Financial Instability and the Credit Crunch of 1966

Abstract

In an article in this journal, Edwin Dickens criticizes the financial instability hypothesis of Hyman Minsky. He contends that ''financial instability theorists'' explain the financial crisis in the US in 1966 as due to the forced sale of securities by commercial banks, but that the 1966 crisis was not due to such sales. Therefore, he says that Minsky's financial instability hypothesis is contradicted. In contrast, this article argues that the 1966 crisis was initiated by the sale of securities by banks, but that such a development was not due to increased financial fragility, and thus was not a necessary aspect of the financial instability hypothesis. While the specifics of the 1966 crisis are somewhat of an exception, the general pattern of financial crisis in the postwar period in the US is powerfully explained by Minsky's financial instability hypothesis.