Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) by Charles P. Kindleberger, Robert Aliber, Robert Solow (Foreword by)

From the Publisher

Manias, Panics, and Crashes, Fifth Edition is an engaging and entertaining account of the way that mismanagement of money and credit has led to financial explosions over the centuries. Covering such topics as the history and anatomy of crises, speculative manias, and the lender of last resort, this book puts the turbulence of the financial world in perspective. The updated fifth edition expands upon each chapter, and includes two new chapters focusing on significant financial crises of the last fifteen years.

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• Table of Contents
• Read an Excerpt

Table of Contents

Read an Excerpt

Don't Panic!

Noted economist Charles P. Kindleberger wrote MANIAS back in 1978 and has been updating it ever since. It's a case study of all the great financial disasters of the last few hundred years. From the Dutch Tulipmania of 1637 -- in which tulip bulbs were eventually valued more than gold -- to the crash of 1987, learn what was done about them at the time, their aftermath, and how knowing about market behavior in times of crisis can help you.

These excerpts deal with two issues: The prime reasons for crashes -- overtrading (too many shares in play at once), and who can be called to save the day during a crisis: the lender of last resort.

From Chapter 2: Anatomy of a Typical Crisis

Now overtrading is by no means a clear concept. It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive "gearing." Pure speculation, of course, involves buying for resale rather than use in the case of commodities, or for resale rather than income in the case of financial assets. Overestimation of profits comes from euphoria, affects firms engaged in the productive and distributive processes, and requires no explanation. Excessive gearing arises from cash requirements which are low relative both to the prevailing price of a good or asset and to possible changes in its price. It means buying on margin, or by installments, under circumstances in which one can sell the asset and transfer with it the obligation to make future payments.

As firms or households see others making profits from speculative purchases and resales, they tend to follow: "Monkey see, monkey do." In my talks about financial crisis over the last decade, I have polished one line that always gets a nervous laugh: "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior to what has been described as "manias" or "bubbles." The word mania emphasizes the irrationality; bubble foreshadows the bursting. In the technical language of some economists, a bubble is any deviation from "fundamentals," whether up or down, leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values (as prices) are called "noise." In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.

From Chapter 10: The Lender of Last Resort

The lender of last resort stands ready to halt a run out of real and illiquid financial assets into money by making more money available. How much? To whom? On what terms? When? These constitute some of the dilemmas of the lender of last resort, after it is determined, first, that there should be one, and second, who it should be....

The experience of the United States is especially pertinent to the questions: Who is the lender of last resort, and how does it or he know it? Under the First and Second Banks of the United States there was some ambiguity, despite the designation of the Bank in each case as a chosen instrument. On various occasions, the Treasury came to the aid of the banks by accepting customs receipts in postdated 30-day notes (1792), by making special deposits of government funds in banks in trouble (1801, 1818, and 1819), and by relaxing the requirement of a commercial bank to pay the Bank of the United States in specie (1801).

With the failure to renew the charter of the Second Bank of the United States in 1833, the Treasury was even busier, both before and after passage of the 1845 law requiring the Treasury to keep funds out of the banks. In times of crisis, and in periods of stringency caused by crop movements, the Treasury would pay interest and/or principal on its debt in advance, make deposits in banks despite the law, offer to accept securities other than government bonds as collateral for deposits of government funds, or buy and sell gold and silver. Banks became accustomed to looking to the secretary of the Treasury for help in an emergency, and for relieving seasonal tightness. In the fall of 1872, Secretary of the Treasury George S. Boutwell served as a lender of last resort by the possibly illegal method of reissuing retired greenbacks. His successor, William A. Richardson, did the same thing a year later.

The Treasury could absorb money in deposits and pay out surpluses from existing funds, but apart from the greenback period it could not create money. For this reason, it was unsatisfactory as a lender of last resort, unless it had previously accumulated a budget surplus. In 1907, when the till was low, the Treasury issued new bonds -- $50 million of Panama Canal bonds, which were eligible for collateral for national bank notes, and $100 million of 3 percent certificates of indebtedness -- hoping to entice existing cash and specie out of hoarding. In the end, the day was saved by a capital inflow from Britain of more than $100 million. Moreover, the devices used were ad hoc in the extreme. An analysis of the crisis of 1857 suggests that the federal government was incapable of intervening effectively, and that the public, including the banks, was left without guidance to stem the tide of the crisis. As we shall see, it was worse than that: intervention proved to be too much and too early.

Copyright 1978 Charles P. Kindleberger. Rights secured from John Wiley & Sons, Inc.