In the past
When dynasties changed, the monetary system was interrupted.
The monetary system collapses
How does the manner of collapse teach us what supported the system?
Dynastic change/Recoinage → Currency crisis/Default
How Monetary Systems Collapse in 3 Minutes
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In the past
Recoinage also caused the monetary system to collapse.
Similarities
The speed at which trust is built isn't always the same as the speed at which it collapses.
Today
Today, collapses take the form of currency crises or defaults.
Today
A default is when a promise (a contract) is broken.
Differences
A different type of collapse means a different path to recovery.
Useful perspective
Looking at how a system collapses shows you what was supporting it.
A word of caution
Don't use past collapses to predict the timing or form of modern ones.
2What would you do?
'The country's rulers changed, and the monetary system ended.' Is this how systems collapsed in the past, or how they collapse today?
Pick one
How they collapsed in the past
That's right. A change of dynasty is a physical break. Today's defaults are a contractual break.
How they collapse today
Today's collapses are currency crises or defaults. A system ending because of a change of rulers is how things happened in the past with dynasties.
A different type of collapse means a different path to recovery. Understanding how a system collapses reveals what was supporting it.
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Representative Historical Scenarios
- The Miracle of the RentenmarkOverview: the world Germany November 1923
- The New Yen ConversionOverview: the world Japan AD 1946
- An American living room, the radio alightUnited States 1929 March 1933
Contemporary Financial Scenarios
Situations from the book where this theme appears. We present a comparison with past situations for each case.
If a bank fails, what happens to the deposits?
1-06 / Modern Money Present. Tokyo. Deposit Insurance Corporation.
- Similarities
- The nature of a deposit—that it will not be returned if the depository fails—has not changed since the era of money changers.
- Differences
- Today, a third party—insurance—draws a line, and within that line, the "bank's liability" is replaced by the "corporation's promise."
- Applications
- When you see a balance, check if it is for payment and settlement or a general deposit, and if it exceeds ten million yen at a single financial institution.
- Limitations
- Ten million yen is the current value in Japan, with an exception that it is multiplied by the number of banks for one year after a merger. The methods of failure resolution (e.g., insurance payment, financial assistance) are not covered.
Borrowing short to hold long
6-04 / Before 2008 2007 New York
- Similarities
- The fragility of the system of borrowing short-term and lending long-term has been a cause of bank runs since the era of money changers.
- Differences
- The borrowing was in the form of collateralized overnight repos, the lenders were MMFs and others, and there was no explicit access to central bank liquidity or public sector credit guarantees.
- Applications
- When you hear "leverage," distinguish between thinness of capital and shortness of borrowing term.
- Limitations
- Specific ratios and amounts could not be extracted from the report's PDF, so they are not cited at this stop.
What happens when the price of collateral falls?
6-05 / Before 2008 Summer 2007–September 2008, United States/Europe
- Similarities
- The dynamic where a fall in collateral value accelerates the flight of lenders is always present where there is collateralized lending.
- Differences
- The collateral was mortgage-backed securities, the lenders were MMFs and foreign banks, and the chain reaction spread globally overnight.
- Applications
- Read crisis reports starting with "what collateral's price has fallen?"
- Limitations
- The overall picture of causality is based on the committee's conclusions and the description by the NY Fed. The report also includes a dissenting opinion citing global capital flows as the main cause.
September 2019 — The day the repo rate spiked
5-05 / Repo and Collateral September 2019 New York
- Similarities
- The phenomenon of interest rates spiking from a small shock when liquidity is thin has the same pattern as modern financial panics where cash dried up during harvest season, causing interest rates to soar.
- Differences
- The units of shock are government bond settlement dates and tax payment dates, and the response is the management of the size of the central bank's balance sheet.
- Applications
- When you see news that "the repo rate has surged," ask what was settled on that day and where the cash flowed.
- Limitations
- The estimates are the result of a regression in the note and depend on the period and definitions. They cannot be generalized to other countries.
How to compare past and present
Similarities
The accumulation and collapse of trust can be asymmetrical.
Differences
A dynastic change is a physical rupture; a modern default is a contractual one. The paths to recovery differ.
Applications
Understanding the way a system collapses reveals what supported it.
Limitations
⚠ When predicting the timing or form of a modern collapse based on past ones.
To go beyond "they are similar," we also describe the differences, what can be applied today, and where past examples should not be applied to the present (limitations).
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