Bubble, Panic, Recover, and Repeat

Even as most U.S. stock indexes have remained largely flat since the beginning of the year, more and more market watchers are agreeing that a major downturn is on the horizon. I posed some questions about historical economic crises to Dr. Jonathan Barth, professor of history at Arizona State University, who teaches about the history of money and currencies. 

Ray McCoy: Financial news sources are splitting hairs over whether we are now in a recession, or if, instead, one is looming on the horizon. Traditionally the rule of thumb had been that there be two consecutive quarters of negative GDP growth. What conditions would have to be met for it to become undeniable that the economy is in recession? 

Jonathan Barth: Circumstances definitely point to a recession coming around the corner, but a hardline, quantifiable definition for what constitutes a recession is not that simple. It would appear to fall under the “know it when you see it” category. Two consecutive quarters of negative GDP growth is the traditional metric, and we had that in Q1 and Q2 of last year. But Q1 was -1.6 percent and Q2 was -0.6 percent. Compare that to the 2008-9 crisis: -2.1 percent in Q3 of 2008, -8.5 percent in Q4, and -4.4 percent in Q1 of 2009. The Dow fell 40 percent in that period; the Dow fell 15 percent in the first half of 2022. Unemployment reached 10 percent by summer 2009, while unemployment through 2022 remained under 4 percent. Housing prices remain extremely high. More significant cuts to GDP, higher unemployment, and the popping of a major asset bubble would undeniably signal that we’re in a recession. 

RM: You’ve lectured on past financial crises including the panics of 1819 and 1837, the Great Depression and more recent crises leading up to the present day. The nation has obviously changed much, but what do you feel ties together these events? Do you see a situation from any specific crisis of the past that in particular resembles today?

JB: The common denominator between most of these crises is the bursting of an asset bubble that had been generated through artificial stimulus, sometimes from government policy but most often tied directly to banking and monetary policy. In the 19th century, bubbles appeared frequently in western land and railroads. In this century, so far, it’s been in housing. 

RM: One of the aspects of economic history that you emphasize is the role of central banks and the speculative bubbles that they create. Do you think that boom and bust cycles can therefore be avoided, or are there natural reasons that they do occur regardless of manipulation? 

JB: Speculative bubbles can certainly come about for natural reasons. Popular hype around a particular commodity—the most infamous example was tulips in 17th-century Holland—can and will generate a bubble in that commodity. But artificial stimulus from governments or central banks makes the likelihood of speculative bubbles a lot stronger. History shows this again and again, and economic theory backs it up. Mises and Hayek demonstrated this very persuasively in their Austrian theory on the business cycle. What it boils down to is severe malinvestment resulting from the manipulation of credit markets. 

RM: Many investors having observed monetary history are looking for shelters for their wealth should there be a catastrophic economic downturn or currency crisis. Some are saying we are headed toward such an event with a severity not seen since the Great Depression. Do you share this anxiety and what advice would you offer to those who haven’t prepared? 

JB: With the extraordinary levels of debt and unsustainable entitlements, in a system awash with fiat currency, people have sound reason to fear the worst, and they are not wrong to prepare accordingly. The safest way is to secure hard assets, of which there are many to choose from. You don’t have to put all your eggs in that basket, but you should have some security. Gold, silver, and land are the most traditional in this asset class, but really anything that you know will have long-term value, no matter how bad things get. Firearms aren’t a bad investment. Bitcoin, arguably, could also fall under that category, as it’s a fixed quantity—it’s a “hard” digital asset—and I think it will have value far into the future. But even among hard assets, it’s wise to diversify your holdings. 

RM: You lecture on the history of money and other monetary topics at the university level, however most of this information is not generally taught at the K-12 level, and few get beyond the surface even if they are a business or finance major. Looking at American education, what would you start with in order to improve that and what are the most essential topics that should be added to the curriculum? 

JB: The history of American money and banking should absolutely be added to the curriculum, especially on the high school level. How did we get from gold and silver coins, to redeemable bank notes backed by gold and silver, to fiat currency issued by a quasi-private central bank? That’s important. What was President Jackson’s “Bank War” truly about? Why did the Populists in the 1890s care so much about “free silver”? How and why was the Federal Reserve founded? What does the Federal Reserve even do? These subjects aren’t generally taught. 

RM: Where would you suggest readers or the public go to learn about the causes of big financial crises? Is there a lot of curiosity about this from your students? 

JB: I teach a history of money course every fall semester and students are very much interested in these subjects. There is high demand for this content: the key, however, is to demonstrate how and why it’s crucial for understanding money and banking, and consequently the total economy, today. Money makes up one-half of most economic transactions in this country. Maybe it’s important to know who creates the money, and how? 

For the causes of financial crises, I subscribe to the Austrian School, so my suggestion is to start by looking there: Ludwig von Mises, F. A. Hayek, and Murray Rothbard are the big three, and they each wrote extensively on this subject. But I’d also encourage you to look at rival theories of the business cycle—read Keynes, for instance, and compare. The Austrian economists come out on top, in my opinion.

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