Britain and the end of the first globalization: ‘financial crisis’, contagion and the British financial system

"The current era is sometimes described as one of unprecedented globalization. An earlier era of globalization is variously argued to have ended with World War One or with the dislocations of the late 1920s and 1930s. Certainly at the beginning of the 1930s the UK economy and some British financial institutions experienced various problems. Contributing factors included: currency crisis and abandonment of the gold standard; payment difficulties of international borrowers, especially those in Germany and central European countries subject to standstill agreements; struggling domestic borrowers in traditional industries; and the background of growing international economic and political tensions. This paper brings together a variety of evidence to present a coherent picture of the impact of financial stresses on the British banking sector in the 1930s. We combine new evidence on the clearing banks, which played a key role in the UK financial system, with data on a variety of other banking institutions from existing studies. Data on asset structures, deposits, capital, profitability, risk concentrations and bad debts are examined, and we consider the links by which ‘contagion’ might have been spread and assess the impact of ‘crisis’ on Britain’s financial system. The impact of the problems affecting the banking sector in the 1930s varied greatly across the different types of institution. While some merchant banks and British overseas banks were particularly hard-hit, the clearing banks, the largest financial institutions and the key element in the payments system, proved to be sound. The performance of these banks in the twentieth century has been subject to many criticisms, many of these unjustified or exaggerated. However, the resilience of these banks contributed greatly to the stability of Britain’s financial system at a time when severe problems were found in many other countries. We argue that the range of evidence now available provides more comprehensive support for this view than has been accepted previously."