DP3742 Crises and Punishment: Moral Hazard and the Pre-1914 International Financial Architecture

Author(s): Marc Flandreau

Publication Date: February 2003

Keyword(s): moral hazard , financial architecture , financial crises , self insurance , relationship banking

JEL(s): F02 , G14 , N10 , N20

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3742.asp

This Paper argues that the backbone of the pre-1914 international financial architecture was the concern about moral hazard. No decentralized system can leave without safeguards against free riding and this typically means that problem countries must find by themselves the means to fix their domestic problems. We review the origins of crises as well as the remedies that were commonly applied one century ago and find that the international financial world was fairly similar to the setting in which we live today, and this for the same reasons. Today, just like one century ago, in the absence of an international lender of last resort with huge regulatory powers, countries must muddle through, with the occasional - and imperfect - help of international finance.