The Perils of Financial Historicism

Every financial crisis is inherently unknowable – before it occurs, and as it occurs. By contrast, we understand past crises very well. Accountants go over the books, the participants tell their tales to the newspapers (or sometimes before a judge), politicians explain why they are sorting out a mess, and in the end historians put together a story.

Because the past is knowable, the best way of understanding a current crisis is to search for a model in past experiences, even those that are long past. But which is the right template?

Often the choice depends less on a rational assessment of similarities and differences than on gut feelings, proclivities to optimism or pessimism, or political orientation. Currently, two dates are circulating widely, 1907 and 1931.

At the beginning of the current credit crunch, many historically minded people picked 1907 as the key precedent. Not only is it an arithmetically neat 100 years in the past, but it also looked like an attractive parallel. The crisis of 1907 was both immediately devastating, provoking a massive but short economic downturn, and, as it turned out, easily resolved.