The Collapse of Trust

In the fall of 2008, trust died.

About a hundred years earlier, President Teddy Roosevelt proclaimed himself a proud ‘trust-buster.’ But that was about the cartels. Wall Street frauds like Bernie Madoff busted the trust that people had in markets and in governments.

In their book Why Nations Fail, Daron Acemoglu and James Robinson identify institutions — economic and political rules of the game — as the fundamental determinant of long-run economic prosperity. But for any institution to have value, it must be legitimate. If people don’t believe that institutions are fair and substantially efficient, why would they want to become educated and make investments?

When credit was disrupted in the fall of 2008, this scared businesses of all kinds. Those who had grown accustomed to trusting their suppliers or customers needed to rethink that kind of relationship.

Companies hold much more cash, in part because they don’t trust each other — and they don’t trust the government.

What drives an economic collapse?

Not guns. Not trade deficits. Not over regulation. The catastrophe comes when time horizons shrink.

Why? Because merchants must believe that their counterparties will be around next year, or next month.

John McMillan and Chris Woodruff did pioneering work on trust in Vietnam during the 1990s. They found that trust can develop between private businesspeople, even when the legal enforcement of contracts is weak. What trust requires is repeated interactions, sufficient transparency in what happens, and, of course, gains from trade.

The Latin root for ‘credit’ means trust.

Would you lend to a fly-by-night travelling salesman? The 2008–2009 crisis turned nearly every company into a fly-by-nighter, grabbing on to the last chopper out Saigon.

The aftermath of the collapse.

In my view, the single biggest implication of the financial crisis on social behavior has been the further erosion of trust in society.

And to a naive and optimistic teenager, this was a sad thing, as it has further undermined the very fabric of a collective and thriving society.

Now, please don’t misunderstand me here.

This wider transition in society has taught us to question everything and everyone —as our received wisdom and common sense have unravelled and because we have not settled on the new rules by which we play.

This includes people and institutions that previously many trusted implicitly: doctors, teachers, religious leaders, politicians — even our parents.


In conclusion, it is critical that political, religious and indeed all leaders examine their roles. They can no longer rely on the erstwhile status quo of their place in the hierarchical authority. Instead their role today must be about demonstrating true ethical and moral leadership.

Thanks for reading. If you enjoyed this essay, share it with a friend and hopefully they get the same value out of it that you did :)

Show your support

Clapping shows how much you appreciated Chase N. Dittmer’s story.