject of chapters 12 and 13. For most of its
wages, must rise relative to those of other countries. This meant that wages and the prices of nontradables did not have to fall by as much during the resumption of convertibility of the pound. 10 The decline in public securities holdings by the Bank of England reflected both the ability of the government to place its debts elsewhere and smaller government deficits. The improved fiscal position of the government was reflected in lower yields on government debt. See Neal (1998), 57. 11 For a
could more easily negotiate. Whether or not such an advantage was anticipated before Word War II, there is no doubt that it came to be important in the 1940s. According to two prominent scholars of British banking during this period, Forrest Capie and Mark Billings: “Political circumstances . . . in the 1940s effectively required the banks to sacrifice their returns to the war effort and resulted in controls which persisted for a long time afterwards. Government acceptance of the oligopoly in the
banks was young Benjamin Franklin, who in 1729, at the age of 23, penned “A Modest Enquiry into the Nature and Necessities of a Paper Currency,” in which he argued that providing credit for land development would attract immigrants to Pennsylvania and create a self-reinforcing virtuous cycle of credit growth, economic expansion, and land appreciation. The British Empire did not smile on the banking experiments of its North American colonies. The crown wanted to protect the control it had allotted
the antebellum South. Clearinghouses, which operated only locally in cities, performed the dual roles of managing the interbank transfers of notes and deposits during normal times and establishing rules for collective action during panics. Clearinghouse members made markets in each other’s liabilities to limit each other’s withdrawal risks during panics. In several extreme panics, the members of the New York City clearinghouse also issued clearinghouse notes, which were collective liabilities,