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Financial Crises, 1880-1913: The Role of Foreign Currency Debt

In: The Decline of Latin American Economies: Growth, Institutions, and Crises

  • Michael D. Bordo
  • Christopher M. Meissner

What is the role of foreign currency debt in precipitating financial crises? In this paper we assemble data for nearly 30 countries between 1880 and 1913 and examine debt crises, currency crises, banking crises and twin crises. We pay special attention to the role of foreign currency and gold clause debt, currency mismatches and debt intolerance. We find fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, a key finding is that countries with noticeably different backgrounds, and strong institutions such as Australia, Canada, New Zealand, Norway, and the US deftly managed their exposure to hard currency debt, generally avoided having too many crises and never had severe financial meltdowns. Moreover, a strong reserve position matched up to hard currency liabilities seems to be correlated with a lower likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We also see that countries with previous default histories seem prone to debt crises even at seemingly low debt to revenue ratios. Finally we discuss the robustness of these results to local idiosyncrasies and the implications from this representative historical sample.

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This chapter was published in:
  • Sebastian Edwards & Gerardo Esquivel & Graciela Márquez, 2007. "The Decline of Latin American Economies: Growth, Institutions, and Crises," NBER Books, National Bureau of Economic Research, Inc, number edwa04-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10655.
    Handle: RePEc:nbr:nberch:10655
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.orgEmail:


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    1. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
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    7. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    8. Bordo, Michael D. & Jonung, Lars, 1994. "Monetary Regimes, Inflation and Monetary Reform: An Essay in Honor of Axel Leijonhufvud," SSE/EFI Working Paper Series in Economics and Finance 16, Stockholm School of Economics.
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    10. John Komlos, . "Financial Innovation and the Demand for Money in Austria-Hungary, 1867-1913," Articles by John Komlos 33, Department of Economics, University of Munich.
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    12. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
    13. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
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    18. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    19. Barry Eichengreen, 1998. "The Baring Crisis in a Mexican Mirror," International Trade 9805001, EconWPA.
    20. Muge Adalet & Barry Eichengreen, 2007. "Current Account Reversals: Always a Problem?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 205-246 National Bureau of Economic Research, Inc.
    21. Michael A. Clemens & Jeffrey G. Williamson, 2004. "Wealth bias in the first global capital market boom, 1870-1913," Economic Journal, Royal Economic Society, vol. 114(495), pages 304-337, 04.
    22. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
    23. Flandreau, Marc & Le Cacheux, Jacques & Zumer, Frédéric, 1998. "Stability Without a Pact? Lessons from the European Gold Standard 1880-1914," CEPR Discussion Papers 1872, C.E.P.R. Discussion Papers.
    24. Charles W. Calomiris, 1992. "Greenback Resumption and Silver Risk: The Economics and Politics of Monetary Regime Change in the United States, 1862-1900," NBER Working Papers 4166, National Bureau of Economic Research, Inc.
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