Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

Fragile by Design: Political Origins of Crises and Scarce Credit Charles W. Calomiris and Stephen H. Haber Princeton, N.J.: Princeton University Press, 2014, 570 pp. Charles Calomiris and Stephen Haber have taken on a big task in their book, Fragile by Design: Political Origins of Crises and Scarce Credit. Their goal is to explain the double hit that economies and financial systems suffer when they experience a and then the tightening of credit that often follows. In order to keep the final product manageable, and thus avoid having a 2,000 page book, the authors limit their case studies to the United Kingdom, United States, Canada, Mexico, and Brazil. Their time frame extends back to the 17th century. At its core, their argument is that financial crises are not random; they flow from the Game of Bank Bargains--that is, political deals that dictate everything in a system from the issuance of licenses to the means for distribution of credit. Charles Calomiris is well-known to those who have studied financial panics and crises. He is the co-author of Origins of Panics and Contagion and Bank Failures during the Great Depression, to name just a few of his widely cited works. Stephen Haber has undertaken research predominantly on Latin American political and economic policy, with particular emphasis on Mexico. Fragile by Design attempts to draw conclusions about a wide range of financial crises in different countries over a period of centuries and brings to mind Carmen Reinhart and Kenneth Rogoff s This Time Is Different: Eight Centuries of Financial Folly (2009). In contrast to the Calomiris and Haber argument that the existence of crises is nonrandom, Reinhart and Rogoff imply the opposite: Banking crises remain a recurring problem everywhere.... incidence of crises proves to be remarkably similar in both high-income and middle- to low-income countries. Indeed, the tally of crises is particularly high for the world's financial centers.... Perhaps more surprising still are the qualitative and quantitative parallels across disparate income groups. Additionally, there are some starkly contrasting definitional differences between the two works. Calomiris and Haber argue that Canada has experienced precisely zero systemic crises since 1840. Their underlying definition of banking crisis is restrictive in nature as it includes those events where the insolvency of banks or the costs of intervention exceed a stated percentage of GDP (a common definition among widely cited works by the International Monetaiy Fund and World Bank) or that involve widespread runs without significant insolvencies or interventions. In contrast, Reinhart and Rogoff impose less restrictive standards. Under their definition, Canada has experienced seven such crises since 1840. Fragile by Design begins its case studies with the example of the UK. Calomiris and Haber demarcate two distinct periods of the history of the Bank of England, starting with a history of monopoly from the late 17th century to the early 19th century. bank bargain at that time involved a bifurcated system whereby the Bank of England, organized by prominent Whig politicians of the period, benefited from a monopoly grant of a joint stock form, limited liability ownership, and exemptions from limitations imposed on the broader swath of private banks, such as usury laws and the tax status of stock holdings. strength of the granted monopoly allowed the Bank of England to finance a war machine in the ever-present squabbles with France. But the structure was not good for providing credit to the private market: The industrial revolution was financed out of the pockets of tinkerers and manufacturers, not through lending ... the Industrial Revolution happened in spite of the revolution in public finance, not because of it. …

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