The systemic causes of financial crises in the long nineteenth century

Abstract

In a globalized and hegemonically organized international economy, the economic fundamentals and policy choices of the hegemon often have spillover effects for peripheral economies. This is a well-recognized dynamic of the contemporary political economy, but it was true during the first age of globalization as well. Motivated by literature examining the impact of the U.S. macroeconomic conditions on other economies throughout the international system, this article advances a systemic theory of financial crisis and applies it to the long nineteenth century, when British hegemony reigned. My main motivation is the earliest example of a systemic theory of financial crisis, Charles Kindleberger's Hegemonic Stability Theory. However, while Charles Kindleberger focused on the stability brought about by a hegemonically structured international economy, I emphasize the dynamics of volatility present in this type of system. I argue that a hierarchical distribution of economic activity in the international system means that the financial cycle of the most central country influences the financial conditions in peripheral countries that lead to financial crisis. Evidence from financial crises which occurred in the long nineteenth century supports this theory.

Hegemonic instability: complex interdependence and the dynamics of financial crisis in the contemporary international system

“… 5. Indeed, Ba (2018) identifies similar dynamics at work during the first period of globalization in the 19th century. During this period, British banks were the most influential international lenders, and increases in domestic credit within Britain typically correlated positively with capital outflows from Britain to peripheral countries. …”

American financial hegemony, global capital cycles, and the macroeconomic growth environment

“…Oatley et al (2013) and Winecoff (2015) produced a network conceptualization of the international financial system using bilateral data on international bank claims and cross-border portfolio investment flows, demonstrating that the contemporary international financial system has exhibited a persistent, hierarchical structure, centered on the US. A subsequent wave of research has expanded this approach by taking the logic of "robust yet fragile" networks one step further, examining whether this exorbitant privilege means that even in noncrisis periods, cyclical changes in the central economy's financial system might be responsible for patterns of volatility throughout the rest of the international system (Ba, 2018(Ba, , 2021Danzman et al, 2017). This paper expands this framework to explicitly examine the system of global economic growth as an interdependent outcome that is highly sensitive to developments at the core of global economic networks.…”

The case for Interdisciplinary Crisis Studies

“…That capitalism destroys social values has been highlighted by conservative and reactionary commentators, but both Marx and Berman, among many others, saw the radical and liberatory potential of the insight. There have been innumerable studies of capitalist crisis, boom and slumps, the global falling rate of profit, economic "contagion" effects from imperialist centre(s) to peripheries, and shifting of crisis from economic to financial to fiscal to political (for recent commentaries see, for example, Ba 2017;Carchedi and Roberts 2018;Sum and Jessop 2013;Walby 2015). A key question such approaches highlight is to what extent crisis is endemic to capitalism producing policies of austerity that further sustain the endemic features of people's sense of existing in permanent economic hardship.…”