It’s easy to get caught up in the recent past. Generals are always fighting the last war. Economists are always fighting the last recession. For example, a lot of (digital and literal) ink has been spilled debating the causes and consequences of the 2007-2008 crisis (some of it here on the Sound Money Project blog). But we should also take a step back from time to time, lest we forget other crises and the lessons they might provide.
Michael Bordo’s recent NBER working paper provides a chance to do just that. It is an excellent summary of the broad trends in monetary policy and financial stability since 1880. Bordo splits the history (excluding the World Wars) into four time periods, each characterized by a different system:
1880-1913: The Classical Gold Standard
1919-1939: The Interwar Period
1945-1972: The Bretton Woods Era
1973-present: Floating Exchange Rate Regime
As Bordo says, “this is primarily the story of central banks developing their policy tools to provide both macroeconomic and financial stability.” The 1914 financial crisis led to the Federal Reserve; the Second World War led to Bretton Woods. Certain large crises pushed central banks to use new instruments in an attempt to create stability.
But the major focal points can hide a lot of the other history under different policy regimes. Indeed, there is more to financial history than the Great Contraction of 1929-1933, the 1970s inflation, and the 2007-2008 crisis. In addition to the broad trends documented, Bordo’s summary gives us a chance to explore the multitude of lesser crises. And there have been a lot of them.
For example, Figure 1 in the paper (reproduced below) plots the frequency of banking crises in each of the four time periods. The frequency is the number of crises divided by the total years in the sample. Bordo’s finds that crises were roughly as frequent under the classical gold standard and the present regime. The interwar period, in contrast, saw a huge surge in crises and the Bretton Woods system had very few crises.
The Great Depression and Great Recession have naturally caused economists to focus on excess credit leading to a boom-bust cycle. But crises like those have been somewhat rare since 1880. Of the credit booms considered, only 13.2% occurred within one year of a banking crisis. Moreover, only 3.7% of credit booms peaked a year or less before a crisis. Figure 5 from the paper (also reproduced below) plots the peak of credit booms (red circles and green squares) and the start of banking crises (blue x’s).
Before the Great Contraction, there were many banking panics without a credit boom. During the Bretton Woods period, there were many credit booms without a banking panic. The two phenomena almost only go together in 1929-1933 and 2007-2009. Of course, those are important crises in terms of economic impact. But they are only two crises. The next one, as Bordo’s paper reminds us, may be nothing like those.