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3 of the World’s Most Devastating Financial Crises

The infamous 1772.

The 1772 Credit Crisis was a peacetime financial contagion that began in London before
spreading to the rest of Europe. The preceding decade saw a credit boom, which
permitted significant growth in industry and mining, as well as a significant rise in
trade between Britain and the United States colonies. Later, however, a credit
contraction spread across the real economy, causing a rise in bankruptcies and a
decline in economic activity as the economy sought to correct the excesses brought on
by credit expansion.

The 1772 crisis is noteworthy for a number of reasons. For instance, institutions that
hadn’t engaged in speculation suffered no losses and won significant prestige during
the crisis. Further, it was one of the first times that the Bank of England responded to
fears of financial contagion by intervening directly in the money market and advancing
short-term credit to chosen banks whose failure might have intensified the crisis. And
finally, despite its short-lived impact, this crisis was one of the first strictly financial
crises, with neither government policy nor European war at its foundation.
Consequently, it harmed relations between Britain and the American colonies,
indirectly leading to the events of the Boston Tea Party in 1773.
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The Great Depression of 1929–39

Throughout the 1920s, the U.S. economy expanded rapidly, and the nation’s total wealth
more than doubled between 1920 and 1929, a period dubbed “the Roaring Twenties.”

The stock market, centered at the New York Stock Exchange on Wall Street in New
York City, was the scene of reckless speculation, where everyone from millionaire
tycoons to cooks and janitors poured their savings into stocks. As a result, the stock
market underwent rapid expansion, reaching its peak in August 1929

By then, production had already declined and unemployment had risen, leaving stock
prices much higher than their actual value. Additionally, wages at that time were low,
consumer debt was proliferating, the agricultural sector of the economy was
struggling due to drought and falling food prices and banks had an excess of large
loans that could not be liquidated.

The American economy entered a mild recession during the summer of 1929, as
consumer spending slowed and unsold goods began to pile up, which in turn slowed
factory production. Nonetheless, stock prices continued to rise, and by the fall of that
year had reached stratospheric levels that could not be justified by expected future
earnings

On October 24, 1929, as nervous investors began selling overpriced shares en masse,
the stock market crash that some had feared happened at last. A record 12.9 million
shares were traded that day, known as “Black Thursday.”

Five days later, on October 29, or “Black Tuesday,” some 16 million shares were traded
after another wave of panic swept Wall Street. Millions of shares ended up worthless,
and those investors who had bought stocks “on margin” (with borrowed money) were
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wiped out completely. As consumer confidence vanished in the wake of the stock
market crash, the downturn in spending and investment led factories and other
businesses to slow down production and begin firing their workers. For those who
were lucky enough to remain employed, wages fell and buying power decreased.

Many Americans forced to buy on credit fell into debt, and the number of foreclosures
and repossessions climbed steadily. The global adherence to the gold standard, which
joined countries around the world in fixed currency exchange, helped spread economic
woes from the United States throughout the world, especially in Europe.

the impact of the Great Depression

• Standards of living
During the Great Depression, people’s living standards dropped dramatically in
a short period of time, especially in the US. One in four Americans was
unemployed! Consequently, people struggled with hunger, homelessness
increased, and overall hardships affected their lives.
• Economic growth
Due to the Great Depression, there was a decline in economic growth overall.
For instance, the US economy shrank by 50% during the years of depression. In
fact, in 1933 the country only produced half of what it produced in 1928

The Asian Crisis of 1997

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The Asian financial crisis of 1997 refers to a macroeconomic shock experienced by

several Asian economies – including Thailand, Philippines, Malaysia, South Korea and
Indonesia. Typically countries experienced rapid devaluation and capital outflows as
investor confidence turned from over-exuberance to contagious pessimism as the
structural imbalances in the economy became more apparent.

The crisis of ’97-99 followed several years of rapid economic growth, capital inflows
and build up of debt, which led to an unbalanced economy. In the years preceding the
crisis, government borrowing rose, and firms overstretched themselves in a ‘dash for
growth.’ When market sentiment changed foreign investors sought to reduce their
stake in these Asian economies causing destabilising capital outflows, which caused
rapid devaluation and further loss of confide

Due to the financial instability, the IMF was requested to intervene. The IMF
implemented $40 billion of financial bailouts and also instigated economic reforms to
tackle the economic imbalances.

Unlike the debt crisis in Latin America, the debt crisis in East Asia stemmed from
inappropriate borrowing by the private sector. Due to high rates of economic growth
and a booming economy, private firms and corporations looked to finance speculative
investment projects. However, firms overstretched themselves and a combination of
factors caused a depreciation in the exchange rate as they struggled to meet the
payments.

Long-term causes of the Asian Financial Crisis

• Foreign debt-to-GDP ratios rse from 100% to 167% in the four large ASEAN
economies in 1993-96. Foreign companies were attracting capital inflows from
the developed world. Investors in the West were seeking better rates of return,
and the “Asian economic miracle’ seemed to offer better rates of return than
lower growth economies in the West.
• Current account deficits. Countries like Thailand, Indonesia, South Korea had
large current account deficits; this meant they were importing more goods and
services than they were exporting – it was a reflection of very high rates of
economic growth and consumption. The current account deficits were financed
by hot money flows (on capital account). Hot money flows were accumulated
because of higher interest rates in the East.
• Fixed or semi-fixed exchange rates. This made currencies vulnerable to
speculation. Also, interest rates were used to maintain the value of a currency.
Causing relatively high-interest rates in S.E. Asia which caused hot money
flows.
• Financial deregulation encouraged more loans and helped to create asset
bubbles. But, the regulatory framework and structure of banking and firms
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meant loans were often made without sufficient scrutiny of profitability and
rates of return.
• Moral Hazard. With a strong political desire for rapid economic growth,
governments often gave implicit guarantees to private sector projects. This was
magnified by the close relationships between large firms, banks and the
government. This closeness encouraged private firms to place less emphasis on
the costs of projects and an assumption expansion plans would be supported by
the government
• Over-exuberance. The booming economy and booming property markets
encouraged expansive borrowing by firms. It also encouraged international
investors to move the capital to these fast-growing economies. There was an
element of irrational exuberance – the idea that Asian economies were
undergoing an economic miracle where high returns were guaranteed.

References
1. Geest, P. (2021). In search of the first Domino: The credit crisis of 1772-1773 in a global
history perspective. Retrieved November 18, 2022,
from https://globalhistory.org.uk/2021/05/in-search-of-the-first-domino/
2. https://www.history.com/topics/great-depression/great-depression-history#stock-market-
crash-of-1929
3. https://www.history.com/topics/great-depression/great-depression-history#stock-market-
crash-of-1929