FRAGILE BY DESIGN

Charles W. Calomiris and Stephen H Haber

Subtitle: The Political Origins of Banking Crises and Scarce Credit - Princeton Univ. Press, Princeton, 2014, 570 pgs., index, bibliography, footnotes

Reviewer Comment - The book is a comparative study of several quite different banking systems and their interrelationships with the political demands of their governments. The section on U.S. Banking is important in itself for its history. Other books on American financial and economic history that can be read with this are: John Steele Gordon's An Empire of Wealth, R. Christopher Whalen's Inflated: How Money and Debt Built the American Dream, and Felix Martin's Money. And on the recent financial crash and banks there is Anat Admati's The Banker's New Clothes.
The most important general lesson in the book is that banking systems are inherently creatures of the governments that support and control them. There are no really independent banking systems today. In other words they are political entities.

Introduction -
The authors state their backgrounds and interests in the subject. They state that they are seeking to explain the political roots of differences in banking system performance across countries and over time. They believe most typical discussion has been too short-term. They write, "In order to do so, we integrate evidence and analytic tools from three distinct disciplines, history, political science and economics."

Great, but right there they reveal the fundamental intellectual problem of this and the past century created by the academic establishment. In reality there is no authentic political science without economics, no authentic economics without political science and neither without being embedded in history.

Their thesis as stated: "We argue that banks' strengths and shortcomings are the predictable consequences of political bargains and that those bargains are structured by a society's fundamental political institutions."

This is the most important reason for studying this book. It completely dispels the 'myth' that central banks are independent of government and that private banks are even less parts of the government. Their key point is that 'states must have banks and banks must have states'.

Chapter 1 - If Stable and Efficient Banks Are Such a Good Idea, Why Are They So Rare?

Chapter 2 - The Game of Bank Bargains -
This chapter explores issues of conflict of interest involved in the relationships between governments and banks

Chapter 3 - Tools of Conquest and Survival: Why States need Banks -
There are many books focused on the origin and development of the modern 'state' and on the history of money in which the development of banking became a central aspect. But the authors here link the two.

Chapter 4 - Privileges with Burdens: Wars, Empire, and the Monopoly Structure of English Banking -
The chapter brings the history of banking and political change in one specific example - Great Britain - during the 18th century together to show their mutual influence.

Chapter 5 - Banks and Democracy: Britain in the Nineteenth and Twentieth Centuries - The chapter continues the story through the 19th and 20th Centuries

Chapter 6 - Crippled by Populism: U.S. Banking from Colonial Times to 1990 -
In this chapter the authors shift the location to the U.S. while continuing their integration of economics, political science and history.

Chapter 7 - The New U.S. Bank Bargain: Megabanks, Urban Activists, and the Erosion of Mortgage Standards -
In this chapter the authors focus on the history of results from the change in fundamental relationships between banks and political actors using the example of its impact on the national mortgage industry.

Chapter 8 - Leverage, Regulatory Failure, and the Subprime Crisis -
In this chapter the authors explain the causes of the 2007-2009 financial crisis

Chapter 9 - Durable Partners: Politics and Banking in Canada -
Turning to Canada and a very different example they contrast the results with those in the U.S.

Chapter 10 - Mexico: Chaos Makes Cronyism Look Good -
The real-world example of a very different political system and banking system creates different results.

Chapter 11 - When Autocracy Fails: Banking and Politics in Mexico since 1982 -
The Mexican example continues.

Chapter 12 - Inflation Machines: Banking and State Finance in Imperial Brazil -
Another very different political-banking relationship provides a case study.

Chapter 13 - The Democratic Consequences of Inflation - Tax Banking in Brazil -
The case study continues.

Chapter 14 - Traveling to Other Places: Is our Sample Representative? -
This is a summary of the previous case studies with some examples from other countries.

Chapter 15 - Reality is a Plague on Many Houses -
A critique of some common views, such as the libertarian agenda, current economic models, and proposals for change in banking regulations