Financial Crises: Understanding the Postwar U.S. Experience

By Martin H. Wolfson | Go to book overview

1
Introduction

In the nineteenth and early twentieth centuries, financial crises occurred regularly in the United States, with particularly severe episodes in 1873 and 1893. Closer to the present time were the Panic of 1907 and the banking crises that took place during the Great Depression of the 1930s. In that latter case, faith in the banking system had fallen to such a low level that a national Banking Holiday that closed all banks was declared on March 6, 1933.

The severe financial and economic trauma of the Great Depression led to major reforms in the structure of the economy, including important institutional changes in banking and finance. The hope at the time was that these reforms would put an end to the dislocations resulting from financial crises.

For a while after the Great Depression and the Second World War, it appeared that these hopes might be realized. For twenty years after the end of World War II, although certain sectors of the economy suffered financial strains from time to time, events in the financial markets did not resemble those that took place during the financial crises of an earlier era.

During the period immediately following World War II, when financial crises seemed to have disappeared forever from the economic scene, mention of them also disappeared from the economics literature. Nearly an entire generation of economists was trained without ever studying the origins and causes of financial crises. If the prevailing wisdom were true, though, such neglect made sense: why study a phenomenon that no longer existed?

Thus the "credit crunch" of 1966 came as quite a shock. For a period of time during the summer of 1966, the market for municipal securities was "disorganized" by the liquidation of bonds from commercial bank portfolios, and thrift institutions came under strong financial pressure. Events seemed to be developing in the same way as they had during past financial crises.

As it turned out, the crisis was resolved before it caused significant damage to the economy. Though the 1966 crisis was much less intense than the Panic of 1907 or other similar crises, it was nonetheless a shock to observers who had thought financial crises were a thing of the past.

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