Frugality versus conspicuous consumption
Gold standard versus bimetallism
Labor-saving machines replace many jobs
Automation and artificial intelligence replace almost all jobs
Real estate booms and busts
Stock market bubbles
Boycotts, profiteers, and evil business
The wage-price spiral and evil labor unions
Some of these chapters present a pair of opposing narrative constellations (for example, frugality versus conspicuous consumption). These pairs suggest opposite economic actions and opposite moral judgments. At certain times one of the constellations may work toward extinguishing the other, but at other times it may help reinforce the other constellation through the controversy generated.
Note that these chapters are organized thematically, not chronologically, because the themes are relevant beyond the specific historical moment in which they occur. Our main goal is to extract common themes from these narratives that will help us recognize and anticipate the effects of future economic narratives.
Chapter 10
Panic versus Confidence
Since the early nineteenth century, a major class of narratives about confidence has influenced economic fluctuations: people’s confidence in banks, in business, in one another, and in the economy. Economically, the most important stories are those about other people’s confidence and about efforts to promote public confidence.
Among the earliest confidence narratives are those about banking panics—that is, whether we have confidence in the banks to make good on their promises. We mean not only public confidence in the morality of bankers and bank regulators but also confidence in banks’ other customers, confidence that they will not all try to withdraw their money at once. Raymond Moley, one of President Franklin Roosevelt’s “Brain Trust” experts during the Great Depression, put this idea into a simple narrative:
A Depression is much like a run on a bank. It’s a crisis of confidence. People panic and grab their money. There’s a story I like to tell: In my home town, when I was a little boy, an Irishman came up from the quarry where he was working, and went into the bank and said, “If my money’s here, I don’t want it. If it’s not here, I want it.”1
This and other confidence narratives help us understand major events marking modern history.
Several classes of confidence narratives have characterized the history of the industrialized economies. The first class is a financial panic narrative that reflects psychologically based stories about banking crises. The second class is a business confidence narrative that attributes slow economic activity not so much to financial crises as to a sort of general pessimism and unwillingness to expand business or to hire. The third is a consumer confidence narrative that attributes slow sales to the fears of individual consumers, whose sudden lack of spending can bring about a recession. Figure 10.1 plots the succession of these narratives since 1800. All of these slow-moving narratives have shown growth paths that span lifetimes. Financial panic came first, followed by narratives about crisis in business confidence, followed by narratives of a crisis in consumer confidence.
As narratives spread about the dangers of business losses and decreased consumer confidence, increasing self-censorship of narratives may, and sometimes does, encourage panic. Because people are aware that others self-censor, they increasingly try to read between the lines of public pronouncements to determine the “truth.”
Broad public interest in the idea that financial events might be related to psychology began in the early nineteenth century, continued after the panic of 1857 in the run-up to the US Civil War, and then grew over the decades. The phrase financial panic peaks on Google Ngrams in 1910, three years after the famous Panic of 1907. The financial panic epidemic was part of a narrative constellation that grew with it. Individual panics ebbed and flowed within the narrative constellation. A particularly strong narrative of the Panic of 1907 involved a celebrity—J. P. Morgan, the most prominent banker in the United States at the time—which made it last for decades. It stands out in Figure 10.1 as the highest point for public attention to financial panics.
Figure 10.2 shows the major US financial panics individually. For example, the panic of 1857 was mostly forgotten within a few years. It later returned as part of a narrative constellation about other panics. During the 1857 financial panic, news reports covered objective events like bankruptcies, bank runs, and suspensions, but they also referred to rumors and emotions. An 1857 newspaper article summarized the panic of that year:
Brokers and others are highly excited, and circulate monstrous reports.… The general disturbance of the public mind makes it impossible to treat the subject coolly, or ascertain the views of the most reliable persons in the business community.2
We must reflect on the prevailing nineteenth-century narratives, and associated views of the world, to understand why people and newspapers spoke of “panics” rather than “depressions” (in the modern sense of the word) and why they never spoke of consumer confidence. Contemporary narratives about financial panics mostly were viewed as stories about wealthy, pretentious people who had bank accounts and who perhaps deserved some of the disruption caused by a financial panic and its associated “depression of trade.” In the eighteenth and nineteenth centuries, most people did not save at all, except maybe for some coins hidden under a mattress or in a crack in a wall. In economic terms, the Keynesian marginal propensity to consume out of additional income was close to 100%. That is, most people, except for people with high incomes, spent their entire income. So, to the spinners of narratives of these past centuries, there would have been no point in surveying ordinary people about their consumer confidence.
FIGURE 10.1. Frequency of Appearance of Financial Panic, Business Confidence, and Consumer Confidence in Books, 1800–2008
The figure shows three separate recurrences of the confidence narrative, but referring to different sectors, finance, business, and consumer. Source: Google Ngrams, no smoothing.
Most people then had no concept of retirement or sending their children to college, so they had no motivation to save toward these goals.3 If they became bedridden in old age, they expected to be cared for by family or by a local church or charity. Life expectancy was short, and medical care was not expensive. People tended to see poverty as a symptom of moral degradation and drunkenness or dipsomania (now called alcoholism), not as a condition related to the strength of the economy. So there was practically no thought that consumer confidence should be bolstered. The people saw the authorities as responsible for instilling moral virtues rather than building consumer confidence. The idea that the poor should be taught to save grew gradually over the nineteenth century, the result of propaganda from the savings bank movement. But contemporary thought was miles away from the idea that a depression might be caused by ordinary people heeding the propaganda and trying to save too much.
A few years after use of the term financial panic peaked, after the Panic of 1907, the United States passed the Aldrich-Vreeland Act (1908), which created national currency associations as precursors to a central bank, and a successor act, the Federal Reserve Act of 1913, which founded the US central bank, whose purpose was to provide a “cure for business panics.”4
A powerful narrative at that time was the story of a celebrity, J. P. Morgan, widely considered one of the richest people in America. In the absence of any US central bank during the Panic of 1907, he used his own money for, and he prevailed on other bankers to contribute to, a bailout of the banking system. This saving of the United States from a serious depression was a truly powerful story, and Morgan’s celebrity only grew. He later built his central office building at 23 Wall Street. Completed in 1913, it is still there today, though he died before he could occupy it. It was directly opposite the New York Stock Exchange (completed in 1903 and still functioning today) and across the street from Federal Hall, which was built in 1842 and replaced the original home of the Co
ngress of the Confederation. George Washington was sworn in as first president of the United States on the steps of Federal Hall in 1789. Morgan chose to make his building strangely small and modest, befitting his public spirit. Thus Morgan emerged in the narrative as a central and model-worthy hero of America. The recovery of confidence after the Panic of 1907 was in substantial measure confidence in one man. The Federal Reserve System was modeled after his 1907 consortium of bankers. In accordance with the narrative, the new central bank was technically owned by bankers, though it was created by the federal government. Every Federal Reserve chair since the founding of the Fed fits into the narrative as a J. P. Morgan avatar.
FIGURE 10.2. Frequency of Appearance of Financial Panic Narratives within a Constellation of Panic Narratives through Time, 1800–2000
Each major historical financial panic occurred in a different single year, but the frequency with which each is mentioned follows a multiyear pattern similar to the more general pattern for the phrase “financial panic” in Figure 10.1. Source: Google Ngrams (smoothing = 5).
After 1930, the narrative mutated and spread in a different direction. Deficiencies of business confidence, and later consumer confidence, were associated more with despair than with sudden fear. By then, the word depression had also taken on another meaning: a psychological state of melancholy or dejection. So the increased use of “depression” to describe an economic contraction reflected a new psychologically based economic narrative of the time.
During the depression of the 1930s, George Gallup, the originator of the Gallup polls and a pioneer in public opinion measurement, became the first social scientist to survey business and consumer confidence using scientific polling methods.5 Then, in the 1950s, psychologist George Katona at the University of Michigan began constructing an “Index of Consumer Sentiment.” The Survey Research Center at the University of Michigan still produces this index, which Katona created in 1952. Later, in 1966, the Conference Board created a Consumer Confidence Index. Both of these indexes are based on questions that consumers answer about their impressions of the strength of the current and near-future economy. None of the questions used to construct these indexes asks respondents about the risk of a banking panic or a sudden stampede of investors, reflecting the changed narrative about business. But the change is not total, and financial panic narratives still have a chance to be rekindled, as we saw, for example, in the United Kingdom with the Northern Rock bank in 2007, the first banking panic there since 1866.
Crowd Psychology Goes Viral
Financial panic narratives have a strong psychological component, and a key concept here is crowd psychology. By the middle of the nineteenth century, Charles Mackay’s popular 1841 book Memoirs of Extraordinary Popular Delusions began to attract public attention to crowd psychology. Gustave Le Bon popularized the term itself in his best-selling 1895 book, The Crowd. Crowd psychology began to become influential around that date and grew in an epidemic-like path, peaking in the early 1930s. The growing number of references to “crowd psychology” appears to have a parallel in the rising level of the booming stock market over the 1920s.
Closely related to the idea of crowd psychology is suggestibility, which refers to the idea that individual human behavior is subconsciously imitative of and reactive to others. The word, first seen in the late nineteenth century, appears to be pivotal in narrative constellations and in popular understandings of crowd psychology. Suggestibility and its relative autosuggestion (which means the practice of suggesting to oneself) follow a fairly standard epidemic curve, peaking around 1920 and mostly declining ever since (Figure 10.3). The concepts likely played a role in the economic exuberance of the 1920s and the depression of the 1930s.
FIGURE 10.3. Frequency of Appearance of Suggestibility, Autosuggestion, and Crowd Psychology in Books, 1800–2008
This figure shows three recurrences of epidemics of confidence narratives with somewhat different embellishments and contexts. Source: Google Ngrams, no smoothing.
The idea that the human mind is suggestible is diametrically opposed to the concept of economic man who is a rational optimizer, who acts as if guided by careful calculations. Suggestibility implies that oftentimes we are acting blind or as in a dream. By 1920, the concept of suggestibility was widely known, indicating that people of that era may have felt that other people are easily influenced by abstract or subtle examples, and are therefore more likely to conduct their economic behavior expecting a highly unstable world. The narrative would lead them to expect herd-like behavior and perhaps to contribute to such behavior. If you think that other people are members of an impressionable herd, you may be more likely to try to anticipate the herd’s movements and try to get ahead of them.
We can use the concepts of crowd psychology and suggestibility to understand depressions, such as the Great Depression of the 1930s. In doing so, we should look not only at the direct applications of these concepts but also at the ways in which people think that these concepts help explain the depressions. These were their concepts much more than ours.
The Psychology of Suggestion and the Autosuggestion Movement
Close to the beginning of the suggestibility epidemic, in 1898, The Psychology of Suggestion was published. The book, written by Boris Sidis, a colleague of psychologist William James, reported on experiments conducted at the Harvard Psychological Laboratory. Sidis defines suggestibility as follows:
I hold a newspaper in my hands and begin to roll it up; I soon find that my friend sitting opposite me rolled up his in a similar way. This, we say, is a case of suggestion.
My friend Mr. A. is absent-minded; he sits near the table, thinking of some abstruse mathematical problem that baffles all his efforts to solve it. Absorbed in the solution of that intractable problem, he is blind and deaf to what is going on around him. His eyes are directed on the table, but he appears not to see any of the objects there. I put two glasses of water on the table, and at short intervals make passes in the direction of the glasses—passes which he seems not to perceive; then I resolutely stretch out my hand, take one of the glasses and begin to drink. My friend follows suit—dreamily he raises his hand, takes the glass, and begins to sip, awakening fully to consciousness when a good part of the tumbler is emptied.6
The term autosuggestion came a little later than suggestibility, but it led to new expectations that one could manipulate not only oneself but also economic activity. Starting in 1921, the autosuggestion epidemic attracted widespread public interest. Emile Coué, a French psychologist who went on a book tour in the United States in 1922, was the most influential proponent of the autosuggestion movement. The key idea, attractive to so many millions, was that most of us are not successful because we do not believe we can succeed. To achieve success, one must repeatedly suggest to oneself that one will be a success. Coué advised people to recite frequently a key affirmation: “Every day in every way I get better and better.” Napoleon Hill, whose varied career included motivational speaking, added to the self-empowerment narrative with his 1925 book, The Law of Success in 16 Lessons and his 1937 best seller, Think and Grow Rich. He emphasized channeling the power of the subconscious mind to adopt a positive, wealth-building attitude.
The autosuggestion narrative was a mutation of an earlier hypnosis narrative that went viral over the few decades before the 1920s. That narrative described traveling hypnotists who put people into a trance. Those in a trance then showed immense suggestibility. According to the 1920 book Success Fundamentals by Orison Swett Marden:
One reason why the human race as a whole has not measured up to its possibilities, to its promise; one reason why we see everywhere splendid ability doing the work of mediocrity, is because people do not think half enough of themselves. We do not realize our divinity; that we are part of the great causation principle of the universe. We do not know our strength and not knowing we can not use it. A Sandow could not get out of a chair if a hypnotist could convince him that he could not. He must believe he
can rise before he can, for “He can’t who thinks he can’t,” is as true as “He can who thinks he can.” [Eugen Sandow, 1867–1925, was a muscleman and bodybuilder who amazed and inspired audiences with his feats.]7
The autosuggestion movement started to peter out after 1924, but it appears to have had aftereffects. Notably, the highly successful 1935 pro-Nazi film Triumph of the Will by Leni Riefenstahl appears to borrow from autosuggestion. Hitler’s appeal was based in part on the idea that he would inspire the German nation out of the depression into which it had sunk, despairing and insecure, in the wake of World War I. At the time, it was widely believed that the Depression resulted from a loss of confidence and that Germans needed a leader to restore the nation’s confidence. Riefenstahl’s movie depicts Hitler, in a speech before the adoring multitudes, saying, “It is our will that this state shall endure for a thousand years. We are happy to know that the future is ours entirely!” Hitler says, “It is our will,” as if saying those words will magically turn Germany into the dominant world power.
Behind all this interest in the unseen force of confidence in human affairs was an analogy to the unseen force of air pressure on weather, and the possibility of forecasting both.
Forecasting the Weather, Forecasting Confidence in the Economy
Scientific weather forecasting was a phenomenal new discovery of the mid-nineteenth century. The science advanced shortly after two important inventions of the 1840s: the telegraph, which transmitted information about weather conditions in dispersed locations, and the practical barograph, which created a time-series plot of changes in air pressure. People were impressed by the new weather forecasts, which had (and continue to have) great scientific appeal. For example, in one famous story about the Crimean War, scientists in November 1854 concluded that two apparently separate storms were in fact one storm, enabling them to establish its trajectory and provide a forecast that saved the British and French fleets from destruction.8
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