Funny Money, Bubbles, and Crashes

Funny Money, Bubbles, and Crashes

1 November, 2013 by admin in Featured, Finances

The stock market is back. Housing is rebounding. The recession is over and investments will keep rising. Or will they? The rise and fall of valuations are nothing new. Our most recent real estate and stock market bubbles, crashes and apparent recoveries have many predecessors in the economic history of nations. In 1599, for example, a handful of Dutch traders tried to corner the world’s pepper market, and the spice became more costly by weight than gold. A generation later, those clever Dutch scammers created a nationwide frenzy for tulip bulbs, which also soon became worth far more than their weight in gold. This bubble, too—like Florida real estate—soon exploded, leaving the investors with some pretty flowers, spicy soup, and lost fortunes. Achoo!

The Mississippi Company was set up to exploit the wealth of French colonies, especially in Louisiana. In 1719, it gained a monopoly of trade with the East Indies and China, and a speculative boom in the value of its shares ensued. The boom, combined with the overissue of notes by the Banque Royale, led to a drain of precious metals from France to London. Then, the boom collapsed—the so-called Mississippi Bubble. This one event set banking in France back by about a hundred years. Contemporary with the Mississippi Bubble was the South Sea Bubble, a speculative boom that took place in the shares of the South Sea Company, originally set up to break the Spanish monopoly of trade with Central and South America. The collapse of this boom undermined the development of banking in both Britain and America for many years.

In 1759, during the Seven Years War between the British and the French in the colonies, General James Wolfe captured Quebec. During his campaign, he complained about being hampered by lack of funds. Similarly, inflation was blamed for the lack of funds that led to the defeat of General Edward Braddock in 1755. Consequently, the British government decided to increase taxation in America, thus spurring the American Revolution. Money policy seems to have had a large hand in our nation’s origins.

In 1766, Benjamin Franklin failed to persuade the British Parliament to allow the creation of colonial paper Money in America. Ten years later, before the ink was dry on the Declaration of Independence, the colonials began furiously printing Money to finance the Revolutionary War. They called their new currency the continental. Not surprisingly, the continental experienced increasing hyperinflation from 1776 to 1783. At war’s end, the new American currency was worthless.

As noted above, centuries ago, Ugandans used cowrie shells as Money. In the early eighteenth century, a man could purchase a wife with just two of them. Then slave traders and other colonial importers began to import large quantities of the shells from places were they were plentiful, making huge profits on these “currency” exchanges. By the end of that century, inflation caused a prospective husband to need a thousand cowries for a bride price.

Shell Moneys were also valued in many other cultures. The early American colony of Massachusetts adopted Native American shell Money, called wampum, as legal tender. Wampum persisted as a form of Money for almost two hundred years. But with typical Yankee ingenuity, the European settlers there started a wampum factory where they used machines to shape the shells, which formerly were limited in production by the hand work of native people. Subsequently, wampum met the same fate of the cowrie and other indigenous currencies: it became inflated and its worth as currency collapsed.

During the 1812–14 war between the United States and Britain, inflation ballooned in the United States. As in the US Revolution, during the US Civil War in 1861–65, the Confederacy largely financed its war effort by printing Money. In addition to the Confederate notes, various states, railways, insurance companies, and other companies also issued notes. The resulting hyperinflation rendered Confederate paper worthless for anything but wallpaper in Confederate homes. By comparison, inflation in the North was relatively moderate as the Union government raised substantial sums of Money by taxation and borrowing. This helped the Northern states maintain economic superiority over Southern states for many decades after the war, just as the European aristocracies maintained their wealth over the peasants through the new golden rule.

From 1922 to 1923, after losing World War I, Germany suffered dramatic hyperinflation. At the worst of it, employers paid some workers every day, even twice a day, so they could make purchases before their Money lost more value, causing some goods to cost more than they had the previous day. Reportedly, it could take a barrel full of notes to buy a loaf of bread. Waiters asked for payment in advance because by the time patrons finished a few drinks and their meal, the price might have risen. Postage stamps from that era were repeatedly reprinted going from 5 to 50 to 500, 5,000, 50,000 and even 5,000,000 Marks. Germany suffered hyperinflation again directly after World War II. From 1945 to 1948, ration cards and permits became more important than currency. On the black market, commodities such as soap, tinned beef, chocolate, and cigarettes served as currency, much as they do in US prisons today.

In 1925–26 there was a huge real estate bubble in Florida. When it popped, in 1926, speculators put their capital in the stock market. Through 1928 and 1929, the stock market inflated the next bubble and the government did nothing as the boom got increasingly out of control. The market crashed in 1929, precipitating the Great Depression, seconded by the somewhat similar, less severe crash in 2007 and a multitude of smaller crashes in the eight decades between them. In 1933, Franklin D. Roosevelt became President and implemented the New Deal. This brought with it a great deal of banking reform, including the creation of the US Federal Deposit Insurance Corporation to guarantee repayment of savers’ deposits in any further case of default. Similar to the most recent downturn, the stock market continued making Money for the upper ranks while millions of working- and middle-class people remained out of work and out of their homes.

Just as inflation has created multiple bubbles through time, bank failures are also nothing new. They have been happening ever since there were banks. In 1790 there were four banks in the United States. By 1800 there were twenty-nine, and by 1921 almost thirty thousand. Widespread banking failures occurred in 1857 when over fourteen hundred banks had to suspend cash payments. This spread around the world. There was another crash in 1873 and another in 1907, which was also global, followed by the Great Depression and most recently the Great Recession, which also saw many bank failures. Stock market crashes have also often followed large run-ups in stock valuation. We can begin to get a feel for the psychological life of Money: if it were a person, he or she would be severely manic-depressive. And what we psychologists know about this is: what goes up must come down.

Dr. Aaron Kipnis is a psychologist in Los Angeles and author of the recent book: The Midas Complex: How Money Drives Us Crazy and What We Can Do About It.

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