Financial Instability in a Developing Economic Setting: The Case of Iran

The examination of the theory and history of financial crisis in Europe and the United States is the subject matter of two important works by Kindle Berger (Kindle Herger, 1978, and Kindle Berger & Lafarge, 1982). In his first work, Kindle Berger (1978), has provided us with a remarkable account of European and American financial history from 1720 to 1975. The second hook (Kindle Berger & Lafarge 1982) presents a collection of essays that include a more in- depth history of selected financial crises in England, Germany, Italy and the United States. In both of these books the authors argue that the observed financial swings have followed a similar pattern. This pattern is best explained by “financial instability hypothesis” that was first presented by Fisher (1932) in his debt-deflation framework of analysis, and later was elaborated by Professor Hyman Minsky (Minsky, 1972, 1982, Kindle Herger 1978). This paper is an attempt to show that the Iranian financial crisis of 1977 followed the same pattern that characterized these earlier European and American financial fluctuations. To this end, I shall develop a Fisher-Minsky-Kindle Berger theory of financial instability, I shall then give an account of the oil boom and bust of 1973-1978 in Iran that culminated in the financial collapse of 1978. s