Bust'd

I ran across an obscure 1975 book by JK Galbraith, Money, a brief and entertaining history of currency and banking. In recent times, that consists of capitalism's great booms and busts (interspersed with central planning during major wars). With respect to the US, he sketches out the crashes of 1778, 1819, 1837, 1857, 1873, 1884, 1893, 1907, 1921, and 1929 (to which we could perhaps add 1973, 1980, 1987, 2000, and 2008). The root of the problem is always someone's "new" way of creating money out of thin air; if investors and legislators go along with it, it becomes a financial bubble which wreaks havoc when it bursts. Afterwards, remorseful legislators impose restrictions to prevent a recurrence... and a few years later those restrictions are quietly removed.

He illuminates some patterns. For one thing, financial bubbles are often the consequence of military overreach. A clear example is the US War of Independence, which could not conceivably be financed by taxation (there was no state apparatus yet) or loans (creditors were not convinced the fledgling state would survive). So the American rebels printed money (see image above) with a certain (inadequate) amount of gold to back it up. True, the money devalued almost to zero after the war, but by then the state was secure. If you think that's ancient history, just look at The Three Trillion Dollar War. The event that bursts the bubble is usually in the civilian real estate or stock markets, but the original bubble came from the monetary policy of the state.

He also points out:

"During the last century and until 1907, the United States had panics, and that, unabashedly, is what they were called. But, by 1907, language was becoming, like so much else, the servant of economic interest. To minimize the shock to confidence, businessmen and bankers had started to explain that any current economic setback was not really a panic, but a crisis. [...] By the 1920's, however, the word crisis had also acquired the fearsome connotation of the event it described. Accordingly, men offered reassurance by explaining that it was not a crisis, only a depression. A very soft word. Then the Great Depression associated the most frightful of economic misfortunes with that term, and economic semanticists now explained that no depression was in prospect, at most only a recession. In the 1950's, when there was a modest setback, economists and public officials were united in denying that it was a recession--only a sidewise movement or a rolling readjustment. Mr Herbert Stein, the amiable man whose difficult honor it was to serve as the economic voice of Richard Nixon, would have referred to the panic of 1893 as a growth correction." (103)

Alas, all too true. With each burst bubble, a legion of teleconomists appears with new mushmouth words for it: "market correction", "slowdown", and most recently "credit crisis". We need macroeconomists who actually study the real economy, draw conclusions, and make reasonable predictions and recommendations--people with intellectual integrity and a memory longer than 6 months--not the glorified grief counselors we have now. Joseph Stiglitz, are you listening?

Galbraith touches on many other topics as well. Here is a good passage about the de facto adoption of cigarettes as the currency of 1945 Germany:

"This was the equivalent, in all respects, of a well-considered coinage. The single cigarette was excellent small change; the package of twenty and the carton of two hundred were convenient multiples for large or major transactions. The decimal form was modified but not to the point of mathematical difficulty. Few forms of money in history have been more difficult to counterfeit. None had within it such an excellent tendency to self-regulation of its value. If the exchange value of cigarettes had a tendency to fall, i.e., if supply was too great and the price of products in exchange for cigarettes too high, there was a tendency for the holder of this coin to smoke it up or offer it to his addicted friends rather than pass it on. This had the effect of reducing supply, maintaining value." (251)