A Short History Of Financial Euphoria: Chapter 5

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

In this chapter, Galbraith runs down a number of bubbles that took place in America from the 1800s to 1920. In all cases, there was an appearance of a "re-invented wheel". That is, some "new" financial phenomenon made it seem as though things were to be different in the future than they were in the past. Unfortunately, in each episode of financial amnesia, a crash and depression/recession ensued.

Many wars in American history (including its civil war, its war separating itself from England, and the War of 1812) were financed with insufficiently-backed paper currency. Soldiers were given notes that could be redeemed, on the assumption that they would not try to redeem all at once. This oversupply of money led to periods of inflation and speculation, culminating in crashes.

Other speculative episodes were the result of debt incurred to fund the country's growth. For example, foreign loans were easy to come by to help fund America's railroad infrastructure. When the mania resulted in too many railroads, however, those foreign debts loomed large as asset prices declined.

Galbraith notes that a theme started to emerge: people felt angry at the notion of having to pay back debts they had willingly taken out when money was easy to come by. This feeling has resulted in numerous defaults over the years; in America, several states have defaulted on their obligations over the years. Many countries around the world have also done so. Galbraith notes that although such events are always referred to as some sort of novel event (e.g. Argentina had recently defaulted as Galbraith wrote this book), they are nothing new.