of Financial Crises
In this chapter we will examine three broad theoretical perspectives. They are concerned with the role of money, asymmetric information, and speculation in the development of financial crises. Although the title of this chapter contains the word "noncyclical," these theories do not argue that financial crises cannot occur near the peak of the business cycle. Indeed, they generally observe that financial crises have often occurred at that time.
But their field of vision is broader. Their explanations of financial crises do not rely upon a cyclical mechanism. Theoretically crises could occur at any time. Thus these theories should be of some help in understanding the financial crises of the 1980s.
Milton Friedman has a theory of financial crises which is based upon his monetarist perspective. For him, the important variable is the supply of money, not the demand and supply of credit. Although banking panics are discussed at some length in his important and influential study of the monetary history of the United States (written jointly with Anna Schwartz), 1 he does not set forth an explicit theoretical approach to the subject. A perusal of some of Friedman's major theoretical writings, e.g., his major statement in 1970, 2 his work on money and business cycles, 3 or the theoretical chapter in his more recent book with Anna Schwartz, 4 fails to turn up a systematic general statement of the origins and causes of financial crises.
However, it is possible to infer his theory of financial crises by analyzing how he and Anna Schwartz explain the banking panics of the past. Then we will investigate whether Friedman considers his analysis to be of broader generality than merely a particular explanation of a historically specific event.
In their monetary history Friedman and Schwartz mention a number of bank‐