Philip M Halperin

Donkey carrying booksBookshelf     Kindleberger-

Charles P. Kindleberger Manias, Panics, and Crashes: A History of Financial Crises, 1996

This book is not an easy read, as it assumes a certain familiarity with the many financial disasters that have occurred since the seventeenth century, particularly the many panics and crashes of the nineteenth and twentieth centuries in Europe. The prose style is academic, at times delightful, but at times turgid, and so requires a bit of effort on the part of the reader. Such effort will be richly rewarded by both the breadth and depth of understanding that this work of comparative historical economics will impart.

The heavily quantitatively-minded could (but should not) be disappointed:

"This book is an essay in what is derogatorily called today 'literary economics' as opposed to mathematical economics, econometrics...The result is an essentially qualitative, not quantitative, approach."
And rightly so. Qualitative understanding is too-often overlooked nowadays; prior to the quantification of events through descriptive statistics, and the formulation of predictive models (of doubtful utility and robustness) must come an understanding of what actually took place, how, and why.

Manias, Panics, and Crashes is an exercise in determining the how and why of financial disasters. Throughout the investigation and discussions, the reader would be well-advised to continuously refer to an appendix [Appendix B in the current, third edition] which sets forth a thumbnail sketch of no less than 35 disasters, ranging from the Kinder- und Wipperzeit of the 1620s Holy Roman Empire to the 1990s Japanese crash. This invaluable table contains the following elements:
Countries (city)
Related to
Preceding Speculation in
Monetary Expansion from
Speculative Peak
Crisis (crash, panic)
Lender of Last Resort

This outline not only gives a succinct rendering, but empasises the qualtitative analytical framework detailed in the book, as the title of the first substantive chapter, "Anatomy of a Typical Crisis" implies. The analytical framework in the third edition relies heavily on a model by Hyman Minsky i that emphasises the instability of the credit system. The typical crash begins with a secular shock to the system or "dislocation" that leads to boom, fed by expansion of credit, leading to a positive feedback cycle of
" Now overtrading is by no means a clear concept. It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive "gearing." Pure speculation, of course, involves buying for resale rather than use in the case of commodities, or for resale rather than income in the case of financial assets. Overestimation of profits comes from euphoria, affects firms engaged in the productive and distributive processes, and requires no explanation. Excessive gearing arises from cash requirements which are low relative both to the prevailing price of a good or asset and to possible changes in its price. It means buying on margin, or by installments, under circumstances in which one can sell the asset and transfer with it the obligation to make future payments. "
speculation that at its height can be characterised as a "mania" or "bubble", often characterised by the emergence of swindlers as well. As the bubble tops out, there often follows a period of "financial distress" which turns to crisis, following news of bank failures, significant bankruptcies, or the revelation of swindles. Finally, there may be panic, a positive feedback cycle of liquidation and disappearance of credit, and the insatiable demand for real money, which may or may not be mitigated by a lender of last resort.

Each of these stages is discussed in detail (with much cross-period comparison) in the successive chapters:
  • Speculative Manias
  • Monetary Expansion
  • Emergence of Swindles
  • Critical Stage
Of particular interest are the next chapters, on the spread of crisis, "Domestic Propagation", and "International Propagation", the latter being fo regrettable significance at this time (1999).

Kindleberger does a masterful job of analysing the various transmission mechanisms internationally, and compares and contrasts many historical periods of international monetary crisis, including the related

" It pays in all these matters to be careful and not claim too much, for example, that all financial crises are internationally contagious... is difficult to see why Tokyo and New York are an exception to the rule of parallel booms and busts that links security markets in Europe and the United States. One counterexample destroys a theorem, and it has to be admitted that the international propagation of bubbles and crashes seems not to be an economic law so much as a tendency....
The hypothesis is that psychological connections between financial markets are stronger than arbitrage, monetary impulses and central-bank cooperation, and also that the psychological and cultural ties across the Atlantic are tighter than those across the Pacific.
South Sea and John Law bubbles, the mostly European crisis of 1847-48, and the international crisis beginning in 1929. To his credit, he also emphasises the lack of a hard-and-fast rule, as evidenced by the lack of any real contagion between the New York crash of 1987 and the Japanese financial disaster that began in 1990.

The last chapters of the book are concerned with what measures have been or could be taken by those in a position to possibly influence the outcomes: "Letting it Burn Out, and Other Devices" is a good exposition of the different approaches taken with varying results. Finally, there is a discussion of the role of the white knight, the political dimension and possible moral hazard in "The Lender of Last Resort" and "The International Lender of Last Resort". The final chapter, "Conclusion: The Lessons of History" suffers to some degree from its emphasis on the question of the role, utility, desireability, and problems of the lender of last resort, rather infelicitously allowing many of the insights of the book to languish in their respective chapter contexts.

One could voice another mild reservation regarding the book's rather mechanistic analysis of events:  Although there is an analysis of irrationality in economics, it is relegated to an appendix, and not enough emphasis is given to mass-psychological factors and indicators in the main discoursive sections. This psychological material is treated well by other authors, however (for example in Galbraith's Financial Euphoria which could serve as an excellent complement to this work).

"Manias, Panics, and Crashes" is a book of tremendous scope and analytic power. It succeeds admirably in providing an anatomical description and qualitative analytic framework for the phenomenon of recurring financial disasters. The current period, characterisable within the framework of national crises and international financial distress can be well measured by comparing and contrasting to the 35 major historical crises in the context of Kindleberger's analytic framework. This framework should be as indispensible to the contemporary financial risk manager as the application of rarefied quantitative technique, and is certainly more robust.

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i see "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. (back to text).