American Precedent

"The money-world feels generally as if it had taken an overdose of persimmons,” The Atlantic reported in its first issue, condemning the leveraged speculation that led to the financial crisis of 1857. For those readers who had never wolfed down too many persimmons, the magazine helpfully elaborated:

The bowels of the banks, with us the great money-lenders, close with the snap and tenacity of steel-traps; and then a general panic, or want of commercial confidence, brings on a paralysis of the domestic exchanges, and wide-spread bankruptcy and ruin.

Sound familiar (if kind of gross)?

In 1930, The Atlantic described how, before the bubble burst in 1929, brokers recklessly let investors borrow against the inflated value of their stocks, to invest further on the assumption the market would keep rising. (Our writer noted that bankers would never, of course, indulge such lax standards when it came to something as “solemnly contracted” as home mortgages.) Then, a year later, we followed up with a broader indictment of the “whirlwinds of speculation,” detailing how, in the ’20s, Americans had talked themselves into believing that what went up would keep going up, that fundamental economic changes meant that earnings would “expand miraculously, without rest or interruption,” and that the supposed scarcity of real estate and assorted commodities meant that their prices would always rise. As our writer, Samuel Spring, explained, “Slowly, optimistically, we tend to accept, as the master index of value, the price at which the unit of speculation can be resold to other speculators.”

Well. Our archive provided pretty cold comfort this fall as the collapsing housing market knocked the supports from under the stock exchanges and began undermining the broader economy. It didn’t help much, as I averted my eyes from my own shriveling 401(k), to be reminded that James Fallows had predicted much of this in his cover story “Countdown to a Meltdown” three years ago. Besides, the looping tracks of the march of financial folly could be seen clearly in our own pages. It was The Atlantic that published “Dow 36,000,” which argued that fundamental economic changes meant that stocks could “double, triple, or even quadruple tomorrow and still not be too high.” That story ran in 1999, about six months before the dot-com bubble burst.

I called an old friend, Henry Blodget, to ask the question that was vexing me personally and professionally: Why don’t we ever learn? Why do even those who are paid to learn from financial history—the financial professionals—seem doomed to repeat it? Blodget’s answer, drawn from his own brutal experience with the tech bubble and his subsequent adventure with the real-estate one, begins on page 50. Also in this issue, Virginia Postrel describes experiments that have persuaded economic theorists that bubbles are inevitable, as each of us bets on selling to an even greater fool. And Fallows conveys some bracing advice from Gao Xi­qing, the man charged with investing part of China’s dollar hoard. Complex instruments like derivatives, Gao says, “are crap,” the excretion of a society that overpays its financial professionals and “distorts the talents of the country.” He actually sounds a lot like Spring, who wrote in 1931 that “an investment banker, if he desires to continue selling, cannot forget his securities as soon as he gets them out of the door.”

It all boils down to a fairly grim account of human progress, no? After all these years of intensifying financial sophistication, we still can’t restrain ourselves from gorging on persimmons. The thing is, though, that the financial meltdown wasn’t the only story this fall, just as it was not our only preoccupation in 1857. This magazine was founded to promote the radical proposition that in America, white people should not treat black people as property. Last month, Americans elected a black man as their president. So maybe history does not move in a circle after all, and, however faltering our steps at times, however clumsy we feel, the path does tend upward.