Reviewed by Francis Lee for the Saker Blog:  Manias, Panics and Crashes: by Kindleberger and Aliber: Palgrave MacMillan – Basingstoke Hants, UK – first published in 1978

Capitalism without failure is like religion without sin – Charles P. Kindleberger

This book was first published in 1978 and is now in its 6th edition. Given human nature and its corollary, economic collapse, there will doubtless be further editions. Mr Kindleberger himself is sadly no longer with us and the more recent up-datings have been carried out by his contemporary and co-author Robert Z Aliber. This book is not an easy read but represents a very scholarly assessment of capitalism’s intrinsic tendency toward boom-bust cycles, which, pace the run-of-the-mill economists and their co-thinkers, is an endemic feature of the system. Moreover, the analysis does not age, and in a sense it cannot; Like the man said: ‘’History repeats itself first time as tragedy, second time as farce.’’ (K.Marx. The Eighteenth Brumaire of Louis Napoleon – 1852)

The history of capitalism is precisely the history of bubbles, booms, manias and busts. The whole show probably started with the great Dutch tulip bubble of 1636, and then was followed by the two great euro bubbles, first in Britain with the South Sea Bubble in 1720 and then concomitantly in France with an early version of Quantitative Easing and the ensuing Mississippi Bubble of the same year. According to the authors, the South Sea and Mississippi bubbles were related … fuelled by monetary expansion in Britain and France that supported a high head of speculative steam. (p.57 Ibid).

One would have thought that the Dutch Tulip bubble of 1636 and the Mississippi and South Sea Bubbles of 1720 would have been of sufficient magnitude and been a salutary chastisement to warn off any repeat performances; but the group-think of the speculating mob was like the African mass herds of Wildebeest on an unstoppable trek across the African plains of the Serengeti. Thus derivative speculators and untamed cattle both moved like clockwork in one direction. At least one can forgive the Wildebeest, the poor brutes didn’t know any better.

The great Dutch Tulip bubble was probably the first major episode in the development of the ongoing boom-and-bust historical drama. The Second and Third bubbles should have been a warning to those who sought easy money and lost. Even the world famous scientist, Sir Isaac Newton (1642-1726) who lost a cool £20,000 – big money in those days – stating, ‘’I can calculate the motion of heavenly bodies, but not the madness of people.’’ In the irrational temper of the age many who played the stocks invariably lost. Having burnt his fingers in this irrational folly Newton put it out of his mind for the rest of his life. Lesson learned.

Sir Isaac Newton (1642-1726)

It took a couple of centuries later for the next big bubble-bust phenomenon – the US stock market (or Wall Street) bubble and subsequent bust of 1929. Once again the basis for the rise in stock prices was due to excess money input which was a function of easy credit. The problem with easy credit conditions (which at the time are never considered a problem but a boon) is that it supplies the excess liquidity that enables speculative buying to push up prices. This results in serial asset bubbles in, well, whatever you choose: tulip bulbs, internet start ups, stocks and shares, property, bonds, Bit.coin … and anything else, which only encourages more buying and further elevating asset prices. Of course it cannot last and it doesn’t. The stage is eventually reached when the rise in incomes and debt repayments on borrowed monies cannot keep up with the rate of asset-price inflation. Prices will eventually reach a plateau, and then begin to fall as highly leveraged debtors cannot borrow any more to service their debts from increasingly cautious lenders. These same borrowers will then have to sell some or all of their assets for payment of interest on their borrowed monies and this panic selling floods the market and results in falling asset prices. Now the boom transmutes into a bust. Fear now replaces greed as the great motivator.

The interesting point, however, is that most of the more significant episodes of boom-bubble-bust have come in our own time. Of the author’s list 10 major boom-bust episodes since the aforementioned 6, have occurred since 1971. Starting with the so-called ‘Tequila Crisis’ in Mexico and other emerging markets in the 1970s through to the great banking and sovereign debt crisis of our own time. In 1971 is a particularly interesting date since it marked the break-up of the Bretton Woods system and the definitive break with the gold standard.

Coincidence? Unlikely. Moreover we are not talking about individual national speculative capital movements but whole clusters of such phenomena. We have also seen the debt crisis move from the global periphery and semi-periphery of capitalism into its heartlands of North America, Europe and Japan. As the author’s state:

Four waves of credit bubbles in 30 years plus a bubble in US stocks in the late 1990s are unique in financial history … Each wave of bubbles when the lenders become much more willing to extend credit to a group of borrowers, perhaps because their incomes or anticipated incomes were set to increase or because the regulatory environment had become less restrictive and lenders were no longer prohibited from extending credit to these borrowers. (Op.cit)

Globalization has facilitated easy movement of capital across national frontiers. This is especially the case with financial capital. Trading in the forex, capital and derivatives markets goes on for 24 hours a day with huge cross border movements of monies and near-money derivatives, this being accomplished with just one click of a computer mouse. This huge ball of ‘hot money’ rolls around the world looking for easy pickings in terms of short term investment opportunities. It is not difficult to see the destabilising effect of such movements on national economies both at a domestic and international level.

During the East Asian crisis of 1997/98 such footloose capital flowed in massive amounts into the emerging markets of East Asia, the second tier of Thailand, Indonesia and Malaysia. This led to a rise in stock and property prices to giddying levels far above their equilibrium, and also pushed up the value of the national currencies. When the bubble burst the investors took their loot and exited, and asset prices duly collapsed. Moreover, many of the borrowers in these countries had borrowed in the currency of the investors, Japanese Yen or US$s. But as the value of their own currencies depreciated their debts as denominated in overseas currencies ballooned.

East Asian Financial Crisis 1997

Similarly at the domestic level the ease of credit led to house price bubbles and the subsequent property bust in the US, UK, Spain, Ireland and Iceland, with all that followed.

So time and again we come back to the same culprit: the ease and policy of credit expansion overseen by central banks around the world, and a glut of global capital looking for viable (and not so viable) investment outlets.

The expansion of credit which has been a feature of the post-1971 epoch has been made possible by a pure paper money (fiat) standard. Governments and Central banks around the world are no longer constrained by a gold standard which meant that their ability to create money was to a large degree circumscribed. But a pure money standard meant that credit could be created to the point of infinity. Additionally the commercial banks have the ability to create money through the fractional reserve system. Add to this explosive mix the (sometimes complete) lack of regulation of the banking and finance industries and everything was in place for the ensuing colossal debacle.

All of the above are necessary features of the capitalist system. The system works through boom and bust. Nothing is going to change this, whatever the liberal-left reformers of the system might argue. Responsible capitalism, a capitalism which would be equitable, stable, in harmony with nature, with sustained growth is a creature of the imagination. As Lenin once remarked, If capitalism could do all these things, it would not be capitalism.

Finally, my somewhat short and narrowly focused review of this book hardly does it justice. Read it and see. Or as Financial Times guru Martin Wolf (who I believe is not a Marxist) enjoins Read. Learn. Weep.’’

And now we are in 2021. To reiterate Martin Wolfe’s timely warning which bears repeating. ‘’The Latest crisis is unlikely to be the last. It may even be the precursor of a still bigger crisis in the years ahead.’’ Anyone wish to argue against this?


Ms Ann Pettifor (Keynesian, of course) the author of

’The Production of Money – How to Break the Power of Banks’

Speaks highly of a certain gentleman – one John Law – ‘’the Scottish genius (sic!) who understood credit or bank money way back in the 1700s.’’ p.94

FYI – John Law was a colourful fellow: Scottish mathematician, gambler, and early economist who left his homeland after killing a man in a duel. He decamped to France where he insinuated himself into the establishment who seemed eager to listen to his crackpot theories of money. He was the first to implement monetary easing. Trade, he argued was held back by lack of money. No problem, paper money or Assignats would be created in abundance to get trade and commerce moving. Sound familiar?

The Duc D’Orleans decreed that all taxes and revenues could be paid in notes to Law’s bank the Banque Générale. To cut a long story short the French authorities gave Law a plan to develop one of France’s possessions in what was then America. This was essentially another get-rich-quick racket similar to the earlier forms, namely the Dutch Tulip Bubble and the South Sea Bubble. As with all Ponzi schemes things went swimmingly at first. Inevitably, however, the bubble burst among a wailing and gnashing of teeth. The Mississippi Bubble collapsed in the same year as the South Sea Bubble. Speculation gave way to panic as share prices fell to 4,000 livres per share, a 73% decrease within a year. It was under these circumstances and the cover of night that John Law left Paris in disgrace some seven months later.

So this is the chap whom Ms Pettifor regards as a genius(sic!)


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