NOTES 1 FINANCIAL CRISIS: A HARDY PERENNIAL 1 Ezra Vogel, Japan as Number One: Lessons for America (Boston: Harvard University Press, 1979). 2 C. P. Kindleberger, The World in Depression, 1929–1939, 2nd edn (Berkeley: University of California Press, 1986). 3 See Robert D. Flood and Peter W. Garber, Speculative Bubbles, Speculative Attacks and Policy Switching (Cambridge, MA: MIT Press, 1994), who believe in ‘fundamentals’ as determining eco- nomic behavior, unless governments change the rules. One particular change in the last quarter of the twentieth century was deregulation of financial markets. 4 Edward Shaw, Financial Deepening in Economic Development (New York: Oxford University Press, 1973); and Roland I. McKinnon, Money and Capitalism in Economic Development (Washington, DC: Brookings Institution, 1973). A detailed study of regulation in developing countries is ‘A Survey of Financial Liberalization’ by John Williamson and Molly Mohar, Essays in International Finance, no. 221 (Princeton: International Finance Section, November 1998). 5 Recent Innovations in International Banking (Basel: Bank for International Settlements, 1986). 6 See C. P. Kindleberger, ‘Panic of 1873’, in Historical Economics (New York: Harvester Wheatsheaf, 1990), pp. 310–25; idem, ‘International Propagation of Financial Crises: the Experience of 1888–93’, in idem, Keynesianism vs. Monetarism and Other Essays in Financial History (London: Allen & Unwin, 1985), pp. 226–39.; Henrietta M. Larson, Jay Cooke, Private Banker (Cambridge, MA: Harvard University Press, 1936); and Matthew Simon, Cyclical Fluctuations in the International Capital Movements of the United States, 1865–1897 (New York: Arno, 1979). 2 THE ANATOMY OF A TYPICAL CRISIS 1 Joseph A. Schumpeter, Business Cycles: a Theoretical, Historical and Statistical Analysis of the Capitalist Process (New York: McGraw-Hill, 1939), vol. 1, chap. 4, esp. pp. 161ff. 2 Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975); and idem, ‘The Financial Instability Hypothesis: Capitalistic Processes and the Behavior of the Economy’, in C. P. Kindleberger and J.-P. Laffargue, eds, Financial Crises: Theory, History and Policy (Cambridge: Cambridge University Press, 1982), pp. 13–29. For a view of the work of Hyman Minsky in histori- cal context, see Perry Mehrling, ‘The Vision of Hyman P. Minsky’, Journal of Economic Behavior and Organization, vol. 39 (1999), pp. 125–58. 3 See R. C. O. Matthews, ‘Public Policy, and Monetary Expenditure’, in Thomas Wilson and Andrew S. Skinner, eds, The Market and the State: Essays in Honour of Adam Smith (Oxford: Oxford University Press, Clarendon Press, 1976), p. 336. 4 See James B. Stewart, Den of Thieves (New York: Touchstone Books [Simon & Schuster], 1991, 1992), p. 97: ‘What really fueled the takeover boom [in the 1980s] was the sight of other people making money, big money, by buying and selling companies.’ 5 See C. P. Kindleberger, The World in Depression, 1929–1939, 2nd edn (Berkeley: University of California Press, 1986), pp. 1–3. 6 Alvin Hansen, Business Cycles and National Income (New York: W. W. Norton, 1957), p. 226. 380 NOTES 7 Robert D. Flood and Peter W. Garber, Speculative Bubbles, Speculative Attacks and Policy Switching (Cambridge, MA: MIT Press, 1964), pp. 73–4, 85, 96, 98, etc. 8 Newspaper accounts state that George Soros’s Quantum Fund made a profit of $1 billion going short of the British pound and the Italian lira in 1992–93 and lost $600 million shorting the yen in the spring of 1994. 3 SPECULATIVE MANIAS 1 John F. Muth, ‘Rational Expectations and the Theory of Price Movements’, Econometrica, vol. 29 (July 1961), pp. 313–35. 2 Harry G. Johnson, ‘Destabilizing Speculation: a General Equilibrium Approach’, Journal of Political Economy, vol. 84 (February 1976), p. 101. 3 Milton Friedman, ‘The Case for Flexible Exchange Rates’, in Essays in Positive Economics (Chicago: University of Chicago Press, 1953). On one occasion, Friedman moved to a different position: ‘Destabilization speculation is a theoretical possibility, but I know of no empirical evidence that it has occurred even as a special case, let alone as a general rule.’ Milton Friedman, ‘Discussion’ of C. P. Kindleberger, ‘The Case for Fixed Exchange Rates, 1969’, in Federal Reserve Bank of Boston, The International Adjustment Mechanism (Boston: Federal Bank of Boston, 1979), pp. 114–15. 4 See Fernand Braudel, The Structures of Everyday Life, vol. 1 of Civilization and Capitalism: the Limits of the Possible, trans. Siân Reynolds (New York: Harper and Row, 1981), pp. 220, 221, 281, 315, 318, 335, etc. 5 H. M. Hyndman, Commercial Crises of the Nineteenth Century (1892; 2nd edn [1932], reprinted, New York: Augustus M. Kelley, 1967), p. 96. 6 Walter Bagehot, Lombard Street: a Description of the Money Market (1873; reprint edn, London: John Murray, 1917), p. 18. 7 Sir John Clapham, The Bank of England: a History (Cambridge: Cambridge University Press, 1945), vol. 2, p. 326. 8 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; reprint edn, New York: Modern Library, 1937), pp. 703–4. 9 Alfred Marshall, Money, Credit and Commerce (1923; reprint edn, New York: Augustus M. Kelley, 1965), p. 305. 10 More and more economic theorists are moving away from unswerving reliance on the assump- tion that market participants are uniformly intelligent, informed, and independent in thought, introducing such concepts as asymmetric information (different knowledge available to different participants), cognitive dissonance (unconscious suppression of information that fails to fit a priori views), herd behavior, procrastination that results in failure to act in timely fashion, and so on. Those interested should consult the work especially of George Akerlof and Richard Thaler. For rel- evant studies, see Frederic S. Miskin, ‘Asymmetric Information and Financial Crises: a Historical Perspective’, in R. Glenn Hubbard, ed., Financial Markets and Financial Crises (Chicago: University of Chicago Press, 1991), pp. 69–108; and Thomas Lux, ‘Herd Behavior, Bubbles and Crashes’, Economic Journal, vol. 105 (July 1995), pp. 881–96. 11 Gustav LeBon, The Crowd: a Study of the Popular Mind (London: T. Fisher Unwin, 1922). 12 Charles Mackay, Memoirs of Extraordinary Delusions and the Madness of Crowds (1852; reprint edn, Boston: L. C. Page Co., 1932). 13 John Carswell, The South Sea Bubble (London: Cresset Press, 1960), p. 161. 14 David Cass and Karl Shell, ‘Do Sunspots Matter?’ Journal of Political Economy, vol. 91, no. 2 (April 1983), pp. 193–227. This concept of a completely extraneous event was included in the first edition more or less randomly. Since 1983, however, ‘sunspots’ has become a word of art to cover general uncertainty as opposed to the ‘fundamentals’ that feature in rational expectations. 15 Irving Fisher, The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises, 2nd edn (New York: Macmillan, 1911), esp. chap. 1, dealing with crises; Knut Wicksell, Interest and Prices (London: Macmillan, 1936) (first published 1898). 16 Henrietta M. Larson, Jay Cooke, Private Banker (Cambridge, MA: Harvard University Press, 1934). 17 John Berry McFerrin, Caldwell and Company: a Southern Financial Empire (Chapel Hill: University of North Carolina Press, 1939; reprint, Nashville: Vanderbilt Press, 1969). NOTES 381 18 Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: W. W. Norton, 1976), pp. 90–3. 19 Joan Edelman Spero, The Failure of the Franklin National Bank: Challenge to the International Banking System (New York: Columbia University Press, 1980). 20 Bagehot, Lombard Street, pp. 131–2. 21 George W. Van Vleck, The Panic of 1857: an Analytical Study (New York: Columbia University Press, 1953), p. 31. 22 R. C. O. Matthews, A Study in Trade-Cycle History: Economic Fluctuations in Great Britain, 1832– 1842 (Cambridge: Cambridge University Press, 1954), pp. 49, 110–11; and M. C. Reed, Investment in Railways in Britain: a Study in the Development of the Capital Market (London: Oxford University Press, 1976). The ladies and clergymen – in American parlance, ‘widows and orphans’ – may more properly belong to a third stage when the securities have become seasoned in the market. The French call such investments suitable for ‘the father of a family’. Charles Wilson, in Anglo-Dutch Commerce and Finance in the Eighteenth Century (Cambridge: Cambridge University Press, 1941), produces a number of variations on investor groups: in the Netherlands ‘spinsters, widows, retired naval and army officers, magistrates, retired merchants, parsons and orphanages’ (p. 118); ‘hundreds of other merchants ... as well as thousands of civil servants, magistrates, widows and orphans and charitable institutions’ (p. 135); ‘widows, parsons, orphanages, magistrates and civil servants’ (p. 162); ‘country gentry, wealthy burghers and officials of Amsterdam, widows and wealthy spinsters’ (p. 181); ‘spinsters, theologians, admirals, civil servants, merchants, professional speculators, and the inevitable widows and orphans’ (p. 202). In the quotation from Bagehot that constitutes one of the epigraphs of this book, owners of the blind capital who lacked the wisdom to invest it properly were characterized in the excised portion as ‘quiet ladies, rural clergymen and country misers’ and again as ‘rectors, authors, grandmoth- ers’. See Bagehot, ‘Essays on Edward Gibbon’, quoted in Theodore E. Burton, Financial Crises and Periods of Industrial and Commercial Depression