IDEAS home Printed from https://ideas.repec.org/p/ucb/calbcd/c99-106.html
   My bibliography  Save this paper

Internal Versus External Convertibility and Developing-Country Financial Crises: Lessons from the Argentine Bank Bailout of the 1930s

Author

Listed:
  • Gerardo della Paolera and Alan M. Taylor.

Abstract

Argentina's money and banking system was hit hard by the Great Depression. The banking sector was awash with bad assets that built up in the 1920s. Gold convertibility was suspended in December 1929, even before the crisis seriously damaged the core economies. Commonly, these events are seen as being driven by external real shocks associated with the World Depression, espite the puzzle of the timing. We argue for an alternative, or complementary, explanation of the crisis that focuses on the inside-outside money relationship in a system of fractional-reserve banking and gold-standard rules. This internal explanation for the crisis involves no timing puzzle. The tension between internal and external convertibility can be felt when banks fall into bad times, and an internal drain can feed an external drain. Such was the case after financial fragility appeared in the 1914-27 suspension. Resumption in 1928 was probably unsustainable due to the problems of the financial system, and a dynamic model illustrates the point well. The resolution of the crisis required lender-of-last-resort actions by the state, discharged at first by the state bank issuing rediscounts to private banks. When the state bank became insolvent, the currency board started bailing out the system using high-powered money. Thus came about the demise of the currency board and the creation of a central bank in 1935, an institution that had no pretense of a nominal-anchor commitment device and no ceiling on lender-of-last-resort actions-innovations with painful long-run consequences for inflation performance and financial-sector health. As one of its first substantive actions, the central bank engineered a bailout of the banking system at a massive social cost. The parallels with recent developing-country crises are remarkable, and the implications for the institutional design of monetary and banking systems are considered.

Suggested Citation

  • Gerardo della Paolera and Alan M. Taylor., 1999. "Internal Versus External Convertibility and Developing-Country Financial Crises: Lessons from the Argentine Bank Bailout of the 1930s," Center for International and Development Economics Research (CIDER) Working Papers C99-106, University of California at Berkeley.
  • Handle: RePEc:ucb:calbcd:c99-106
    as

    Download full text from publisher

    File URL: http://www.haas.berkeley.edu/groups/iber/wps/cider/c99-106.pdf
    File Function: main text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
    2. repec:idb:wpaper:318 is not listed on IDEAS
    3. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, pages 473-500.
    5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    7. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters,in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402 National Bureau of Economic Research, Inc.
    8. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, pages 1-27.
    9. Elías Salama, 1997. "El Orden Monetario. Caja de Conversión-Banco de la Nación," Department of Economics, Working Papers 001, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    10. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
    11. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
    12. Barry Eichengreen, 1998. "Exchange Rate Stability and Financial Stability," Open Economies Review, Springer, vol. 9(1), pages 569-608, January.
    13. Taylor, Alan M., 1992. "External Dependence, Demographic Burdens, and Argentine Economic Decline After the Belle Époque," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 907-936, December.
    14. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 6067, Inter-American Development Bank.
    15. Miller, Victoria, 1996. "Speculative currency attacks with endogenously induced commercial bank crises," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 383-403, June.
    16. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, January.
    17. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, pages 433-448.
    18. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
    19. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
    20. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    21. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    22. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    23. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Willem Buiter & Clemens Grafe, 2001. "Central Banking and the Choice of Currency Regime in Accession Countries," Revue d'Économie Financière, Programme National Persée, vol. 6(1), pages 287-318.
    2. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
    3. repec:wsi:rpbfmp:v:06:y:2003:i:01:n:s0219091503001006 is not listed on IDEAS

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucb:calbcd:c99-106. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/debrkus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.