Galbraith on Bubbles

I want to quote at length from Chapter One of John Kenneth Galbraith's 1955 book The Great Crash:

One thing in the twenties should have been visible even to [President Calvin] Coolidge. It concerned the American people of whose character he had spoken so well. Along with the sterling qualities he praised, they were also displaying an inordinate desire to get rich quickly with a minimum of physical effort. The first striking manifestation of this personality traint was in Florida. There, in the mid-twenties, Miami, Miami Beach, Coral Gables, the East Coast as far north as Palm Beach, and the cities over on the Gulf had been struck by the great Forida real estate boom. The Florida boom contained all of the elements of the classic speculative bubble. There was the indispensable element of substance. Forida had a better winter climate than New York, Chicago, or Minneapolis. Higher incomes and better transportation were making it increasingly accessible to the frost-bound North. The time indeed was coming when the annual flight to the South would be as regular and impressive as the migrations of the Canada Goose.

On that indispensable element of fact men and women had proceeded to build a world of speculative make-believe. This is a world inhabited not by people who have to be persuaded to believe but by people who want an excuse to believe. In the case of Florida, they wanted to believe that the whole peninsula would soon be populated by the holiday-makers and the sun-worshippers of a new and remarkably indolent era. So great would be the crush that beaches, bogs, swamps, and common scrubland would all have value. The Florida climate obviously did not insure that this would happen. But it did enable people who wanted to believe it would happen so to believe.

However, speculation does not depned entirely on the capacity for self-delusion. In Florida land was divided into building lots and sold for a 10 percent down payment. Palpably, much of the unlovely terrain that thus changed hands was as repugnant to the people who bought it as to the passer-by. The buyers did not expect to live on it; it was not easy to suppose that anyone ever would. But these were academic considerations. The reality was that this dubious asset was gaining in value by the day and could be sold at a handsome profit in a fortnight. It is another feature of the speculative mood that, as time passes, the tendency to look beyond the simple fact of increasing values to the reasons on which it depends greatly diminishes. And there is no reason why anyone should do so as long as the supply of people who buy with the expectation of selling at a profit continues to be augmented at a sufficiently rapid rate to keep prices rising.

I suppose now is a good time to drag up that old saying about how history repeats itself, the first time as tragedy, the second time as farce.