31 March 2015

British Financial Crises since 1825

Edited by Nicholas Dimsdale and Anthony Hotson
2014, Oxford University Press, 224 pages, £55
ISBN 9780199688661

Reviewer: Bridget Rosewell

The current issue of the Bank of England Quarterly Bulletin (2015 Q1) contains a description of the failure of the City of Glasgow Bank in 1878.  It is quite rightly not just academics who are interested in historic failures.  This well-written set of essays gives a wider perspective on both the particular failure described in the Quarterly Bulletin article, and more systemic ones.

Several of the authors would in fact argue that the failure of the City of Glasgow was in fact the first instance of containment of a crisis which did not become systemic and would argue that the system showed its resilience from before that date right up until 2008. The reasons for such stability are obviously of immediate relevance, although whether we can learn from them is of course another matter.

Three things stood out for me.  First it would appear that the adage (with which I at least was brought up) that banks borrow short and lend long was largely wrong.  In the past, High Street banks both borrowed short and lent short, whether on Bills or overdrafts or trade credit.  The specialisation between this and merchants and investment banks was a specialisation of maturities as well as client base. 

Second, banks did not do property, as the Handbook of the day by George Rae was at pains to advise.  Property was seen to be too volatile in price and too long term to be a suitable asset for a bank.

Third, until 1958 banks had access to contingent capital.  While limited liability had made significant headway in the nineteenths century, and indeed the City of Glasgow was an outlier by 1878, shares were generally issued part paid – and the bank could call upon the remainder if required.  Moreover, bank directors and managers were expected to hold a significant proportion of their own assets in bank shares, putting a stern limit on moral hazard. The unwinding of these constraints by regulatory changes, Big Bang, and the long post-war stability obscured their consequences, which is well described in the chapters by Capie and by Turner.

This book is well worth reading in order to understand what created the hugely successful banking system that the UK enjoyed for over a century and how it was undermined by our own failures to understand the past, as well as our hubris.  The editors themselves conclude that in 2008, This Time is Was Different.  The scale of the debacle of 2008 was unmatched by anything since at least 1825 in the UK, whose banking system had survived the New York panic of 1907, and the turmoil of the 1930s fairly unscathed.  Only the disruption of 1914 had come close to undermining the banking system and the disruption was not caused by anything internal to the banks but by the exigencies of war.  Roberts’ descriptions of officials trying madly to work out what to do under extreme circumstances are eerily reminiscent of later descriptions of officials doing exactly the same in 2008.

It is also worth reading for a mix of approaches and techniques.  One chapter uses econometric techniques to look at the 1930s and concludes that it was the collapse of trade which was the major contributor to a recession which was never as deep or financially damaging as in the US or other European countries.  Other chapters rely more on description and institutional history, such as that by Flandreau and Ugolini.

As well as interest and relevance, I found this book an excellent read, I hope it gets into paperback.