This is a lucid and illuminating book with much to teach both the student and instructor It comes as close to a page turner as a book on finance and economics can be The approach adopted of first documenting financial crises and then explaining those using alternative theoretical approaches is very effective This method applied as a climax of the book to the 2007–2008 financial crisis successfully reinforces earlier lessons Shahrukh Rafi Khan, Visiting Professor of Economics, Mount Holyoke College, USA This book offers and employs a rich theoretical framework for examining, assessing, and understanding the multiplicity of forces generating specific crises over an especially long run – from tulip mania and the Mississippi Bubble all of the way up to what the author coins as “The Latest Act: The Crash of the 2000s.” In my judgment, Bilginsoy has authored an especially comprehensive, thorough, and readable book on the subject of crisis and crises John Hall, Department of Economics, Portland State University, Oregon, USA This new volume by Cihan Bilginsoy will take its place alongside Kindleberger and Aliber’s “Manias, Crashes, and Panics” and Reinhart and Rogoff’s “This Time It’s Different” as a valuable introduction to the financial booms and crashes which continue to shape our world While “Manias, Crashes, and Panics” focuses attention on market and international dynamics, and “This Time It’s Different” on sovereign debt, Bilginsoy goes beyond these texts in his recounting of the historical background and institutional mechanics of a wide range of boom–crash episodes, and in his comprehensive discussion of economists’ debates about why they happened Indeed, a great strength of this book is its author’s even-handed approach to different economic points of view: readers can think along with established experts about the deeper logic of these events Consequently, this book – written to be accessible to non-economics university students – will be equally valuable for professional economists and investors Gary A Dymski, Professor of Applied Economics, Leeds University Business School, University of Leeds, UK This page intentionally left blank A History of Financial Crises “Once-in-a-lifetime” financial crises have been a recurrent part of life in the last three decades It is no longer possible to dismiss or ignore them as aberrations in an otherwise well-functioning system Nor are they peculiar to recent times Going back in history, asset-price bubbles and bank runs have been an endemic feature of the capitalist system over the last four centuries The historical record offers a treasure trove of experience that may shed light on how and why financial crises happen and what can be done to avoid them – provided we are willing to learn from history This book interweaves historical accounts with competing economic crisis theories and reveals why commentaries are often contradictory First, it presents a series of episodes from tulip mania in the seventeenth century to the subprime-mortgage meltdown In order to tease out their commonalities and differences it describes political, economic, and social backgrounds, identifies the primary actors and institutions, and explores the mechanisms behind the asset-price bubbles, crashes, and bank runs Second, it starts with basic economic concepts and builds five competing theoretical approaches to understanding financial crises Competing theoretical standpoints offer different interpretations of the same event, and draw dissimilar policy implications This book analyses divergent interpretations of the historical record in relation to how markets function, the significance of market imperfections, economic decision-making processes, the role of the government, and evolutionary dynamics of the capitalist system It is written for university students and demonstrates that the discipline of economics is far more diverse than standard textbooks may convey The theoretical and historical content complements economics, finance, history, and political science curricula Cihan Bilginsoy is Professor of Economics, University of Utah, USA Economics as Social Theory Series edited by Tony Lawson University of Cambridge Social Theory is experiencing something of a revival within economics Critical analyses of the particular nature of the subject matter of social studies and of the types of method, categories and modes of explanation that can legitimately be endorsed for the scientific study of social objects are re-emerging Economists are again addressing such issues as the relationship between agency and structure, between economy and the rest of society, and between the enquirer and the object of enquiry There is a renewed interest in elaborating basic categories such as causation, competition, culture, discrimination, evolution, money, need, order, organization, power probability, process, rationality, technology, time, truth, uncertainty, value etc The objective for this series is to facilitate this revival further In contemporary economics the label “theory” has been appropriated by a group that confines itself to largely asocial, ahistorical, mathematical “modelling” Economics as Social Theory thus reclaims the “theory” label, offering a platform for alternative rigorous, but broader and more critical, conceptions of theorizing Other titles in this series include: Economics and Language Edited by Willie Henderson Rationality, Institutions and Economic Methodology Edited by Uskali Mäki, Bo Gustafsson, and Christian Knudsen Rules and Choice in Economics Viktor Vanberg Beyond Rhetoric and Realism in Economics Thomas A Boylan and Paschal F O’Gorman New Directions in Economic Methodology Edited by Roger Backhouse Feminism, Objectivity and Economics Julie A Nelson Who Pays for the Kids? Nancy Folbre Economic Evolution Jack J Vromen Economics and Reality Tony Lawson 10 The Market John O’ Neill 11 Economics and Utopia Geoff Hodgson 12 Critical Realism in Economics Edited by Steve Fleetwood 13 The New Economic Criticism Edited by Martha Woodmansee and Mark Osteeen 14 What Economists Know? Edited by Robert F Garnett, Jr 15 Postmodernism, Economics and Knowledge Edited by Stephen Cullenberg, Jack Amariglio and David F Ruccio 16 The Values of Economics An Aristotelian perspective Irene van Staveren 17 How Economics Forgot History The problem of historical specificity in social science Geoffrey M Hodgson 18 Intersubjectivity in Economics Agents and structures Edward Fullbrook 19 The World of Consumption, 2nd Edition The material and cultural revisited Ben Fine 20 Reorienting Economics Tony Lawson 21 Toward a Feminist Philosophy of Economics Edited by Drucilla K Barker and Edith Kuiper 22 The Crisis in Economics Edited by Edward Fullbrook 23 The Philosophy of Keynes’ Economics Probability, uncertainty and convention Edited by Jochen Runde and Sohei Mizuhara 24 Postcolonialism Meets Economics Edited by Eiman O Zein-Elabdin and S Charusheela 25 The Evolution of Institutional Economics Agency, structure and Darwinism in American institutionalism Geoffrey M Hodgson 26 Transforming Economics Perspectives on the Critical Realist Project Edited by Paul Lewis 27 New Departures in Marxian Theory Edited by Stephen A Resnick and Richard D Wolff 28 Markets, Deliberation and Environmental Value John O’Neill 29 Speaking of Economics How to get in the conversation Arjo Klamer 30 From Political Economy to Economics Method, the social and the historical in the evolution of economic theory Dimitris Milonakis and Ben Fine 31 From Economics Imperialism to Freakonomics The shifting boundaries between economics and other social sciences Dimitris Milonakis and Ben Fine 32 Development and Globalization A Marxian class analysis David Ruccio 33 Introducing Money Mark Peacock 34 The Cambridge Revival of Political Economy Nuno Ornelas Martins 35 Understanding Development Economics Its challenge to development studies Adam Fforde 36 Economic Methodology An historical introduction Harro Maas Translated by Liz Waters 37 Social Ontology and Modern Economics Stephen Pratten A History of Financial Crises Dreams and follies of expectations Cihan Bilginsoy First published 2015 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2015 Cihan Bilginsoy The right of Cihan Bilginsoy to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Bilginsoy, Cihan A history of financial crises : dreams and follies of expectations / Cihan Bilginsoy – First Edition pages cm – (Economics as social theory) Financial crises–History Banks and banking–History Corporations–Finance–History I Title HB3722.B565 2014 338.5’42–dc23 2014022357 ISBN: 978-0-415-68724-9 (hbk) ISBN: 978-1-315-78087-0 (ebk) ISBN: 978-0-415-68725-6 (pbk) Typeset in Palatino by Sunrise Setting Ltd, Paignton, UK To the memory of Sadi Bilginsoy and Raika Bilginsoy ... Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Bilginsoy, Cihan A history of financial crises : dreams and. .. British railways and banks Canals 143 Early years of the railways and the 1825 boom and panic 145 The railway panic of 1836–7 148 The railway fever of 1845 154 The bust 159 Understanding British railway... Cihan Bilginsoy will take its place alongside Kindleberger and Aliber’s “Manias, Crashes, and Panics” and Reinhart and Rogoff’s “This Time It’s Different” as a valuable introduction to the financial