Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
Chapter 17: The Shock of the Old: The First Financial Crisis of the Twenty-first Century
17. The shock of the old: the first financial crisis of the twenty-first century Geoffrey Wood1 17.1 INTRODUCTION The first banking crisis of the twenty-first century came towards the end of the first decade of that century. It was a surprise almost everywhere, and nowhere was it a greater surprise than in Britain. For the Bank of England, with the guidance of a few outsiders, had learned how to prevent crises by the third quarter of the nineteenth century. There had been no financial crisis in Britain – even at the outbreak of wars – since then. Much the same can be said of most of the countries that had learned from the Bank of England and followed its crisis-preventing procedures. But crisis there was. What had changed between the nineteenth and twenty-first centuries to allow this to happen? And what is worth changing now so as to make such events less likely in the future? Probably there are many things that would help. But in this chapter it is argued that one change was crucial. That change allowed individual failure to lead to crisis. Reversing it is essential to prevent banking crises recurring. It is necessary first to be precise as to what is meant by a banking crisis. Once that is done discussion of how they were prevented in the past naturally follows. That enables identification of the crucial difference between the nineteenth and twenty-first centuries. It is then possible to proceed to consider how to remove this difference. 17.2...
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