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Last Modified: 1999-08-14
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Financial Crises in the 1890s and 1990s:

We Remember History, So Why Are We Still Condemned to Repeat It?

J. Bradford DeLong
U.C. Berkeley and NBER

August 1999

My presentation...

This is a placeholder file until the final draft is published by Brookings...


The decade of the 1990s saw three-and-a-half large currency crises shake the world economy: the collapse of the European exchange rate mechanism in the fall of 1992, the collapse of the Mexican peso in the winter of 1994-1995, the East Asian financial crisis of 1997-1998, and--this is the half-crisis--the Brazilian financial crisis of 1998-1999. Practically every observer saw this wave of crises as the result of deep troubles in the structure of global finance--though diagnoses of what the precise flaws in global financial organization were turned out to be all over the map.

Some saw the fundamental flaw in an inappropriate response to crisis. The editorial page of the Wall Street Journal tells us that the flaw was in the International Monetary Fund, which advised emerging-market governments to allow the value of their currencies to fall during the crisis instead of maintaining the previous parity vis-a-vis the dollar (no matter what trying to maintaining the parity would require for domestic interest rates). Others also tell us that the flaw was in the International Monetary Fund, which advised emerging-market governments to raise interest rates to reduce the magnitude of the fall in the value of their currencies.


Before World War I

In recent years it has become a commonplace to say that in this second era of globalization the world economy is more integrated and more interconnected than ever before. Along most dimensions this is correct. But in the sheer magnitude of net international capital flows--measured relative to either exporting or importing country domestic product--the 1870-1914 era still saw a more "global" economy than today. Even in 1850 Great Britain's net overseas assets amounted to 7.5 percent of total domestic wealth--approximately 25 percent of a year's domestic product. By 1914 Great Britain's net overseas assets were perhaps 47 percent of total domestic wealth--and amounted to perhaps 1.6 times a year's domestic product (see Edelstein (1994), p. 173).

This enormous overseas asset position was not built up smoothly. Net foreign investment by Britons, for example, reached a high of nearly eight percent of GDP in the early 1870s before falling to less than one percent of GDP in 1877. Measured in percentage points of GDP, the cyclical swings in net foreign investment had approximately twice as large a magnitude as (and an inverse correlation with) pre-World War I cyclical swings in domestic investment.


Pace of capital exports from Britain in the late 1890s - early 1900s

Common to say that we are more globalized now than we were then--and probably true--but this is one respect in which it is not true

Richard Grossman's and my story about sources of capital outflow...

Almost all outflows to similar, politically-stable countries

So waves hard to attribute to "crony capitalism"--instead, the source of fluctuations on the British side.

When London caught cold, X caught pneumonia

How to deal with a crisis then...

How we deal with a crisis now...



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Bordo, Michael, Michael Edelstein, and Hugh Rockoff (1999), "Was Adherence to the Gold Standard a 'Good Housekeeping Seal of Approval' During the Interwar Period?" unpublished manuscript, Rutgers University.

Michael Bordo and Barry Eichengreen, "Is Our Current International Economic Environment Unusually Crisis Prone?" (U.C. Berkeley Working Paper).

Bordo, Michael, Barry Eichengreen and Douglas A. Irwin (1999), "Is Globalization Today Really Different Than Globalization a Hundred Years Ago?" Brookings Trade Policy Forum (forthcoming).

Bordo, Michael and Finn Kydland (1996), "The Gold Standard as a Commitment Mechanism," in Tamim Bayoumi, Barry Eichengreen and Mark Taylor (eds), Modern Perspectives on the Gold Standard, Cambridge: Cambridge University Press.

Bordo, Michael and Anna Schwartz (1996), "The Operation of the Specie Standard: Evidence for Core and Peripheral Countries," in Jorge Braga de Macedo, Barry Eichengreen and Jaime Reis (eds), Currency Convertibility: The Gold Standard and Beyond, London: Routledge, pp.11-83.

Calomiris, Charles (1999), "Victorian Perspectives on the Banking Collapse of the 1980's and 1990's," unpublished manuscript, Columbia University.

Campa, Jose M. (1990), "Exchange Rates and Economic Recovery in the 1930s: An Extension to Latin America," Journal of Economic History 50, pp.677-682.

Capie, Forrest and Webber Alan (1985), A Monetary History of the United Kingdom, 1870-1982: Volume I, Data, Sources, Methods. Boston: George Allen & Unwin.

Caprio, Gerald, Jr. and Daniela Klingebiel (1996), "Bank Insolvencies: Cross-Country Experience," Policy Working Paper no. 1620, Washington, D.C.: The World Bank.

Cork, Nathaniel (1894), "The Late Australian Banking Crisis," Journal of the Institute of Bankers. 15 part. 4, pp.175-261.

DeLong, J. Bradford and Richard Grossman (),

Edelstein, Michael (1994), "Foreign Investment and Accumulation, 1860-1914," in Roderick Floud and D. McCloskey, eds., The Economic History of Britain Since 1700 2nd ed., vol. 2 (Cambridge: Cambridge University Press).

Eichengreen, Barry (1992), Golden Fetters: The Gold Standard and the Great Depression 1919- 1939, New York: Oxford University Press.

Eichengreen, Barry, Andrew Rose and Charles Wyplosz (1995), "Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks," Economic Policy 21, pp. 249-312.

Eichengreen, Barry, Andrew Rose and Charles Wyplosz (1996), "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System" in Matthew Canzoneri, Wilfred Ethier and Vittorio Grilli (eds.), The New Transatlantic Economy, New York: Cambridge University Press.

Eichengreen, Barry and Jeffrey Sachs (1985), "Exchange Rates and Economic Recovery in the 1930s," Journal of Economic History 49, pp. 925-945.

Eichengreen, Barry and Peter Temin (1997), "The Gold Standard and the Great Depression," NBER Working Paper no. 6060.

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Goodhart, Charles and and P.J.R. DeLargy (1999), "Financial Crises: Plus ça change, plus c'est la meme chose," LSE Financial Markets Group Special Paper No. 108.

Gorton, Gary (1985), "Clearing Houses and the Origins of Central Banking in the U.S.," Journal of Economic History 45, pp.277-283.

Jones, Matthew T. and Maurice Obstfeld (1999), "Historical Data on Investment and Savings," unpublished manuscript, University of California, Berkeley.

Kindleberger, Charles P. (1984), A Financial History of Western Europe, Boston: George Allen & Unwin.

Kindleberger, Charles P. and Jean-Pierre Laffargue, eds. (1982), Financial Crises: Theory, History and Policy, New York: Cambridge University Press.

Marichal, Carlos (1989), A Century of Latin American Debt Crises, Princeton: Princeton University Press.

Neal, Larry (1992), The Rise of Financial Capitalism: International Capital Markets in the Age of Reason, Cambridge: Cambridge University Press.

Quintero Ramos, Angel M. (1965), A History of Money and Banking in Argentina, Piedras, P.R.: University of Puerto Rico Rio.

Schwartz, Anna J. (1986), "Real and Pseudo Financial Crises." in Forrest Capie and Geoffrey E. Wood, eds, Financial Crises and the World Banking System, New York: Macmillan, pp.11-31.

Sprague, O.M.W. (1910), History of Crises Under the National Banking System, Washington, D.C.: Government Printing Office.

Williams, J.H. (1920), Argentine International Trade Under Inconvertible Paper Money 1880- 1890, Cambridge: Harvard University Press.

World Bank (1999), Global Economic Prospects and the Developing Countries, 1998/99: Beyond Financial Crisis, Washington, D.C.: The World Bank.

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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
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