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Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses—of History



Barry Eichengreen's new book Hall of Mirrors is a detailed, excellent, and somewhat pessimistic comparison of the two most serious financial crises ever—their causes, development, and consequences. Readers well versed in the comprehensive literature on the Great Depression and the Great Recession in the United States and Europe will not find much information in Hall of Mirrors that is completely new, but most others will. What is new is the comparative approach: the detailed and analytically successful search for similarities and differences between the Great Depression and the Great Recession.
Review Essay
Hall of Mirrors: The Great Depression, the Great Recession, and the
Usesand Misusesof History. By Barry Eichengreen. New York:
Oxford University Press, 2015. vi + 512 pp. References, notes, index.
Cloth, $29.95. ISBN: 978-0-19-939200-1.
Reviewed by Per H. Hansen
Barry Eichengreens new book Hall of Mirrors is a detailed, excellent,
and somewhat pessimistic comparison of the two most serious nancial
crises evertheir causes, development, and consequences. Readers well
versed in the comprehensive literature on the Great Depression and the
Great Recession in the United States and Europe will not nd much in-
formation in Hall of Mirrors that is completely new, but most others will.
What is new is the comparative approach: the detailed and analytically
successful search for similarities and differences between the Great
Depression and the Great Recession.
Also, Eichengreens partial focus on the uses of history or historical
analogies is a promising step within the eld of economic history. Many
economic and nancial historians have argued that the fading of memo-
ries of the Great Depression contributed to the trend, since the 1980s, of
nancialization of the economy and society and to the nancial crisis and
Great Recession.
It follows that understanding the role of memory in
economic history is important. However, the question of memory and
forgetting has never been at the top of the research agenda in economic
history. Eichengreen should be commended for addressing this impor-
tant issue.
Business History Review 89 (Autumn 2015): 557569. doi:10.1017/S000768051500077X
© 2015 The President and Fellows of Harvard College. ISSN 0007-6805; 2044-768X (Web).
See, for instance, Tobias Straumann, The UBS Crisis in Historical Perspective(working
paper, Institute for Empirical Research in Economics, University of Zurich, 2010); Barry
Eichengreen, The Great Detour: European Money and Banking in the Second Half of the
Twentieth Century,in Bank Austria Creditanstalt: 150 Jahre Österreichische Bankenge-
schichte in Zentrum Europas, ed. Oliver Rathkolb, Theodor Venus, and Ulrike Zimmer
(Vienna, 2005); Youssef Cassis, Banking and Finance in Europe since 1945,in Perspectives
on European Economic and Social History, ed. Jan-Otmar Hesse, Christian Kleinschmidt,
Alfred Reckendrees, and Ray Stokes (Baden-Baden, 2014); David A. Moss, Reversing the
Null: Regulation, Deregulation, and the Power of Ideas,in Challenges to Business in the
Twenty-First Century, ed. Gerald Rosenfeld, Jay W. Lorsch, and Rakesh Khurana (Cambridge,
Mass., 2010); and Harold James, The Creation and Destruction of Value: The Globalization
Cycle (Cambridge, Mass., 2009).
Memories of the Great Depression may have been fading over the
years, but they were not erased. As soon as the nancial crisis of 2008
broke, all kinds of media were replete with references to the Great
Depression andmore generallyto economic history and the lessons
that might be learned. Clearly, decision makers and the public had an
urgent need to make sense of the highly unexpected and complex situa-
tion that was unfolding. And when the nancial crisis developed into the
Great Recession, the apparent similarities with the Great Depression
only intensied as questions and disputes arose about secular stagna-
tion, quantitative easing and tapering, zero-bound interest rates, and
scal decits.
It soon became clear that mainstream economics and modern
nance were as much part of the problem as the solution, and that
despiteor because ofall the elds advanced econometrics, deductive
reasoning, and assumptions of rationality and Bayesian updating, it was
not particularly well positioned to help us understand what was going on
and what to do about it.
Instead, economic history enjoyed a renewed interest as a depository
where one could search for meaning and explanation. For instance,
Danske Bank, the largest Danish bank, which was hit relatively hard
by the breakdown of the international interbank market following the
failure of Lehman Brothers, published a thirteen-page report in February
2009 with the title Lessons from the Great Depression.In December
2011, the Economist published a three-page brieng on the Lessons of
the 1930s.
These examples are only the tip of the iceberg, so Barry Eichen-
greens most recent book arrives at the right time. Other scholars have
already compared the Great Depression and the Great Recession, of
course, and as early as 2009. For instance, Harold James published
The Creation and Destruction of Value, which focuses on the relation-
ship between globalization and nancial instability, ending on a some-
what more upbeat note than Eichengreen.
Also, Richard S. Grossman
and Hugh Rockoff recently published an interesting working paper com-
paring responses to nancial crises in historical perspective. Their basic
point is that economists consistently fought the last war in addressing
See, for instance, Paul Krugman, How Did Economists Get It So Wrong?New York
Times Magazine, 2 Sept. 2009.
Allan von Mehren, Global: Lessons from the Great Depression(research paper, Danske
Bank, 23 Feb. 2009); There Could Be Trouble Ahead,Economist, 10 Dec. 2011.
James, Creation and Destruction of Value. See also Michael Bordo and Harold James,
The Great Depression Analogy,Financial History Review 17, no. 2 (2010): 12740; and
Charles Calomiris, Banking Crises Yesterday and Today,Financial History Review 17, no.
1 (2010): 312.
Review Essay / 558
crises, a point also made by Anna Schwartz in October 2008.
In other
words, looking back in time for analogies has been widespread since
the nancial crisis broke out in 2008. Common to most of this research
is a focus on what lessons can be learned for future crises.
While this lessons-of-history approach is also part of Hall of
Mirrors, I found particularly interesting and promising Eichengreens
focus on how the actors in the Great Recession used historical analogies,
or usedand misusedhistory.In the introduction, Eichengreen
argues, insofar as the history of the Great Depression was the frame
through which policymakers viewed events, it caused them to overlook
how profoundly the nancial system had changed(p. 5).
Eichengreens focus on historical analogy necessarily involves the
concept of narrative, since analogies must come in narrative form. The
quote above illustrates an important point about narratives: they are per-
formative because they make us see the world in a specic way and legit-
imize certain actions while delegitimizing others. They focus on some
aspects of what they describe and leave others out; they create not
only memory but also forgetting or oblivion. What is not told is not re-
membered, and what is not remembered cannot be taken into account
in decision making.
Such a narrative approach poses a challenge to
the basic assumptions of mainstream economic theory. It thus holds
the promise of improving our understanding of how actors and decision
makers behave under pressure as they deal with an unfolding crisis
under extreme uncertainty.
Such a uses-of-history and narrative approach is a well-established
eld in the discipline of history.
In economics and economic history,
however, it isto my knowledgean extremely rare species.
Thus, it
would seem that Hall of Mirrors is an exciting effort to follow through
on Eichengreens important presidential address to the Economic
Richard S. Grossman and Hugh Rockoff, Fighting the Last War: Economists on the
Lender of Last Resort(NBER Working Paper No. 20832, National Bureau of Economic Re-
search, Cambridge, Mass., 2015). See also Brian M. Carney, The Weekend Interview: Anna
Schwartz. Bernanke Is Fighting the Last War,Wall Street Journal, 18 Oct. 2008.
For this idea of narratives applied to business history, see Per H. Hansen, Business
History: A Cultural and Narrative Approach,Business History Review 86, no. 4 (2012):
Among the pioneers in the uses-of-history approach, see Eric Hobsbawm and Terence
Ranger, The Invention of Tradition (Cambridge, U.K., 1983); and Pierre Nora, General
Introduction: Between Memory and History,in Realms of Memory: Rethinking the French
Past, ed. Pierre Nora (New York, 1996). For uses of history in business history, see Hansen,
Business History; and Per H. Hansen and R. Daniel Wadhwani, Can Business History
and Anthropology Learn from Each Other?Journal of Business Anthropology 3, no. 1
(2014): 5159.
One exception that comes to mind is Deirdre McCloskeys work. See Deirdre
N. McCloskey, The Rhetoric of Economics, 1st ed. (Madison, Wis., 1985); and Deirdre N.
McCloskey, Bourgeois Dignity: Why Economics Cant Explain the Modern World (Chicago, 2011).
Review Essay / 559
History Association in 2011, which was published in the Journal of Eco-
nomic History in 2012.
In his talk, Eichengreen discussed the widespread invocation of the
lessons of historyin 2008 and 2009. He focused in particular on how
the historical analogy of the Great Depression was used to make sense
of the nancial crisis, and why it was this particular analogy that was
used. He drew on cognitive and behavioral disciplines, and on discus-
sions about the use of historical analogies in foreign policy studies, but
not on the narrative and cultural approaches that are gaining ground
in business history, which in my opinion could have been used in a fruit-
ful way.
I will return to that question later, among others, but rst a
presentation of the books main points.
Main Points of Hall of Mirrors
Hall of Mirrors raises two basic questions or topics. The rst topic is
a detailed comparison of the causes, development, and consequences of
the two crises. An integral part of Eichengreens analysis deals with the
lessons of the Great Depression and how they were or were not
learned and used by decision makers during the Great Recession. The
second topic is the uses-of-history part, which concerns how the
analogy of the Great Depression shaped authoritiesresponse to the -
nancial crisis. This discussion includes questions such as how central
bankers and governments used historical narrativesconsciously or
notduring the nancial crisis of 20082009 and the Great Recession,
and what the consequences were.
The former topic, it could be argued, is a rst-order question and,
though it deals with lessons from history, the lessons are mostly
derived by Eichengreen, not by the decision makers. The latter topic,
however, is a second-order question. It focuses not on the true causes
of the Great Recession but on how the lessons of . . . [the 1930s,] as dis-
tilled by economists and historians, powerfully shaped perceptions and
reactions(p. 377).
Barry Eichengreen, Economic History and Economic Policy,Journal of Economic
History 72, no. 2 (2012): 289307.
See, for instance, Hansen, Business History; Per H. Hansen, From Finance Capitalism
to Financialization: A Cultural and Narrative Perspective on 150 Years of Financial History,
Enterprise & Society 15, no. 4 (2014): 60542; and Per H. Hansen, Making Sense of Financial
Crisis and Scandal: A Danish Bank Failure in the Era of Finance Capitalism,Enterprise &
Society 13, no. 3 (2012): 672706. See also Mads Mordhorst, Arla and Danish National Iden-
tity: Business History as Cultural History,Business History 56, no. 1 (2014): 11633; and
Mads Mordhorst, From Counterfactual History to Counter-Narrative History,Management
& Organizational History 3, no. 1 (2008): 526.
Review Essay / 560
The book is organized in four chronological sections. Part 1, The
Best of Times,compares the bubbles or eras of unsustainable optimism
that preceded the nancial breakdowns in the 1920s and the 2000s, re-
spectively. Part 2, The Worst of Times,proceeds to tell the stories of the
two crises, while part 3, Toward Better Times,discusses the recovery
efforts in detail. Finally, part 4, Avoiding the Next Time,argues that
there will be a next time.
The book is well written, with numerous precise portraits of some of
the main actors and a generous dose of understated humor and sarcasm,
by now a hallmark of Eichengreens writing style. The author shifts ef-
fortlessly between the micro and the macro levels, and while the argu-
ment is complex, there are only a few technical sections that might
deter the average business historian such as myself. It is hard to
imagine any scholar besides Eichengreen who could have compared
the two crises with such command of empirical detail, general develop-
ment, and theoretical issues.
The main point in Hall of Mirrors is that decision makers had
learned (some of) the lessons from the 1930s and therefore managed to
avoid the worst,that is, a total breakdown of the nancial system and
the economy. As is well known, some of the important decision makers
and advisers were scholars with extensive knowledge of the Great Depres-
sion. The chair of the Federal Reserve Board, Ben Bernanke, was one,and
Christina Romer, the chair of President Barack Obamas Council of Eco-
nomic Advisors, another. More surprisingly, perhaps, British Prime Min-
ister Gordon Brown is praised for being one of the actors who best
understood what was at stake during the crisis. The reason for this assess-
ment of Brown is at least partly that as a former history student he had
studied the 1933 World Economic Conference in London.
For a moment it seems that Eichengreen comes close to arguing that
people with historical knowledge are better decision makers than people
without such knowledge. However, in the introduction he admits that
economic historians did not fare better than economists when it came
to foreseeing the crisis. Moreover, Bernanke is hardly one of the
heroes of the story. He is criticized for, among other things, not recogniz-
ing the housing bubble, letting Lehman Brothers fail, and believing that
the Great Moderation was not only real but also Fed-made. Indeed, in
line with Irving Fisher, Hyman Minsky, and Charles Kindleberger,
Eichengreen points to the importance of narratives for inating the
bubble in both the 1920s (New Era) and the 1990s (the New Economy)
and 2000s (the Great Moderation).
He argues that the similarities
See Charles P. Kindleberger and Robert Z. Aliber, Manias, Panics, and Crashes: A
History of Financial Crises, 6th ed. (New York, 2011); Hyman Minsky, A Theory of Systemic
Review Essay / 561
between the 1920s and the 2000s were a warning sign, which Bernanke
of all people should have noticed.
Among the many narratives carrying lessonsfrom the Great
Depression, Milton Friedman and Anna SchwartzsA Monetary
History of the United States (1963) is perhaps the best known. Essen-
tially, Friedman and Schwartz blamed the Depression in the United
States on the Federal Reserves failure to act as a lender of last resort
and to provide liquidity to nancial markets during the banking crises
of the early 1930s.
While Hall of Mirrors has numerous references to
the lessons of the 1930s,the lessons of the Great Depression,and
more generally lessons of history,this case is the only explicit
example where Eichengreen substantiates empirically how decision
makers understood the crisis through the lens or frame of the 1930s.
The empirical substantiation, of course, is the well-known speech
given by Bernanke in honor of Friedmans ninetieth birthday, in 2002,
where Bernanke acknowledged the Federal Reserves responsibility for
the Great Depression and continued, Were very sorry. But thanks to
you, we wont do it again(p. 170).
Despite the promise, they almost did it again by allowing Lehman
Brothers to fail, an event that Eichengreen characterizes as the single
most important policy failure of 2008(p. 199). That failure led to a
run on the shadow banking system, which had not been foreseen
because the analogy of the 1930s focused on the commercialnot the
shadowbanks. Friedman and Schwartzs narrative framed the way de-
cision makers perceived the world and where they, in turn, looked for
signs of risk. Decision makers focused on the lesson from the 1930s con-
cerning the risk of a run on the commercial banking system. The
immense risks built up in the investment banks and other parts of the
shadow banking system were blind spots and therefore neglected.
Lehmans failure on September 15, 2008, had dramatic conse-
quences both in the United States and in Europe. Governments and
central banks mobilized all available resources in order to halt the
crisis from developing into a breakdown as in the 1930s. Friedman
and Schwartzs lesson had been learned after all, and the worst was
avoided in 2008 and 2009. Liquidity, currency swaps, scal stimulation,
and international cooperation inspired by the lessons of the 1930s all
contributed to this result.
Fragility,in Financial Crises: Institutions and Markets in a Fragile Environment, ed.
Edward I. Altman and Arnold W. Sametz (New York, 1977); and Irving Fisher, The Debt-
Deation Theory of Great Depressions,Econometrica no. 1 (1933): 33757. See also
Hansen, Making Senseand From Finance Capitalism to Financialization.
See Milton Friedman and Anna J. Schwartz, The Great Contraction, 19291933,part 7
in A Monetary History of the United States, 18671960 (Princeton, 1963).
Review Essay / 562
Shift to a New Analogy
Having saved the world from another Great Depression, however,
things took a turn for the worse. According to Eichengreen, another his-
torical analogy with quite different lessons now came to dominate deci-
sion makersworldview: the narrative of German hyperination and fear
of a repetition of 1970s ination. Historically based fears of ination
became the new dominant frame in 2010, when decision makers in
both Europe and the United States prematurely shifted their focus to
state budgets and therefore austerity, which soon caused economies to
contract and unemployment to rise. This result is the ironic twist in
Hall of Mirrors. Precisely because governments and central bankers
avoided the worstby applying the lessons of the 1930s, they reefed
the sails too early and caused a double-dip recession, also known as
the Great Recession.
In other words, the Great Recessionlike the Great Depression
was self-made. As Eichengreen has shown in his book Golden Fetters,
the failure to leave gold and to devalue currencies in the 1930s forced
countries to deate their economies. This was what made the Great
Depression great.
Eighty years later it was as if Andrew Mellons liqui-
dationism had returned, and this time around, to make matters worse,
Europe had the modern equivalent of the gold standard, the euro
another political failure, in Eichengreens view.
The result was that
Europe was doing even worse than in the Great Depression(p. 353).
So much for the lessons of history.
Even in countries with oating exchange rates, austerity became the
order of the day. In the United States the rise of the Tea Party and the
sequester took care of that, while in Great Britain, Prime Minister
David Cameron made it clear that budget cuts had come to stay. Eichen-
green is not a big fan of the idea of expansionary scal consolidation,
where budget costs are supposed to instill condence and create
growth. He suggests that liquidationism and austerity may be universal
human instincts . . . not easily suppressed(p. 384).
Austerity may be human instinct, or nature, but is it not as likely that
liquidationismis a narrative deeply embedded in Western culture and
related to private interests and power? As a matter of fact, Eichengreens
analysis mostly leaves out the question of whose interests were served by
the policies pursued before, during, and after the crises. Questions of
Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919
1939 (Oxford, 1992).
See also Barry Eichengreen and Peter Temin, Fetters of Gold and Paper,Oxford
Review of Economic Policy 26, no. 3 (2010): 37084.
Review Essay / 563
power also do not gure prominently in the analysis, which in my
opinion is problematic.
In any case, Eichengreens sympathies lie squarely with Keynesian
theory. He approvingly quotes Franklin D. Roosevelt: We accepted
the nal responsibility of Government, after all else had failed, to
spend money when no one else had money left to spend(p. 327). At
the same time, he argues that FDR was a scal conservative who believed
in balanced budgets. Eichengreen rejects the argument that the New
Deal was a Keynesian exercise in scal stimulation. Only Japan conduct-
ed a truly Keynesian policy, while FDRs most important contributions to
dragging the United States out of the Depression were leaving gold, de-
valuing the dollar, and easing monetary policy.
Eichengreen returns several times to the obligation to spend money
when no one else had money left to spend,but the authorities in Europe
and the United States had not learned the Keynesian lesson. Instead,
they only avoided the worstin 20082009 before the role of the
state came under pressure more generally. Fiscal decits exploded
because nations felt compelled to bail out their banking systems, and
the European debt crisis began.
With the arrival of the debt crisis,
focus moved from the nancial sector to the states as the villains. This
shift had consequences for the European debt crisis. With states and gov-
ernments as the new scapegoats of the story, and with the dominant nar-
rative of the euro crisis, which set abstemious Germans against
proigate Greeks and, more generally, thrifty Northern Europeans
against spendthrift Southerners,any agreement was (and still is) hard
to reach (p. 373).
But the ironic tale of avoiding the worstcontinued, according to
Eichengreen. Not only are the people of the United States and Europe
paying a high price because of the ill-timed turn to austerity, but avoiding
the worstalso gave the nancial sector time to regroup and lobby gov-
ernments to ease or avoid new regulation. In combination with the size
and complexity of the nancial system, the result was that, unlike in the
1930s, postcrisis nancial regulation did not amount to much. The
Dodd-Frank Act sought to strengthen the system rather than overturn
it,as the Glass-Steagall Act had done (p. 320).
Hall of Mirrors ends on a somber note. Based on his in-depth com-
parison of the Great Depression and the Great Recession, Eichengreen
concludes that radical reform is possible only in the wake of an excep-
tional crisis,and he stresses that precisely because the worstwas
avoided, success became the mother of failure(pp. 324, 11). The
result is that we are likely to see another serious crisis again.
See also Mark Blyth, Austerity: The History of a Dangerous Idea (New York, 2013).
Review Essay / 564
Eichengreens history of the Great Depression and the Great Reces-
sion is a successful example of diachronic comparative history. More-
over, the ambition of addressing how policymakers used history and
viewed the unfolding crisis through the frame of the Great Depression
is highly laudable. However, this part of the book does not fully deliver
on its promise, in my opinion. In this section I will discuss a few of the
issues where I think Eichengreen could have gone further and identify
areas where more work is needed in order to better understand how his-
torical narratives or analogies of earlier nancial crises are used to make
sense of unfolding emergencies and how they constrain the choice set of
In Fortune Tellers, Walter Friedman briey recounts how the
192021 crisis served as a baseline of sortsto forecasters who used
that analogy to make sense of the Great Depression.
Whether such
analogies are explicitly referred to or just implicitly evoked in the
shape of experience, they are consistently used to understand the
present. Because such analogies guide our decisions and actions, they
also shape the future. As Eichengreen argues in his presidential
address, the Great Depression legitimated certain responses to the col-
lapse of economic and nancial activity while delegitimizing others.
However, as I have indicated above, the lessons Eichengreen derives
from the Great Depression are mostly his own, not those of the actual de-
cision makers. Most of the time Eichengreen sticks to the rst-order per-
spective, while the second-order perspective would have focused on how
the actors explicitly or implicitly used historical analogies as a guide for
making sense of the Great Recession. This is not a subtle difference but,
on the contrary, an important distinction with signicant implications
for our understanding of the actions of policymakers. Rather than
judging decisions and actions, we might be better able to understand
why central bankers and others acted as they did if we knew how they
made sense of what was going on.
When the next nancial crash arrives, we are likely to once again see
decision makers stumble along trying to make sense of scarce informa-
tion, the meaning of which is rarely clear and unambiguous, especially
during a crisis. Eichengreen recognizes this and argues that we can
now better appreciate how policy makers in the 1920s and 1930s were
forced to take decisions on the basis of partial information(p. 380).
But the point goes further than that, I would argue. If narratives shape
Walter A. Friedman, Fortune Tellers: The Story of Americas First Economic
Forecasters (Princeton, 2014), 200.
Eichengreen, Economic History,290.
Review Essay / 565
perception, decision making is not just a matter of incomplete and scarce
information. The available information also needs to be assigned
meaning, before it can be used as a blueprint for decisions and action.
This sense-making process is carried out through narratives. It is difcult
to make decisions and to act before a reasonably consistent narrative ex-
plaining what is going on has been created.
That is what decision
makers did during the 1931 and 2008 nancial crises, and for better or
worse they used the historical analogies available to them at the time.
If we want to understand these methods better, we need to focus on
sense-making processes as decision makers go forward. In addition to
narrative analysis, we might use the German historian Reinhart Kosel-
lecks set of conceptual tools to make such an analysis. Kosellecks
point that actors are situated in the present between a space of experi-
enceand a horizon of expectationenables us to think more systemati-
cally about the role of historical analogies in decision making.
Hall of
Mirrors is already contributing to such a line of thinking in economic
history, but I would argue that we need a more focused second-order
analysis of how policymakers perceived the crisis within the constraints
of the historical analogy of the Great Depression.
This scrutiny is even more necessary because, as Eichengreen also
reminds us, there does not exist a single historical narrative, but
several. History is contested(p. 382). In his presidential address,
Eichengreen further argues that we will, therefore, see more explicit at-
tention to the question of how such narratives are formed.
This is
exactly why there arent any clear, undisputed lessons from history, as
the debate about the causes of the 2008 nancial crisis has made quite
It is hard to blame decision makers for not unambiguously under-
standing the lessons of history if history is contested and there is no
single universally accepted historical narrativeno true lessons. There
will always be an ongoing struggle over what an event means; that is
why history is contested in the rst placeits about interests and
See Mitchel Y. Abolaa, Making Sense of Recession: Toward an Interpretive Theory of
Economic Action,in The Economic Sociology of Capitalism, ed. Victor Nee and Richard
Swedberg (Princeton, 2005); Mitchel Y. Abolaa, Narrative Construction as Sensemaking:
How a Central Bank Thinks,Organization Studies 31, no. 3 (2010): 34967; and Hansen,
Making Sense.
Reinhart Koselleck, Futures Past: On the Semantics of Historical Time (New York,
Eichengreen, Economic History,304. See also Hall of Mirrors, 382.
To see that there are widely different perceptions of what caused the nancial crisis, one
need only contrast Eichengreens account with, say, Lawrence WhitesHow Did We Get into
This Financial Mess?(Brieng Paper No. 110, Cato Institute, Washington, D.C., 2008) or
Peter J. WallisonsThree Narratives about the Financial Crisis,Cato Journal 31, no. 3
(2011): 53549.
Review Essay / 566
power. In addition, as I read it, Hall of Mirrors is more a comparison of
the two crises and how central bankers and governments responded to
them than it is an analysis of how central bankers and governments
used historical analogies and narratives (the lessons of history) to
make sense of and halt the worst nancial crises ever.
While I agree with most of Eichengreens lessons, had he tried to
trace how decision makers actually used historical analogies to make
sense of the crisis, the result would have been more in line with the
books subtitle. Such an inquiry would have required more focus on
the reasoning and explanations put forward by central bankers and
other decision makers. Perhaps I am being the typical annoying reviewer
and asking for a different book, but if so it is only because I agree with
Eichengreen that decision makers, consciously or not, used analogies
in their attempts to make sense of crises.
I suppose my concern is that the narrative/analogy framework so
well discussed in Eichengreens presidential address and in the books
conclusion is not consistently applied in the body of the book. Here, I
believe, Eichengreen could have beneted from some of the recent re-
search in business history and organization studies on narratives.
For instance, Eichengreens focus on the dominant narrativein the
euro crisis points toward accepting the inuence of narratives on be-
havior. Twenty years ago Eichengreen explained the lack of cooperation
during the Great Depression with reference to the incompatible concep-
tual frameworksof the actors.
The shift from incompatible con-
ceptual frameworksto dominant narrativesis important because it
recognizes the role of narratives in shaping our perceptions and
actions. Economic history has added a powerful analytical approach to
its toolbox that now needs to be applied with a vengeance.
What might such a second-order narrative analysis look like? When
Eichengreen blames decision makers for neither understanding nor
For general approaches in organizational history, see Marcelo Bucheli and R. Daniel
Wadhwani, eds., Organizations in Time: History, Theory, Methods (New York, 2014); and
Stephanie Decker, Matthias Kipping, and R. Daniel Wadhwani, New Business Histories! Plu-
rality in Business History Research Methods,Business History 57, no. 1 (2015): 3040. Olof
Brunninge, Using History in Organizations: How Managers Make Purposeful Reference to
History in Strategy Processes,Journal of Organizational Change Management 22, no. 1
(2009): 826; Hansen, Business History; Hansen, From Finance Capitalism to Financiali-
zation; Hansen and Wadhwani, Business History and Anthropology; Mordhorst, Arla and
Danish National Identity.Roy Suddaby, William M. Foster, and Chris Quinn Trank, Rhetor-
ical History as a Source of Competitive Advantage,in The Globalization of Strategy Research,
ed. Joel A. C. Baum and Joseph Lampel (Bingley, U.K., 2010), 14773.
Barry Eichengreen, Central Bank Co-operation and Exchange Rate Commitments: The
Classical and Interwar Gold Standards Compared,Financial History Review 2, no. 2 (1995):
See also George Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology
Drives the Economy, and Why It Matters for Global Capitalism (Princeton, 2009).
Review Essay / 567
applying the lessons of the Great Depression to the Great Recession, I
would argue that this failure might be understood in the context of the
New Era and Great Moderation narratives that Eichengreen refers to
in Hall of Mirrors. Is it not possible, even likely, that such narratives
are important drivers of bubbles? And how can we expect decision
makers to be able to see beyond these narratives when they see the
world through them?
My point is that rationality is embedded within the dominant narra-
tive, such as the so-called Great Moderation, which shapes peoples per-
ception and worldview and, therefore, their actions or lack of action.
Narratives create groupthink, what Robert Shiller has called a social ep-
And narratives also work in smaller groups and in specic ep-
istemic communities, such as the central bank community.
So narratives, I would argue, are cultural and social phenomena with
economic consequences. Only very few economists (and historians, for
that matter) cried nancial bubble when stock markets and housing
markets inated during the 2000s. We, too, were under the inuence
of the narrative. A case in point is the ofcial report on the Danish nan-
cial crisis of 20082009. The report refers several times to the opti-
mismbehind the bubble, but nowhere does it explore where this
excessive optimism came from.
That optimism was likely driven by
narratives that inated the bubble, while investors and regulators alike
failed to see through the social or cultural epidemic created by this think-
ing. Perhaps the best indicator of upcoming troubles in nancial markets
might come from tracking the narratives that drive the optimism needed
for inating a bubble. Financial institutions have already realized that
language is an important variable when trying to make sense of nancial
As Eichengreen says, historical narratives powerfully shape percep-
tions and reactions. But they do more than that. They not only create
memory but also oblivion or blind spots by focusing on some things
while leaving other things out.
This selective focus raises interesting
See, for instance, Ben S. Bernanke, The Great Moderation(remarks at the meetings of
the Eastern Economic Association, Washington, D.C., 20 Feb. 2004), available at http://www.
Robert J. Shiller, The Sickness beneath the Slump,New York Times, 11 June 2011. See
also Akerlof and Shiller, Animal Spirits.
Jesper Rangvid, The Financial Crisis in Denmark: Causes, Consequences and Lessons,
Ministry of Business and Growth, Denmark, last modied 18 Sept. 2013, accessed 25 Apr. 2015,
See, for instance, Dow Jones Introduces News Analytics to Institutional Trading Com-
munity,Dow Jones press release, 14 Feb. 2012,
Daniel Geiger and Elena Antonacopoulou, Narratives and Organizational Dynamics:
Exploring Blind Spots and Organizational Inertia,Journal of Applied Behavioral Science
Review Essay / 568
questions: Exactly what memories or analogies are remembered and
which are forgotten, and why? Why, when, and how did memories of
the Great Depression fade, only to be reactivated in the 2008 nancial
crisis? And why did the Great Depression analogy shift to the fear of in-
ation story in 2010?
It was most likely the eruption of the euro crisis that drove the shift
from using the lessons of the Great Depression to using those of 1920s
hyperination and 1970s ination. This shift in historical narrative or
analogy in turn made thorough nancial and social reform impossible.
The weakening of the state, and the Keynesian narrative more generally,
also contributed strongly to the lack of nancial reform, as did cultural
capture, or groupthink, where ofcials and the public in general came
to accept the narrative of nance as the wheels that drove the economy.
Eichengreen argues that only if the Great Recession had been
worsean exceptional crisiswould groundbreaking reform have been
possible; a narrative perspective offers an alternative interpretation.
The Great Recession was and is serious enough to warrant deep
reform. Why this has not happened and does not seem likely is because
no consistent and coherent narrative has been put forward that can
explain what happened and point us in a new direction. For a while in
2009 such an alternative narrative based on a Keynesian framework
seemed to be under construction. However, as already mentioned, the
European debt crisis effectively killed that alternative narrative and
shifted the power balance once again. As a result the status quo prevailed.
In conclusion, Hall of Mirrors is not really a study of the uses and
misuses of history by the actors and how history shaped their percep-
tions and decisions in the Great Recession. Together with Eichengreens
2012 presidential address, however, Hall of Mirrors provides a convinc-
ing framework for economists and economic historians to build on.
While we are waiting for that to happen, Hall of Mirrors is a must-
read on its own terms: an outstanding analysis of the similarities and dif-
ferences between the two great crises of the twentieth and twenty-rst
Per H. Hansen is professor of business history at Copenhagen Business
School. His most recent publication is Finn Juhl and His House (Ostldern,
2014). Some of his current research is on central bankers and sense making
in the 1931 nancial crisis.
45, no. 3 (2009): 41136; Brunninge, Using History in Organizations; Hansen, Business
See Hansen, Finance Capitalism to Financialization.On cultural capture, see James
Kwak, Cultural Capture and the Financial Crisis,in Preventing Regulatory Capture:
Special Interest Inuence and How to Limit It, ed. Daniel Carpenter and David A. Moss (Cam-
bridge, Mass., 2013).
Review Essay / 569
... Crisis of 1997. In this way 21 st century was also marked early with the Dot-Com bubble followed by latest episodes of the crash in subprime market and the ensuing financial crisis that wreaked havoc across the global markets (Eichengreen, 2015;Ferguson, 2008;Hansen, 2015). ...
Banking regulators and supervisory authorities aim to develop and exercise prudent policies to mitigate the riskiness of financial sector to achieve a stable banking system. In the banking literature, the tradeoff between competition and stability has resulted in predominantly two opposing views; the traditional view of competition-fragility argues that increased competition in banking erodes market power, reduces profit margins and charter value, which in turn encourage banks to take excessive risks. In contrast, the competition-stability view suggests that, low competition in banking results in more market power which may encourage the banks to charge higher loan rates adversely affecting borrowers by risk shifting mechanisms, exacerbating moral hazard and adverse selection issues. Given the opposing predictions of the literature, this study aims to test the two views, considering the effects of market power on the risk taking behavior of Pakistani banks along with the conditional effects of capital requirements, charter value and market discipline. Moreover, the literature has largely investigated the competition stability and or fragility nexus in deposit market only while ignoring the said nexus in loan market as a portfolio issue. We differentiate competition in deposit and loan markets for the first time in the case of Pakistan by estimating separate Lerner indices accordingly. In addition, we allow for possible non-linearities and explicitly test for charter value hypothesis, the risk shifting paradigm, the asset risk / leverage tradeoff effect and the capital buffer channels as potential channels for the risk effects of market power. Using annual data for an unbalanced panel of 30 banks from 2006 to 2017, this study adopts dynamic panel data analysis techniques of two step system GMM. To control for endogeneity and for robustness, the GMM is further augmented with instrumental variables. Our findings suggest that, the competitive conditions in lending and deposit markets are substantially and significantly different in the case of Pakistan. The lending market is highly monopolistic whereas the deposit market is highly competitive. In addition, the relationship between competition and stability is largely nonlinear whereby risk shifting paradigm is dominant in the deposit market whereas the asset risk / leverage tradeoff effect is supported in lending market. We also find that the theoretical link between charter value and market power is sufficiently strong to restrain risky behavior of banks. At policy level, our findings suggest that infusing further competition into the deposit market may become detrimental to stability while the same is necessary to improve the competitive conditions in lending market. Furthermore, our results suggest thoroughly encouraging charter value and capital requirements as these two are strongly restraining risky behavior of banks. In addition, banks’ risk, capital regulations, charter value and market discipline are largely interconnected and should be taken as such that these mostly reinforce each other in lending market while behaves otherwise in deposit market. Thus banking regulators and supervisory authorities should be cognizant of the implications of unilateral policies. Key Words: Competition, Market Power, Charter Value, Market Discipline, Capital Adequacy, Bank Risk, Bank stability, GMM, Instrumental Variables, Stochastic Frontier Analysis, Translog Cost Function. JEL Classification: G21, G32, L1
... Thus, unsurprisingly, many executives from private, public, and not-for-profit sectors agree that the importance of strategic agility has been growing over time (Macias-Lizaso and Thiel, 2006). Additionally, following the Great Recession (starting with the global financial crisis in 2007), many governments have adopted austerity measures and reduced public sector expenditures (Hansen, 2015;Callan et al., 2011). Due to these drivers, many government organizations have been forced to rationalize their portfolios, which have also fallen under greater scrutiny (Karanikolos et al., 2013). ...
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Purpose Although corporate portfolio management (CPM) has been a popular tool for strategic management of multi-business portfolios in the private sector since the late 1960s, it has received limited attention in the public sector. Accordingly, empirical research on the use of CMP in government organizations is virtually non-existent. The purpose of this paper is to partially fill that gap in the literature by highlighting and discussing some of the key points that public sector organizations may need to consider when adopting CPM. Design/methodology/approach Rather than deductively proposing and testing narrowly specified hypotheses, this study aims to answer a broad research question, namely: What are the key points that public sector organizations may need to consider when adopting CMP? Hence, the study adopts the qualitative interpretive research paradigm. The findings are based on empirical research conducted in a large Australian publicly funded research organization. Potential application of CPM was iteratively and incrementally explored with a reference group comprising 15 middle management representatives and several members of the senior leadership group over the course of one year. Findings Assessment criteria traditionally used in CPM (e.g. growth potential and market share) are generally not applicable in public sector organizations. This paper suggests that government organizations should instead consider past performance and future potential of individual business units, which may be operationalized via capability (a function of human capital and associated resources/infrastructure) and delivery (a function of the demand for, and the impact of, relevant business units). The paper also highlights the importance of organization-wide consultation, evidence-based decision making, and contestability. Originality/value From a practical perspective, the paper may assist public sector organizations with adapting and applying CPM. From a theoretical perspective, the paper highlights an important and relatively neglected research problem, and suggests several avenues for future research.
Adam Tooze's Crashed is arguably the first historical narrative of the financial crisis. It is an ambitious account of the crisis and its global economic, financial, political, and geopolitical causes and implications. Crashed is organized chronologically in four parts—the “Gathering Storm,” “The Global Crisis,” “Eurozone,” and “Aftershocks”—and focuses more on the macrolevel structures, processes, and decisions than on the microlevel and the people suffering from the crisis. Except, that is, in aggregate numbers and a few empathic comments such as this: “As house prices fell, equity dwindled, and the hardest hit slid into negative equity. Families scrambled to slash spending and pay down credit card and other short-term debt. The result was a smothering recession in consumer demand” (p. 143).
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In this article I interpret 150 years of financial history with a focus on shifts in the role of finance in society. I argue that over time the role of finance has shifted twice from that of servant to that of master of society, and that this process has been driven by sense making through narratives that legitimized and shaped these changes. When finance became a master rent seeking, cultural capture and out-of-control financial innovation resulted in financial and social instability. Finance as a master was the characteristic of finance capitalism from around 1900-1931 and of financialization from around 1980 to today. Finance capitalism and financialization were enabled by a dominant narrative that legitimized the power of finance. The shifts in the role of finance happened when crises undermined the meaning of the existing narrative and created for a new narrative able to make sense of the crisis and point society in a new direction. This sense-making process stabilized when a new narrative was established that could explain the crisis and legitimize and shape a new role for finance. The article is based on my presidential address presented at the Business History Conference's annual meeting in March 2014 in Frankfurt.
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Freely available from publishers until June 2015: . We agree with de Jong et al.’s (2015) argument that business historians should make their methods more explicit and welcome a more general debate about the most appropriate methods for business historical research. But rather than advocating one ‘new business history’, we argue that contemporary debates about methodology in business history need greater appreciation for the diversity of approaches that have developed in the last decade. And while the hypothesis-testing framework prevalent in the mainstream social sciences favoured by de Jong et al. should have its place among these methodologies, we identify a number of additional streams of research that can legitimately claim to have contributed novel methodological insights by broadening the range of interpretative and qualitative approaches to business history. Thus, we reject privileging a single method, whatever it may be, and argue instead in favour of recognising the plurality of methods being developed and used by business historians – both within their own field and as a basis for interactions with others. Available for free on publisher's website until June 2015: Free ePrint:
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THE origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused. News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect. But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.
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This article argues that a cultural and narrative perspective can enrich the business history field, encourage new and different questions and answers, and provide new ways of thinking about methods and empirical material. It discusses what culture is and how it relates to narratives. Taking a cultural and narrative approach may affect questions, sources, and methodologies, as well as the status of our results. Finally, a narrative approach may contribute to our historical understanding of entrepreneurship and globalization.
In this paper I discuss a dramatic financial collapse and scandal in Denmark in the interwar period. I analyze the asset price bubble from 1914 to 1920 and the subsequent failure in 1922 of Scandinavia's largest bank, the Danish Landmandsbanken, as well as the downfall of its CEO Emil Glückstadt. I discuss the sense-making process, first during the bubble and then following Landmandsbanken's collapse and Glückstadt's fall from power in 1922, and finally until the introduction of a new bank act in 1930. I further argue that such crises and scandals force contemporaries to make sense of the dramatic fall from the top of society of these icons and of their role in the collapse of their banks. I view the sense-making process as centered on the construction of narratives that explain the crisis and enable or constrain institutional response to the crisis. To conclude, I argue that the process of sense-making in the case of Landmandsbanken can be generalized as the way in which society enforces norms and values in cases of dramatic financial crisis and scandal.
The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity. Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.
Through a study of the co-operatively organised dairy company Arla the article argues that the influence of co-operative societies in Denmark goes far beyond the economic sphere. Since the founding of the co-operative movement in the late nineteenth century it has been viewed as a unique Danish way into modernity that is more democratic than the traditional process of industrialisation seen in other European countries. Thus the narrative of the co-operatives has become part of Danish memory and identity. In the post-war years, however, and especially in the last two decades, the process of globalisation in the food industry has eroded the foundation of this narrative from within, such that it has begun to turn against the co-operative societies. Accused of being monopolistic, multinational and undemocratic, the companies today find themselves trapped in their own history and storytelling. The article draws on a cultural-historical framework, narrative theory and Pierre Nora's notion of memory.