Comment on Real and Pseudo-Financial Crises

Anna Schwartz's paper makes a useful distinction between actual and pseudo financial crises. The distinction in a reaction against the tendency to dilute the language by using extreme terms to refer to ordinary problems. The tendency arises on one side from the understandable desire of the people with the problem to convince the public that the prevention of chaos or disaster depends on special assistance being rendered by government to them and, on the other, by the eagerness with which governments respond to such pleading when it is made by a large, vociferous group. In cases of financial distress, it is in the interest of creditors to palm off the debts of insolvent or illiquid borrowers on the taxpayers by arousing fears of a financial collapse and a return to the depressed conditions of the thirties.

Schwartz attacks this argument with her characteristic vigor, thoroughness and careful scholarship. I will restate her argument in two main propositions, expand the discussion of one, and briefly relate the two propositions to current financial distress. I agree with her conclusions and have no fault to find with her brief, but succinct episodic history of past British and American financial distress. I have a few comments on her discussion of the lender of last resort, so most of my attention is on that.