Add together fundamental illiquidity and smallness of capital, and what have you got?
Indeed, drawing from Reinhart and Rogoff’s very long list of banking crises, we find that in the century between 1901 and 2000, a banking crisis began in one or more countries (often in several simultaneously) in 54 of the 100 years! The crises can last multiple years; the list below shows the initial years. Of course, this data does not include the great international banking crisis of 2007-09, now rekindled in Europe from 2010-?, and looks instead back to a century of “good old days.”So let us consider the entire 20th century, in which there were both vast catastrophes and amazing progress, and in which a great many things changed dramatically, but in which, the record shows, the tendency of banking to experience a crisis did not change.
Banking Crises, 1901-2001, According to Reinhart and Rogoff*
Year Countries1901-1910
1901 Germany, Japan
1902 Denmark
1904 Canada
1907 United States, France, Italy, Denmark, Sweden, Japan, Chile, Egypt
1908 Canada, Scotland, India, Mexico
1910 Switzerland
Years in decade with a crisis started: 6
1911-1920
1912 Canada
1914 Belgium, Italy, Netherlands, Argentina, Brazil, United States
1917 Japan
1920 Spain, Portugal
Years in decade with a crisis started: 4
1921-1930
1921 Denmark, Finland, Norway, Italy, Netherlands
1922 Sweden
1923 Canada, China, Japan, Brazil, Portugal
1924 Austria, Spain
1925 Belgium
1926 Poland
1927 Japan
1929 United States, Austria, Mexico
1930 France, Italy, Estonia
Years in decade with a crisis started: 9
1931-1940
1931 Germany, Austria, Belgium, Czechoslovakia, Denmark, Finland, Norway, Sweden, Estonia, Latvia, Greece,
Hungary, Poland, Romania, Portugal, Spain, Switzerland, Argentina, Egypt, Turkey, China
1933 Switzerland, United States1934 Argentina, Belgium, China
1935 Italy
1936 Norway
1939 Belgium, Finland, Netherlands
Years in decade with a crisis started: 6
1941-1950
Years in decade with a crisis started: 01951-1960
Years in decade with a crisis started: 0
1961-1970
1963 Brazil
Years in decade with a crisis started: 1
1971-1980
1971 Uruguay
1974 United Kingdom
1976 Chile, Central African Republic
1977 Spain, Germany, Israel, South Africa
1978 Venezuela
1979 Thailand
1980 Argentina, Chile, Egypt, Chad
Years in decade with a crisis started: 7
1981-1990
1981 Ecuador, Mexico, Philippines, Uruguay
1982 Mexico, Hong Kong, Singapore, Columbia, Congo, Ghana, Trinidad and Tobago, Turkey
1983 Canada, Taiwan, Thailand, Hong Kong, Israel, Peru, Kuwait, Morocco, Equatorial Guinea, Niger
1984 United States, United Kingdom, Mauritania
1985 Argentina, Brazil, Gambia, Guinea, Kenya, Malaysia, Iceland
1986 Korea, Brunei
1987 Denmark, Norway, New Zealand, Bolivia, Costa Rica, Nicaragua, Cameroon, Mali, Mozambique, Tanzania,
Bangladesh
1988 Lebanon, Benin, Burkina Faso, Central African Republic, Cote d’Ivoire, Lesotho, Madagascar, Senegal, Nepal, Panama
1989 Australia, Argentina, South Africa, El Salvador, Jordan, Papua New Guinea, Sri Lanka1990 Brazil, Egypt, Algeria, Italy, Romania, Sierra Leone
Years in decade with a crisis started: 10
1991-2000
1991 United Kingdom, Sweden, Finland, Czech Republic, Hungary, Poland, Slovakia, Greece, Congo, Djibouti,
Liberia, Rwanda, Tunisia, Georgia, Guatemala
1992 Japan, Mexico, Indonesia, Estonia, Albania, Bosnia and Herzegovina, Angola, Chad, Congo, Kenya, Nigeria1993 Venezuela, India, Iceland, Macedonia, Slovenia, Eritrea, Guinea, Kenya, Togo, Kyrgyz Republic
1994 France, Indonesia, Mexico, Brazil, Bolivia, Costa Rica, Ecuador, Estonia, Latvia, Armenia, Botswana, Burundi,
Congo, Cote d’Ivoire, Ethiopia, Uganda, Jamaica, Turkey
1995 Russia, United Kingdom, Taiwan, Argentina, Paraguay, Azerbaijan, Belarus, Bulgaria, Lithuania, Cameroon, Gabon, Guinea-Bissau, Swaziland, Zambia, Zimbabwe, Jamaica
1996 Thailand, Croatia, Dominican Republic, Ecuador, Kenya, Myanmar, Tajikistan, Yemen1997 China, Indonesia, Korea, Taiwan, Malaysia, Philippines, Vietnam, Ghana, Mauritius, Nigeria, Ukraine
1998 Russia, Hong Kong, Columbia, Ecuador, El Salvador, Estonia
1999 Bolivia, Honduras, Peru
2000 Nicaragua, Turkey
Years in decade with a crisis started: 10
Total years in which a banking crisis started:
1901-1950: 26 (52%) **
1951-2000: 28 (56%)
Grand Total: 54 (54%)
*Source: Carmen M. Reinhart and Kenneth S. Rogoff, ‘This Time Is Different’ (2009), Appendix A.4, Historical Summaries of Banking Crises, pp 348-392.
** I have made one addition to Reinhart and Rogoff’s list: the United States in 1933, since I consider the nationwide collapse and closing of the banks that year to rank as a new crisis.
Obviously, it is normal to have banking crises. They were especially frequent in the last three decades of the 20th century (let alone the first decade of the succeeding 21st century!) The 1980s and 1990s have the distinction of having had 100 percent of their years feature crises starting somewhere. Is there group learning in banking? If so, it is not observable on this list.
You will have noticed that the different decades were the 1940s, 1950s, and 1960s. In the 1940s, countries were busy destroying each other, which required running up government debt in service of the war with no questions asked and using the banks to help do so. The disaster was unimaginably greater than a mere financial crisis, and was followed by the disappearance of the old governments and currencies of the losers, the financial exhaustion of a victorious but bankrupt Britain, and then the anomalous postwar era of U.S. dominance, which allowed that country to bail out Europe with the Marshall Plan.
In the 1950s, the U.S. economy and its financial markets, banking system, companies, and currency enjoyed global dominance—a unique historical period bound not to last. It was fading in the 1960s and gone by the 1970s, which began with the United States abrogating its international commitment to redeem dollars for gold, and the steep depreciation of the dollar that followed. The normal round of banking crises returned and has not departed.
What is it about banking? The problem seems pretty straightforward. First, since banks promise to make everyone else liquid by par redemption of short-dated liabilities, they are themselves fundamentally illiquid and cannot on their own survive a liquidity panic. “Against such panic,” as economist David Ricardo wrote, “banks have no security on any system.” Second, banking is the most leveraged of businesses. The great banking theorist Walter Bagehot pointedly observed, “The main source of the profitableness of established banking is the smallness of the requisite capital.”
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