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Home , Baring crisis, Black Friday (1869), Panic of 1837, Panic of 1907, Tulip mania

History of Financial Turbulence and Crises Prof. Michalis M. Psalidopoulos Spring term 2011

Course description:

The outbreak of the 2008 has rekindled academic interest in the history of fi‐ nancial turbulence and crises – their causes and consequences, their interpretations by eco‐ nomic actors and theorists, and the policy responses they stimulated. In this course, we use the analytical tools of , the history of economic policy‐ making and the history of economic thought, to study episodes of financial turbulence and crisis spanning the last three centuries. This broad historical canvas offers such diverse his‐ torical examples as the Dutch mania of the late 17th century, the German of 1923, the Great Crash of 1929, the of 1994/5 and the most recent sub‐ prime mortgage crisis in the US. The purpose of this historical journey is twofold: On the one hand, we will explore the prin‐ cipal causes of a variety of different manias, panics and crises, as well as their consequences – both national and international. On the other hand, we shall focus on the way economic ac‐ tors, economic theorists and policy‐makers responded to these phenomena. Thus, we will also discuss bailouts, sovereign debt crises and , and global re‐ cessions, including the most recent financial crisis of 2008 and the policy measures used to address it. What is more, emphasis shall be placed on the theoretical framework with which contemporary economists sought to conceptualize each crisis, its interplay with policy‐ making, as well as the possible changes in theoretical perspective that may have been precipi‐ tated by the experience of the crises themselves.

Last but not least, the course seeks to provide an introduction to important themes in eco‐ nomic and social history, and highlight the usefulness and significance of both economic his‐ tory and the history of economics to modern economists.

Course objectives:

By the end of the course, students will be familiar with: • The typology, terminology and basic etiology of different financial crises, as well as the principal historical facts surrounding major crises. This includes distinguishing between different types of crises (currency, debt, financial, liquidity, etc.), being able to highlight key differences and similarities, as well as discussing and evaluating their causes and consequences. • The methods applied by economic historians to topics in financial history, and their sig‐ nificance to modern day economists. Historical scholarship in economics finds itself in an ongoing discussion about what events or processes are significant, how one can de‐ fine and assess them and, especially, why it is important for present day social scientists to be literate in economic history. • Ways to synthesize knowledge of economic history, the history of economic policy and the history of economic thought to forge one’s own original way of looking at contempo‐ rary episodes of economic turbulence – and the way they are interpreted and tackled by policy‐makers.

1 Course prerequisites:

Apart from a working knowledge of intermediate macroeconomics, the course assumes little prior knowledge of financial history or the history of economic thought, although a back‐ ground in these fields will be an advantage. Throughout the course, emphasis shall be placed on historical rather than financial/mathematical tools for studying crises.

Course outline:

The main outline of the course is given below, along with some supplementary reading allot‐ ted to each week of coursework; the main book to be studied throughout the course is:

Charles P. Kindleberger, 2000. Manias, panics, and crashes : a history of financial crises. New York: Wiley

This is the fourth edition of the classic book by Charles Kindleberger, and the last one to be signed by him alone. The book is now in its fifth edition with Robert Aliber as co‐author; whilst this will also serve the purposes of the course, students are encouraged to make an effort to obtain a (used) copy of any previous edition.

Because of the structure of the book, individual chapters cannot be matched to specific weeks of study, but students will be expected to have covered most of the material included by the middle of the course. For a good introduction into various issues relating to the history of economic thought, stu‐ dents are encouraged to turn to:

H.W. Spiegel, 1991. The Growth of Economic Thought. Durham: Duke University Press.

For a brief introduction to economic history, students could use the following book:

Angus Maddison, 1995. Monitoring the , 1820‐1992. Paris: OECD.

Week 1 – Introduction

... course objectives; basic theoretical concepts and taxonomies of financial crises; a sum‐ mary narrative of historical experience;

Galbraith, J.K. (1994) A History of Financial Euphoria, New York: Penguin. Read chap‐ ters 1‐2. Neal, L. and Weidenmier, M. (2002), ‘Crises in the Global Economy from to Today: Contagion and Consequences’, NBER Working Paper, No. w9147. Eichengreen, B. and Portes, R. (1987), ‘The anatomy of financial crises’, in R. Portes and A.K. Swoboda (eds.) Threats to international financial stability, Cambridge: Cambridge Uni‐ versity Press. Eichengreen, B. (2003), ‘Three generations of crises, three generations of crisis models’, Journal of International Money and Finance, 22. Minsky, H. P. (1992) ‘The Financial Instability Hypothesis’, Jerome Levy Economics Institute of Bard College, Working Paper No 74 Oliver, M. J. (2008), ‘Financial Crises’, in M.J. Oliver and D.H. Aldcroft (eds.) Economic Disas‐ ters of the Twentieth Century, Edward Elgar. Chapter 6.

Week 2 – Crises in the 18th century

... the tulip crisis (1636‐7), the South Sea Bubble (1720), the 1763 crisis after the seven year war, the ‐3, the Assignats and during the French Revolution (1789‐97).

2 Galbraith, J.K. (1994) A Short History of Financial Euphoria, New York: Penguin. Read chap‐ ters 3‐4. Garber, P.M. (1990), Famous First Bubbles, Journal of Economic Perspectives, 4(2), pp. 35‐54. Hoppit, J. (1986), ‘Financial Crises in Eighteenth‐Century England’, Economic History Review, 39, pp. 39‐58. Schnabel, I. and Song Shin, H. (2004), ‘Liquidity and Contagion: the Crisis of 1763’, Journal of the European Economic Association, 2, pp. 929‐68. White, E. N. (1995), ‘The French Revolution and the Politics of Government Finance, 1770‐ 1815’, Journal of Economic History, 55, pp. 227‐55.

Week 3 – The 19th century

... the banking crisis in the USA (1818‐9), the crisis of 1815, the London crisis of 1825, the , the railroads “mania” (1847), the Ohio Life (1857), the Overend and Gurney bankruptcy (1866), “ Friday” in the USA (1869), the crisis of 1873, the bankruptcy of Union Generale (1882), the crisis of 1890.

Bordo, M. (1985), ‘Financial crises, banking crises, ‐market crashes and the money sup‐ ply: some international evidence, 1870‐1933’, in F. Capie and G.E. Wood (eds.) Finan‐ cial Crises and the World Banking System, London: Macmillan. Galbraith, J.K. (1994) A Short History of Financial Euphoria, New York: Penguin. Read chap‐ ter 5. Rousseau, P. (2002), ‘Jacksonian , specie flows, and the panic of 1837’, Journal of Economic History, 62. Ford, G.A. (1956), ‘ and the of 1890’, Oxford Economic Papers, 8, pp. 127‐ 150. Arnold,A.J./S. McCartney (2003), ‘The of 1845‐47:Market irrationality or collu‐ sive swindle based on accounting distortions?’, Accounting, Auditing and Accountabil‐ ity Journal, pp.821‐852

Week 4/5 – The early 20th century

… the US banking crisis of 1907 and the creation of the System, the inter‐ war period prior to the , the German hyperinflation of 1923.

Moen, J. and E. W. Tallman (1992) ‘The Bank : The Role of Companies’, Journal of Economic History, 52(3), 611‐630 Johnson, J.F. (1908), ‘The Crisis and Panic of 1907’, Political Science Quarterly, 23, pp. 454‐467. Sprague, O.M.W. (1908), ‘The American Crisis of 1907’, Economic Journal, 18, pp. 353‐372. Hetzel, R. L. (2002), ‘German Monetary History in the first half of the twentieth century’, Eco‐ nomic Quarterly ‐ of Richmond; 88(1); pp. 1‐35. Meltzer, A. (2003), A History of the Federal Reserve, Vol. I, 1913‐1951, Chicago: Chicago Univer‐ sity Press. Chapter 3 (pp. 65‐137).

Week 5/6‐ Theoretical explanations and implications for economic policy‐making.

….The 19th century: the Bullionist Controvercy, the Currency versus the Banking School, sun‐ spot theory. Early 20th century: the natural versus the nominal rate of interest. The : Fisher, Schumpeter, Kalecki, Keynes, Hayek and the . Post WWII re‐ statements: Friedman, Minsky, Kindleberger. /deregulation

David Laidler (2000)Highlights of the Bullionist controversy, A report. Roger W. Garrison (1989) The Austrian Theory of the in the Light of Modern Macroeconomics, The Review of Austrian Economics, Volume 3, pp. 3‐29

3 Steve Keen (1995) Finance and economic breakdown: modeling Minsky’s “financial instability hypothesis”, Journal of Post Keynesian Economics, Vol. 17, No 4, pp. 607‐635 Joseph Schumpeter (1927) The Explanation of the Business Cycle, Economica, No. 21 (Dec), pp. 286‐311 Allin Cottrell (1993) Hayek’s Early Cycle Theory Re‐examined, Cambridge Journal of econom‐ ics,18: 197‐212 Carlos Diaz‐Alejandro (1995), Goodbye financial repression, hello financial crash, Journal of Development Economics, 19:1‐24 Stephen Morris and Hyun Song Shin (2008) Financial regulation in a system context, Brook‐ ings papers on Economic Activity, Fall:229‐261

Week 7/8 – The Great Depression

Galbraith, J.K. (1994) A Short History of Financial Euphoria, New York: Penguin. Read chap‐ ter 6. James, H. (1992), ‘Financial flows across frontiers during the inter‐war depression’, Economic History Review, 45. James, H. (1984), ‘The Causes of the German Banking Crisis of 1931’, Economic History Review, New Series, 37(1), 68‐87 Gordon, R. J. and J. A. Wilcox (1981) “Monetarist Interpretations of the Great Depression: An Evaluation and Critique”, in K. Brunner (ed.) The Great Depression Revisited, Kluwer Publishing, pp. 49‐107. Temin, P. (1981), ‘Notes on the Causes of the Great Depression’, in K. Brunner (ed.) The Great Depression Revisited, Kluwer Publishing, pp. 108‐124. Garside, W.R. (2008), ‘The Great Depression, 1929‐33’, in M.J. Oliver and D.H. Aldcroft (eds.) Economic Disasters of the Twentieth Century, Edward Elgar. Chapter 2. Romer, C.D. (1993), ‘The Nation in Depression’, Journal of Economic Perspectives, 7(2), pp. 19‐ 39. Calomiris, C.W. (1993), ‘Financial Factors in the Great Depression’, Journal of Economic Perspec‐ tives, 7(2), pp. 61‐85. Temin, P. (1993), ‘Transmission of the Great Depression’, Journal of Economic Perspectives, 7(2), pp. 87‐102

Weeks 9/10 – Post‐war ( up to 2008) crises the sterling crisis (1967), the crash of 1987, «» and the pound’s withdrawal from the ERM (1992), the 1997 Asian crisis, the Mexico crisis of 1994‐5, the debt crises in Argentina (2001) and Turkey.

Blanco, H. and Garber, P. (1986), ‘Recurrent Devaluation and Speculative Attack on the Mexi‐ can Peso’, Journal of Political Economy, 94. Galbraith, J.K. (1994) A Short History of Financial Euphoria, New York: Penguin. Read chap‐ ter 7. Eichengreen, B. (2003), Capital flows and crises, Cambridge, Ma: MIT Press. Read chapters 7‐ 9. Jacque, L.L. (2010) Global Derivative Debacles: From Theory to Malpractice. World Scientific. Read chapters 15‐16. Furman, J. and Stiglitz, J.E. (1998), ‘Economic Crises: evidence and insights from East Asia’, Brookings Papers on Economic Activity, 2. Mishkin, F. S. (1999), ‘Lessons from the Asian crisis’, Journal of International Money and Finance, 18, pp. 709‐723. Feldstein, M. (2002) “Argentina’s Fall. Lessons from the Latest Financial Crisis”, Foreign Af‐ fairs, 81(2), 8‐14

4 Ferguson, N. and B. Granville (2000) “‘Weimar on the Volga’: Causes and Consequences of Inflation in 1990s Russia Compared with 1920s Germany”, Journal of Economic History, 60(4), 1061‐1087 Carlson, M. (2007), ‘A brief history of the 1987 crash, with a discussion of the Federal Reserve Response’, Finance and Economics Discussion Series, 2007/13, Federal Re‐ serve Board, Washington, DC. Issawi,C (1978‐9), The 1973 crisis and after, Journal of Post Keynesian Economics, 1:2 Englund,P. (1999) ‘The Swedish Banking Crisis: Roots and Consequences, Oxford Review of Economic Policy, 15:80‐97

Weeks 11/14 – Presentations of final assignments

… these lectures will be devoted to the presentation of students’ final assignments, which will discuss various aspects of the contemporary financial crisis.

Week 15 – Appraisal

Bordo, M. and Schwartz, A. (1999), ‘Under what circumstances, past and present, have inter‐ national rescues of countries in financial distress been successful?’, Journal of Interna‐ tional Money and Finance, 18. Galbraith, J.K. (1994) A Short History of Financial Euphoria, New York: Penguin. Read chap‐ ter 8. DeLong, J.B. et al. (1999), ‘Financial crises in the 1890s and the 1990s: must history repeat?’ Brookings Papers on Economic Activity, 2. Eichengreen, B. (2003), Capital flows and crises, Cambridge, Ma: MIT Press. Read chapters 10‐11. Kindleberger, C. P. and Aliber, R. Z. (2005), Manias, panics and crashes: a history of financial crises, 5th Edition, Wiley. Read chapters 10‐13. Reinhart C.M. and Rogoff. K. (2009) This Time is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press. Read chapter 17.

Grading

The final grade will be determined as follows: • 25% class participation; this includes in‐class presentations of assigned work. • 25% mid‐term assignment; this will be a mid‐term in‐class quiz/exam. • 50% final assignment; this will be the final term paper on financial crises.

Final assignments:

The final assignment shall consist of a 10‐page paper discussing the experience of a spe‐ cific country, or group of countries, during and after the 2008 financial crisis. The paper should be written in the form of an analysis and policy memo addressed to each country’s economic policy‐making authorities (e.g. the minister of finance, governor, etc.). Its goal should be to explain the principal causes, modes of transmission and attributes of the crisis in each case, pose the main theoretical and policy dilemmas and propose specific policy measures. References to other historical experiences, if applicable, will be rewarded accord‐ ingly. A list of supplementary readings to help prepare these assignments will be given out to individual students. Each memo will also be presented in class.

An indicative list of countries, whose experience with the crisis since 2008 could be the sub‐ ject of a final paper, is the following:

• of America •

5 • Iceland • India • Russia • Hungary • China • Ireland • Japan • Portugal – Spain • Greece • Venezuela • • Southeast Asia • Argentina • Southeastern Europe

Other basic resources www.eh.net The International Encyclopaedia of the Social Sciences The New Palgrave. A Dictionary of Economics

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