Nation & World

When the economy crashes

6 min read

HBS exhibition portrays U.S. downturns of the past

Many historians and other scholars argue that the clear hindsight of history allows people to learn from their mistakes. But others insist that historical catastrophes, particularly economic ones, are going to recur, despite our knowledge of the past.

That provocative debate is renewed in an unusual Harvard exhibit.

In the wake of the country’s recent financial meltdown, the Harvard Business School’s Baker Library has mounted a show called “Bubbles, Panics and Crashes: A Century of Financial Crises, 1830s–1930s.”

“This seemed like an excellent moment to be looking at the history of financial crises, because we need to get a little perspective on the subprime mortgage crisis,” even as it continues to play out, said the show’s curator, Caitlin Anderson, a visiting scholar at Harvard’s Center for History and Economics.

Drawing largely from Baker’s historic collection, the show includes letters, pictures, old money, cartoons, and legislative documents that chart the economic implosions of 1837, 1863, 1907, and 1929.

The varied causes of these crises help to illustrate the difficulty of predicting the future by looking to the past. The present recession, surpassed only by the Great Depression that began in 1929, differs in many ways from the economic disasters highlighted in this exhibit.

But the historical perspective is enlightening. While explaining the financial underpinnings of each economic dip, the exhibit helps to illustrate the history of the country’s development: from Western expansion, to the creation of the nation’s transcontinental rail lines, to the recovery from the Civil War, to the creation of Franklin Roosevelt’s New Deal.

In 1837, a panic occurred involving land speculation, mostly in the Western territories, which were increasingly open to settlement. Bank notes dating back to the 1830s, from institutions like Philadelphia’s Bank of the United States and Boston’s Bank of the Orient, illustrate how the problem was compounded by the ability of each of the country’s then-850 banks to print their own currency. The paper money lost much of its value when President Andrew Jackson required that payment for government land be made in gold or silver. The currency depreciation factored into the economic decline.

An unregulated insurance industry played a leading part in the financial downturn of 1907. A lavish photo in one of the show’s four glass cases gives viewers a clue to part of the underlying trouble — corruption in the industry — and elicits fresh memories of contemporary corporate scandals. It shows an extravagant costume ball thrown by a prominent life insurance executive. The image fueled the public’s anxiety that executives were using policyholders’ investments for their own benefit.

“Contemporaries felt that the investigation and reform of the life insurance industry in 1905-1906,” say the exhibit’s accompanying notes, “had chilling effects on the stock market, eventually contributing to the Panic of 1907.”

Borrowing copies of texts from the Historical and Special Collections at Harvard Law School (HLS) Library, the exhibit also details the creation of the Securities and Exchange Commission (SEC), which was a reaction to the devastating stock market crash of 1929. Many of these documents were culled from the papers of James Landis, former HLS dean and the second chairman of the SEC. Typed pages, yellowed by age and covered with handwritten notes, deletions, and edits, offer visitors a look at how the financial regulatory body came into being.

The exhibit’s detailed historic perspective shows striking similarities between financial meltdowns past and present, as well as key differences.

Comparing the nation’s economic situation in 1907 with that of 2007, Anderson noted that “the generation after the Civil War saw the same sort of financial innovation that we saw in the 1990s and early 2000s, and had the exact same problems with regulations and [the dangerous practice of] evading definitions,” including “trust companies” that, by virtue of their name, avoided regulations demanded of banks.

“Thus, these institutions were able to over-leverage themselves and became an extraordinary destabilizing factor in the economy, the exact same way hedge funds did. It’s such déjà vu.”

“Can we learn the lessons of the past, or is that a naive hope?” wondered Anderson. “What really stood out for me working on this exhibit was how different each of these crises looked on the ground. They all share defining features of a speculative bubble followed by a crash, but … they really emerged in idiosyncratic ways. … I am not sure you can ever figure out a pattern.”

Despite all that has been learned from previous crashes, Anderson continued, “In the end, someone is going to come up with a new financial innovation that will not fall under existing regulation, and they will be able to over-leverage themselves and create the same instability all over again.”

But others are more hopeful. David Moss, John G. McLean Professor of Business Administration, who consulted on the show and teaches an HBS course on financial history, said the country has relied on a host of smart decisions to get it through challenging economic times in the past. In part as a result of effective financial regulation enacted between 1933 and 1940, he noted, the United States enjoyed nearly 50 years without a major financial crisis, by far the longest stretch in the nation’s history.

Highlighting the long series of crises that punctuated American history up through 1933, Moss said, the exhibition helps both to bring the earlier turmoil to life and to remind people how volatile the financial system was before modern financial regulation.

Discussing the current downturn, he said, “I am afraid that we took the stability that we achieved for granted, and we started to look at the regulation purely as a cost, as an obstacle, or a problem, and not realize the benefits it was delivering. That ended up taking us down a rather dangerous path.”

While it is impossible to eliminate every potential crisis, Moss said, “We need to think about what we did in the past and try to make sure that we are effective now in trying to return to a strategy of prevention.

“Are we going to be as successful as we have been in the past at fixing these mistakes and trying to innovate in the ways that Americans have been able to? Based on the history, I am more optimistic than some.”

Visitors to the exhibit will be able to draw their own conclusions — and muse on their future investments accordingly. The show will be on display through May 3.