A Short History of Financial Euphoria (Business)

by John Kenneth Galbraith

Anyone taken as an individual is tolerably sensible and reasonable—as a member of a crowd, he at once becomes a blockhead. —FRIEDRICH VON SCHILLER, AS QUOTED BY BERNARD BARUCH

the speculative episode always ends not with a whimper but with a bang.

They will be required to resist two compelling forces: one, the powerful personal interest that develops in the euphoric belief, and the other, the pressure of public and seemingly superior financial opinion that is brought to bear on behalf of such belief.

“all people are most credulous when they are most happy.”

The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcise, or condemn those who express doubts.

The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten.

There can be few fields of human endeavor in which history counts for so little as in the world of finance.

The second factor contributing to speculative euphoria and programmed collapse is the specious association of money and intelligence.

The rule is that financial operations do not lend themselves to innovation.

All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.

All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.

Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.

Speculation, it has been noted, comes when popular imagination settles on something seemingly new in the field of commerce or finance.

“Then will be rediscovered the oldest rule of Wall Street: Financial genius is before the fall.”

Regulation outlawing financial incredulity or mass euphoria is not a practical possibility. If applied generally to such human condition, the result would be an impressive, perhaps oppressive, and certainly ineffective body of law.

The only remedy, in fact, is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associate intelligence with the acquisition, the deployment, or, for that matter, the administration of large sums of money.