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...

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Great Depression Problem Set:

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Comments

[Daniel S. Lee SID: 17361661]

I find it very interesting that we are going over the great depression almost exactly at the same time our country is going through another economic crisis. The shady dealings and similar mistakes that went on nearly eighty years ago make it unsettling to see that history does in fact repeat itself. Obviously there are different reasons and causes for the great depression and the situation we are facing now, but the analysis of the central problem dealing with the stock and financial markets are eerily similar to what is going on now.

[Craig Ng]

I think that Andrew Mellon is a man to be admired. Even though it didn't make for good economic policy to let the financial institutions crumble, I have to applaud him for sticking to his guns in trying to teach the American people a lesson. A lot of people now want to see the heads of the various investment banks and insurance companies punished for their poor decisions (not hedging), but no one is willing to sacrifice the economy. Andrew Mellon was just a man that thought that meting out justice to those that messed up was his responsibility.

[Jae Kim]

Today's lecture was engaging. I liked how you explained some causes of the crisis in 1930 and now. Also, you were talking about Karl Marx's idea.

[Andreas Gross (SID: 18454047)]

What I found most interesting in today's lecture was the failure of government action. In particular when we considering recent events with today's market crisis, where the government has taken an enormous role, I think that this interaction is essential to save the banking sector. For me all the actions by Europe are very interesting as well, their bailout. I am also very curious to see what is said on how the problems are fixed (or at least attempts to fix it).

[Sanpreet Gill]

I really enjoyed the part where you were comparing the fall of the Jay Cook bank in 1873 with all the banks falling these past couple of months. I feel we could have delved further into the topic and potentially create some sort of chart that breaks down the extent of the falls financially.

[Sanpreet Gill]

I really enjoyed the part where you were comparing the fall of the Jay Cook bank in 1873 with all the banks falling these past couple of months. I feel we could have delved further into the topic and potentially create some sort of chart that breaks down the extent of the falls financially.

[Carolyn Wu]

I found the discussion today about Mellon and Hoover to be especially interesting. Mellon had a unique perspective of liquidating the financial system, and allowing things to fail in order to "purge" the economy. I also thought it was interesting that Mellon believed unemployment to be a good thing, in that in times of high unemployment, people become more financially conservative, which eventually helps the economy recover.

[Nick Garcia]

I found today's lecture interesting because the Great Depression is one of those instances in American history that directly correlates to economics, so I found this lecture fitting for the class. In past history classes, I have never learned too much about Mellon, and I found the comparisons to Karl Marx and manipulation of finances compelling.

[Theo Vadpey]

I too thought the comparison between the current financial crisis and the depression was helpful. Though I thought I remembered from an American History class in high school or somewhere, that overproduction of certain goods was also a factor in the depression. Like prices for agricultural goods were too low. Were they? Or did the whole thing come from the risky investments in stock and the subsequent bank failures?

[Eric Rodriguez]

The part of this lecture that I found most interesting regarded Great Britain during the French Revolution era. I liked the part about how Britain lost a lot of its mercantile strength in bad investments like giving the king of Prussia 20 million pounds in gold in exchange for Prussia attacking the French. It reminded me of how complicated contracts are today, and how it would've been in the British interest to have had a more detailed contract with Prussia, to ensure that Prussia fought to a more significant degree. Of further interest is how Britian initially failed to bail out its banks who froze due to the lack of mercantile wealth to exchange, and how these silly mistakes could freeze their entire economy eventually. Also enjoyable was how these examples were paralleled to today's market situation.

[Lara Cueto]

I liked hearing about the parallels between past panics and crises and current financial events. I feel like I don't understand current economic events as much as I should so this helped. I also enjoyed the story of how and why Roosevelt became president.

[Eran Ben-Zvi]

I found the connection between broker loans and the great depression interesting. It seems like our current financial crisis was bound to happen because in a way we were along the same path that the U.S. was in the early 1900s. It's remarkable how nobody was able to make the association before it was too late and save us from this.

[Jennifer Chen]

The most interesting part of lecture today was the comparison between the events surrounding the Great Depression and the current economic crisis. The recent failures of Bear Stearns, Fannie and Freddie are similar to the collapse of key financial institutions in the 1930s. You also noted the differences in leadership. The Secretary of the Treasury under President Hoover, Andrew Mellon, took a hands-off approach. Paulson is doing the opposite, in fear of a second Great Depression. Despite the government intervention, it still concerns and shocks me to learn that the severities of the economic problems today and those of the Great Depression in the 1930s are comparable!

[Scott Nightingale]

What I found most interesting today was Mellon's argument against government intervention and the idea of moral hazard. His idea was to let the large companies that has overstepped their bounds fail and allow new ones to take their place. Not to mention the amount of tax payer's dollars that it would take to aid in the saving of the failing corperations. It is interesting today to see how many people still feel that the government should not intervene in our current economy. It seems to be a hot topic that has risen again. I find it interesting to see how close we are to another "Great Depression" and whether government intervention can at all aid in the current financial crisis. While yes, many of the financial instistutions can be held at fault for the crisis, it is rarely the CEO's that feel the sting of a depression.

[Eugene Song]

I thought that the most interesting part about today's lecture was about the bank failures and that it was a constant problem in the past. From today's lecture, it seems that a great deal of the success of the market is dependent on financiers and bankers. It was also interesting to learn that there are similar qualities to the 2008 credit failure to the 1930 Great Depression.

[Eugene Song]

I thought that today's lecture was interesting in that I did not know that many of today's bank failure problems are actually indicative of past problems with credit that the US has had in the past. Banks have had issues in the past but obviously not one as large as the one that we are currently experiencing. However, I didn't really find it surprising that many of the characteristics the 2008's bank failure is reminiscent of the Great Depression during the 1930's.

[Abdulaziz Nana]

In this lecture, the thing that I found most interesting was the background behind the Great Depression. I found the reasons of why and how the Great Depression took place and how due to Andrew Mellon, Herbert Hoover pretty much allowed the Great Depression to take place. I also found the whole story behind Theodore Roosevelt and how he came into power and what how he split the party.

[Ali Starczak]

I have been enjoying your discussions comparing past historical events, specifically the Great Depression, with the current financial crisis we are in today. It is really interesting to see how closely related the events today are with the events that took place during the Great Depression.

[Joshua Champion]

The most interesting thing to me during the lecture was trying to draw parallels with the Great Depression, it's causes, and the crisis of today. It helped to give insight as to how big this crisis truly is, where we might be headed, and how best to avoid spiraling downward. Hopefully, as you said, Great Depressions such as 1929 and possibly today, are just larger "animals" of recession, and can be averted by the same measures, and are not a different species entirely.

[Katherine Marcelo]

I thought the different views on financial crisis and what to do about it was very interesting. I also found the story about Hoover and Mellon to be very amusing. However, I don't have a strong knowledge on how the stock market works so lecture was a bit hard to follow. Going into more details about this would be very helpful.

[You Wu]

I enjoyed today's lecture, especially as it seems to apply to the current financial crisis. I recently read an article about how there is unlikely to be another Great Depression today. As you said in lecture, having The Fed intervene today makes a huge difference, but exactly how is unclear to me. Essentially monetary policy is the printing of money, very effective in the short run. But how can you solve an economic problem by simply printing money? Perhaps part of the answer is just the confidence that governments restores.

[Eric Huynh]

I am still confused about the causes of the Great Depression. I understand somewhat about the buying on margin part but I don't get how their recklessness hurts the economy. I guess it would help if you can point me to a website or article that explains how financial systems work, such as banks, stocks, lending, etc.

[James Inouye (sid 18926370)]

This lecture was very interesting as many events that happened in the Great Depression have happened again today. The failure of key institutions in both eras have caused our financial leaders to look back and compare how hands-off policies in the past did not work.

[Jenny Xie]

I found it interesting how a financial crisis can often be created by bad decisions in government finance, such as England's big financial crisis in 1793. Something else I found interesting was Karl Marx's connection to the Great Depression, and the consequential decisions/mistakes made by Mellon and Hoover. The Great Depression really justifies that markets cannot be entirely "free" and devoid of government intervention. The lecture was particularly interesting because it directly relates to the current financial crisis we are now facing. It is good to note that both the Great Depression and today's financial crisis are caused by the failure of risk management within the banking sector. Let's hope history does not repeat itself.

[Jenny Xie]

I found it interesting how a financial crisis can often be created by bad decisions in government finance, such as England's big financial crisis in 1793. Something else I found interesting was Karl Marx's connection to the Great Depression, and the consequential decisions/mistakes made by Mellon and Hoover. The Great Depression really justifies that markets cannot be entirely "free" and devoid of government intervention. The lecture was particularly interesting because it directly relates to the current financial crisis we are now facing. It is good to note that both the Great Depression and today's financial crisis are caused by the failure of risk management within the banking sector. Let's hope history does not repeat itself.

Jenny Xie
SID: 18821677