Finance
by Charles Kindleberger
Why do bubbles keep coming back?
Dutch tulips, the South Sea Company, Japanese land in the 1980s. Speculative booms keep ending the same way. Charles Kindleberger, an economic historian, studied centuries of them and called financial crises a hardy perennial. He wanted to know what grows them, and what stops a crash from spreading.
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Every mania begins with a shock from outside that changes where money can be made. Kindleberger's examples include the end of a war, a new invention like the railway, and a sudden change in the rules. Investors rush towards the new opportunity, and lenders are happy to fund them.
A boom can't get far on savings alone. Kindleberger, building on the economist Hyman Minsky, shows lenders expanding credit as prices rise, and the extra money pushing prices higher still. Everything looks safe while the lending grows. When it stops, the boom stops with it.
Kindleberger finds that fraud grows alongside speculation, because rising prices hide almost anything. It comes to light once money runs short and people start asking questions. The fall of a well-known swindler is often what turns nervousness into outright panic.
Kindleberger says a panic ends when someone with deep pockets lends freely, as Walter Bagehot urged the Bank of England to do. The catch is that people who count on a rescue take bigger risks. So he wanted a lender of last resort that nobody could be sure would act.
The spark
A mania starts with a real shock, which the book calls a displacement, that opens a new way to make money.
Credit
Easy credit is what turns a good idea into a mania, as borrowed money chases rising prices.
Euphoria
At the peak, people buy only because prices are rising and they expect to sell to someone keener.
Swindles
Swindles grow alongside the boom and tend to come to light only once it ends.
Panic
When a few insiders start selling, the rush for the exit can turn into a panic almost overnight.
A story from the book
In 1720 the South Sea Company swapped its own shares for a large slice of Britain's government debt, then talked its share price up. Everyone from dukes to shopkeepers piled in, and copycat companies were floated on the flimsiest of plans. By the autumn the shares had collapsed.
One thing to try
Kindleberger wrote that nothing upsets your judgement like watching a friend get rich. When someone's quick profit tempts you, write down why you'd buy and what would prove you wrong. Then wait seven days before you do anything.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Manias, Panics, and Crashes comes with a Name That Idea round to make it stick.
Get the whole book on KnotdOpen in the appWhy do bubbles keep coming back? Dutch tulips, the South Sea Company, Japanese land in the 1980s. Speculative booms keep ending the same way. Charles Kindleberger, an economic historian, studied centuries of them and called financial crises a hardy perennial. He wanted to know what grows them, and what stops a crash from spreading.
It starts with a displacement; Credit feeds the fire; Swindles surface in the crash; Who stops a panic?.
Kindleberger wrote that nothing upsets your judgement like watching a friend get rich. When someone's quick profit tempts you, write down why you'd buy and what would prove you wrong. Then wait seven days before you do anything.
Yes. Knotd has the key ideas from Manias, Panics, and Crashes in a few minutes, in plain words, plus a Name That Idea round to test them. It's one of 250+ non-fiction books in the app.
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