20081008 Manias, Panics, and Crashes

Audio: The Coming of the Great Depression

Robert Peel, 1844: My confidence is unshaken that we have taken all the Precautions which legislation can prudently take up against the Recurrence of a pecuniary Crisis. It my occur in spite of our Prescuamay occur in spite of our Precautions, and if it does, and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair the efficiency and probable success of those measures by which one hopes to control evil tendencies in their beginning, and to diminish the risk that extraordinary measures may be necessary...

Karl Marx, 1851: As is always the case, prosperity very rapidly encouraged speculation. Speculation regularly occurs in periods when overproduction is already in full swing... provides... temporary market outlets, while for this very reason precipitating the outbreak of the crisis and increasing its force. The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as [what it really is,] a consequence of its own previous exuberance, but merely as a setback caused by the collapse of speculation....

The crisis reached its peak... all commercial transactions had come to a standstill. A deputation from the City then brought about a suspension of the Bank Act of 1844, which had been the fruit of the deceased Sir Robert Peel's sagacity.... Since his death Peel himself has been apotheosized in the most exaggerated fashion.... His power over the House of Commons was based upon the extraordinary plausibility of his eloquence. If one reads his most famous speeches, one finds that they consist of a massive accumulation of commonplaces, skillfully interspersed with a large amount of statistical data...

Karl Marx, 1867: The... decennial cycle... of periods of average activity, production at high pressure, crisis and stagnation, depends on the constant formation, the greater or less absorption, and the re-formation of the industrial reserve army or surplus-population.... The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause...

---

Great Depression Problem Set:

http://www.scribd.com/doc/6450665/null

null - Upload a Document to Scribd

Comments

[Brad DeLong]

Test...

[Ming Li]

I really like when you were talking about what caused the crisis both in 1930s and now. Money is not going anywhere. Therefore, I think there should be some winner in both crisis. It would be great if you could talk about, who was and is the winner in both case. But if there aren't any winners, then where are all those loss of money?

[Michael Morales]

oddly enough, I thought that the portion of the lecture involving Mellon and Hoover was very interesting. i have to admit, the term "liquidationists" made me chuckle a little. THe Comparison between him and Karl Marx was also interesting because they both pointed out the same problem with "financial manipulation," and yet proposed completely different solutions. Mellon's ideology unfortunately became policy, under the Hoover presidency and led the U.S. to a great depression.

[Sandhya Jacob]

I thought today's lecture was very interesting, but I found it hard to follow. I don't have any background in finance, and therefore wasn't exactly sure how investment banks work, and how they leverage money to increase a company's wealth. It would be great to have a general summary of how the these investment banks works, and their correlation to the stock market.

[Stephen Deng (Guang)]

The part of the lecture that was most interesting to me was the part about Hoover trusting Mellon's advice to let the financial institutions crash.

I suppose it is one of those "never again" situations, but it will be interesting (and scary) to see how well this new bill can handle a similar mess.

I hope they are the same animal.

[Jinghao]

Hello Professor,

Since I have experience in finance, I found today's lecture about the great depression and the various financial problems that led up to it interesting.

Onto a different topic, seeing as the inflation-adjusted stock market did not grow much (on average) between 1870 and 1930 even when there was significant deflation during the earlier parts of the era, where did we get the notion that on average the stock market grows 11-13% a year?

Thanks,
Jinghao Yan

[Fang Zhang]

I am really interested in studying the manias, panics, and crashes in the American economy. Although people tried over the years to propose theories to figure these events out, from Shiller's Irrational Exuberance to Soros' theory of reflextivity, it seems that people have not learnt their lessons and have changed little since the dutch tulip mania.

[Jason Lee]

I really found all the parallels drawn in class today to be very interesting. Although not relevant to the course material, the similarities between Teddy Roosevelt and Sarah Palin were an amusing way to transition into the comparisons between the Great Depression and the current financial crisis. I thought today's lecture really demonstrated how important economic history can be to solving current and future economic issues that may arise. Thanks to the mistakes of their predecessors such as Andrew Mellon, the current administrators can avert disastrous mistakes that would drive the economy further downward.

name: Jason Lee SID: 18048004

[Ben Eisenpress]

The good part of todays lecture is that it tied the readings together. While each of them provided a specific view on the depression, reading them alone it was easy to get bogged down in the details. The lecture did a good job of unifying them. That said, there may have been times where the lecture was also deeper into details than needed.

[Aloysius Pawlicki]

I liked how you compared the Great Depression with our current financial crisis. I found the similarities interesting. Hopefully, this current financial crisis will not progress into something as drastic as the Great Depression. Also, I want to point out when you talked about how the Bank of England illegally printed out notes to help aid recession. Should Parliament have allowed this? I think the main concern was inflation versus how much this helped battle recession. Yeah, I just thought that was really interesting.

[Alice Kang]

It was really interesting how the Great Depression was sort of indirectly caused by the ideologies of Karl Marx, who influenced Mellon, who convinced Hoover to let the financiers go bankrupt. It sheds some light on whether or not one of the most read social/political commentators in history was correct in his assessment of economic problems.

[Ashley Stilley]

I found it funny when you said in lecture how historians consider James Buchanan to be one of the worst presidents in history, but how Bush comes extremely close and may change things up. I also appreciated how you interconnected the economy leading up to The Great Depression to that of today's economy.

[Sameer Khan]

JP Morgan and the North Pacific railroad leading to a panic was great. It is always interesting to hear stories of how men have exploited circumstances to their advantage, regardless of the overall effects. I would like to hear of how the central bank was created and allowed to function given that the first national bank was shut down. A history of how the stock exchange came to be would also be nice.

[Juan Carlos E. Camara]

Professor DeLong,

The lecture today was particularly insightful as to the various financial depressions that occurred prior to the Great Depression. Also, the reasoning that was given seems to be very sound, and the contingency of actions from one to another was clearly pointed out.
On the other hand, I am still unclear on the specific issues that led to the Great Depression. I see certain similarities that you attempted to point out in lecture, but do not see the reasons as to why the Great Depression was far worse than other similar situations. What led employment to hit that high of 25%? Was it solely, the lack of government action that propelled the economy downwards?

[Gwen Lee]

My favorite part of today's lecture was certainly about Hoover, Mellon, and the Great Depression only because there was an entertaining New Yorker cartoon supplementing it. I thought Mellon's shock therapy solution to "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system" sounds a lot like Charles Darwin and the whole notion of survival of the fittest, but I guess nobody really came out the winner in the end since the result became the Great Depression. On an aside note, I thought today's lecture was a bit hard to follow. Tons of dates were thrown out, so I just kind of got lost in between all the numbers and events that accompanied them.

[Elliott Bosnick Farrell]

I certainly found this lecture interesting because I'm curious to what extent it's possible that the depression/stock market crash could be repeated in the now. Considering I'm pursuing a finance profession, it's nice to get as many opinions of what kind of storm I'm racing into. I especially look forward to hearing what's to be said about FDR's action.

[Joy Peng]

I really like how you related the Great Depression of 1930 to the financial crisis in the present. It showed how history repeats even though we already had knowledge of what came before; yet, we decided, once again, the only direction a market can go is up and took no regards for the fact it might go down one down as it is currently doing.

[Colin Campbell]

As a follower of campaign politics, I was most amused by the Teddy Roosevelt discussion. Now that I understand his political history, it's interesting to compare that to the two other vice-presidents who assumed office after unfortunate assassinations - both Lincoln and Kennedy's VP's were also picked completely out of balancing the ticket in their own ways as well, I wonder if tickets that need more substantive balancing occur more often in an unstable, grander American context.

[Grace Lin]

I was surprised to learn that financial crises like the one we are experiencing now, has been a constant problem in the past, though the 2008 crisis is of course, on a much larger scale. It seems like the livelihood of the whole financial system and free market capitalism is largely dependent on financiers and bankers, or people in general, being conscientious and responsible about the investments that they make. It was also surprising to see the similarity between the 2008 Financial Crisis, and the Great Depression in the 1930’s.

[Serena Yang]

I thought the most interesting part of this lecture was the emphasis on the illusion that assets are always liquid. Can a financial system without this illusion exist? If not, is there a way of resolving the paradox of this illusion's necessity in our financial market and the potential damage it can cause? I suppose, in other words, I wonder if crises that arise from this illusion are inevitable or whether we (or state institutions) can somehow sidestep the danger.

[Nicholas Kessler]

I found it fascinating to see the parallels between the lead up to the the Great Depression and the current economic crisis. In both cases, the crisis was in part caused by investment banks packaging securities based on the faulty assumption that the market would continue to forever increase in value and that market liquidity would never become an issue. And in both cases these assumptions were flat out wrong. One would have assumed our banking industry would have learned from the mistakes of the past.

Another interesting point raised in today's lecture is how the policies of Andrew Mellon were partially responsible for the crisis leading up to the Great Depression and how President Hoover, although going along with Mellon's policies, tried to avoid taking responsibility for the crisis. This could be viewed as another parallel to today's economic crisis, as none of our present day leaders are willing to accept any of the blame.

[Thomas Sanford]

Karl Marx did not agree with the presentation of Robert Peel's work and thought of it as rhetorical and eloquent, made believable by complexities of statistical data. Ironically, Marx argument around the effects of speculation during financial crisis were used by Mellon in Hoover's administration and led to the Great Depression.

[Megan MacDonald]

I found the part of lecture about broker loans particularly interesting, especially as connected to the mortgage-backed securities of today's financial crisis. Also, the discussion of why the stock market was supposed to go up in the 1920s (the invention of the steam engine, prohibition, and the creation of the Federal Reserve) was intriguing.

[Megan Quinones]

I have really enjoyed your recent comparisons with past trends in history and the current financial crisis. I was aware about the possibility of a recession, but was unaware the extent to which the current crisis mirrors the great depression.

[Keith Tsang]

This was the first time that I've heard of a connection between Karl Marx and the Great Depression. I thought it was particularly interesting, because I had not previously known that this event could be added to the list of grievances that we could thank Marx for.