Dating Major Global Financial Crises
Both of the most recent major global financial crises—1930s and 2000s—followed close behind the peaks in the Kelly et al. innovation index. Perez cites the mass production process that permitted the building of the Ford Motor Company’s Model-T in 1908 as the signature innovation of the early 20th century, ultimately providing rapid growth of the 1920s and the mania that ensued (see Gordon 2016, 149–168). Later in the century, it was Intel’s microprocessor that made computing and communications at scale possible, and that gave rise to the current era.
While both of these technological innovations have gone on to demonstrate long-run success, in the excitement following their creation, the frenzy, and mania—the roaring 20s and the dot.com bubble—eventually resulted in a separation of current period pricing and long-run fundamentals. The ensuing asset price correction and write down of debt, which financed such asset purchases, resulted in painful balance sheet adjustments that required deep recessions to correct.
While the 1929–1933 global depression and the 2008–2010 global financial crisis are well known, the 19th-century’s major financial crises are less well known. Further, available data describing the period are relatively sparce and are very limited for the early decades of the century.1
The 1890 peak in the Kelly et al. innovation index is followed by a financial crisis aligning with the 1893–1894 recession as dated in the National Bureau of Economic Research (NBER) chronology (see Table A.1). Both Perez and Aliber–Kindleberger designate the recession as a major global financial crisis. Aliber–Kindleberger and Reinhart–Rogoff designate the 1907–1908 recession as a follow-on major global financial crisis as balance sheets were cleansed for the explosive growth ahead.
Table A.1 Major financial crisis dates
Perez points to the 1875 opening of the Carnegie Bessemer Pittsburgh steel plant as the instantiation of the innovation that drove the surge. Perez describes the era at the turn of the century as one in which distributed electrical power for industrial production was introduced.2 Perez writes that economies of scale were created with massive steel structures for vertically integrated plants. Universal standardization and cost accounting were introduced for control and efficiency. Science became a productive force.
While data for the early decades of the 19th century are very limited, there is consensus that the building of the rail networks across continental Europe, Britain, and the United States resulted as a mania at mid-century. Aliber–Kindleberger and Perez detail the 1848–1850 panic that followed the railroad mania. Aliber–Kindleberger (2015, 192) write: “In January 1847 distress developed in London in response to railroad calls and the crisis came late in the summer.”
Perez suggests that the 1829 test of the “rocket” steam engine for the Liverpool–Manchester railway began a series of innovations that resulted in economies of agglomeration and the creation of industrial cities, scale from standard parts and machine-made machines, and steam as an energy source. Crafts (2004) finds “steam contributed little to growth before 1830 …. Only with the advent of high‐pressure steam after 1850 did the technology realise its potential.”
Mokyr cites important innovations in the late 18th and early 19th centuries resulting from unskilled-bias technology: “First in firearms, then in clocks, pumps, locks, mechanical reapers, typewriters, sewing machines, and eventually in engines and bicycles, interchangeable parts technology proved superior and replaced the skilled artisans working with chisel and file” (see Mokyr 1990, 137, cited in Acemoglu 2020).
1 The Kelly et al. innovation index is limited by the lack of available patent data prior to 1840. Portions of the Reinhart–Rogoff financial crisis data extend back to 1800. Aliber, Kindleberger, and Perez are economic historians and provide qualitative descriptions for earlier centuries.
2 David (1990) and earlier papers describe the process of industrial electrification in detail. See also Gordon 2016, pp. 114–122. After the very significant technology deployment of the 1870s, Gordon (2016, p. 61) concludes: “The Second Industrial Revolution was on its way to changing the world beyond recognition.”