Manias, Panics and Crashes

Last night the History Book Club met to discuss Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Z. Aliber. This is a classic book, regularly cited by other economists. It was first published in 1978, but we read the sixth edition published in 2011. That edition covered the U.S. housing bubble and the subsequent financial crisis which led to the Great Recession.

18 members participated in a lively discussion. In fact, the discussion was so lively that we drew in a couple of passing B&N customers. There was agreement that the book was a tough read -- one member suggested it be marketed as a cure for insomnia. On the other hand it deals with a timely topic of great interest to the members.

The book provides a theory of how financial bubbles start, evolve, pop and crash. (The theory is well described in this review of the book.) It then shows how the theory applies to a large number of financial bubbles that have occurred over several centuries, including the tulip mania in Holland in the 17th century.

The discussion was introduced by a member who has had a long career as a professional economist. (Here are notes he provided on the book.)  He told us that the book mentioned several of the well known theories of business cycles, failing to mention the long term Kondratiev waves relating to technological revolutions. (The implication is that Kindelberger and Alber because they to incorporate the mechanisms of the business cycles have produced only a partial model.) He suggested that the book so emphasized the historical record because it was probably written to counteract a very conservative trend in economic theory in the American universities at the time of its first printing.

Our economist led us into a discussion of the Bretton Woods Agreements, the World Bank and the International Monetary Fund. He was especially negative about the emphasis of the IMF for many years on austerity measures as the only solution for developing countries that got into financial problems. He noted examples from his own experience of UN-World Bank projects that failed to recognize the intersectoral nature of development projects, preferring instead relatively narrowly focused, single sector projects.

In the latter part of Manias, Panics and Crashes, it is suggested that in the last 40 years, the pattern of financial crises has changed. Not only are these crises more likely to affect several countries, but (according to the authors) the changes in the changes in the relative values of currencies that follow a crash lead to bubbles in the countries that become newly attractive to investors, thus triggering new crises. It was noted that 1971, 40 years before this edition was published, was when the Nixon administration took the dollar off the gold standard, marking the end of the Bretton Woods system. In that system, countries were obligated to link their currencies to gold or the U.S. dollar, allowing the value to move in only a narrow range. Since 1971, currencies have floated, changing greatly in relative values during financial crises. Moreover, the magnitude of international financial flows has magnified enormously over time with globalization of financial systems.

Kindleberger and Alber stress the role of "lender of last resort" in dealing with financial crises. The most important of these today are the central banks of the United States, the European Union, and Japan, as well as the IMF. The authors noted the problems faced by the managers of the lenders of last resort in choosing how and when to intervene to deal with crises.

We also discussed the current effort to reform the IMF. When it was created in the 1940s, the United States and the colonial powers controlled most of the world's economy. In 2014 it is predicted that developing and emerging nations will produce more than half of the world's GDP. The reform efforts are intended to increase the funds available to the IMF, and change the quotas to more accurately reflect the current economic conditions. Unfortunately, it appears that the United States Congress is too deadlocked over domestic economic issues to ratify the new IMF agreements.

The fundamental issue addressed by the book is the instability of financial systems. It was suggested that one problem is that the systems involved are hugely complex and getting more so. Their management thus is difficult and getting more difficult. There was also a significant point made that economic knowledge does not seem to be adequate to the job. Mention was made of Nassim Talib's The Black Swan: The Impact of the Highly Improbable in respect to its description of the failure of financial models in the last U.S. bubble, crisis and crash. It was also mentioned that whenever rules are put into effect to control the rate of growth of credit, people invent new ways to circumvent those rules (legally or illegally).

The group tossed around the question, "what is money", recognizing that the question itself was beyond our capability, although we noted that at least one city in New York state has its own money in circulation in parallel with the dollar. We chatted about virtual money in cyberspace and a recent bubble in its worth. Similarly we wondered what was real about "value"; what does it mean when a Chinese vase if auctioned for millions of dollars? How could the land around the Tokyo royal palace have had a nominal price comparable to that of all the land in California? One of our members suggested that for these things to have any real meaning one had to know who were the buyers and bidders, and who were the sellers.

We also discussed the political problems involved in increasing the stability of the financial system. Politics define the rules of the game and the regulatory agencies that enforce them. These rules and regulators in theory can damp the rate of increase and decrease of prices and can provide negative feedback (as central banks modify interest rates to provide negative feedback to control inflation). However, the rules and regulators depend on political action. Financial firms and the big players in financial markets often lobby effectively to limit the rules and reduce the authority of regulators. Moreover, the public -- participating too often in the mania -- also discourage politicians from putting effective regulations in place to ameliorate the instability of financial systems.

Mention was made of The Great Deformation: The Corruption of Capitalism in America by David Stockman. Central banks are currently intervening in financial markets to an unprecedented level, flooding the world with new money in order to restore the economic growth of the United States, Europe and Japan, thereby to create jobs and decrease unemployment. Interest rates are being kept very low. Money has been flowing into the United States from Europe due to the financial insecurity related to the crises in Iceland, Ireland, Greece, Cyprus, Spain, Portugal and other countries. There must soon be an unwinding of these policies as the central banks refocus on debt; they will have to sell off troubled assets that they acquired as lenders of last resort. The question is whether they will navigate this untested unwinding successfully, or whether it will lead into still another crisis.

Kindleberger and Alber hold that the world has faced unprecedented challenges of managing contagion of financial crises in a globalized economy with floating currencies. Our members wondered if the world will face still a more complex and more dangerous challenges as the central banks try to unwind from the last crisis.

These might help as you read the book:

• "Manias, Panics, and Crashes by Charles P. Kindleberger" (blog post with good description of the model)
• "Not bad, but more popular than it deserves: A Review of 'Manias, Panics and Crashes: A History of Financial Crises'"
• "Manias, Panics and Crashes" (a Power Point presentation summarizing the book.)

Here are some blog posts by one of our members on reading the book:

• "A thought about investing"
• "A thought about the housing bubble"
• "More on Manias, Panics and Crashes"
• "The Kindleberger Model"
• "Does Kahneman clarify Manias, Panics and Crashes?"
• "A thought about economic bubbles."
• "A thought on reading about the 4 decade long cycle of economic crises."

Preferences for the July Book

We have chosen books for April, May and June.

• April: Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Z. Aliber

• May: The Conquerors: Roosevelt, Truman and the Destruction of Hitler's Germany, 1941-1945 by Michael Beschloss

• June: American Dreamer: The Life of Henry A. Wallace by John C. Culver

We have discussed books that we might read in the following month. They are reflected in the History Book Club website.

Please now vote on the kind of history you would like to read for July. (Free Java software is required to vote.)

God's Englishman: Oliver Cromwell and the English Revolution

Last night 16 members of the Book Club met to discuss God's Englishman: Oliver Cromwell and the English Revolution by Christopher Hill. We kicked off the discussion suggesting that the 17th century might, as Hill suggests, have been a decisive century in English history; in 1600 there were still traces of the Middle Ages in British society, but by 1700 Britain was ready to enter into the age of the Industrial Revolution.

It was suggested that Hill may have painted too favorable a picture of Cromwell, excusing his changes in policy and, for example, treating his Irish war too favorably. Surely the Irish see Cromwell as a far more sinister character than that described in this book.

We discussed Cromwell's rise to power. Starting as a member of the lesser branch of a well connected but only locally powerful family, he rose through Parliamentary duties and -- more importantly -- his military career. Blessed with a talent for tactics, he rose to be general in command of the New Model Army, than overall commander, and ultimately Protector of England with more power than the deposed monarch.

Cromwell rose through the English Civil War (1641-1649), the invasion and subjugation of Ireland and the war with Scotland. He pursued a pro trade policy and his western strategy resulted in the British acquisition of Jamaica from Spain in 1655 (and the shipment of tens of thousands of Irish to Jamaica). Yet his death was quickly followed by the Glorious Revolution; two years after his death his body was exhumed and hanged. We wondered about the sources of his policy preferences and managerial abilities.

We noted the chapter in the book which demonstrated that people writing about Cromwell over the centuries have come to very different conclusions about his character and intentions. It was noted that he was pragmatic, and that while he listened to others he held his own council. Ultimately we did not understand the man very well.

We spent considerable time discussing the religious situation in Britain in the 17th century. There was a deep anger between the Catholics and Protestants, a competition for the nature of the Anglican church, and considerable conflict between the many groups of Dissenters considering migrating to the American colonies where his friend Roger Williams was making his own life.

We also noted the economic bases of the conflicts, noting how much property changed hands during the Civil War and the related turmoil. We discussed the enclosure movement and the Levelers movement. We also noted that the little ice age was creating havoc in European agriculture in the early part of the 17th century. The emergence of the local squires as more powerful as a result of the civil war (and the monarchy and aristocracy as being restored in power at the end of the century). For many, the priority in those times may have been simple survival and protection of what they had.

There are several members present with considerable interest in military history and we spent some time discussing the New Model Army, a standing army of well trained and paid troops that produced victory in the Civil War for the Parliamentary side.

Several of the members said that they found the book hard to read, largely because it assumed more background information than we possessed. One member drew upon Antonia Fraser's Cromwell which she had previously read. One member said she liked the book, another said that it had stimulated him to read a lot of other related material. One of the members had previously distributed the following references via the club's Yahoo Listserve.

• British Civil Wars, Commonwealth and Protectorate, 1638-60
• English Dissenters

Another brought a copy of the Wikipedia Cromwell entry.

One of the members has posted a review of the book.

Following the discussion of the book, there was a discussion of future readings. The books previously chosen are  Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Z. Aliber (April 10) and The Conquerors: Roosevelt, Truman and the Destruction of Hitler's Germany, 1941-1945 by Michael Beschloss (May 8(. Last night we selected American Dreamer: The Life of Henry A. Wallace by John C. Culver for future reading (June 12).

We discussed further readings. There continues to be interest in finding a book on the history of a church or religious movement, but it was hoped that such a book would be of modest size and well written as well as dealing with a limited period of time. There continues to be interest in reading about history in regions we have not yet touched, with specific recommendations about recent Russian history. And of course there continues to be interest in American history. The "possible future reading" list will soon be updated to reflect these priorities.

Vote: Re Reading on Religious History

Interest was expressed at the last meeting of the History Book Club in reading a book on the history of the Catholic Religion. In the past the club members have chosen not to read books on religious history.




If you voted yes, please express an opinion as to which of the following books you would prefer:



Here are links to the pages for the books on the Amazon website (more complete than the Barnes and Noble website):

• Absolute Monarchs: A History of the Papacy by John Julius Norwich. 
• The Catholic Church Through the Ages: A History by John Vidmar
• The Compact History of the Catholic Church by Alan Schreck
• The Dividing of Christendom by Christopher Dawson
• Whose Bible Is It?: A Short History of the Scriptures by Jaroslav Pelikan
• Roger Williams and the Creation of the American Soul: Church, State, and the Birth of Liberty by John M. Barry

Of course you may add a comment if you wish to share your views.

Vote: Re:Interest in reading a Henry Wallace biography

The book got 11 five star ratings out of 11 in hardback on Amazon and 5 out of 9 in paperback. It is a little long at 532 pages of text. A Washington Post Best Book of the Year,

The great politician, agriculturalist, economist, author, and businessman—loved and reviled, and finally now revealed.

The first full biography of Henry A. Wallace, a visionary intellectual and one of this century's most important and controversial figures. Henry Agard Wallace was a geneticist of international renown, a prolific author, a groundbreaking economist, and a businessman whose company paved the way for a worldwide agricultural revolution. He also held two cabinet posts, served four tumultuous years as America's wartime vice president under FDR, and waged a quixotic campaign for president in 1948. Wallace was a figure of Sphinx-like paradox: a shy man, uncomfortable in the world of politics, who only narrowly missed becoming president of the United States; the scion of prominent Midwestern Republicans and the philosophical voice of New Deal liberalism; loved by millions as the Prophet of the Common Man, and reviled by millions more as a dangerous, misguided radical. John C. Culver and John Hyde have combed through thousands of document pages and family papers, from Wallace's letters and diaries to previously unavailable files sealed within the archives of the Soviet Union. Here is the remarkable story of an authentic American dreamer.

February 2013 meeting: "Plundering Time: Maryland and the English Civil War, 1645-1646"

Last night 14 people braved the mixed rain and snow to meet at the almost empty Barnes and Noble book store to discuss The Plundering Time: Maryland and the English Civil War, 1645-1646 by Timothy B. Riordan.

The first colony in Maryland, with only a few hundred colonists, was traumatized by violence during 1645 and 1646. The population dropped from perhaps 800 colonists to a small fraction of that, especially due to the departure of many of the colonists. However forces raised by the Calvert family eventually arrived and regained control of the colony.

We discussed the extreme difficulties faced by the colonists, comparable to those we read about in Mayflower: A Story of Courage, Community, and War by Nathaniel Philbrick. Colonists had to quickly produce most of the food needed for their survival, and do so facing unfamiliar soils and climate. They had to quickly produce exports, in this case tobacco (again growing a crop that they did not know in England) and competing with Virginians and Dutch and Swedish trading for furs with the Indians. In Maryland, the colonists faced not only raids from Indians, the original occupants of the territory, but from Virginian colonists who resented Cecil Calvert, Lord Baltimore's acquisition of the Maryland colony carved out of the north of the Virginia colony. They were dependent for their very survival on supplies from England, but those supplies came mainly by way of the annual Tobacco fleet, small ships which took 8 to 10 weeks to make the Atlantic voyage each way. Moreover, Parliament, the King and Irish rebels were all issuing letters of marque allowing private ships to attack and plunder the ships and towns affiliated with the others.

Lord Baltimore had obtained feudal control over the colony, and was able to charter its government, appoint its governmental officials and impose the rule that colonists could only obtain title to land from him or his agents. The colony was established on a manorial pattern, essentially a feudal system with gentlemen plantation owners, indentured servants, and some freemen who were able to obtain their own (smaller) land holdings. On the other hand, Baltimore sought to impose English laws on the colony, including the laws outlawing the Catholic clergy. A Catholic himself, he recruited both Catholics and Protestants for the colony, and they brought with them the religious prejudices that were fueling the English Civil War. We wondered how Baltimore had prevailed upon the Stuart king to grant  him so much power over so large a colony; our best guess was that he used his influence with the king while the Parliament was unable to influence the king's decisions. (In one of the many digressions of the discussion, we went into the history of the Calvert family, their rise to wealth and power, and their endowment of the University of Maryland.)

The colonists appear extremely litigious fin the book. They were under stress to survive, divided by religion. They also must have been influenced by the Civil War that had already begun in England. Into this explosive mix entered Captain Richard Ingle, the captain of a trading ship who had been given a letter of marque by the Parliament to attack royalists. Ingle, a Protestant with anti-Catholic prejudice and supporter of the Parliamentary cause in the English Civil War, had traded in the Chesapeake for several years before 1645; he had a grudge against the Maryland colonial government that had been created by the Calverts. He convinced his ship's crew to join him in plundering the Maryland colony's Catholics and recruited Virginian and Maryland Protestant colonists to join in the plunder. We agree in our discussion that it is impossible at four centuries distance to understand the relative weight of his various motives leading to this decision: how important was the profit motive, the grudge, the religious prejudice, and the political motive? How important were these motives in the men who joined him?

Riordan makes a convincing case that the Catholics resisted. The fortified a manor in St. Mary's, fought back against their enemies, and sought to maintain some government functions.

We discussed the Jesuit mission to the Maryland Indians and Lord Baltimore's effort to counteract their influence bringing secular priests to Maryland. That led us into a discussion of the hierarchies in the Catholic church, of the Anglican church, and of Episcopal versus Presbyterian policies. We supposed that the Parliament now has control over the royal succession in England, as the sovereign is both the head of state and the titular head of the Church of England.

After the Calverts had reestablished control of the colony they placed Protestants in its key government posts. Seeking to quickly repopulate the colony, they recruited Puritans from Virginia. The Puritans had been discriminated against by the Church of England leaders of Virginia. The Calverts established the first formal policy of religious tolerance as part of the effort to attract the Puritans (while protecting the Catholic colonists as well the episcopal and presbyterian colonists). Thus the new colonial system was much less feudal than the original one.

However, the Puritans eventually gained political power in the colony, reversing the policy of religious tolerance, and outlawing Catholicism. It was pointed out that that led to the flight of the converted Piscataway Indians.

Some of the people who managed to make it to the meeting had not read the book, some had tried and been turned off by the detail. One member thought that it was "dry as old bones", "sucking moisture out of the air by its aridity". Riordan is an anthropologist who had not only dug through a vast quantity of old court and government records but literally dug into the dirt of St Mary's colonial places. The book is primarily a detailed summary of his findings with assessment of the implied changes in understanding of the early Maryland colony resulting from the new data. It was suggested that the club members tend to prefer books by professional writers who summarize the historical knowledge (or from professional historians who write as well as professional writers).

Ultimately, the book is about a couple of years in the lives of a few hundred people, of which little is known. It would seem that the importance of the events in the Maryland colony during "the plundering years" pales in comparison with the contemporaneous events in England, Ireland, and on the European continent. Still, one of the members commented that the book told him more about these people than he really wanted to know.

Future Selections

The members had already chosen God's Englishman: Oliver Cromwell by Christopher Hill to discuss in March, and Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger, Robert Z. Aliber, Robert Solow for April. For May we selected The Conquerors: Roosevelt, Truman and the Destruction of Hitler's Germany, 1941-1945 by Michael Beschloss.

The group also expressed interest in reading more broadly. We have not read about the Philippines or many other Asian nations, nor have we read about norther Europe, the Arabian peninsula, Canada, nor much about the Latin America nor Africa. While we have read some economic history, we might read more in that field, as well as social history and history of science and technology. There was considerable interest in the history of the Catholic church and of the evolving churches of the Reformation. The group will think more about how to broaden our readings.

A couple of members mentioned that they had read newspaper accounts suggesting that Barnes and Noble would probably close a significant portion of its stores. This raises the issue of where the club would meet if the Montrose Crossing Barnes and Noble store were to close.

January 2013 Meeting: "Embracing Defeat: Japan in the Wake of World War II"

We discussed Embracing Defeat: Japan in the Wake of World War II by John W. Dower.  Winner of the Pulitzer Prize, the 1999 National Book Award for Nonfiction, finalist for the Lionel Gelber Prize and the Kiriyama Pacific Rim Book Prize, Embracing Defeat is John W. Dower's brilliant examination of Japan in the immediate, shattering aftermath of World War II.

Here is the description of the book from the Barnes and Noble website:

Drawing on a vast range of Japanese sources and illustrated with dozens of astonishing documentary photographs, Embracing Defeat is the fullest and most important history of the more than six years of American occupation, which affected every level of Japanese society, often in ways neither side could anticipate. Dower, whom Stephen E. Ambrose has called "America's foremost historian of the Second World War in the Pacific," gives us the rich and turbulent interplay between West and East, the victor and the vanquished, in a way never before attempted, from top-level manipulations concerning the fate of Emperor Hirohito to the hopes and fears of men and women in every walk of life. Already regarded as the benchmark in its field, Embracing Defeat is a work of colossal scholarship and history of the very first order. John W. Dower is the Elting E. Morison Professor of History at the Massachusetts Institute of Technology. He is a winner of the National Book Critics Circle Award for War Without Mercy.

Click here to read a summary of the discussion.

Click here for a review of the book by a club member.