At what point does a market crash translate to a lengthy bear market and/or an economic recession? This question was taken up by a celebrated historian of the early 20th century, one Otto C. Lightner.

In 1922, Lightner chronicled nearly every major economic depression in the known history of the Western world in a 400-page volume entitled “The History of Business Depressions.” Lightner’s comprehensive chronicle of business depressions contains much that is applicable to today’s economic situation following the credit crisis. (It must be noted that before the Great Depression of the 1930s, the word “depression” was used without distinction to describe what could either be considered a mild recession or a major depression.)

One interesting example of an ancient economic crisis was detailed by Lightner, who explained the Roman debt crisis of A.D. 33. This particular crisis had some amazing parallels to the credit crisis of recent times. The Roman debt crisis began by a series of money panics attended by a number of runs on Roman banking houses.

“A description of the panic,” wrote Lightner, “reads like one of our own times: The important firm of Seuthes and Son, of Alexandria, was facing difficulties because of the loss of three richly laden ships in a Red Sea storm, followed by a fall in the value of ostrich feather and ivory. About the same time the great house of Malchus and Co. of Tyre with branches at Antioch and Ephesus, suddenly became bankrupt as a result of a strike among their Phoenician workmen and the embezzlements of a freedman manager. These failures affected the Roman banking house, Quintus Maximus and Lucious Vibo. A run commenced on their bank and spread to other banking houses that were said to be involved, particularly Brothers Pittius.”

Lightner continued, “The Via Sacra was the Wall Street of Rome and this thoroughfare was teeming with excited merchants. These two firms looked to other bankers for aid, as is done today. Unfortunately, rebellion had occurred among the semi civilized people of North Gaul, where a great deal of Roman capital had been invested, and a moratorium had been declared by the governments on account of the distributed conditions. Other bankers, fearing the suspended conditions, refused to aid the first two houses and this augmented the crisis.”

The crisis was solved by the emperor Tiberius, who “suspended temporarily the process of debt and distributed 100 million sesterces from the imperial treasury to the solvent bankers to be loaned without interest for three years. Following this action, the panic in Alexandria, Carthage and Corinth quieted.”

After surveying depressions over a period of more than three thousand years, Lightner went on to make the following provocative statement: “What we lose in depressions could easily pay our national debt.” While it’s somewhat debatable that this statement would apply to the present time, there’s no denying there is at least a ring of truth to it, especially as the tally of losses from the 2008 credit crisis continues to mount.

In “The History of Business Depressions,” Lightner also made the following observation: “Panics do not necessarily bring general depression. We have had many panics that have passed away without affecting more than the financial centers, and these only temporarily. Some of them never got on the first page of the newspapers. As to whether or not a panic will lead to depression depends upon whether its force has broken the credit structure. If the prosperity phase of the cycle has not run its course, and inflation has not reached its height, a panic will have little effect on business in general. If, however, it happens at a time when inflation and speculation have run rampant, and the elasticity of credit has reached its limit, then depression will result because there are no resources at hand to stem the evil effects.”

This is one of the important principles Lightner discusses in his book, namely that of inflation running its course. We can see this principle in action in the many stock market panics of the period between the 1980s and before the credit crisis of 2008. Panics in the stock market during that 20-year period were typically followed by a quick recovery because the stock price inflationary trend of those years hadn’t run its course. The same could also be said for the temporary setbacks (mostly regional in nature) for real estate prices in those years. But when inflation has completed its course and the long-term cycles are no longer supportive of the uptrend, a panic will often be followed by a business recession and prices will be quite slow in recovering.

This brings us to an observation about the price of gold. Gold was liquidated along with every other financial asset imaginable during the worst part of the 2008 financial crisis. Yet gold alone recovered in quick fashion and ended up making a new all-time high while other stock and commodity prices remained well below their previous highs. Gold passed the 2008 crisis test with flying colors while other asset categories still haven’t fully recovered. Hence gold has taken the torch away from investments that dominated the last century and we see that the inflationary trend in the gold price hasn’t run its course yet.

Lightner also made some interesting statements about the demand for money in times of economic difficulties that has a particular bearing on the gold price. The demand for gold in recent years is a reflection of the fear and uncertainty among investors, which is a spillover effect of the credit crisis. It’s also based on a latent belief that gold is money. In his book, Lightner observed that “The use of money as a store of value diminishes its efficiency for the purpose for which it was intended. It therefore increases the demand for money since an inefficient instrument does less work.” Gold as a store of value, as opposed to its industrial applications, is the main driving force for the yellow metal and will likely continue to be so for some years to come.

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