Currency School vs Banking School
One aspect of the history of monetary theory is a continuing debate between two different views the Currency School and the Banking School about how best to manage the growth of the money supply. The proponents of the Currency School advocated a firm limit on the expansion of the money supply to avoid inflation. The adherents of the Banking School believed that increases in the supply of money would not lead to inflation as long as these increases were associated with business transactions. In...
Objects of speculation
In the last several decades of the twentieth-century investors speculated primarily in real estate or stocks in earlier periods the objects of speculation were more diverse. A stylized table of cycles is presented in the Appendix. The list shows the tendency for these objects to move from a few favored items at the beginning of our period to a wide variety of commodities and other assets and instruments at the end. The list is partial but suggestive. How likely is it that a displacement will...
Minskys threepart taxonomy
Minsky distinguished between three types of finance hedge finance, speculative finance, and Ponzi finance on the basis of the relation between the operating income and the debt service payments of individual borrowers. A firm is in the hedge finance group if its anticipated operating income is more than sufficient to pay both the interest and scheduled reduction in its indebtedness. A firm is in the speculative finance group if its anticipated operating income is sufficient so it can pay the...
Foreword
Charlie Kindleberger CPK from now on was a delightful colleague perceptive, responsive, curious about everything, full of character, and, above all, lively. Those same qualities are everywhere evident in Manias, Panics, and Crashes. I think that CPK began to work on the book in the spirit of writing a natural history, rather as Darwin must have done at the stage of the Beagle collecting, examining and classifying interesting specimens. Manias, panics, and crashes had the advantage over rodents,...
History vs economics
For historians each event is unique. In contrast economists maintain that there are patterns in the data and particular events are likely to induce similar responses. History is particular economics is general. The business cycle is a standard feature of market economies increases in investment in plant and equipment lead to increases in household income and the rate of growth of national income. Macroeconomics focuses on the explanations for the cyclical variations in the rate of growth of...
The big ten financial bubbles
1. The Dutch Tulip Bulb Bubble 1636 4. The late 1920s stock price bubble 1927-1929 5. The surge in bank loans to Mexico and other developing countries in the 1970s 6. The bubble in real estate and stocks in Japan 1985-1989 7. The 1985-1989 bubble in real estate and stocks in Finland, Norway and Sweden 8. The bubble in real estate and stocks in Thailand, Malaysia, Indonesia and several other Asian countries 1992-1997 9. The surge in foreign investment in Mexico 1990-1993 10. The bubble in...
Fueling the Flames The Expansion of Credit
Axiom number one. Inflation depends on the growth of money. Axiom number two. Asset price bubbles depend on the growth of credit. Speculative manias gather speed through expansion of money and credit. Most expansions of money and credit do not lead to a mania there are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit. In the last hundred or so years the expansion of credit has been almost exclusively through the banks and the...
National differences in speculative temperament
One suggestion is that investors in some countries are more likely to speculate than those in other countries. Despite Ruth Benedict's distinction between cultures with Apollonian balancing and those with Dionysian orgiastic temperaments,80 the proposition is dubious. And despite this implausibility, the opinion among historians seems general that the Bra-banters had a strong gambling temperament in the sixteenth century, and that those tens of thousands who migrated to the United Provinces...
The chapterbychapter story
The background to the analysis, and a model of speculation, credit expansion, financial distress at the peak, and then crisis that ends in a panic and crash is presented in Chapter 2. The model follows the early classical ideas of 'overtrading' followed by 'revulsion' and 'discredit' musty terms used by earlier generations of economists including Adam Smith, John Stuart Mill, Knut Wicksell, and Irving Fisher. The same concepts were developed by the late Hyman Minsky, who argued that the...