Manias, Panics & Crashes: A History of Financial Crises

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The best known and most highly regarded book on market crisis, Manias, Panics, and Crashes is entertaining, exhaustive, and thoroughly engaging. Since its introduction in 1978, it has charted a new landscape in the volatile world of financial markets. Charles Kindleberger's brilliant, panoramic history revealed how financial crises follow a nature-like rhythm: they peak and purge, swell and storm. Now in a newly revised and expanded third edition, Manias, Panics, and Crashes probes the most recent "natural disasters" of the markets - from Black Monday to the Japanese boom and bust, from the Sterling crisis and Peso devaluation to the potential "bubble" of today's technology stocks. Along with scores of casualties and criminals, a revealing common thread emerges from this rich history of manias, panics, and crashes: market crises are associated with greed and avarice. Just as money evolved from coins to include bank notes, bills of exchange, bank deposits, and checks, greed likewise took on many different forms. Lightning will strike an economic environment in strife, and Kindleberger explores what happens to the markets when conflicting interests arise. Manias, Panics, and Crashes can be regarded as a warning or a proposition, reminding readers, in many ways, that what goes around comes around. Like all true classics, Kindleberger's book remains timely - for better or for worse.

Product Details

ISBN-13: 9780471161714
Publisher: Wiley, John & Sons, Incorporated
Publication date: 12/1/1996
Edition description: Older Edition
Edition number: 3
Pages: 288
Series: Wiley Investment Classics Series, #10
Product dimensions: 5.35 (w) x 8.54 (h) x 0.90 (d)

Read an Excerpt

Don't Panic!

Every month, we find out how to draw yet more business lessons from history. As the stock market continues its ride in great gulping drops and soaring heights, take heart from this fact: It's all happened before.

Noted economist Charles P. Kindleberger wrote MANIAS back in 1978 and has been updating it ever since. It's a case study of all the great financial disasters of the last few hundred years. From the Dutch Tulipmania of 1637 -- in which tulip bulbs were eventually valued more than gold -- to the crash of 1987, learn what was done about them at the time, their aftermath, and how knowing about market behavior in times of crisis can help you.

These excerpts deal with two issues: The prime reasons for crashes -- overtrading (too many shares in play at once), and who can be called to save the day during a crisis: the lender of last resort.

From Chapter 2: Anatomy of a Typical Crisis

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.

As firms or households see others making profits from speculative purchases and resales, they tend to follow: "Monkey see, monkey do." In my talks about financial crisis over the last decade, I have polished one line that always gets a nervous laugh: "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior to what has been described as "manias" or "bubbles." The word mania emphasizes the irrationality; bubble foreshadows the bursting. In the technical language of some economists, a bubble is any deviation from "fundamentals," whether up or down, leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values (as prices) are called "noise." In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.

From Chapter 10: The Lender of Last Resort

The lender of last resort stands ready to halt a run out of real and illiquid financial assets into money by making more money available. How much? To whom? On what terms? When? These constitute some of the dilemmas of the lender of last resort, after it is determined, first, that there should be one, and second, who it should be....

The experience of the United States is especially pertinent to the questions: Who is the lender of last resort, and how does it or he know it? Under the First and Second Banks of the United States there was some ambiguity, despite the designation of the Bank in each case as a chosen instrument. On various occasions, the Treasury came to the aid of the banks by accepting customs receipts in postdated 30-day notes (1792), by making special deposits of government funds in banks in trouble (1801, 1818, and 1819), and by relaxing the requirement of a commercial bank to pay the Bank of the United States in specie (1801).

With the failure to renew the charter of the Second Bank of the United States in 1833, the Treasury was even busier, both before and after passage of the 1845 law requiring the Treasury to keep funds out of the banks. In times of crisis, and in periods of stringency caused by crop movements, the Treasury would pay interest and/or principal on its debt in advance, make deposits in banks despite the law, offer to accept securities other than government bonds as collateral for deposits of government funds, or buy and sell gold and silver. Banks became accustomed to looking to the secretary of the Treasury for help in an emergency, and for relieving seasonal tightness. In the fall of 1872, Secretary of the Treasury George S. Boutwell served as a lender of last resort by the possibly illegal method of reissuing retired greenbacks. His successor, William A. Richardson, did the same thing a year later.

The Treasury could absorb money in deposits and pay out surpluses from existing funds, but apart from the greenback period it could not create money. For this reason, it was unsatisfactory as a lender of last resort, unless it had previously accumulated a budget surplus. In 1907, when the till was low, the Treasury issued new bonds -- $50 million of Panama Canal bonds, which were eligible for collateral for national bank notes, and $100 million of 3 percent certificates of indebtedness -- hoping to entice existing cash and specie out of hoarding. In the end, the day was saved by a capital inflow from Britain of more than $100 million. Moreover, the devices used were ad hoc in the extreme. An analysis of the crisis of 1857 suggests that the federal government was incapable of intervening effectively, and that the public, including the banks, was left without guidance to stem the tide of the crisis. As we shall see, it was worse than that: intervention proved to be too much and too early.

Copyright 1978 Charles P. Kindleberger. Rights secured from John Wiley & Sons, Inc.

	Introduction to the Third Edition
	Preface to the Second Edition
	Foreword
1	Financial Crisis: A Hardy Perennial
2	Anatomy of a Typical Crisis
3	Speculative Manias
4	Fueling the Flames: Monetary Expansion
5	The Emergence of Swindles
6	The Critical Stage
7	Domestic Propagation
8	International Propagation
9	Letting It Burn Out, and Other Devices
10	The Lender of Last Resort
11	The International Lender of Last Resort
12	Conclusion: The Lessons of History
	Appendices
	Notes
	Index

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Anonymous

Posted January 28, 2001

Still one of the best on financial market follies

I first read this book over three decades ago and found it so fascinating that I gave copies as gifts to friends and colleagues over the years. Since the start of the current market mania many books, some very good, have been written on the subject of financial manias. However, none of the authors have the breadth of academic and government experience as Kindleberger. This has been, and remains, one of the best books on the subject. The extensive bibliography covers both general and specific periods and events and allows one to focus on seminal works. This is a well balanced overview of not only the cycle of financial market manias, but also of human folly and the role of government intervention. I also recommend reading his books on the Great Depression and the Economic History of Europe.
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Manias, Panics & Crashes: A History of Financial Crises

Overview

More About This Book

Overview

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Product Details

Read an Excerpt

Don't Panic!

From Chapter 2: Anatomy of a Typical Crisis

Table of Contents

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Still one of the best on financial market follies