From 1929: When Even a Rich Economy Can Fall Into Panic

To understand why economic crisis can be one of the most horrifying kinds of crisis in the modern 200 years, it helps to start with the United States in 1929. Before the Great Depression, America was not a backward society. It was the largest industrial economy in the world, with cars, electrification, a booming stock market, modern cities, banks, factories, advertising, consumer credit, and a belief that the future would be richer than the present.

Put simply, the pathogen was that production and speculation were running ahead of the economy's real purchasing power. Factories made more goods than people could buy with sustainable income. Agriculture also had oversupply, pushing farm prices down. Stocks and consumption were propped up with credit - meaning today's demand was borrowed from tomorrow's income. As long as credit kept flowing, everything looked like growth. Once credit stopped, the truth surfaced: more goods than buyers, more debt than cash flow, more expensive assets than income could support.

From there the spiral fed itself. Slow sales made businesses cut prices and cut production. Cutting production put workers out of jobs. Job losses meant less spending. Less spending meant even more unsold goods. Falling asset prices made banks afraid to lend, depositors afraid of banks, and businesses unable to roll over their debt. A problem that sounds bone-dry - supply exceeding demand backed by ability to pay - turned into unemployment, poverty, homelessness and political crisis.

Within just a few years, that same society watched the stock market crash, banks close, businesses go bankrupt, farm prices collapse, unemployed people line up for bread, and makeshift "Hooverville" shanty towns spring up on the edges of cities. Britannica records that in the U.S. between 1929 and 1933, GDP fell roughly 30%, industrial output fell almost 47%, and unemployment topped 20%; by 1933, about a quarter of the labor force had no job. When Roosevelt took office in March 1933, the banking system was nearly paralyzed.

What was truly frightening wasn't just that people got poorer. It was that society lost its ability to trust its normal mechanisms. Bank deposits were no longer certain. A job was no longer a reward for hard work. The factory was still standing, but it wasn't hiring. The farmer still had crops, but couldn't sell enough to cover his debts. The urban worker still had skills, but no one was hiring. Families didn't just cut spending; they lost status, lost homes, lost their children's education plans, and lost faith that the system was operating fairly.

A Shock From the Direction No One Wanted to Look

In 1997, East Asia did not walk into crisis looking like a picture of poverty or war. Before that, the region was a success story: high growth, rapid urbanization, export-driven industry, a rising new middle class, banks and businesses expanding on credit. That's exactly why the crash was so dangerous. It didn't arrive like a storm tracked by satellite. It arrived through the balance sheet.

Companies borrowed in dollars because rates were low. Banks borrowed short-term abroad and lent domestically. Governments pegged the exchange rate to project stability. International investors believed the "miracle" economies would keep growing. When Thailand floated the baht on July 2, 1997, the market began asking a very simple question: if Thailand couldn't hold its peg, who's next?

That question alone was enough to turn debt into crisis. Capital fled. Local currencies fell. Dollar debt ballooned once converted into local currency. Companies that thought they'd only borrowed cheaply suddenly saw their debt multiply many times over. Banks that thought they only had a liquidity problem suddenly became insolvent. People who thought their savings were savings suddenly saw the price of rice, medicine, milk and school fees outrun their wages.

Does a Society Go Bankrupt Overnight?

Not exactly in the sense that every shop closes at once one morning. What's more frightening is that society stays open, but the relationships inside it change meaning very quickly. Shops still sell goods, but prices change by the day. Banks still have their signs up, but depositors start lining up to withdraw. Companies still have offices, but their accountants can't buy dollars to pay debt or import materials. Employees still go to work, but at the end of the month they hear about pay cuts, unpaid leave, or layoffs because orders got cancelled.

A society "going bankrupt" through a currency crisis usually moves through four steps. Step one: the exchange rate jumps, but many people think it's just market volatility. Step two: businesses that import, borrow in foreign currency, or depend on foreign inputs start running short of cash. Step three: banks and suppliers stop trusting each other, so everyone demands payment early, demands dollars, or stops offering credit. Step four: a financial problem turns into a social problem, because wages, jobs, food prices, tuition, rent and street safety all get pulled in.

So the honest answer is: not everything collapses in one morning, but there are mornings when people realize the old assumptions have died. Yesterday a month's wage was enough to live on; today food prices have already outrun wages. Yesterday the company felt like a stable place; today the boss says the bank won't extend the credit line. Yesterday a deposit was safe; today the neighbor withdraws their money and you start wondering if you should too.

Indonesia: From Exchange Rate to Social Collapse

Indonesia is the most frightening example because the economic shock didn't stop at GDP. It reached food prices, banks, ethnicity, students, the military, and the legitimacy of a regime that had lasted more than three decades.

Before the crisis, Indonesia had made strong gains against poverty for years. But the economy also had weaknesses: companies and banks borrowed in foreign currency, cronyism ran deep, short-term debt was high, and the political system was closed tight around Suharto. When the rupiah collapsed, corporate balance sheets broke. When banks came under suspicion, depositors panicked. When import prices rose, the shock went straight to the dinner table.

The cruelty of economic crisis is that it turns a technical problem into a moral one. A bank closing isn't just "restructuring the financial system." It's depositors standing in line. A devalued currency isn't just "an exchange-rate adjustment." It's baby formula, medicine, rice, school fees, rent. An IMF package isn't just "macro stabilization." It's the question of who has to bear the pain first: the budget, businesses, banks, civil servants, students, or poor households.

January 1998 was the kind of month when the crisis walked out of the bank boardroom and into the market. NBER records that Indonesia's food price index rose in January 1998 by as much as it had over the previous six months combined. For someone earning a fixed rupiah wage, this was a double blow: the money in their pocket got weaker while the price on the shelf got higher. A family didn't need to lose its home to be ruined; wages standing still while rice, medicine and school fees rose - and the main earner losing their job - was enough.

Businesses didn't "die" the way a light switches off either. Many companies died because they could no longer price tomorrow. If you imported materials in dollars but sold in rupiah, every day the exchange rate rose was a day your cost of goods changed. If you'd borrowed in dollars, the rupiah-denominated debt ballooned faster than revenue. If banks got scared of risk, credit lines got pulled at the exact moment a business needed cash most. The company still had machines, staff, customers - but not the right currency to keep running.

Urban life changed shape very quickly. An office worker who used to put on a shirt and go to work in Jakarta could lose their job because the importing company couldn't buy dollars, the factory cut shifts, the bank closed the credit line, or the parent conglomerate cut costs. When formal jobs vanished, people didn't sit around waiting for the concept of "unemployment" to show up in a statistical report. They flooded into the informal sector: selling food, selling cigarettes, driving, working at a stall, opening a tiny stand, buying and reselling anything anyone would still buy. The ILO estimates that in 1998, millions of workers outside the financial sector lost their jobs or were pushed out of stable employment; many industrial workers fell into the informal sector or moved back to rural areas.

This is what makes economic crisis look both ordinary and terrifying at once. A city doesn't go quiet the way it might after a bombing; it gets louder. Sidewalks get busier because the unemployed have to invent their own work. Black markets get livelier because businesses and people with money need dollars. Small stalls spring up because people who used to draw a salary now have to sell off items one by one to scrape together food money. But behind all that noise is a cold truth: social productivity is falling. Someone who used to be an accountant, a technician, a bank employee, a factory worker turning to street vending isn't a sign of an "agile" economy - it's a sign the formal system can no longer absorb them.

By May 1998, economic shock had merged with political anger. Students weren't just protesting prices; they were protesting a regime they saw as corrupt, nepotistic and no longer capable of protecting people's lives. On May 12, 1998, security forces shot and killed four Trisakti students following a protest in Jakarta. The shooting was the psychological ignition point: the crisis was no longer about the rupiah, the IMF or the banks - it became a question of whether the regime still had the right to rule.

On May 13-15, Jakarta fell into days many describe as a city without an owner. Shops, vehicles, shopping centers and warehouses were smashed, looted, burned. Smoke rose from many districts, streets were blocked, families locked themselves inside, and foreigners and many ethnic Chinese Indonesians tried to reach the airport or took shelter in hotels. Many ethnic Chinese Indonesian shops were targeted because the community was associated with commerce, wealth and cronyism, even though most were simply small traders or ordinary families. This is the darkest side of the crisis: when rice prices and unemployment turn into rage, a society goes looking for a group to punish.

The chaos wasn't just a spontaneous crowd. Part of the tragedy of 1998 was that no one seemed to know exactly who controlled the streets. The military was present but couldn't stop every flashpoint; there were allegations of provocation, infighting within the power structure, and ambiguity among security forces. For ordinary people, that was even more frightening than getting poorer: if they were robbed, their house burned, or they were attacked, they had no certainty that police or soldiers would arrive in time to help - or arrive at all.

Suharto still tried to hold on to power at that point. He cut short a foreign trip, returned to Jakarta, promised cabinet reform, and spoke of an orderly transition. But those words no longer bought trust. Students occupied the parliament building. Political allies began drifting away. Some ministers no longer wanted to join a new cabinet. Military leaders didn't hand him a strong enough exit to restore order the way they once had. When a dictator loses money, the streets, students, allies and legitimacy all at once, power can look intact on the surface while being hollow underneath.

On May 21, 1998, Suharto resigned after 32 years in power, handing over to Vice President B.J. Habibie. But that moment didn't instantly normalize society. It only confirmed a truth that had already played out in the streets: the economic crisis had broken the New Order's ruling contract. The regime had traded stability and growth for political silence; once stability and growth vanished, so did the silence.

After the crisis, Indonesia entered Reformasi: democratization, decentralization, and a changed relationship between the state, the military, political parties and civil society. But the wound didn't disappear just because GDP recovered. For many families, the memory of 1998 is a memory of rice prices, lost jobs, fleeing chaos, banks, ethnic violence, and the feeling that the state no longer controlled the streets.

By GDP, Indonesia began growing again from 1999-2000. By exchange rate and confidence, the rupiah stayed weak and volatile for years afterward. By society, the recovery time was much longer: Reformasi opened up right after 1998, but rebuilding trust in banks, the law, elections, ethnic relations and state capability took an entire decade. For the ethnic Chinese Indonesian community and families who were looted, lost their jobs, or had to flee the city, "recovery" wasn't the moment GDP rose again; it was the moment they dared to believe it wouldn't happen again. That part took many years, and in social memory, it has never fully disappeared.

But Indonesia didn't just "recover" by pumping in money and going back to how things were. The lesson of 1998 forced the country to change its power structure. On monetary policy, Bank Indonesia was granted independence under Act No. 23/1999, separating the central bank's function from more direct political interference than before. On banking, the state set up IBRA to take over, close, merge, sell off bad assets from, and recapitalize the system; the process was messy, costly and never entirely clean, but it acknowledged something: crony banks could no longer be allowed to operate as an extension of political power.

Politically, the 1999 election was the first multi-party election after the New Order fell. Post-Reformasi constitutional amendments limited presidential terms, expanded the role of parliament, opened the path to direct presidential elections, strengthened the constitutional court, and created more checks and balances between the executive, legislature, judiciary, local government and the press. Decentralization also shifted much power from Jakarta down to the regions. These reforms didn't turn Indonesia into a flawless system; corruption and oligarchy still exist. But after 1998, power could no longer be concentrated as easily around one man, one family and one crony bank-business network the way it was under Suharto.

Korea: No Indonesia-Style Riots, But Society Was Restructured

Korea did not suffer a political collapse like Indonesia. The state kept functioning, society retained its collective discipline, and the economy recovered faster. But that doesn't mean the shock was mild. In Korea, the 1997 crisis entered daily life through a single word Koreans still use as a generational memory: "IMF."

Before the crisis, the Korean model rested on chaebols, banks, export orientation, and an unspoken social contract: work hard, get into a big company, and in exchange get relatively stable employment, family standing, and an upward future. When the foreign-exchange crisis broke out in late 1997, that contract was torn apart.

Korea's crisis wasn't just a handful of chaebols going bankrupt. It changed the psychology of labor. Lifetime employment weakened. Layoffs, short-term contracts, outsourcing and individual competition all increased. A society that already placed heavy weight on achievement and company status grew even more tense. For a middle-aged man who lost his job, the shock wasn't just income; it was losing his role in the family. For a fresh graduate, it was the labor market's door suddenly narrowing. For households, it was debt, tuition, housing, and the feeling that "just one macro shock can rewrite your private life."

In Korea, the picture of collapse wasn't necessarily rioting in the streets. It was HR calling groups in one at a time to announce layoffs. It was a father who used to work at a big company hiding his job loss from his family, still putting on a suit each morning and heading out, then sitting in a park or a library all day. It was a graduate finishing school in the exact year the labor market froze. It was a small shopkeeper watching customers dwindle because everyone was hoarding cash. It was a household selling their wedding gold, a baby's ring, family heirlooms - not only out of patriotism, but because society was telling them: if the nation lacks dollars, everyone's future hangs in the balance together.

The OECD describes this shock going straight into household balance sheets: income and wealth fell, real consumption in 1998 was cut by nearly 10%, with durable goods purchases alone falling by roughly a third. Brookings recorded per-capita GDP falling from more than $10,000 in 1997 to under $7,000 in 1998, with real wages falling for the first time in almost two decades. In other words, Korean families weren't just "tightening their belts" in a moral sense. They genuinely got poorer in dollar terms, lost more jobs, earned lower wages, saw paper wealth shrink, and had to cut major spending like cars, electronics, home repairs, and extra education.

The brutal part is that a few years later, Korea's GDP numbers looked great again, but many people's lives never went back to how they were. Businesses got stronger because they were allowed to cut staff, sell off bad assets, reduce debt, and hire cheaper labor. Banks got stronger because they were forced into tighter governance. Exports got stronger because a weaker won made Korean goods cheaper abroad. But for workers, "a stronger economy" didn't mean their jobs were safer. It usually meant shorter contracts, easier to be laid off, fewer benefits, and if another crisis hit, families would have to shoulder even more of the burden themselves.

Korea's GDP recovered quickly, but the social cost lasted far longer than the growth numbers. After 1997, the country entered a more flexible, more competitive, more globalized economy - but also a more anxious one. Many Koreans don't call it "the Asian financial crisis." They call it simply "IMF," a marker of an era: before IMF and after IMF.

By GDP and foreign reserves, Korea recovered very fast: 1999 saw a strong bounce, the stock market surpassed pre-crisis levels, and the IMF loan was repaid early in 2001. But by workers' lives, society did not return to its pre-1997 state. Mass job losses passed within a few years, but non-regular labor, the fear of layoffs, exam pressure, household debt and middle-class anxiety carried into the 2000s. So it's fair to say Korea took roughly 3-4 years to recover macro-financially, but far longer to digest the social shock; part of the legacy of the "IMF crisis" remained embedded in labor structures and family psychology long after.

Same Shock, Two Societies Broke in Two Different Ways

How Different People Fared Depending on What Assets They Held

Economic crisis doesn't hit everyone equally. It's a brutal test of what kind of asset you're holding. Two families that each had "100 units" of assets before the crisis could walk out of it with opposite fates: one family holding local-currency deposits and bank stocks; the other holding gold, dollars, unmortgaged land, or remittances from relatives abroad. On paper, both are "well off." But once the currency breaks, whatever asset is priced in that broken currency falls with it.

In Indonesia, those holding rupiah, bank stocks, or leveraged business assets took the direct hit. Those holding gold, dollars, unmortgaged land, or assets convertible into food and foreign currency fared much better. But that also stratified society faster. Dollar/gold holders weren't just "richer" - they had the ability to wait. Those with only a rupiah salary had to sell first, cut first, pull kids from school first, eat less first.

In Korea, won and stock holders also suffered, but the shock played out within a state that still had the capacity to reorganize the system. People lost paper wealth, lost jobs, saw wages cut, but still held a minimum level of trust that banks, courts, the new government, the press and businesses would keep functioning after the crisis. That's why the public's gold could flow through banks and become dollars for the nation. In Indonesia, the public's gold instead became something many families kept to self-insure against the very system they no longer trusted.

Did Indonesia's Public Have a Lot of Gold, and Why Didn't It Save the State?

Yes, but it has to be understood correctly. Indonesia is not short on a gold-holding culture. In many households, gold jewelry is a familiar form of savings: easy to store, easy to sell, not entirely dependent on banks, and often held by women as the family's last layer of insurance. Post-crisis studies using Indonesian household data show gold acting as a shock-absorbing asset; households with gold could maintain spending or investment in their children better when income collapsed.

But "the public has gold" is entirely different from "the state has usable foreign reserves." The public's gold is scattered across millions of households, in the form of rings, necklaces, small pieces of jewelry. To turn it into dollars for importing medicine, fuel, food or paying foreign debt, the state needs a very specific chain: people willing to sell, a trustworthy bank/dealer to buy it, a fair purchase price, melting/standardization logistics, international export or pledging, and then the dollars flowing back to exactly where they're needed. Every link in that chain requires trust.

The deeper reason is political. Korea could tell its people: bring your gold to the bank, the nation will use it to earn dollars, and we'll recover together. Suharto's Indonesia couldn't credibly say that. People saw banks controlled by cronies, the government favoring those close to power, information that lacked transparency, and violence rising in the streets. In that context, handing gold/dollars over to the system didn't feel like "saving the country" - it could feel like handing your own lifejacket to someone you don't trust to come back and save you.

So when the state's foreign reserves ran dry, the public's gold in Indonesia didn't automatically flow into the state. It stayed in households, sold off piece by piece in markets, exchanged for food, tuition, medical bills, or kept as an escape option. That is the heaviest signal of a crisis of trust: social wealth still exists, but it no longer wants to pass through the official system.

Gold, Dollars and the Black Market: Did the Public Contribute to the State?

The short answer: Korea had a famous nationwide gold-collection campaign; Indonesia had no comparable large-scale gold/foreign-currency donation campaign to save the state. Both lacked dollars, but the social response differed because trust in the state differed.

Korea's gold campaign also needs to be understood correctly. This wasn't a case of people handing over all their gold "for free" to the state. Much of the gold was bought by banks at a fixed price or through a sale/exchange mechanism, then exported for foreign currency. But socially, the act was still a sacrifice: during a currency crisis, gold is a better safe haven than local currency. Selling gold for won or handing it over to the campaign meant accepting a trade - giving up a personal defensive asset for the belief that the nation would get back on its feet.

In Indonesia, those holding dollars or gold were in a completely different position from those holding only rupiah. If you had dollars, your savings gained relative purchasing power as the rupiah fell. If you had gold, you held something the market still trusted. If you only had a rupiah salary, you were squeezed between rising prices and stagnant income. This is one of the dark sides of economic crisis: it doesn't just make society poorer; it rearranges the balance of power between those holding the right asset and those holding the wrong one.

Why Can Economic Crisis Be More Terrifying Than Storms and Covid?

1. It attacks society's unit of measurement: money

A natural disaster can destroy assets, but money still functions as a measure. After a storm, a sack of rice still has a price, an insurance policy still means something, a construction contract can still be priced. In a currency crisis, the ruler itself bends. Last month's wage can't buy this month's basket of goods. A loan that seemed fixed becomes unpayable. Savings turn into something that loses purchasing power right inside the account.

2. It turns healthy people into victims without ever touching their bodies

Covid needs a virus. A storm needs wind and water. An economic crisis needs only a shift in confidence. A healthy, skilled person, working normally, can still lose their job because their company borrowed in the wrong currency, a customer went bankrupt, a bank cut a credit line, or an export market closed. The victim doesn't necessarily do anything wrong.

3. It destroys multiple layers of defense at the same time

In a natural disaster, people usually rely on family, community, government budgets, banks, insurance, aid. In a financial crisis, those very layers can weaken together: families lose income, communities all get poorer, budgets fall short, banks are afraid to lend, insurers and investment firms take losses too. The number of people needing relief rises exactly as the capacity to provide relief falls.

4. It creates imagined enemies

When a storm comes, the enemy is the weather. When an epidemic comes, the enemy is the virus. When an economy collapses, society goes looking for someone to blame: the rich, the banks, foreigners, ethnic minorities, the government, the IMF, businesses, speculators. Indonesia in 1998 shows how that risk can slide into real violence.

5. It arrives while everything still looks normal

This is the most dangerous part. Before the crash, offices are still lit, malls are still crowded, banks are still advertising, GDP reports still look good, real estate still has a price, workers are still getting paid. The risk lives in debt maturities, foreign currency, leverage, financial structure and market confidence. Ordinary people don't see it until prices, jobs and banks all change state at once.

6. It punishes people who don't understand a balance sheet

An ordinary family doesn't need to know whether their company borrowed in dollars or local currency. A worker doesn't need to know their employer's bank is having its credit line pulled. A student doesn't need to know how much foreign reserve the nation has left. But when the crisis hits, those distant, unfamiliar things decide whether they get paid, can afford tuition, can get medicine, can get rice, can stay safe. This is the particular injustice of economic crisis: the risk is created at the financial level, but the bill lands at the level of everyday life.

Practical Lessons

The lesson isn't to live in constant fear. If every society lived in a state of panic, no one would invest, no one would borrow, no one would build. The better lesson is this: the biggest economic risk is usually not the thing making the most noise.

Before 1997, not many people in Indonesia or Korea thought an exchange-rate decision in Thailand could change their family's fate. But the financial network had already tied them together: companies borrowed dollars, banks borrowed short-term, governments defended pegs, foreign investors held the power to pull capital out, and the whole society had built its expectations on the assumption that "tomorrow, capital will keep flowing in." When that assumption turned out wrong, the crisis didn't need permission to travel from the foreign-exchange market straight to the dinner table.