The Crash Next Time

There are so many ways for an economy to go wrong. It can decline, stagnate, slow down, or overheat. We are used to the common technical definition of a recession: two consecutive quarters of negative GDP growth, as measured by the National Bureau of Economic Research. The long nineteenth century was littered with panics: 1825, 1837, 1857, 1873, 1893, 1896, and 1907, at least. Markets have not stopped panicking since 1907, but nobody calls the Black Monday stock market conniption “the Panic of 1987.” Instead we have moved on to crises and meltdowns. Writing in 1930, John Maynard Keynes diagnosed a “Great Slump,” and “slump” still mostly adheres to what we now know as the Great Depression. (For a writer in 1930, the term “Great Depression” would probably have referred to the persistent deflation of 1873–1896.)

In his new book Seven Crashes, the economic historian Harold James tells us that the German financial disaster of 1873 was the first known as a “crash,” but does not explain whether that was an allusion to the vehicular kind, especially the locomotive disasters that would have been well known to European and American readers in the late nineteenth century. Since then we have added car crashes and plane crashes, and markets do indeed still crash, as with the “Flash Crash” of 2010, which lasted thirty-six minutes and temporarily evaporated over a trillion dollars from global stock markets.

These terms may seem synonymous, but they are not. Newspapers of the 1890s and early 1900s advertised products at “crash prices,” meaning they were steeply discounted, and that is a hint: prices, whether of stocks or commodities, crash. Panics are outbursts of collective irrationality; slumps suggest something prolonged and involving exhaustion. Montesquieu was probably the first to use the word “crisis” to refer to an economic event. In his Spirit of the Laws (1748) he looked back on the monetary manipulations of 1720, known today as the Mississippi Bubble, and referred to them as a crisis for the state. “Bubble” was the contemporaneous term in 1720, and it specifically denoted deception. Speculators were known as “bubblers,” and to be cheated was to get “bubbled.” Before the 1740s, “crisis” had either a medical or a theological meaning, indicating a turning point when a patient either recovered or died, or when a person in doubt recovered their faith or lost it. A crisis was a moment of change. Despite the proliferation of crises today, that sense of the word has been utterly lost: crises both economic and not have ceased to be moments of sudden change, let alone conscious decision. Instead they drag on interminably without resolution.

How many economic crises have there been? Each scholar’s answer will depend on what they are trying to learn. Sometimes it is useful to separate a single crisis into several national experiences, such that, for instance, there may have been a single event in the 1980s known as the Latin American Debt Crisis, or instead several individual national debt crises spanning the decade. It may also be productive to separate a single crisis into component parts, so that, say, the events of 1931 in Austria comprised a banking crisis, a government fiscal crisis, and a currency crisis. Most researchers will provide some sort of definition of how far any number of things—bank reserves, exchange rates, stock prices, GDP—must fall in order to constitute a crisis or a crash instead of a dip or a correction. One widely cited study from 2001 produced a dataset covering 56 countries that enumerated 44 banking crises, 156 currency crises, and 33 “twin crises” between 1973 and 1997.^* The number must be far greater today.

On the left side of the political spectrum, critics like Wolfgang Streeck and Robert Brenner have argued that there has essentially been one continual crisis of profitability and capital accumulation rolling steadily along since the 1970s, papered over by a variety of short-term fixes that themselves have run into crisis or eventually broken down. Thus, estimates of the number of economic crises since the mid-1970s run from one to more than two hundred. (The National Bureau of Economic Research counts seven US recessions in that time span, but not every recession is precipitated by a crisis, and not every crisis leads to a recession.)

James is a distinguished economic historian at Princeton. His first book, The German Slump (1986), is one of the best books ever written about the Great Depression, and since then he has published many more books, on individual firms and banks, on the international monetary system, and on globalization. He is the official historian of the International Monetary Fund, and he is a rare economic historian who sometimes publishes in cultural history journals. In Seven Crashes he argues that

new institutions—market innovations, but also states that are stronger and extend their capacities—generally arise out of responses to a particular kind of disruption: supply crises…. These supply crises are moments when fundamental items such as food or fuel become scarce, prices rise, and new channels of production and distribution are required.

His focus, then, is on supply crises specifically, not currency, banking, or stock market crises, and he wants to analyze whether they promoted or restrained globalization. His seven crashes span from the 1840s through Covid-19, and from them he derives seven lessons.

Linda Yueh is a fellow in Economics at Oxford and an adviser and consultant to several economic policy entities. She has spent years as an economics broadcaster for the BBC and Bloomberg Television. Her Great Crashes aims to show that crises follow a set pattern: after a phase of euphoria they require solutions in the form of credible economic policies, and then they produce an uncertain aftermath. Yueh sets out to cover ten “cautionary tales,” aiming to derive several lessons from each individually and from all of them together. The Great Depression features briefly in the introduction, but otherwise her crashes are all concentrated in the period from 1980 through Covid. She divides the 2008 financial crisis from the 2010 eurozone crisis, though many would argue that they were one and the same. James puts the late nineteenth century all together, kicked off by the crash of 1873, instead of separating out the various panics that followed until 1907. Both books spend time on the Great Depression, on 2008, and on Covid.

Any book that covers seven or ten complicated historical events is going to be better at some than others. Yueh is excellent in The Great Crashes on the Savings and Loan Crisis of the 1980s. James’s chapter on the late nineteenth century in Seven Crashes is terrific and has no real rival as a concise, clear discussion of those events. He has quite a few lively and unusual opinions, for instance that OPEC was not the villain of the 1970s oil shocks but rather was reacting rationally to the incoherence of American policy. He also acquits the Federal Reserve chairman Arthur Burns of the usual charge of being bullied by Richard Nixon into the wrong monetary policies—instead, he thinks Burns had a poor understanding of the causes of inflation. Even readers who are familiar with the economic history will find striking new details and surprising juxtapositions in each of his chapters.

The obverse is that nobody is an expert in so many complicated events over so much time and space, so there are inevitably some evidentiary or interpretive troubles of varying degrees of severity. To take a small example, James asserts that the Irish potato blights of 1845–1848 could not have been anticipated, but there had been at least eight potato crop failures in various parts of Ireland between 1821 and 1841. A more startling derailment occurs when Yueh explains the slowdown of the Japanese property market in the 1990s as follows: “A historically feudal society, Japan equated the possession of land with status.” Even after the reader recovers from the breathtaking cultural stereotype, the analytical problems compound. Many societies equate possession of land with status. Can all property booms be traced to a history of feudalism?

Different readers will have different thresholds for these moments, and for the equally inevitable omissions that occur in these sorts of books. Your favorite crash may be skipped over; crucial pieces of evidence or counterevidence may seem missing or minimized. Yueh especially covers a lot of ground very fast: The Great Crashes deals with three currency crises in eighteen pages, the Savings and Loan Crisis in fourteen, and the Great Depression in about six.

While The Great Crashes is striking for its velocity, Seven Crashes is unusual in several respects. The focus on supply-side crises is fresh and welcome; research on these has largely been neglected, thanks partly to political consensus on Keynesian demand management and partly to the association of “supply-side economics” with the implacable reactionaries of the Reagan administration. The supply chain disruptions since 2020 have reinvigorated thinking on the supply side, and this is one of the first books to follow that agenda into a historical and comparative frame. The book is also unusual in that each chapter first walks through the events of a crash, then discusses the ways that a famous thinker or group of thinkers tried to understand it and apply their lessons afterward.

For the most part, these pages show a litany of failure. Either a thinker learned the wrong lessons (like Marx did from the 1840s), or their lessons led to outcomes James thinks were deleterious (like Keynes’s from the 1930s), or the lessons were misunderstood or incompletely applied by policymakers (as with Milton Friedman after the 1970s). There is something tantalizing about the possibility of a general history of economic thinkers continually reaching the wrong conclusions, but that is not James’s goal here. He wants to find lessons of his own, with the daunting hope that he may succeed where (depending on your politics) illustrious figures like Marx, Keynes, or Friedman failed.

The central conceit of Seven Crashes is that James will consider whether each crash was good or bad for globalization, which he views as the main driving force for improvement in human lives. That choice of framing creates many more problems than it solves, because he takes for granted that readers will agree with his conclusion that “the lesson then [in past crises] was as simple as it is now: globalization improved lives.” Or, with more detail from the introduction:

Globalization pushes up growth rates (g), while at the same time political modernization, institutional reforms, and the growth of representative governments with property-owning legislatures make for a greater stock of safe assets, and consequently a lower rate of return (r).

And to be sure, if it were axiomatic that more globalization always and everywhere improved lives, pushed up growth rates, and encouraged representative democracy, it would be easy to follow him in sorting the good crashes from the bad. But the evidence he provides does not support that assumption.

The first crash in Seven Crashes is that of the 1840s, when the Irish potato famine and other agricultural subsistence crises provoked monetary and fiscal crises, which in turn became political crises in the revolutions of 1848. In James’s taxonomy, this was a crash that led to more globalization, in the form of free trade, transport infrastructure like railroads, and industrialization, so it was implicitly one of the good ones. It was also caused by globalization. As he himself notes, in the case of the Irish famine, “the historical consensus explains that British doctrinaire laissez-faire liberalism led to the disaster.” He does not add that the potato fungus came from Mexico via Pennsylvania—another contribution of globalization. If a crash can be caused by globalization, propagate from country to country through globalization, and lead to more globalization, while killing about a million people and igniting a continent-wide sequence of political violence, it is difficult to agree with the simple lesson that globalization improved lives.

As with the potato blight in the first chapter, so with Covid in the last. As James puts it:

The Covid-19 crisis was very obviously a product of globalization—the web of global interconnections—and the challenge was managed through a combination of technology, politics, and interconnectedness: or, in other words, genius, government, and globalization.

Even if the reader accepts that interpretation of the management of the pandemic, if globalization is both the cause of and the solution to a problem, either it is not defined very well, or no simple lessons can be drawn from it. To take an example from another crash, here is Mervyn King, the former governor of the Bank of England, as quoted by James:

The origins of the crisis [of 2008] lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire—in a word, globalization.

Or, in James’s summary, “Globalization was running too hot.” Here it seems globalization improves lives, unless there is too much of it.

Both James and Yueh briefly discuss the historical curiosity that between about 1945 and 1971 there were no great crashes. The aforementioned study on crises found that they happened at about half the rate they did before that period or after it, and were less severe. Those years also corresponded to what James calls the “age of deglobalization,” which he views as the unfortunate result of Roosevelt and Keynes learning the wrong lessons from the Great Depression.

Widely known as a Golden Age, or “the Thirty Glorious Years,” the postwar decades were the era of the Bretton Woods monetary system, which was assembled by the Allies in 1944, aiming to prevent another Depression. A compromise between Keynes and the US Treasury representative Harry Dexter White, it secured national policy autonomy by imposing restrictions on cross-border financial flows. “Globalization had been curtailed, walled off, by war and its outcome,” James writes. “Bretton Woods…did not—and was not intended to—restore a world of globalization, which was now widely dismissed as a relic of a nineteenth-century world view.” And, as he goes on to say, “there was a logic of deglobalization that brought real improvements for workers who were now protected by new restrictions on international mobility.” Quite a contrast to the return of globalization since the 1970s, when, as James suggests,

Globalization was often supposed to act principally on wages and prices—producing constant deflation by bringing large numbers of new workers into a global workforce and devaluing the activities of traditional blue-collar manufacturing workers in rich countries.

Global GDP growth rates were roughly double in the 1945–1971 period what they have been since the 1980s, and even that total figure has been dragged upward by the phenomenal growth of China. The “age of deglobalization” also corresponded to sustained median wage growth, and according to Thomas Piketty, it was the only identifiable moment since the Industrial Revolution when inequality was substantially reduced. If the era of deglobalization corresponded to GDP growth, wage growth, equality, and stability, while the eras of globalization devalued the activities of workers and delivered, variously, the potato famine, the 2008 crisis, and Covid, then it is very difficult indeed to accept the simple lesson that globalization has improved lives.

There is no going back to the Bretton Woods system, although there are sometimes calls to do just that. And there are good reasons to think it was always going to unravel, that it was always incomplete and unstable, dependent on overwhelming American economic power that was inconsistent with the recovery of Germany and Japan. But eras without crises surely also tell us something about how and why crises happen, and a counterhistory to both James and Yueh would note that great crashes seem to be effectively prevented when there are capital controls, strong unions, high taxes, relative equality, and strict financial regulation, or in other words when capital is weak and labor is strong. The unfettered power of capital may well be good for globalization, but it has proven inimical to democracy, stability, equality, and even economic growth itself.

Who are these books for, and what work are they intended to do? They are representatives of an entire genre of economic writing. Some are written by journalists, like Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation (1999); some are by and for academic researchers, like William Quinn and John Turner’s Boom and Bust: A Global History of Financial Bubbles (2020); some have a clear policy intention, like Carmen Reinhart and Kenneth Rogoff’s This Time Is Different: Eight Centuries of Financial Folly (2009). The foundational text is Charles Kindleberger’s Manias, Panics, and Crashes, first published in 1978 and now in its eighth edition. There he sets out the model of what he calls a “typical crisis,” following the theories of the economist Hyman Minsky. In Kindleberger’s model, the first step to crisis is some sort of sudden positive shock, often an innovation in technology or financial engineering. Those shocks are profitable, and profit incentivizes investment, and as more people see other people making profits, they too want to invest, and a euphoria results.

These euphorias can be contagious across sectors and countries. Since profits are easy to find, people borrow to make their investments, and the supply of credit expands procyclically, so that more growth means more credit, which fuels more growth. But eventually the prices peak as some set of ventures fails, some proportion of loans inevitably goes bad, or some policy shift changes the distribution of relative profits. The euphoria sharply reverses, the supply of credit abruptly contracts, and prices suddenly decline. Kindleberger’s influence is still evident, and other books in the genre follow similar patterns: Quinn and Turner’s very careful and detailed Boom and Bust has a “bubble triangle,” which forms when a new technology or institutional change is easily marketable to a wide audience, whose members have access to ample credit, and many of whom go on to engage in speculation.

Each book draws some general policy implications, like the need for a central bank to act as lender of last resort, or for stricter regulation on speculation and credit. But they also assume that financial crisis is, in Kindleberger’s phrase, a “hardy perennial”: natural, inevitable, rooted in human nature, and thus impossible to eradicate. In 1862 the French statistician Clément Juglar wrote in his book On Commercial Crises and Their Periodic Occurrence in France, England, and the United States:

Crises, like illnesses, appear to occur in every society dominated by commerce and industry. We may foresee them, we may mitigate them, we may build limited defenses against them and facilitate a recovery from them, but up to the present no one has been able, in spite of the most varied connivances, to stop them.

Some 160 years and several hundred crises later, our lessons are still about how to recognize and mitigate, not how to create structures and institutions to eliminate crises entirely.

Both James and Yueh are aware of the difficulty in translating knowledge into action. Seven Crashes opens with the Nobel Prize–winning economist George Stigler complaining in 1976 that economists are always ignored, while The Great Crashes begins with John Kenneth Galbraith, who advised several presidents, observing that finance never learns from history. James’s first two lessons are that each turning point does not resemble the others, and that the lessons from a previous crisis can stand in the way of new solutions. Then he follows with five general lessons drawn from previous crises. Yueh’s summary of her lessons is as follows:

An enduring insight from financial crises is the importance of recognizing the risk posed by rising levels of debt fuelled by euphoria. Another is that policymakers can resolve a crisis only if their actions are viewed as credible. We’ve also seen that the aftermaths of crises vary greatly. How a country fares depends not only on the cause of the crash but also on how it is resolved.

Most of this is at an unhelpful level of generality, insofar as it tells us that things have beginnings, middles, and ends, but the concept of “credibility” is the more persistent problem. At no point does Yueh clarify what she means by credibility, or what makes some set of unprecedented policies credible or not. The closest she comes is in her chapter on Covid, when she claims that the ability of the United States, the United Kingdom, China, Japan, Germany, France, and Portugal to borrow cheaply shows that investors thought their policies were credible. So the minimum claim is that credible policies are whatever investors think is credible, and they can be identified by low interest rates.

Setting aside the fact that investors lent readily to governments during Covid because they were fleeing to safety during an unprecedented global financial collapse, and, as Yueh acknowledges, the fact that those countries pursued very different policies, the point remains that the aspiring policymaker seeking to learn lessons from history will have no idea whether their emergency policies will be credible or not, until they work or don’t. There was no way to know that abandoning the gold standard in 1933 or that engaging in over $4 trillion of quantitative easing after 2008 would be seen as credible; on the other side, Nixon’s price and wage controls when he separated the dollar from gold in 1971 were widely praised at the time but are scorned today. Austerity was pushed as the only credible response to the public debt crises after 2008, but it wrought ruin and misery for millions of people over more than a decade.

The reason is politics. Any policy agenda is going to come with its own claim to credibility, and debating these competing claims is the heart of politics. In her discussion of the 2010 eurozone crisis, Yueh finds that “politics determined its course. This crisis is therefore rather different from those preceding it.” The idea that the course of the Great Depression, the Savings and Loan Crisis, the Asian financial crisis of 1997, and the crisis of 2008 (to stick only to those discussed in The Great Crashes) were not determined by politics is impossible to take seriously.

Yueh concludes that “all financial crises are due to too much debt in some shape or form,” but not only is that claim untrue for many financial crises, it isn’t even true for all of the crises in her book. The 1992 currency crisis in the European Exchange Rate Mechanism was not caused by too much debt, but rather by a mismatch between the inflation rates, interest rates, and exchange rates of different member countries. The increase in German debt to fund reunification after 1989 was a contributing factor, but the trigger was a series of speculative currency attacks on the British pound—made possible, incidentally, by free capital flows. In the case of the Great Depression and the Covid crash, the words “some shape or form” are doing a lot of lifting. Some form of debt was present in all these crises, but many had different inciting causes and transmission mechanisms. And if too much debt causes all crises, but credibility is demonstrated by the ability to borrow cheaply, then isn’t debt also the solution? The result is too general: it is good to borrow to do credible things, and bad to borrow to do euphoric things.

The problems compound when the reader tries to take lessons from both books, let alone the entire genre. How is a policymaker to know amid a crisis whether it is one that will be good or bad for globalization? Yueh thinks the lessons of the Great Depression have been learned, and that they were to provide ample, supportive monetary policy, but James thinks the Great Depression began “a new age of deglobalized politics.” Who is right? How should a policymaker confronting the next crisis know whether to apply the lessons of the 1870s or the 1930s or the 1990s? Even if central bankers, legislators, and regulators were all amenable to learning lessons from history, they might in good faith learn divergent ones, or disagree over the right fit of lessons to circumstances. Politics would indeed be likely to determine the course of a crisis. And even if history could be reduced to compact, digestible lessons there would still be the risks of learning the wrong ones, or applying them in the wrong situations, or thinking that all of them have been learned and none remain to be discovered, revised, or overthrown.

Both books assume that crises are inevitable, and they are both composed of a history of failures and blunders, but they both conclude with optimism. For James, “learning is the major outcome of the crises of globalization, and we need to think of ways in which we can learn more effectively,” and fortunately, “we learn most when the present is most dismal.” Yueh believes that

we as individuals have an important part to play in executing these lessons from history and recognizing that our sustained effort is important, because progress is not linear and there can be backtracking by governments and companies.

Examples of playing our part include voting for politicians who “address climate change and promote equality,” discussing the value of recycling in public forums, and choosing not to buy from companies that pollute or mistreat their employees.

Voting, recycling, and exercising choice are all valuable practices, but they seem incommensurate to global economic crises, the structure of the international financial system, and the political tenor of the moment. Nor do they address currency crises or stock market crashes, let alone monetary policy made by central banks insulated from democratic accountability. They are focused on a limited horizon of conceivable change, reveal a complacency about the unequal distribution of wealth and power, and reflect an exhaustion of visions for a different, better world. But another lesson from history is that radical transformations seem impossible and unthinkable until they happen, and then they seem to have been inevitable.