Banking crises, or financial crises, have been back in the news in abundance in the past few years. They weren’t heard of much in the years before the great crisis of 2007–2008, though—at least not in developed economies. What are these crises? There have been many approaches to defining and measuring them. Some researchers have taken the number of commercial bank failures, or these as a proportion of the total number of banks, as the indicator. That approach has been supplemented with the quantity of capital that has failed as a proportion of the total capital employed in banking. Carmen Reinhart and Kenneth Rogoff preferred a bank run leading to a state takeover, or the closure of an important financial institution, as the guide, although they then discuss all manner of financial problems in their book, This Time Is Different (2009). Anna Schwartz defined a financial crisis as something that posed a threat to the payments system. Large financial institutions might fail—or municipalities, or even many banks—but if these did not pose a threat to the payments system, they could be safely ignored for the purposes of financial crisis analysis.

John Turner takes a different approach. He first sensibly points out that failure can help stabilize markets, and a certain amount is healthy. However, a crisis presents problems. He considers the failure of commercial banks, their failure rate, and the capital wiped out, but his principal focus is on the collapse in bank share prices relative to the rest of the market. In an examination of British experience this approach leaves just two crises: that of 1825 and the most recent one of 2007–2008. This disposes of all the other crises that have been written about—the 1830s, 1847, 1857, 1866, and also a number of other cases, such as the City of Glasgow Bank in 1878, Barings in 1890, that on the outbreak of World War I, the problems of 1931, the Secondary Banking Crisis of 1974, and several other similar cases. We could largely accept the dismissal of those after 1866, with considerable qualification for 1914—but the others in the first two-thirds of the nineteenth century are surely more difficult to get rid of. For Turner, however, the British banking system was stable from 1826 until the recent experience. Anything else in between is described as an episode of stress.

The dispute over quite what constitutes a crisis and how it might be measured, and how many crises there were, can be put aside for the moment. The question in which Turner is primarily interested is what accounts for the long period of stability. His answer is, essentially, unlimited liability. Banks were obliged to conduct their business with unlimited liability for owners from their origins until the late 1850s. Legislation then allowed banks to decide on which form of governance they preferred. The large bank Overend Gurney promptly adopted limited liability and then soon failed in 1866. Many stuck with unlimited liability until after the 1878 Glasgow bank failure. Even after that, there remained in place contingent liability of different kinds, leaving shareholders liable for more than their basic shareholding. Turner addresses all the criticisms that have been made of unlimited liability and debunks convincingly the idea that there were deficiencies in it.

Limited liability had become the norm by the beginning of the twentieth century, however, and yet stability continued. Why? Initially, the reason was that reserve liability continued in place. For the years after 1945, though, Turner shows how the different measures of what would later be called financial repression or macro-prudential regulation account for the continuing stability. The banks were severely circumscribed in what, where, and how they could lend. Risk shifting was limited. Financial repression is inefficient and something better is desirable. In any case, after these kinds of constraints were gradually removed, the two pillars underpinning financial stability had gone and we finished up with 2007–2008.

So, Turner asks, what should now be done? Banking needs radical reform and shareholders held to account. Bankers need adequate incentives. The answer is that in an ideal world, we would restore extended liability and there would be a credible commitment to no government bailouts. There are costs attaching to extended liability, of course, but Turner argues that these are not great. In the world we live in, extended liability is not going to be reintroduced. Politics dominates. There has been regulatory capture by the banks and the political elite is reluctant to remove the various safety nets that protect the banking system. Inevitably, these will not prevent a further crisis, but we will have to live with the costs of the protection in the meantime.

John Turner has written a very good book. It is the product of some years of research. It is stimulating, thought provoking, and needs to be read by policy makers as well as bankers and historians.