Reviewed by Francis Lee for the Saker Blog: Manias, Panics and Crashes: by Kindleberger and Aliber: Palgrave MacMillan – Basingstoke Hants, UK – first published in 1978
Capitalism without failure is like religion without sin – Charles P. Kindleberger
This book was first published in 1978 and is now in its 6th edition. Given human nature and its corollary, economic collapse, there will doubtless be further editions. Mr Kindleberger himself is sadly no longer with us and the more recent up-datings have been carried out by his contemporary and co-author Robert Z Aliber. This book is not an easy read but represents a very scholarly assessment of capitalism’s intrinsic tendency toward boom-bust cycles, which, pace the run-of-the-mill economists and their co-thinkers, is an endemic feature of the system. Moreover, the analysis does not age, and in a sense it cannot; Like the man said: ‘’History repeats itself first time as tragedy, second time as farce.’’ (K.Marx. The Eighteenth Brumaire of Louis Napoleon – 1852)
The history of capitalism is precisely the history of bubbles, booms, manias and busts. The whole show probably started with the great Dutch tulip bubble of 1636, and then was followed by the two great euro bubbles, first in Britain with the South Sea Bubble in 1720 and then concomitantly in France with an early version of Quantitative Easing and the ensuing Mississippi Bubble of the same year. According to the authors, the South Sea and Mississippi bubbles were related … fuelled by monetary expansion in Britain and France that supported a high head of speculative steam. (p.57 Ibid).
One would have thought that the Dutch Tulip bubble of 1636 and the Mississippi and South Sea Bubbles of 1720 would have been of sufficient magnitude and been a salutary chastisement to warn off any repeat performances; but the group-think of the speculating mob was like the African mass herds of Wildebeest on an unstoppable trek across the African plains of the Serengeti. Thus derivative speculators and untamed cattle both moved like clockwork in one direction. At least one can forgive the Wildebeest, the poor brutes didn’t know any better.
The great Dutch Tulip bubble was probably the first major episode in the development of the ongoing boom-and-bust historical drama. The Second and Third bubbles should have been a warning to those who sought easy money and lost. Even the world famous scientist, Sir Isaac Newton (1642-1726) who lost a cool £20,000 – big money in those days – stating, ‘’I can calculate the motion of heavenly bodies, but not the madness of people.’’ In the irrational temper of the age many who played the stocks invariably lost. Having burnt his fingers in this irrational folly Newton put it out of his mind for the rest of his life. Lesson learned.
It took a couple of centuries later for the next big bubble-bust phenomenon – the US stock market (or Wall Street) bubble and subsequent bust of 1929. Once again the basis for the rise in stock prices was due to excess money input which was a function of easy credit. The problem with easy credit conditions (which at the time are never considered a problem but a boon) is that it supplies the excess liquidity that enables speculative buying to push up prices. This results in serial asset bubbles in, well, whatever you choose: tulip bulbs, internet start ups, stocks and shares, property, bonds, Bit.coin … and anything else, which only encourages more buying and further elevating asset prices. Of course it cannot last and it doesn’t. The stage is eventually reached when the rise in incomes and debt repayments on borrowed monies cannot keep up with the rate of asset-price inflation. Prices will eventually reach a plateau, and then begin to fall as highly leveraged debtors cannot borrow any more to service their debts from increasingly cautious lenders. These same borrowers will then have to sell some or all of their assets for payment of interest on their borrowed monies and this panic selling floods the market and results in falling asset prices. Now the boom transmutes into a bust. Fear now replaces greed as the great motivator.
The interesting point, however, is that most of the more significant episodes of boom-bubble-bust have come in our own time. Of the author’s list 10 major boom-bust episodes since the aforementioned 6, have occurred since 1971. Starting with the so-called ‘Tequila Crisis’ in Mexico and other emerging markets in the 1970s through to the great banking and sovereign debt crisis of our own time. In 1971 is a particularly interesting date since it marked the break-up of the Bretton Woods system and the definitive break with the gold standard.
Coincidence? Unlikely. Moreover we are not talking about individual national speculative capital movements but whole clusters of such phenomena. We have also seen the debt crisis move from the global periphery and semi-periphery of capitalism into its heartlands of North America, Europe and Japan. As the author’s state:
Four waves of credit bubbles in 30 years plus a bubble in US stocks in the late 1990s are unique in financial history … Each wave of bubbles when the lenders become much more willing to extend credit to a group of borrowers, perhaps because their incomes or anticipated incomes were set to increase or because the regulatory environment had become less restrictive and lenders were no longer prohibited from extending credit to these borrowers. (Op.cit)
Globalization has facilitated easy movement of capital across national frontiers. This is especially the case with financial capital. Trading in the forex, capital and derivatives markets goes on for 24 hours a day with huge cross border movements of monies and near-money derivatives, this being accomplished with just one click of a computer mouse. This huge ball of ‘hot money’ rolls around the world looking for easy pickings in terms of short term investment opportunities. It is not difficult to see the destabilising effect of such movements on national economies both at a domestic and international level.
During the East Asian crisis of 1997/98 such footloose capital flowed in massive amounts into the emerging markets of East Asia, the second tier of Thailand, Indonesia and Malaysia. This led to a rise in stock and property prices to giddying levels far above their equilibrium, and also pushed up the value of the national currencies. When the bubble burst the investors took their loot and exited, and asset prices duly collapsed. Moreover, many of the borrowers in these countries had borrowed in the currency of the investors, Japanese Yen or US$s. But as the value of their own currencies depreciated their debts as denominated in overseas currencies ballooned.
Similarly at the domestic level the ease of credit led to house price bubbles and the subsequent property bust in the US, UK, Spain, Ireland and Iceland, with all that followed.
So time and again we come back to the same culprit: the ease and policy of credit expansion overseen by central banks around the world, and a glut of global capital looking for viable (and not so viable) investment outlets.
The expansion of credit which has been a feature of the post-1971 epoch has been made possible by a pure paper money (fiat) standard. Governments and Central banks around the world are no longer constrained by a gold standard which meant that their ability to create money was to a large degree circumscribed. But a pure money standard meant that credit could be created to the point of infinity. Additionally the commercial banks have the ability to create money through the fractional reserve system. Add to this explosive mix the (sometimes complete) lack of regulation of the banking and finance industries and everything was in place for the ensuing colossal debacle.
All of the above are necessary features of the capitalist system. The system works through boom and bust. Nothing is going to change this, whatever the liberal-left reformers of the system might argue. Responsible capitalism, a capitalism which would be equitable, stable, in harmony with nature, with sustained growth is a creature of the imagination. As Lenin once remarked, If capitalism could do all these things, it would not be capitalism.
Finally, my somewhat short and narrowly focused review of this book hardly does it justice. Read it and see. Or as Financial Times guru Martin Wolf (who I believe is not a Marxist) enjoins Read. Learn. Weep.’’
And now we are in 2021. To reiterate Martin Wolfe’s timely warning which bears repeating. ‘’The Latest crisis is unlikely to be the last. It may even be the precursor of a still bigger crisis in the years ahead.’’ Anyone wish to argue against this?
APPENDIX
Ms Ann Pettifor (Keynesian, of course) the author of
’The Production of Money – How to Break the Power of Banks’
Speaks highly of a certain gentleman – one John Law – ‘’the Scottish genius (sic!) who understood credit or bank money way back in the 1700s.’’ p.94
FYI – John Law was a colourful fellow: Scottish mathematician, gambler, and early economist who left his homeland after killing a man in a duel. He decamped to France where he insinuated himself into the establishment who seemed eager to listen to his crackpot theories of money. He was the first to implement monetary easing. Trade, he argued was held back by lack of money. No problem, paper money or Assignats would be created in abundance to get trade and commerce moving. Sound familiar?
The Duc D’Orleans decreed that all taxes and revenues could be paid in notes to Law’s bank the Banque Générale. To cut a long story short the French authorities gave Law a plan to develop one of France’s possessions in what was then America. This was essentially another get-rich-quick racket similar to the earlier forms, namely the Dutch Tulip Bubble and the South Sea Bubble. As with all Ponzi schemes things went swimmingly at first. Inevitably, however, the bubble burst among a wailing and gnashing of teeth. The Mississippi Bubble collapsed in the same year as the South Sea Bubble. Speculation gave way to panic as share prices fell to 4,000 livres per share, a 73% decrease within a year. It was under these circumstances and the cover of night that John Law left Paris in disgrace some seven months later.
So this is the chap whom Ms Pettifor regards as a genius(sic!)
On this one, I’ll have to disagree. This time it’s different and it shall be much, much worse than before.
The difference – our global, interconnected world. In the days of the Great Tulip Mania or the South Sea Bubble it took days, even weeks the news to reach interested parties. That delay gave time to implement some remedies.
Today, with our global Net, a small hick-up at COMEX in New York can cause a firestorm in Hong-Kong’s stock exchange. The financial crisis in 2008, which started with the default of two obscure hedge funds, managed by Bear-Stearns should serve as warning for the things to come
Heartily agreed! In addition, with the nearly total deregulation of the banking sector and the privatization of nearly all pension plans, the ring fence around the speculative investment sphere has been eliminated, putting literally everyone’s personal bank accounts and pensions at risk. This guarantees that government bailouts (i.e., even MORE money printing) will continue to be the only possible rational response to further crashes, lest every single person out there be utterly wiped out by the unbridled greed of a relative few. Vicious cycle indeed! The banking wizards would seem to have created the proverbial perpetual motion/wealth transfer machine with today’s system. All done incrementally over decades so that only a powerless handful would notice as it happened.
But the run away price inflation must have its limits to peoples sanity and abilities. Its already well under way and I say it wont end well, only b/c it wont end.
Globalisation is not new. The Credit Bubble interwar in USA was due to shift in gold reserves from Warring Europe to USA to pay for weapons. That fuelled credit expansion.
Dutch Tulip Mania was because Amsterdam Merchants were making a fortune out of the East Indies Spice Trade.
It is the external sector which fuels booms unless the capital inflows are sterilised.
Free flows of capital are not sterilised and seep into property as in Germany as capital flows from Club Med countries into German property – such as Italian money into Munich.
“Dutch Tulip Mania was because Amsterdam Merchants were making a fortune out of the East Indies Spice Trade.”
The Tulip mania is largely a gross exaggeration of what actually happened. Each later writer has embellished what his predecessors had reported. Very few people were involved in this bulb speculation. All of them were wealthy. None of them lost all their capital. Amsterdam was the centre of world finance at the time. The spice trade was largely controlled by the Jews of Amsterdam. They did not get involved in this speculation.
These Jews later moved their business to London – after financing Oliver Cromwell. Later still, they reinstalled a king in England. Since then, the Jews and the British royal family have been inseparable. The two Boer Wars, WW1, 1917 and WW2 were largely their effort.
This article brings up a very interesting point; Today, unlike the past “Trading in the forex, capital and derivatives markets goes on for 24 hours a day with huge cross border movements of monies and near-money derivatives, this being accomplished with just one click of a computer mouse.” One can envision the world economy being math modeled as some second order equation. The economic cycles behaving like a mass at the end of a bouncing spring. In the past, the rather slow speed of transactions would dampen the amplitude and frequencies of the economic cycles. Now with computers transactions taking place at lighting speed, the friction component that dampened the cycling is removed. The cycling thus becomes ever greater and faster. Like an uncontrolled mass at the end of a spring, the world economy will eventually bounce out of control. It is most probably already in the process of doing so.
World leaders should be out trying to find a way to put some brakes on the whole thing. Instead they are trying to intensify the situation even more.
A bit more understanding of control systems would be useful in exploiting this ECO 101 2nd order thing. Faster feedback is stabilizing, all other things being equal. “Friction” (ie. losses as in taxation of transactions) tends to be stabilizing.
The Financial Empire ~ Bragging, Bubbles, Bailouts, Bullying, Bombs,…
The Private Imperial Cartel has mastered the art of capturing companies, countries and continents using the short, medium and long term debt cycles, respectively.
It creates a central-private banking system (privatiZe Money) and then blows a bubble. When it bursts, its lackey kleptocrats win and its controls established. The great Dutch tulip bubble of 1636 happened after the founding of the Bank of Amsterdam in 1609. The South Sea Bubble in 1720 happened after the private Bank of England was founded in 1694. The Mississippi Bubble of 1720 occurred after the Banque Royale (“Royal Bank”) in 1716-18. Similarly, the Wall Street crash of 1929 happened after the Fed creation in 1914. Also, imperialism, wars follow the creation of the central-private banking system. Follow the money/credit/debt.
Every bubble requires two essential inputs to fuel its rise:
1. a compelling story
2. ample credit
Everything Bubble pops, the pain is going to be epically calamitous. Now stocks, bonds, real estate, fine art, you name it — nearly everything has been inflated to all-time highs. When will the coming bubble bust arrive?
“The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revivial, but finally giving up in the final collapse.”
– Charles Kindleberger
Charles also stated, “Money is a public good; as such, it lends itself to private exploitation.” Why let public’s credit for private gains? Why do presidents/pms, prince(s)s, politicians, people, … let the Private Imperial Oligarchy use the public money/good for enslavement and exploitation? Think different!
This time it’s different. The private imperial oligarchy will lose it big time! They’re out of luck. Gandalf’s team has arrived!
“It is not possible to found a lasting power upon injustice, perjury, and treachery. These may, perhaps, succeed at first, and limp along on hope for awhile with a flourishing appearance. But time betrays their weakness, and they eventually fall into ruin of their own designs.”
Max; an excellent summary. There is a cultural power structure lurking behind this. The Romans made a civilization based on the supremacy of private power and private capital over the state. They legislated it. They ran as far as they could with this aggressive egoism of private individuality until it finally blew itself up. But this classical cultural structure lived on and became the foundation of the European way. So our beloved culture of individuality carries with it a culture of permitting private individuals to hold freedom and power over the powers of the State. Including the power of money formation. Not even Caesar could dent it. Private power has a Roman sword. They called it “Sol Invictus.” Oligarchs must have veto power over the central authority. Ever since Rome Patriarchal individuality has something of the character of a religion.
Current capitalism is the final apotheosis of this original Roman creation. So the disintegration needs to be severe enough to break humanity out of a 2000 year old culture cycle.
Snow Leopard, thanks for your response and sharing cultural insights. Appreciate it!
“Rome has grown so much from its humble beginnings that it is now overwhelmed by its greatness.”
The Roman Empire didn’t end, it morphed into what?
The British Empire didn’t fall, it morphed into what?
The Financial Empire will not morph but fall and justice will be done at the end. All its pillars of power will be dismantled. Aragorn has received the sword! It is called “In God We Trust.” We’re living through an epoch in the history of humanity!
Power and money (elements of Greed) have been the two great corrupting influences on mankind throughout history. In a money democracy (where the fundamental element of influence is the unit of money), the political and legal system is influenced and shaped by systems of power to protect and enhance those systems of power. The rights of individuals and emergent social groups of human beings are irrelevant next to the rights of power systems to perpetuate, dominate and control.
“When a group of individuals acquire power over money & credit creation they automatically gain control & power over markets, power in the community, power over the state and power over belief, it is a political instrument, different in degree but not in kind from the state itself. To deny the political character of the money & credit creation — is not merely to avoid the reality. It is to disguise the reality.”
Most of the narratives describe the world in a way that purposely keeps the workings of “power” opaque. We need to shine light on the power dynamics and expose the matrix & debtrix. Truth will win!
“The problem of power is how to achieve its responsible use rather than its irresponsible and indulgent use — of how to get men of power to live for the public rather than off the public.”
– Robert Kennedy
Aragorn gets the sword – the return of the king.
https://youtu.be/fsbDigj7w5c
The old saying fool me once shame on you fool me twice shame on me. Because of the generational cyclic nature of boom bust people get fooled at least once.
The detaching of money from somthing of value in the real world is always forwarded by the criminal elite and always excepted by lazy government.
Australia has been in the toilet ever since the self-anoited “worlds greatest treasurer” Oaul Keating finacialized the market. But it was Nixon who started the ball rolling. What now keeps it rolling is the world accepting American debt for payment of real goods.
Remember shame on me!
This time is fueled by hydrocarbons, coerced deregulation by a hegemon, and information technology. Comparing Tulip Mania or 1929 to The Everything Bubble is worse than comparing the Great Pyramid to Burj Khalifa.
This time *is* different — by an easy order of magnitude.
These guys, much like gvt critters, are good at the convincing, but get stupid real quick when the shtf, as its about to do
The goal of the Central Banks is simple – maximize indebtedness to themselves.
And as if they are not indebted too anyone except their own selves, or own morals, or own past.
I think more than a few of these critters are going to start wetting the bed at night soon. long beds.
It seems that the capitalism and its poriodic crisses are more matter of psychology than of economy. A more suitable issue would be about greed, so essential to human nature. The episode about Isaac Newton, a genius per se, clearly illustrates such thought. No one can resist. No matter warnings and bad experience.
What is the origin of the greed?
Or, we cold say It takes a genius, such as Isaac newton to control yourself and escape the bubble. :-)
‘ When it’s spring again, I’ll bring again, tulips from Amsterdam ‘ – The Bankers song.
Toss in – Never give a sucker an even break and Never underestimate the stupidity of the Great Unwashed – The squid Goldman Bankers code.
It was reported yesterday that the US/MIC would send in hired killers to work with ISIS in Afghanistan ( I wonder if these were the same fellas who detonated explosions killing US Marines ). The CIA are spitting feathers, the tulips have been replaced by opium.
The song remains the same – ‘ It’s spring again, I’ll sing again, poppies from Afghanistan ‘.
Big Pharma ( HEALTHCARE hmm ) is the new US Subprime
(un)Civil Servants in the West love a good flogging while wearing a diaper.
Time to introduce the great drug eugenics war, the aim is to eat an apple a day to keep the doctor away, and give a penny away a day to keep the tax man at bay.
How do ya like me now?
Yup, banks “as we know them” (fractional-reserve) are necessarily a bubble too. If you want a version for us laymen, Moldbug wrote on banks. He even described bank run starting with a clean-slate model.
(for example, this: http://www.unqualified-reservations.org/2008/09/maturity-transformation-considered/ )
A-and the only way a bank can have more debts than money on hand, yet at the same time always have all the money it’s obligated to pay is: infinite backing via connection to the printing press, i.e. being either a Central Bank with license to inflate or a puppet thereof. That is, part of the government, legitimately or not.
If legitimately, it will run about as well as bureaucrats run everything, but at least they are accountable. If not, you get the sort of things that happened in USA with loans. And then the fish, as usual, rots from the head down.
Mr. Lee has not mentioned the historical increase in the human population, as well as historical, pesent and upcoming wars and both’s relationship to, for lack of a better experssion, “economic matters”. These things are intimately related to each other — all part of the same “ball of wax”, and, therefore, none of them should be discussed or analyzed in isolation from the others.
The bubbles are created by expansion of the money supply and credit then the bust is triggered by both the exhaustion of buyers available and the deliberate withdrawal and contraction of the money flow by central bankers.
This puts average people into debt and then steals their savings.
The rises a falls will happen away but the severity of them is a function of the money supply and central bank action.
In the 1920s the bankers expanded credit by consumer hire-purchase and stock margin loans. You could get buy now pay later loans for every type of consumer goods made at the time which people in the US and many other countries took up. Then the banks pulled the rug under it and contracted the money supply so they and their friends could come in and buy up everything in the 1930s for 5 cents in the dollar.
The 1970s lull in the mkts to 1982 was one without much monetary contraction.
Stagflation did that for them reducing the real value of money.
The 1987 crash was merely a temporary blip.
The 1990s was computer tech boom caused by banks removing most of the reserve limits previously used to limit money circulation expansion. Occurred under the corrupt Clintons. Tech stocks were being “flicked” by brokers – they would start them rising and unsuspecting investors would come in to get a slice of the action until insiders stocks were offloaded and no more buyers came in. It was gambling.
The 2008 GFC was a mortgage boom and bust in some sectors and really underlined the weak economic performance of the W Bush and Blair years.
The current situation involves the Obama Biden QE expansion.
The end result will be a decline as markets run out of buyers at high prices in the end because big smart investors know the true value of securities and offload them at high price levels. Once the average buyer changes to a seller and the big players are also out the mkt slides because there are no buyers.
Similar to Bitcoin – it has no real intrinsic value other that people’s willingness to pay for it and when big players stop supporting it and small fish also want out it will collapse in the end.
Robert Prechter has been pushing the same line in his publications for years about the bubble – in 1978 claiming it would be in the late 1980s, and in the 90s then in 2000 etc…. the only question is when will it exhaust – soon is the likely answer.
But it is part of capitalism as the rising stock prices in booms enable companies to obtain $ capital to investing in real things. But naive investors get trapped and burned in the process.
Booms and busts happen every decade or so because a new generation who hasnt experienced the previous ones comes along and want to place their bets – like in a casino.
But the increased frequency of booms and busts since 1971 is a product of the relaxation of banking and investment and anti-trust laws, and globalization of money flows. I doubt it will ever end but there will be periods of bear markets because in the end the banks cannot keep throwing money at markets to keep them afloat otherwise long term inflation will happen. At some point the line must be drawn.
A lot of money was printed in the 1960s and despite that the 1970s saw the economy stagnate.
Caused by inflation, it will happen again and stagnation will effect company profits and stock prices in the end.
The name of the game is consolidation of power. Many years ago I said that it would all boil down to single mega corporations. Think of the game “Monopoly.” The forces slowly push toward the lone victor.
These bubbles are just more rearranging of the deck chairs as we slosh toward singular masses that cannot provide any stabilization to a listing ship. Is it advisable to believe (in the presence of human hubris) that we can create transactions quick enough to slosh the mass to the other side of the listing ship? It’ll be a constant slamming, side-to-side, just waiting for entropy (we inappropriately attribute them as being “black swans” [they’re a combination of entroy- overwhelming natural forces plus human hubris]) to kick in and cause a horrific final shifting which will capsize all.
I agree that this time it’s not different in that it IS the same function. BUT, there ALWAYS comes an end. Each thing is but a single Super Cycle in which multiple mini-cycles can play out. It WILL end, the only matter is WHEN.
THE question is one of growth. I offer no answers. For sure, however, the label of “virtuous” needs to be stripped from “growth.” The word/thing needs to be seen in total objectivity (not marketing/sales hype).
I think you are generally quite correct. However, consider that there is not necessarily an end. There is this concept of infinity; i.e. no beginning, and no end. The question then becomes at the end of the super cycle, what does the system morph into?
By the way I heard that Chuck Norris actually counted to infinity twice!
All bubbles are created buy the central banks increasing then decreasing the money supply. It is like roulette. Everyone has a great time then the casino racks in all the chips. The blue chip chips never hit the market again but are passed on to their chosen friends at very reasonable rates.
We are left with overpriced poor assets to fight over.
I can but quote again the immortal words of Paul Warburg upon witnessing the bubble of the roaring 20’s
“The world lives in a fools paradise based upon fictitious wealth, rash promises and mad illusions.
We must beware of booms based upon false prosperity which has it roots in inflated credits and prices.”
Real estate here in the lower mainland of BC is just stupid. I know of a family both parents who are working at good jobs the lady wants to start a home based business as well as working full time to get in on the action of buying real estate in the fear of not being left out! With 2 jobs they can’t afford the bubble and so add more work lol? Yeah I say you really think your going to buy at say 999,000 and then sell when at 1,900,000 while rubbing your hands in glee?
This is all so insane and frightening.
the reason for the bubble is the collapse. when the collapse happens, they are the only ones left with the assets left to pick up the crumbs of whats left of the economy. for pennies on the thousands of dollars. this is the plan,always was the plan.
Where des Soros fit in?