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
This is a placeholder file until the final draft is published
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
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
Pace of capital exports from Britain in the late 1890s - early
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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