A Short History of Financial Euphoria
This short book, first published by Whittle Books in 1990 for limited distribution, examines the causes of such runaway speculative binges as Holland’s tulipomania in the mid-1630’s, France’s sale in the next century of shares in Louisiana gold that could not be unearthed, Britain’s debacle in 1720 when shares in the joint-stock South Seas Company rose to ten times their value in nine months, only to collapse ignominiously before year’s end, and Florida’s disastrous land-scams of the heady 1920’s.
Galbraith is not sanguine about the public’s ability to resist the quick and easy money that spawns speculative fever. Economic amnesia, it seems, hits the financial world with every new generation of financial gurus; what hot-shot broker today remembers in any vivid way the go-go 1920’s, the brutal 1930’s that followed them, the market-dull 1960’s, or even the panic of 1987? Add to this forgetfulness the allure of Ponzi schemes that reward early speculators handsomely as a means of attracting the unwary, who jump onto the reverse pyramid just as it nears the saturation point.
“Al crises have involved debt that...has become dangerously out of scale in relation to the underlying means of payment,” Galbraith cautions. Leveraging is a profitable business as long as no one rocks the boat, but once investors begin to demand what has been promised them, the disorderly market that ensues often generates panic. Financial panics, as Galbraith documents in lucid detail, occur with the monotonous regularity of the moon’s monthly phases, although over a period of two or more decades. The time between panics equals the time it takes for economic amnesia to be complete.