David R. Henderson  

Canada's Central Bank

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Yesterday, blogger Megan McArdle had an interesting post on Canada. She wrote:

Canada is now being held up as a regulatory example to us, but Canada has always been an odd duck--it was also the only major economy in the Great Depression not to have a banking crisis. You can tell a lot of stories about why this is so, but most of them--like nationwide banking, big downpayments on mortgages, and banks keeping substantial portions of the loans they originated, are found elsewhere.

By "why this is so," she presumably means "why Canada didn't have a banking crisis during the Great Depression." I think she's right to emphasize nationwide banking. But she leaves out one major factor that distinguished Canada from the United States: Canada had no central bank until 1935. For more on this, see Michael D. Bordo and Angela Redish, "Why Did the Bank of Canada Emerge in 1935?," The Journal of Economic History, Vol. 47, No. 2, June 1987, pp. 405-417.

BTW, Ms. McArdle refers to herself as "The World's Tallest Female Econoblogger." Does anyone know how tall she is?


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COMMENTS (10 to date)
David W writes:

6'2", according to this post of hers: http://www.janegalt.net/blog/archives/005134.html

razib writes:

thaz 4 standard deviations above the female norm. around 1 out of 32,000 women assume gaussian....

Duncan writes:

She did also say that she's 4 standard deviations above the average female height, in response to reports of a research paper that found a positive correlation between height and IQ.

Francis writes:

Sorry, I don't know how tall Ms. McArdle is.

But I am glad that the case of Canada enters the debate, at last. Now as in 1929, it is the only (or one of the very few) country not to have a banking crisis.

It didn't have a central bank in '29, but it has one now.

So, what is it that keeps us Canadians outside the storm? I think those who genuinely search for a solution to the banking crisis problem should at last have a story about the case of Canada.

Floccina writes:

Tyler Cowen had post about the Cayman Island banks also avoiding crisis.
http://www.marginalrevolution.com/marginalrevolution/2008/10/how-are-the-cay.html

Yancey Ward writes:

I wouldn't be so quick to accept the claim that the Canadian banks are actually OK. Remember, the same claim being made 6 months ago about banks around the world.

Yancey Ward writes:

I saw Megan McArdle once on a Blogginheads, and I thought she was 10 feet tall.

Francis writes:

Yancey;

the thing is: even if Canadian banks started to fail now, they would do so with a three month lag to American and European banks. Why?

Yancey Ward writes:

Francis,

You seem to have some belief that banks fail at the moment they become insolvent. This is not the case- insolvency can be hidden for quite a while, especially the more deeply entwined a banking system is with the government. However, I would also point out that the Canadian banks may very well be more deeply damaged by the commodity bust than by the housing bust, and the commodity bust is a much more recent event.

Francis writes:

Yancey;

What you write are good hypothesis. Yet they are not answers. I believe that if someone wants to understand what went so wrong and how it can be avoided, perhaps that investigation is worthwhile. Even if it turns out that Canadian Banks were as rotten as the others.

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