A Short History of Financial Euphoria (Business)

by John Kenneth Galbraith

But overshadowing all previous speculative episodes was the great stock-market boom of the later 1920s. Not since John Law or the Bubble had mania seized so deeply so large and influential a sector of the population. Here on display were all the basic features of financial euphoria. Here too was an end to the Schumpeterian notion that the ensuing contraction was normal, tolerable, and, as he urged, benign.

T he first manifestation of the euphoric mood of the 1920s was seen not on Wall Street but in Florida—the great Florida real estate boom of the middle of that decade.

Present, apart from the optimism engendered by Coolidge and Mellon, was the undoubted attraction of the Florida climate—to many, in its contrast with that of New York or Chicago, a shining discovery. And present also was leverage; lots could be purchased for a cash payment of around 10 percent.

In 1926 came the inevitable collapse. The supply of new buyers needed to sustain the upward thrust dried up; there was a futile rush to get out.

The responsibility for the debacle was thus shifted from man and his capacity for financial delusion to God and the weather.

The 1920s Florida land boom came to an end when the supply of new and adequately gullible buyers dwindled and thousands were left homeless after a hurricane.

In 1925, bank clearings in Miami were $1,066,528,000; in 1928, they were down to $143,364,000. By 1928, the speculative mood and mania had shifted to the far less equable climate of lower Manhattan.

In the spring of 1929, there was a mild break. The Federal Reserve Board, departing very slightly from its then unexampled timidity and accepted incompetence, announced that it might tighten interest rates to arrest the boom, and the market receded a bit.