Financial Crises: Plus ça Change, plus c'est la Même Chose

During recent decades most financial crises were caused by excessive public‐sector expansion. The current Asian crisis, however, had its roots in private‐sector over‐expansion. In this respect it had more in common with the pre‐1914 crises. In this paper we compare and contrast these two sets of financial crises. Many of their initial features – a toppling investment boom, widespread bank failures, financial dislocation and withdrawal of prior capital inflows – were common and prevalent in both eras. We focus here on the differences between the two cases and this centres on the external exchange‐rate regime. Prior to 1914, the regime encouraged large‐scale gold inflows in the aftermath of crisis, a re‐liquification of the economy and interest rates returning rapidly to low levels. Stabilizing expectations are harder to encourage in current circumstances; in their absence the essential alternative is to reduce the burden of foreign debt.