Bordo and Eichengreen (2002): What Lessons from the Last Era of Financial Globalization?
Michael D. Bordo and Barry Eichengreen http://www.nber.org/papers/w8716.pdf:
Goodhart dates the first age of globalization to the laying of the transatlantic telegraph cable, which by providing a real-time communications link between England and North America transformed the information environment. ... There were other, perhaps equally important, factors at work. One was the growth of trade, stimulated by the Cobden-Chevalier Treaty of 1860 which was generalized to other countries through the operation of most-favored-nation clauses. In the four decades leading up to World War I, as transport costs fell and governments adopted trade-friendlier commercial policies, there was nearly a doubling of the share of exports in GDP.... Certainly the enthusiasm of British investors for Argentine railway bonds would have been less in the absence not just of cable traffic and refrigerated steamships but also of an open British market for chilled beef...
19th Century Financial Crises: How Do They Compare to Today's? Pegged exchange rates, high capital mobility, asymmetric information, and weak institutions clearly comprised a fertile environment for crises. In these respects if not others, the crises of the pre-1914 era bear no little resemblance to the Asian crisis of 1997-8 and other recent crises. But how extensive are the parallels?... We distinguish banking crises, currency crises and twin crises. For an episode to qualify as a currency crisis, we must observe a forced change in parity, abandonment of a pegged exchange rate, or an international rescue. For an episode to qualify as a banking crisis, we must observe either bank runs, widespread bank failures and the suspension of convertibility of deposits into currency such that the latter circulates at a premium relative to deposits (a banking panic), or significant banking sector problems (including but not limited to bank failures) resulting in the erosion of most or all of banking system collateral that are resolved by a fiscally- underwritten bank restructuring...
Compared to these pre-1914 cases, Asian countries in the 1990s fared less well because of the absence of an analogous rule. There, as Delargy and Goodhart put it, "the combination of a downwardly flexible exchange rate (raising the domestic burden of dollar debt) combined with efforts to keep the Asian countries from imposing moratoria on outward debt payments, plus high (often sky-high) interest rates has led to a cocktail of external/internal financial conditions far less conducive to rapid recovery than pre-1914..."
The major difference between then and now, we would argue, lay not in currency crises per se but in banking crises and their tendency to spill over to the currency market. Banking crises, although as frequent then as now, were less prone to undermine confidence in the currency in the countries that were at the core of the gold-standard system. Today, the outbreak of a banking crisis typically leads investors to anticipate that the authorities will engage in large-scale credit creation to bail out the banks. Banking crises undermine currency stability, creating the notorious twin crisis problem (Kaminsky and Reinhart 2000). This was not the case a century ago at the center of the gold standard system. Then, banks suspended the convertibility of deposits into currency, currency went to a premium (relative to deposits), and foreign capital -- undeterred by exchange risk -- flowed in to arbitrage the difference, so long as countries remained on gold (Gorton 1987)...
Where the pre-1914 system appears to have worked better (quoting Delargy and Goodhart, 1999, p.11) was in limiting the tendency for banking problems to destabilize the currency market.... A very hard currency peg, like that practiced in the countries at the core of the European gold standard in the late 19th century, could thus prevent financial problems arising elsewhere in the economy from also undermining the currency and then feeding back to the rest of the economy in destabilizing ways. Of course, even a very firm commitment to the peg was no guarantee against other financial problems, serious banking-sector problems in particular. This is an important lesson of history for emerging markets today...
