The Panic of 1907, 2nd Edition

Foreword

What causes perfect storms in financial markets, whether the Panic of 1907 or the Global Financial Crisis that began in 2007? Bruner and Carr's magisterial treatment of the former episode paints a lucid picture that gets to the heart of the matter.

Start with modern “fractional reserve banking,” which first saw the light of day in the early seventeenth century when East India merchants arrived in London with hauls of gold and silver and no place to safely stash them. In 1650, England was a tiny, institutionally backward nation of just 5 million souls—about half the population of Italy and a third that of France— and actually less than its own population on the eve of the arrival of the Black Death in 1348–1349. The majestic, free‐trading empire that straddled the globe lay yet two centuries in the future; mid‐seventeenth‐century Britain was a weak, backward nation, embroiled in the process of throwing off its corrupt ancient regime; its presence on the high seas emphasized raiding as much as trading.

It had no banking system, but London was home to a large number of goldsmiths, whose livelihoods demanded the safe storage of valuables. Merchants began to deposit their loot with the goldsmiths, who in exchange issued certificates, which then began to circulate as money. Soon enough, the goldsmiths tumbled to the happy realization that they could issue the certificates in excess of the amount of precious metal they held.

In other words, they could print money.

Since the ...