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The Historical Roots of Banking Systems

on August 24th, 2016 by admin

Have you ever wondered why the United States has had 14 banking crises since the country’s inception, whereas Canada has had none?  Or why Mexico and Brazil has some of the riches natural resources on the planet yet the majority of its populations live in poverty.  I just finished reading an interesting book that answers these questions.  The book titled Fragile by Design: The Political Origins of Banking Crises and Scarce Credit written by Charles W. Calomiris and Stephen H. Haber, gives a detailed look at the creation of  banking systems in the UK, United States, Canada, Mexico, and Brazil.

Looking at our own crises with the most recent being in 2007-2009, the writers’ looks at how our volatile system is primarily due to populism and bad public policy-which led to the subprime mortgage crisis.  Another example Calomiris and Haber note about the fragility of our banking systems stems from laws that prohibit the creation of branch banking; and overreliance on unit banking.  Branch banking is defined as engaging in making deposits or loans away from a bank’s headquarters.  Unit banking is engaging in financial services at one small bank within a state or city.  It is autonomous and not linked with any other branches.  This approach, as the authors state hindered access to credit and created a level of cronyism that has affected our banking system.  If unit banking was the preferred method, particularly in the Southern agrarian states, a banking crisis would prove difficult to mitigate because of the lack of liquidity.  This set the stage for continuing banking crises in the U.S.  If you are interested in an insider’s look at the most recent crisis check out this post.

I want to focus this post on Mexico and Brazil.  These nations have some of the best natural resources on the planet.  Yet the majority of their populations remain mired in poverty.  Why?  History shows that Mexico has been plagued by civil wars, coup d’états, and various authoritarian regimes.  In this political climate it was inevitable that the country’s banking system would be used as a personal piggy bank for whichever gang was in power.  Calomiris and Haber note that between 1821 and 1876 Mexico had 76 presidents!  That’s more than our own nation’s 240 year history; we’ve had a total of 44 presidents.  In this political milieu a top-down system was created to satisfy the needs of a small elite at the expense of everyone else.  I cannot blame any Mexican citizen who crosses the border for a better life. 

 Now let’s look at Brazil a nation that just wrapped up hosting the 2016 Summer Olympics.  Brazil’s political history mirrors Mexico’s in some respects.  Due to Brazil’s expansive size made it difficult to create a coherent, centralized government.  Despite having a monarchy, it was still weak in that the Brazilian states remained autonomous; their remoteness made it possible for oligarchs to set up their own rules.  It wasn’t until the development of a railroad system that a semblance of an economy took root.  Slavery was used to maintain their vast plantations.  This was not ended until 1888.  The authors explains the nature of this feudal society and the effects on Brazilian culture.  Slavery was of an all-encompassing nature.  There wasn’t any semblance of a free society.  Since there wasn’t any real governance in the country, homesteading laws, and enforcement of private property rights were non-existent.  Citizens were at the mercy of the local oligarchs. 

This type of framework still persist today.  Until 1989, Brazil was ruled under a military dictatorship.  It is now under a democratic system with its inherent weaknesses on full display.  A small mostly white elite continues its control over the country’s vast minority population who still live in poverty.

What I enjoyed most about this book is the authors’ extensive historical research.  This is most crucial in understanding why nations prosper or continue to be mired in poverty.  It also showed me how unique The United States of America is.  The Founding Fathers were geniuses in that they understood the importance of basing laws on the philosophic principle of individual rights.  Because this framework has been held inconsistently, Calomiris and Haber reveals our continued slide into populism and pressure group politics.  This has effectively undermined our political and economic freedom.

The authors also demonstrate the poor quality of economic thinking today.  This is what angers me most.  Economic thinking is still heavily influenced by Keynesian thought despite reality and economic wreckage.  Relying heavily on quantitative mathematics these economists, many of whom are Nobel Prize winners, could not foresee the latest economic crash due to their lack of historical and philosophic knowledge.  I was one of the many thousands of individuals who lost their jobs in finance due to bad economic policy. 

Calomiris and Haber have written a very important book that gives a board overview of an important industry.  They also show the importance of using history as a guide to understand the success and failures of nations.  This is also crucial in correcting serious flaws in our own banking industry.         

Bookish Babe          

Tags: , , , , , , , , , , , | Posted in Economics/Business, History, Philosophy

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