A History of US Financial Crises, 1860-2008
Econ 227, Fall 2016
Instructor: Dr. Harlan Holt
Contact: holth@[Link]
Office: Olin 211A
Office Hours: T 1:00-3:00pm, W 2:00-4:00pm
Class meeting times: T/Th 9:00-10:45am
Classroom: Lippman 017
Content:
Why are financial markets so important? Why are crises so destructive? Are crises inevitable, or
are they encouraged and exacerbated by bad institutions? How can policy help or harm? For
many people, these questions tend to be reflected by their preference for regulation. State
oversight, we are promised, is necessary to discipline bankers and other private actors who
behave badly, and to insure the public from their excesses. Since its inception, the Federal
government of the United States has been heavily involved in shaping the US banking sector
through policy and politics, often to its own benefit at the expense of the public. We will see that
banking and government are inseparable entities that depend on each other in often obscure
ways. The United States’ experience with this partnership has resulted in a remarkably crisis-
prone system. Since 1830, the US has experienced 14 separate banking crises or panics, while
Canada has experienced none! Why is banking so stable in some countries but unstable in
others, especially ours?
We will extensively study the National Banking Era crises from 1860-1912, the Great Depression
of 1929-1933, and the Global Financial Crisis of 2008. In many of these cases, bad or ineffectual
regulations, and incompetent, sometimes perverse, state oversight either caused these crises, or
caused them to be significantly worse. We will provide a historical account of the major crises
during these periods, discuss the regulatory response to these crises, and eventually suggest
some policy solutions.
This course involves a lot of reading. Much of the material will be dense, so expect to spend a
lot of time doing it. You will be expected to already be familiar with introductory micro and
macroeconomics. It will be put to good use in this course. We will review money and banking
concepts along the way, but there will not be an assigned text for that material (so make sure
you come to class). What you put into this course is what you will eventually get out of it. Work hard
and come to class, and you will (in all likelihood) find this course to be richly rewarding.
Required books:
Gary Gorton, Slapped by the Invisible Hand (Oxford University Press)
Charles Calomiris and Steven Haber, Fragile by Design: The Political Origins of Banking Crises and
Scarce Credit (Princeton University Press)
Elmus Wicker, Banking Panics of the Gilded Age (Cambridge University Press)
Milton Friedman and Anna Schwartz, The Great Contraction 1929-1933 (Princeton University
Press)
Viral Acharya, Matthew Richardson, Stijn van Nieuwerberg, and Lawrence White, Guaranteed to
Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance (PDF available at:
[Link]
Recommended books:
O. M. W. Sprague, A History of Banking Crises During the National Banking Era (Available at:
[Link]
Elmus Wicker, Banking Panics of the Great Depression (Cambridge University Press)
James Barth, Gerald Caprio Jr., and Ross Levine, Guardians of Finance: Making Regulators Work for
Us (MIT Press)
Walter Bagehot, Lombard Street: A Description of the Money Market (available at
[Link]
Milton Friedman and Anna Schwartz, A Monetary History of the United States 1867-1960
(Princeton University Press)
Charles Kindleberger and Roger Aliber, Manias, Panics, and Crashes: A History of Financial Crises
William H. Riker, Liberalism Against Populism (Waveland Press)
Peter Garber, Famous First Bubbles: The Fundamentals of Early Manias
Course Requirements: This is a rigorous course which will require a lot of reading. In addition
to the required books, I will frequently assign outside reading. These will be made available on
Nexus, or you will be given links to material available on the web. Expect to cover 30-40 pages
every class period. (Seriously, if you don’t think you can keep up with the reading, please drop
the course. You will not do well.) Because of the rigorous nature of this course, it is imperative
that you keep up with the material. Falling behind will be the number one reason you do not do
well in this course!
Attendance: I do not take attendance. You alone bear the costs of your actions. If you would
rather be texting, facebooking, twittering, chatting with your friend, looking at cat pictures,
watching youtube, or sleeping, please do not come to class. If you do decide to attend class,
please be attentive and respectful. Do not bother me or your neighbor with unnecessary chatter.
Quizzes: There will be between 4-6 quizzes throughout the semester. I will ask you general
questions about your reading assignments. These quizzes will be unannounced, so it is
important that you come to every class and do every reading assignment.
Exams: There will be two exams: a midterm and a final exam. Exams will be in essay format.
You will be required to answer relatively open ended questions, choose a position and provide
supporting evidence. Answers will be graded according to (1) Correctness, if applicable, (2)
Clarity including use of proper grammar, (3) Overall strength of the argument and discussion,
and (4) Strength of presented supporting evidence.
Grades: Your final grade will be calculated as a weighted total of your exams and quizzes:
20% - Reading quizzes
30% - Midterm Exam
50% - Final Exam
I do not use +/- grades.
Academic Dishonesty: Cheating and plagiarism will not be tolerated in this course and will be
reported to the Honor Council.
***Ignorance is NOT a valid defense for cheating or plagiarism***
If you are unsure if something could be construed as cheating or plagiarism, consult your
university guidelines or ask me. This is your only warning.
Disabilities: Union College facilitates the implementation of reasonable accommodations,
including resources and services, for students with disabilities, chronic medical conditions and
temporary disabilities resulting in difficulties accessing learning opportunities. All students
needing services must first register with Accommodative Services located in Reamer 303. It is
strongly recommended that accommodations be requested within first two weeks of the term.
Last minute requests can be denied. I will not accommodate anyone without permission from
Accommodative Services.
Schedule: Readings will come from the required texts, and outside sources. PDFs will be made
available for you online. Journal articles can be found through the campus library system from
Jstor or ScienceDirect. Schedule is approximate and will proceed as quickly as I care to make it.
We may not cover all readings in class. Do not ignore them however as they may be quizzed
over, or may prove useful to answer exam questions.
General writing materials and advice – These are books I expect any college economics student
to own and read for all classes. Both can be found on Amazon for under $10.
Strunk, W., and E. White, The Elements of Style (Any edition)
McCloskey, D., Economical Writing
1. Introduction, review of banking and finance, a brief history of banking, and some
theories of banking crises
Calomiris/Haber Ch. 1-2
Calomiris, C., and G. Gorton, 1991, “The Origin of Banking Panics: Models, Facts
and Bank Regulation,” in Financial Markets and Financial Panics, University of Chicago
Press, Glenn Hubbard, Ed. (PDF).
White, E., 1982, “The Political Economy of Banking Regulation,” Journal of
Economic History, Vol. 42, No. 1, 33-40.
Diamond, P. and P. Dybvig, 1983, “Bank Runs, Deposit Insurance, and
Liquidity,” Journal of Political Economy, Vol. 91, No. 3, 401-419.
Hendrickson, J., 2014, “Contingent Liability, Capital Requirements, and Financial
Reform,” The Cato Journal, Vol. 34, No. 1, 129-144.
2. The National Banking era
Gorton Ch. 2, pp 28-38.
Wicker Ch. 1-7.
Calomiris/Haber Ch 6 up to p. 188.
Tallman, E. and J. Moen, 1990, “Lessons from the panic of 1907,” Economic
Review, Federal Reserve Bank of Atlanta, May/June, 1-12. (PDF)
Moen, J., and Tallman, E., 2013, “Close, but not a Central Bank: The New York
Clearing House and Issues of Clearing House Loan Certificates,” Working paper,
Federal Reserve Bank of Cleveland. (PDF)
3. The Great Depression
Friedman/Schwartz Ch. 1-7
Calomiris/Haber Ch. 6, 189-202
White, E. 1990, “The Stock Market Boom and Crash of 1929 Revisited,” Journal of
Economic Perspectives, Vol. 4, No. 2, 67-83.
Higgs, R., 1997, “Regime Uncertainty: Why the Great Depression Lasted so Long
and Why Prosperity Resumed After the War,” The Independent Review, Vol. 1, No. 4, 561-
590.
Romer, C., 1992, “What Ended the Great Depression?” Journal of Ecomomic
History, Vol. 52, No. 4, 757-784.
4. Asset Bubbles/The 2008 Global Financial Crisis (The Great Recession)
Calomiris/Haber Ch. 7-8
Gorton Ch. 2-4
Stewart, J., “Eight Days”, The New Yorker, Sep. 21, 2009, 59-81. (PDF)
Calabria, M., 2011, “Fannie, Freddie, and the Subprime Mortgage Market,” Cato
Institute Briefing Paper No. 120 (PDF)
Coval, J., J. Jurek, and E. Stafford, 2009, “The Economics of Structured Finance,”
Journal of Economic Perspectives, Vol. 23, No. 1, 3-25.
Acharya, et al., “Guaranteed to Fail”, Ch. 1-5. (PDF)
Approximate schedule:
Week 1-2 Review: Supply/Demand,
intro to banking and finance,
What really causes a banking
crisis? Some theory and
evidence
Week 3 Political economy, voting
theory, liberalism vs.
populism, banking regulation
in the US, Why has regulation
failed so badly?
Week 4 Brief history up to 1860,
National Banking Era Crises,
New York Clearing House, Is
a Lender of Last Resort a
public good?
Week 5 National Banking Era, JP
Morgan, founding of the
Federal Reserve
Midterm: Oct. 11
Week 6 Monetary policy and
macroeconomics review,
Quantity theory of money,
Aggregate
demand/Aggregate Supply
Week 7 Great Depression, Stock
market crash of 1929, Did the
Federal Reserve cause the
Depression?
Week 8 Great Depression cont., FDR,
Economic impact of the New
Deal, Did WWII end the GD?
Week 9 Modern finance, derivative
securities, swaps, REPO
markets, post-Great
Depression reforms, Glass-
Steagall Act and repeal,
Housing regulation reform
1970-2000, asset price bubbles
Week 10-11 2008 Subprime mortgage
Final day of class: Nov. 15 crisis/financial crisis, 2008
stock market crash, Great
recession, Have we learned
anything? Effects of Obama-
era regulation on banking and
finance in America, will
Dodd-Frank really fix
anything? Should we bring
back Glass-Steagall?
Final Exam: TBA
Disclaimer: This syllabus may change at the discretion of the instructor and no other parties.
Your continuing participation in this course indicates your agreement to the provisions
contained within. If you do not understand something, please see me before problems arise.
