A Short History of Financial Euphoria – John Kenneth Galbraith

In this book, Galbraith rounds up instances of financial booms and busts, starting from the Tuliopomania in the mid-1630s to the stock market crash in 1987. He cites two primary factors as being the cause of this financial euphoria: the brevity of financial memory and the association of wealth with intelligence. About the former, Galbraith remarks:

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is a part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. 

Another common factor is the thought of a new and rewarding opportunity that the participant hopes to exploit.

In analyzing the past instances of financial euphoria, Galbraith attempts to demonstrate the recurrence of these common features, and hopes that the vulnerable reader will be warned. The list includes the Tulip Mania in Holland (1637), the Mississippi company and Banque Royale flouted by John Law in France (1720), the South Sea Company in England (1720), a series of bubbles in the US (1819, 1837, 1857 and 1873), the Great Depression (1929), and Black Monday (1987).

It is often easy to argue in hindsight about the factors responsible for such bubbles. Nevertheless, this book offers a remarkable insight into the various bubbles that have plagued the financial world over the centuries. To investors easily swayed by novel financial instruments that are little understood, Galbraith appeals through this book, to err on the side of caution.

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