What causes perfect storms in financial markets, whether the Panic of 1907 or the Global Financial Crisis that began in 2007? Bruner and Carr's magisterial treatment of the former episode paints a lucid picture that gets to the heart of the matter.

Start with modern “fractional reserve banking,” which first saw the light of day in the early seventeenth century when East India merchants arrived in London with hauls of gold and silver and no place to safely stash them. In 1650, England was a tiny, institutionally backward nation of just 5 million souls—about half the population of Italy and a third that of France— and actually less than its own population on the eve of the arrival of the Black Death in 1348–1349. The majestic, free‐trading empire that straddled the globe lay yet two centuries in the future; mid‐seventeenth‐century Britain was a weak, backward nation, embroiled in the process of throwing off its corrupt ancient regime; its presence on the high seas emphasized raiding as much as trading.

It had no banking system, but London was home to a large number of goldsmiths, whose livelihoods demanded the safe storage of valuables. Merchants began to deposit their loot with the goldsmiths, who in exchange issued certificates, which then began to circulate as money. Soon enough, the goldsmiths tumbled to the happy realization that they could issue the certificates in excess of the amount of precious metal they held.

In other words, they could print money.

Since the prevailing interest rate was well over 10 percent year, the goldsmiths made a good living loaning out the certificates, a process that held up only as long as a large number of certificate holders didn't redeem them all at once. If the goldsmith's safe held £10,000 of silver, and he had issued £30,000 worth of certificates—one third issued to the specie's owners and two thirds to borrowers—and the bearers of £10,001of the certificates demanded payment in silver, the goldsmith was bankrupt. In fact, if the certificate holders even suspected that the goldsmith was in trouble, they could precipitate a disastrous run. As banking systems grew ever more complex and interlinked, the contagion would spread through a process that social psychologists and financial economists call herding (which works just as well on the way up as down).

Just why, then, do financial participants herd? Because they are human. About 50,000–100,000 years ago, modern humans “escaped” from northern Africa to inhabit all of the continents except Antarctica. Even more remarkably, tribes spread over the entire New World, from the Arctic Ocean to Tierra del Fuego, over a period of just several thousand years.

Along the way, humans had to learn how make kayaks in the arctic, hunt buffalo on the Great Plains, and make poison blowguns in the Amazon. It seems highly unlikely that human evolution occurred rapidly enough to acquire these varied skills innately in the same way that, for example, birds build nests or termites build hills.

Rather than hardwire into our genes a distinct ability for making kayaks, hunting buffalos, or fashioning poison blowguns, evolution instead encoded the general‐purpose skill of imitation. Given a large enough population and enough trial and error, someone will eventually figure out how to build, for example, a serviceable kayak, and the rest can accurately imitate the process.

We imitate more than almost all other animal species; as soon as someone creates a useful innovation, others quickly adopt it. Yet our propensity to imitate also serves to amplify maladaptive behaviors, primary among which is mass delusions of all types, particularly the propensity of modern societies to participate in financial panics.

We are also the ape that tells stories. When our remote ancestors needed to communicate with each other to survive, they certainly did not do so with the kinds of mathematical tools used by the competent investor. The primary mode of that communication was, and still is, narration: “You go right, I'll go left, and we'll spear the mastodon from both sides.”

We are narrative animals, and a compelling tale, no matter how misleading, will more often than not trump facts and data. Not only do people respond more to narratives than to facts and data, but preliminary studies also demonstrate that the more compelling the story, the more it erodes our critical thinking skills. (This research suggests, in addition, an inherent conflict of interest between the suppliers and consumers of opinion: the former—think your stockbroker or the talking head on CNBC—wishes to convince and will devise the most compelling narratives possible, whereas the investor should intentionally avoid those narratives and rely only on data, facts, and analytical discipline.)

Toss together an unstable fractional reserve system and an army of herding participants—thousands in 1907, and millions in 2007—and you have a recipe for a panic so well described by Bruner and Carr between these covers.

Over the past two centuries, Europeans and Americans have slowly realized the need for regulatory circuit breakers in the system to throttle the booms and inject liquidity during the busts. The problem, as the authors point out, is that as the world grows wealthier and our financial system grows ever more complex, it outgrows the regulatory apparatus, which, rather than adapting to rapidly changing circumstances, becomes ever more hidebound.

In 1907, the regulatory apparatus was the clearing house system of the so‐called “national banks,” a relatively informal private network that provided temporary capital, when needed, to its well‐behaved members. Trouble arose when a parallel system of trust banks, unconstrained by the reserve rules of the national system, began lending to increasingly speculative ventures. In that era, “American exceptionalism” expressed itself in the nation as being alone among its developed peers in its lack of a central bank that would obey Bagehot's famous rule for such institutions: act as a lender of last resort to solvent firms against good collateral at a high “penalty rate.”

In 2007–2008, a nearly identical series of events played out as another parallel banking system, this time consisting of unregulated financial services companies, blew the largest credit bubble in the history of mankind—a bubble that the nation's nearly century‐old central bank contributed to in no small part. To paraphrase Harry Truman, the only thing that's new in finance is the history we haven't read. And that is why reading Robert Bruner and Sean Carr's explanations of both “07s” is a must.

Floyd Norris, chief financial correspondent for the New York Times, appears to have meandered upon a copy of this book's first edition. He picked it up, put it down, and then apparently picked it up again (always the sign of a good book) as the next “07” started to play out. Upon later reflection, he hailed The Panic of 1907 as “one of the most insightful books” he had ever read. “When I read it last year,” noted Norris in a Times blog comment on February 22, 2008, “I thought it had lessons for today, but I did not realize just how quickly those lessons would become crucial.” I couldn't agree more. Robert Bruner and Sean Carr have refreshed a great book and drawn further insights about the seven critical factors that created the second “07” drama that is now still playing center stage on Wall Street and Main Street and in Washington. The parallels they see, the wisdom they share into the precise nature and causes of financial crises, and their alternative views to simple “silver bullet” explanations should be studied and reread closely by those now embroiled in the financial crises that played out in 2007–2009 in the United States and in Europe in the years that followed, and appear to be playing out in the cryptocurrency markets as I type these words. Sit back, relax, and enjoy their ideas as Bruner and Carr take you back to the future.