Fragile By Design PDF by Charles W. Calomiris and Stephen H. Haber


Fragile By Design

By Charles W. Calomiris and Stephen H. Haber



preface ix

section one

No Banks without States, and No States without Banks

1 If Stable and Efficient Banks Are Such a Good Idea, Why Are They

So Rare? 3

2 The Game of Bank Bargains 27

3 Tools of Conquest and Survival: Why States Need Banks 60

4 Privileges with Burdens: War, Empire, and the Monopoly Structure of English Banking 84

5 Banks and Democracy: Britain in the Nineteenth and Twentieth Centuries 105

section two

The Cost of Banker-Populist Alliances: The United States versus Canada

6 Crippled by Populism: U.S. Banking from Colonial Times to 1990 153

7 The New U.S. Bank Bargain: Mega banks, Urban Activists, and the Erosion of Mortgage Standards 203

8 Leverage, Regulatory Failure, and the Subprime Crisis 256

9 Durable Partners: Politics and Banking in Canada 283

section three

Authoritarianism, Democratic Transitions, and the Game of Bank Bargains

10 Mexico: Chaos Makes Cronyism Look Good 331

11 When Autocracy Fails: Banking and Politics in Mexico since 1982 366

12 Inflation Machines: Banking and State Finance in Imperial Brazil 390

13 The Democratic Consequences of Inflation-Tax Banking in Brazil 415

section four

Going beyond Structural Narratives

14 Traveling to Other Places: Is Our Sample Representative? 451

15 Reality Is a Plague on Many Houses 479

references 507

index 549



Books are not written by chance. This one was written from 2010 to 2013, after the worst three decades of banking crises the world has ever seen, and in the immediate wake of the worst U.S. banking crisis since the Great Depression. We have both spent much of our academic lives writing about banks and their politics and history and have been involved in advising governmental and regulatory agencies about the defi ciencies of banking systems.

Over the years, we have been struck by the disconnect between the way the public and the press experience and discuss banking crises and the way that we and our colleagues think about them as scholars. Most popular narratives about banking problems focus on very shortterm considerations (this quarter’s lending growth, profi ts, or scandals) and on the personal details, including the moral failures, of the careers of bankers and regulators. While the public recognizes that banking problems are matters of intense political debate with serious consequences for the performance and stability of the economy, the media provide little discussion of the systematic role of politics in the determination of banking systems’ performance. This deficiency leaves the public in a curious position: they know that they should be deeply concerned about banking regulation; they know that there are links between politics and banking; but they are unsure what those links are and even less sure what to do about them.

This book is an attempt both to bridge that gap and to offer a contribution to scholarship. We seek to explain the political roots of differences in banking-system performance across countries and over time. In order to do so, we integrate evidence and analytic tools from three distinct disciplines: history, political science, and economics.

We argue that banks’ strengths and shortcomings are the predictable consequences of political bargains and that those bargains are structured by a society’s fundamental political institutions. Citizens may be satisfied to blame the deficiencies of their country’s banking system on the moral failings of bankers or regulators, or on “market failures” related to greed and fear, but when they do so, they miss the opportunity to see banks for what they really are, for better or worse: an institutional embodiment—a mirror of sorts—of the political system that is a product of a society’s deep history.

This project grew out of our participation in the John and Jean De Nault Task Force on Property Rights at Stanford University’s Hoover Institution. We had known one another for over two decades, and our paths had crossed at numerous conferences and workshops. It was within the De Nault task force, however, that the two of us first sat down together to explore three fundamental questions about banking that defined the starting point of this book: Why are some societies able to construct banking systems that avoid banking crises, while others are not? What makes some societies limit the right to charter a bank to a favored few, even though doing so limits the availability of credit to broad swaths of the population? Why do societies sometimes fail to protect the property rights of lenders, depositors, and bank stockholders in ways that undermine the ability of banks to raise funds or lend them?

Four years and many conversations and cross-country visits later, we completed this manuscript. Along the way, we accumulated more intellectual debts than we can ever repay. We are indebted to many colleagues at institutions around the world who offered comments on chapter drafts, or on the entire manuscript, including Daron Acemoglu, Terry Anderson, Michael Bordo, Michael Boskin, Florian Buck, Forrest Capie, Gerard Caprio, Matthew Carnes, Latika Chaudhary, Isaias Chávez, Gustavo del Angel-Mobarak, Darrell Duffi e, Roy Elis, Richard Epstein, Nick Eubank, Adriane Fresh, Alex Galetovic, Richard Grossman, James Huffman, Scott Kieff, Dorothy Kronick, Sandra Kuntz Ficker, Ross Levine, Gary Libecap, Jonathan Macey, Noel Maurer, Allan Meltzer, Victor Menaldo, Joel Mokyr, Ian Morris, Aldo Musacchio, Larry Neal, Raquel Oliveira, Agustina Paglayan, Edward Pinto, Alex Pollock, Lucas Puente, Russ Roberts, James Robinson, Jared Rubin, Thomas Sargent, Henry Smith, Paul Sniderman, William Summerhill, John Taylor, Larry Wall, Peter Wallison, and three anonymous referees. We also thank our students in classes at Columbia University and Stanford University, where we taught parts of the book in various courses; their reactions taught us a great deal about how to frame and organize the material. Our research assistants, Ishan Bhadkamkar, Ianni Drivas, and Patrick Kennedy, helped us find data and track references as well as providing cogent comments about chapters as they took shape. We were fortunate to be able to present drafts of chapters at workshops and conferences and to receive valuable feedback. We thank the institutions that organized those workshops and conferences, including the Banco de México, the Center for Economic Studies of the Ludwig-Maximilians- Universität München, the Centro de Investigación y Docencia Económicas, Chapman University, the All-Chicago Friends of Economic History Dinner, the Federal Reserve Bank of Atlanta, Harvard Business School, the Hoover Institution’s Working Group on Economic Policy, the International Monetary Fund, the London School of Economics, and the World Bank.

Research support does not grow on trees; we are therefore grateful to John Raisian and Richard Sousa, director and senior associate director of the Hoover Institution, respectively. Seth Ditchik, Beth Clevenger, and Terri O’Prey at Princeton University Press and Peter Strupp at Princeton Editorial Associates ably shepherded the manuscript through the production process. We owe special thanks to our series editor, Joel Mokyr, whose enthusiasm, humor, and constructive criticisms did much to improve the book and to facilitate its timely completion. Finally, we are deeply grateful to our wives, Nancy Calomiris and Marsy A. Haber, for their constant patience, support, and encouragement throughout the four years of our bicoastal collaboration.

We dedicate this book to our daughters. We hope that young people who read this book, including the three of them, will not misinterpret our discussions about political bargains as a call to cynicism about democratic politics. Our intent is rather to illustrate the value of learning history, thinking critically, and facing the hypocrisy of politicians with a sense of humor. They will need all three in a search for solutions to the deep problems that face democracies during the current global pandemic of banking crises.

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