CHAPTER 1

The Bubble Triangle

The definition of a bubble we take to be an undertaking which is blown up into

an appearance of splendour and solidity, without any probability of perma-
nence, and the name, we take it, is derived from the specious products of
puffing and soapy water, with which the most of the ingenious youth of this
realm have been long familiar.1
Anon.

We have to turn the page on the bubble-and-bust mentality that created this
mess.2
President Barack Obama

W hat is the difference between the great composer

George Frideric Handel and Shane Filan, the lead singer of
Irish boyband Westlife? To those of a musical bent, the answer is obvious:
Handel is one of the most respected classical musicians of all time, having
composed several famous operas. Filan, on the other hand, largely spe-
cialised in saccharine cover versions of 1970’s pop songs. The difference
that interests us, however, is that while one lost all of their wealth in
a bubble, the other got out before a bubble burst, making a handsome
profit as a result.
By the time he was 30 years old, Handel’s musical compositions had
already made him a very wealthy man, and his patron, Queen Anne,
provided him with a considerable annual income. In 1715 he invested
some of his wealth in five shares of the South Sea Company, which
would have cost about £440. Handel sold his shares before the end of
June 1719 for a profit of about £145 – just before the huge bubble in
the company’s shares.3 By the time Shane Filan was 30, Westlife was

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 BOOM AND BUST

one of the most successful pop groups of all time and the net worth of
the group’s four members was over £32 million. Along with his
brother, Filan decided to become a property developer in the midst
of the Irish housing bubble. In order to purchase as much housing as
possible, he supplemented his own funds by borrowing large sums of
money from banks. In 2012 he was declared bankrupt, owing his
creditors £18 million.
Shane Filan was not the only loser when the housing bubble col-
lapsed. In Northern Ireland, where we both live, house prices more
than trebled between 2002 and 2007; by 2012, they had collapsed to
less than half their peak.4 We thus observed at close quarters the
economic destruction that a bubble can wreak. Bubbles can encourage
overinvestment, overemployment and overbuilding, which ends up
being inefficient for both businesses and society.5 In other words,
bubbles waste resources, as clearly illustrated by the half-built houses
and ghost housing estates that stood across Ireland when the housing
bubble burst. Other inefficiencies are in the realm of labour markets,
as people train or retrain for a bubble industry. When the bubble
bursts, they become unemployed and part of their investment in
education has been wasted. After the collapse of the housing bubble,
many of our friends, neighbours and students who had trained as
architects, property developers, builders, plumbers and lawyers were
either unemployed, in a new industry, or travelling overseas to find
work.
The most severe economic effects usually occur when the bursting of
a bubble reduces the value of collateral backing bank loans. This,
coupled with the inability of bubble investors to repay loans, can result
in a banking crisis. The collapse in house prices after 2007 was followed
by the global financial crisis and we witnessed the downfall of American,
British, Irish and other European banks. This resulted in major long-
lasting damage to the economy. Financial crises are astonishingly
economically destructive: estimates of the losses in economic output for
post-1970 banking crises range from 15 to 25 per cent of annual GDP.6
These estimates, however, conceal the large costs that financial crises
have on psychological and human well-being.7 They also ignore the
human costs associated with the imposition of austerity measures once

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 THE BUBBLE TRIANGLE

the crisis is over. We both experienced and witnessed cuts in real pay,
decreased levels of public service provision and cuts in welfare payments
to family members.
Not all bubbles, however, are as economically destructive as the
housing bubble of the 2000s, and some may even have positive social
consequences.8 There are at least three ways in which bubbles can be
useful. First, the bubble may facilitate innovation and encourage
more people to become entrepreneurs, which ultimately feeds into
future economic growth.9 Second, the new technology developed by
bubble companies may help stimulate future innovations, and bubble
companies may themselves use the technology developed during the
bubble to move into a different industry. Third, bubbles may provide
capital for technological projects that would not be financed to the
same extent in a fully efficient financial market. Many historical
bubbles have been associated with transformative technologies, such
as railways, bicycles, automobiles, fibre optics and the Internet.
William Janeway, who was a highly successful venture capitalist dur-
ing the Dot-Com Bubble, argues that several economically beneficial
technologies would not have been developed without the assistance
of bubbles.10
Why do we refer to a boom and bust in asset prices as a bubble? The
word ‘bubble’, in its present spelling, appears to have originated with
William Shakespeare at the beginning of the seventeenth century. In the
famous ‘All the world’s a stage’ speech from his comedy As You Like It, he
uses the word bubble as an adjective meaning fragile, empty or worthless,
just like a soap bubble. Over the following century, ‘bubble’ was widely
used as a verb, meaning ‘to deceive’. The application of the term to
financial markets began in 1719 with writers such as Daniel Defoe and
Jonathan Swift, who viewed many of the new companies being incorpo-
rated as not only worthless and empty, but deceptive.11 The bubble meta-
phor stuck, but over time its use has become somewhat less pejorative.
Nowadays the word ‘bubble’ is used by commentators and news media
to describe any instance in which the price of an asset appears to be
slightly too high. Among academic economists, however, using the word
at all can be deeply controversial. One school of thought sees a bubble as
a non-explanation of a financial phenomenon, a label applied only to

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 BOOM AND BUST

episodes for which we have no better explanation.12 Eugene Fama, the

father of modern empirical finance, goes further than this, calling the
term ‘treacherous’ and complaining that ‘the word “bubble” drives me
nuts’.13 In Fama’s view the word ‘bubble’ is devoid of meaning, having
never been formally defined.14
In this book, we borrow the definition of Charles Kindleberger, the
MIT economic historian and bubble scholar, who describes a bubble as
an ‘upward price movement over an extended range that then implodes’.
In other words, a bubble is a steep increase in the price of an asset such as
a share over a period of time, followed by a steep decrease in its price.15
Others have suggested that, for an episode to constitute a bubble, prices
must have become disconnected from the ‘fundamental value’ of the
asset.16 However, this definition makes bubbles much more difficult to
identify with any certainty, which can lead to lengthy discussions about
whether a particular episode was a ‘real’ bubble or not. It is also divorced
from the historical usage of the term. The beauty of Kindleberger’s
definition for us is that, because the definition makes no claims about
the underlying causes of bubbles, we can investigate these causes for
ourselves. One implication of this definition is that a bubble can only
be identified with 100 per cent certainty after the event. However, this
does not mean that bubbles are wholly unpredictable and random
events. In this book, we propose a new metaphor and analytical frame-
work which describes their causes, explains what determines their con-
sequences, and – we hope – will help predict them in the future.

THE BUBBLE TRIANGLE

The starting point of our metaphor is to think of a financial bubble

as a fire: tangible and destructive, self-perpetuating and difficult to
control once it begins. While fires can cause serious damage, they
can also be useful in certain ecosystems, contributing, for example,
to the renewal of savannas, prairies and coniferous forests. The same
is true of bubbles. Taking this metaphor further, the formation of
a fire can be described in simple terms using the fire triangle, which
consists of oxygen, fuel and heat. Given sufficient levels of these
three components, a fire can be started by a simple spark. Once

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 THE BUBBLE TRIANGLE

POLITICS AND/OR TECHNOLOGY

Figure 1.1 The bubble triangle

N

MA
IO

RK
AT
UL

ET
EC

AB
SP

ILI
TY

MONEY/CREDIT

the fire has begun, it can then be extinguished by the removal of any
one of the components. We propose that an analogous structure can
be used to describe how bubbles are formed: the bubble triangle,
summarised in Figure 1.1.
The first side of our bubble triangle, the oxygen for the boom, is
marketability: the ease with which an asset can be freely bought and
sold. Marketability has many dimensions. The legality of an asset funda-
mentally affects its marketability. Banning the trading of an asset does
not always make it wholly unmarketable, as demonstrated by the abun-
dance of black markets around the world. But it does usually make
buying and selling it more difficult, and bubbles are often preceded
by the legalisation of certain types of financial assets. Another factor is
divisibility: if it is possible to buy only a small proportion of the asset,
that makes it more marketable. Public companies, for example, are
more marketable than houses, because it is possible to trade tiny pro-
portions of the public company by buying and selling its shares. Bubbles
sometimes follow financial innovations, such as mortgage-backed secu-
rities, that make previously indivisible assets – in this case, mortgage
loans – divisible.
Another dimension of marketability is the ease of finding a buyer or
seller. One of the least marketable investment assets is art, for example,
because the pool of potential buyers is very small in comparison to assets
like gold and government bonds. Bubbles are often characterised by

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 BOOM AND BUST

increased participation in the market for the bubble asset, expanding the
potential pool of buyers and sellers. Finally, it matters how easily the asset
can be transported. Assets which can be transferred digitally can now be
bought and sold multiple times a day without the buyer or seller leaving
home, whereas more tangible assets like cars or books need to be moved
to a new location. Some bubbles are made possible by financial innova-
tions that allow transportable assets to be used in lieu of immobile ones –
trading the deeds to a house, for example, instead of the house itself.
Like oxygen, marketability is always present to some extent, and is essen-
tial for an economy to function. However, just as one would not keep
oxygen tanks beside an open fire, there are times and places where too
much marketability can be dangerous.17
The fuel for the bubble is money and credit. A bubble can form only
when the public has sufficient capital to invest in the asset, and is there-
fore much more likely to occur when there is abundant money and credit
in the economy. Low interest rates and loose credit conditions stimulate
the growth of bubbles in two ways. First, the bubble assets themselves may
be purchased with borrowed money, driving up their prices. Because
banks are lending other people’s money and borrowers are borrowing
other people’s money, neither are fully on the hook for losses if an
investment in a bubble asset fails.18 The greater the expansion of bank
lending, the greater the amount of funds available to invest in the bubble,
and the higher the price of bubble assets will rise. When investors start
selling their bubble assets in order to repay loans, the price of these assets
is likely to collapse. Financial bubbles can thus be directly connected to
banking crises.19
Second, low interest rates on traditionally safe assets, such as govern-
ment debt or bank deposits, can push investors to ‘reach for yield’ by
investing in risky assets instead. As a result, funds flow into riskier
assets, where a bubble is much more likely to occur. The propensity
of investors to reach for yield has a long history. Walter Bagehot, the
famous editor of The Economist, observed in 1852 that ‘John Bull can
stand a great deal, but he cannot stand two per cent . . . Instead of that
dreadful event, they invest their careful savings in something impossi-
ble – a canal to Kamchatka, a railway to Watchet, a plan for animating
the Dead Sea.’20 In Bagehot’s experience, investors would often rather

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 THE BUBBLE TRIANGLE

invest in something ridiculous than accept a low interest rate on a safe

asset.
The third side of our bubble triangle, analogous to heat, is specula-
tion. Speculation is the purchase (or sale) of an asset with a view to selling
(or repurchasing) the asset at a later date with the sole motivation of
generating a capital gain.21 Speculation is always present to an extent;
there are always some investors who buy assets in the expectation of
future price increases. However, during bubbles, large numbers of
novices become speculators, many of whom trade purely on momentum,
buying when prices are rising and selling when prices are falling. Just as
a fire produces its own heat once it starts, speculative investment is self-
perpetuating: early speculators make large profits, attracting more spec-
ulative money, which in turn results in further price increases and higher
returns to speculators. The amount of speculation required to start the
process is only a small fraction of that which occurs at its peak.
Once a bubble is under way, professional speculators may purchase an
asset they know to be overpriced, planning to re-sell the asset to ‘a greater
fool’ to make a capital gain.22 This practice is commonly referred to as
‘riding the bubble’.23 However, it is often difficult to distinguish investors
who rode the bubble from those who were lucky enough to sell at the
right time. Speculation is also much more widespread when many inves-
tors have limited exposure to downside risk. This may be the case when
defaulting on debts incurs few costs, when institutional investors are
faced with poorly designed incentive structures or when bank owners
have limited liability. In these circumstances, the prospect of buying
a risky asset in the hope of short-term gains is much more appealing.
Of course, investors can also speculate ‘for the fall’: selling assets in
the hope of buying them back later for a lower price. If the speculator
does not own the asset, they can speculate for the fall by short selling:
borrowing the asset, selling it, buying it back later for a lower price, then
returning it to the lender. The short seller is hoping that the asset’s price
will fall in the intervening period so that they can make a profit from the
trade. In practice, however, short selling is often much more difficult and
risky than simply buying an asset. When an investor buys a stock, the
potential losses are limited, but the potential gains are unlimited; when
an investor short sells a stock, the opposite is true. Short selling even the

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 BOOM AND BUST

most clearly overvalued asset can thus completely ruin an investor if its
price continues to rise. Often there are legal or regulatory restrictions on
short selling, coupled with social opprobrium against short sellers. At
other times it can be extremely expensive to borrow the asset in the first
instance.24 In less regulated markets, short selling can leave investors
exposed to market manipulators who engineer corners on the short-sold
stock.25
What is the spark that sets the bubble fire ablaze? Economic
models of bubbles struggle to explain when and why bubbles start –
according to Vernon Smith, a Nobel Laureate, the sparks that initiate
bubbles are a mystery.26 In this book, we argue that the spark can
come from two sources: technological innovation, or government
policy.
Technological innovation can spark a bubble by generating abnormal
profits at firms that use the new technology, leading to large capital gains
in their shares. These capital gains then attract the attention of momen-
tum traders, who begin to buy shares in the firms because their price has
risen. At this stage, many new companies that use (or purport to use) the
new technology often go public to take advantage of the high valuations.
While valuations may appear unreasonably high to experienced obser-
vers, they often persist for two reasons. First, the technology is new, and
its economic impact is highly uncertain. This means that there is limited
information with which to value the shares accurately. Second, excite-
ment surrounding technology leads to high levels of media attention,
drawing in further investors. This is often accompanied by the emer-
gence of a ‘new era’ narrative, in which the world-changing magic of the
new technology renders old valuation metrics obsolete, justifying very
high prices.27
Alternatively, the spark can be provided by government policies that
cause asset prices to rise.28 Usually, but not always, the rise in asset prices
is engineered deliberately in the pursuit of a particular goal. This goal
could be the enrichment of a politically important group, or of politi-
cians themselves. It might be part of an attempt to reshape society in
a way that the government deems desirable – several housing bubbles, for
example, have been sparked by the desire of governments to increase
levels of homeownership. The first major financial bubbles, described in

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 THE BUBBLE TRIANGLE

Chapter 2, were engineered as part of elaborate schemes to reduce the

public debt.
As well as creating the spark through their policy decisions, govern-
ments can pull other policy levers which affect one or more of the sides of
the bubble triangle. For example, governments can lower interest rates
or increase the money supply, thus ensuring that the public have suffi-
cient funds to invest in the bubble. They may pursue financial deregula-
tion, allowing banks to lend more money on less restrictive terms, thereby
increasing the amount of credit. An extension of credit can allow more
investors to buy into the bubble on leverage, encouraging them to
engage in more speculation. Financial deregulation may also make it
easier to buy and sell the assets involved in the bubble, increasing their
marketability.
Why do bubbles end? One obvious reason is that they run out of fuel.
There is a finite amount of money and credit to be invested in the bubble
asset, and increases in the market interest rate or central bank tightening
can cause the amount of credit to fall. This makes borrowing to invest in
an asset more difficult for speculators, which can in turn trigger a sell-off
in the bubble asset as investors look to raise capital. Alternatively, the
tightening of credit markets can make it impossible for those who
invested in the bubble with borrowed money to extend the duration of
their loans, forcing them to sell the asset.
The number of speculators is also finite, and can eventually reach an
upper limit. Speculators may be spooked and exit the market when new
information arrives which changes their expectations about future
prices. For example, a bubble might burst in response to news announce-
ments suggesting that the future cash flows associated with the bubble
assets will be lower than expected. Since speculative investors typically
buy an asset because its price is rising, even a slight reversal can drama-
tically reduce the asset’s appeal. The effect of momentum trading is
reversed: investors sell the asset because its price is falling, and the belief
that prices will continue to fall becomes self-fulfilling.
Why do some bubbles cause widespread economic damage, whereas
others have little effect on the macroeconomy? There are two important
variables: the size of the bubble and its centrality within the wider
economy. The most damaging bubbles are those where substantial

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 BOOM AND BUST

wealth is invested in an asset that is deeply integrated with the rest of the
economy. This integration may be in the form of supply chains; for
example, the failure of a bubble company may also bankrupt its suppli-
ers, who in turn default on payments to another firm. However, a more
common route for the damage to spread is via the banking system. To
extend the fire metaphor, banks are the equivalent of a combustible oil
rig in the middle of a busy town. When banks fail, often as a result of the
bank or its borrowers holding too much of a bubble asset, it can set off
a chain of bankruptcies and defaults that destroys businesses, jobs and
livelihoods. In the worst-case scenario, the failure of one bank exposes
several others, with similarly devastating effects. Banks also tend to
service a wide array of customers, many of whom would otherwise
have no connection to the bubble. The exposure of banks to a crash
can thus cause a regional or industry-specific bust to develop into an
economy-wide recession.
In summary, our bubble triangle describes the necessary conditions
for a bubble – marketability, money and credit, and speculation. They
become sufficient conditions for a bubble only with the addition of
a suitable technological or political spark. We believe the bubble triangle
is a powerful framework for understanding why bubbles happen when
they do, as well as their severity or societal usefulness. Since it describes
the circumstances in which a bubble is likely to occur, it is also useful as
a predictive tool. However, since the various elements of the framework
cannot be reduced to a neat set of metrics, the application of the frame-
work for predictive purposes requires the use of judgement.
The most long-standing existing explanation for bubbles is irrationality
(or madness) on the part of individuals and concomitant mania on the part
of society. One of the earliest expressions of this explanation came from
Charles Mackay, a Scottish journalist and writer, who first published his
Memoirs of Extraordinary Popular Delusions and the Madness of Crowds in 1841.
This book has been so popular that it is still in print today. Mackay was
a great storyteller, and his theory was supported by a series of colourful
anecdotes that supposedly illustrated how insane societies could become.
His tales covered witches, relics, the Crusades, fortune telling, pseu-
doscience, alchemy, hairstyles and even facial hair. Having demonstrated
the near universality of madness, he then had chapters on the South Sea

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 THE BUBBLE TRIANGLE

Bubble, the Mississippi Bubble, and the Dutch Tulipmania, all of which
argued that bubbles occur because of the psychological failings of investors.
Mackay was not the first to associate bubbles with madness and
irrationality. Sir Isaac Newton, one of the most brilliant and influen-
tial scientists in all of history, lost a fortune by investing in the South
Sea Bubble. When questioned about his losses, he is reputed to have
said ‘that he could not calculate the madness of the people’.29
This madness-of-crowds hypothesis has been refined and expanded by
the likes of Kindleberger, John Kenneth Galbraith and, most recently,
Nobel Laureate Robert Shiller.30 Shiller and other economists argue that
bubbles can largely be explained by behavioural economics, with cogni-
tive failings and psychological biases on the part of investors causing
prices to rise beyond their objective value.31 A subset of investors, for
example, may suffer from an overconfidence bias, whereby they over-
estimate the future performance of a company stock, or they may have
a representativeness bias, whereby they incorrectly extrapolate from
a series of good news announcements and overreact.32 Other investors
may simply follow or emulate this subset of investors simply because of
herd behaviour and naivety on their part.33
The view that bubbles are largely a product of irrationality has been
contradicted by economists who, like Nobel Laureate Eugene Fama,
believe investors to be rational and markets to be efficient.34 Much
recent research on the subject has thus focused on establishing whether
a particular bubble was ‘rational’ or not.35 This is unfortunate, because
the rational/irrational framework is almost useless for understanding
bubbles. Partly this is because the word ‘rational’ is so loosely defined
that many common investor behaviours can be classed as either
‘rational’ or ‘irrational’, depending on the preferences of the
economist.36 But more fundamentally, the framework is too reductive.
Asset prices in a bubble are determined by the actions of a wide range of
investors with different information, different worldviews and invest-
ment philosophies and different personalities. They often also face
different incentives. Simply dividing these investors into categories
labelled ‘rational’ and ‘irrational’ does not do justice to the complexity
of the phenomenon, and as a result, we try to avoid these terms
altogether.

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 BOOM AND BUST

HISTORICAL BUBBLES

We approach the historical bubbles in this book as if we were fire scene

investigators, sifting through the ashes of historical bubbles in an effort to
understand their causes. We then attempt to use this knowledge to
become like fire-safety advisers, devising policies which may prevent
bubbles from happening or being socially destructive in the future.
First, however, we need to decide which fires to investigate. We have
two selection criteria. Consistent with our definition of a bubble, we are
interested only in bubbles where there was a large rise and then fall in
asset prices. How large is large? We require a rise in asset prices of at least
100 per cent over less than 3 years, followed by at least a 50 per cent
collapse in prices over a 3-year period or less.37 For stock market bubbles,
we do not require the entire market to have experienced a reversal;
rather, the reversal may have taken place in specific sectors or
industries.38 This set of criteria means that those bubbles included in
our catalogue are major ones. However, it also means that we may have
overlooked some bubbles simply because we or previous scholars have
been unable to find and collate price data.
The second criterion is that the asset price reversal must have been
accompanied by a promotional boom, with new companies or financial
securities being floated on financial markets. This ensures that the bub-
bles we select are those which had an impact on the economy beyond the
effects of the price reversal. One implication of this criterion is that we
exclude bubbles in commodities or collectables, such as comics, beany
babies and baseball cards. Real estate or property bubbles are excluded
unless they were accompanied by bubbles in stocks or facilitated by the
issuance of newly created financial securities.
Table 1.1 contains a list of the major historical bubbles which meet
these criteria, and which are studied in detail in this book. This list is by
no means exhaustive. However, there are at least five things about our
bubble catalogue which are of note. First, our selection of bubbles
extends from the birth of stock markets through to the present day.
Second, our catalogue is global in scope, covering four continents and
nine countries. Third, although Table 1.1 contains many famous bub-
bles, there are also some which are less well known: the first emerging

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 THE BUBBLE TRIANGLE

table 1.1 Major financial bubbles

Post-bubble
Bubble Country Years Asset financial crisis

Mississippi Bubble France 1719–20 Mississippi Company No

stocks
South Sea Bubble UK 1719–20 Company stocks No
(including stocks of the
South Sea Company)
Windhandel Bubble Netherlands 1720 Company stocks No
First emerging market UK 1824–6 Company and mining Yes
bubble stocks
Railway Mania UK 1844–6 Railway stocks Yes
Australian Land Boom Australia 1886–93 Company stocks and real Yes
estate
Bicycle Mania UK 1895–8 Stocks of bicycle No
companies
Roaring Twenties USA 1920–31 Stocks of new technology Yes
companies
Japanese Bubble Japan 1985–92 Company stocks and real Yes
estate
Dot-Com Bubble USA 1995–2001 New technology stocks No
Subprime Bubble USA, UK, Ireland, 2003–10 Real estate and houses Yes
Spain,
Chinese bubbles China 2007, 2015 Stocks No

market bubble of 1824–6; the Australian Land Boom, which burst in the
1890s; the British Bicycle Mania of the 1890s; and the Chinese bubbles in
2007 and 2015. Fourth, six of our twelve bubbles were followed by
financial crises, and at least five were followed by severe economic down-
turns. Fifth, several of the bubbles listed in Table 1.1 were explicitly
connected to the development of new technology – railways in the
1840s, bicycles in the 1890s, automobiles, radio, aeroplanes and electri-
fication in the 1920s and the Internet and telecommunications in the
1990s.
Probably the most famous absentee from our study is the Dutch
Tulipmania of 1636–7, which witnessed the rapid price appreciation of
rare tulip bulbs in late 1636, followed by a 90 per cent depreciation in
bulb prices in February 1637.39 This is excluded for the simple reason
that the price reversal was exclusively confined to a thinly traded com-
modity, with no associated promotion boom and negligible economic

13
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 BOOM AND BUST

impact.40 In other words, the Tulipmania was too unremarkable to merit

inclusion. Although the wild fluctuations in price are striking, they are
not unusual for markets in rare and unusual goods, particularly those
predominantly used to signal status.41 In the case of the Tulipmania these
fluctuations were compounded by legal ambiguity over the status of
futures contracts, suggesting that the price movements may have had
a somewhat mundane explanation.42
The infamy of the Tulipmania is largely the fault of Charles Mackay.43
Mackay painted the picture of a society overcome with collective insanity
on the subject of tulips, where the value of some bulbs exceeded the value
of luxury Amsterdam houses. He also stressed the universality of the
trade, with the general populace of Amsterdam ‘investing’ in tulip
bulbs at the various taverns dotted around the city. But Mackay’s work
is unreliable. His sources are based on second-hand accounts, which are
in turn based on contemporary pieces of propaganda criticising the trade
in tulips.44 Very few of the claims Mackay makes can be substantiated.
The popular narrative of the Tulipmania is thus largely fictional, ‘based
almost solely on propaganda, cited as if it were fact’.45 Indeed, for several
episodes in this book we can see a similar process of myth-making,
whereby bubble anecdotes that were originally satire or propaganda are
repeated years later as if they really happened.
Another notable set of absentees from our list are the property bub-
bles which occurred in Scandinavia in the 1980s and in South-East Asia in
the 1990s.46 In both cases major credit booms had their roots in financial
liberalisation, and in both cases the crash was followed by a banking crisis.
Capital account liberalisation exacerbated the credit boom in South-East
Asia, where substantial amounts of international capital flowed into the
region, resulting in twin banking and currency crises.47 However, the
only one of these housing bubbles that was accompanied by a major stock
market boom was in Thailand. The scale of the Thai stock market bubble
does not meet our criterion for inclusion, and there appears to have been
no promotional boom.48
Having chosen our fires, how do we go about investigating them?
A good place to start is usually the findings of previous investigators.
We thus make extensive use of existing literature, much of which comes
from fields far beyond history or economics.49 However, the memory of

14
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 THE BUBBLE TRIANGLE

an event and the experience of an event are often very different, and we
also want to understand the thoughts and actions of those who were on
the scene at the time. We therefore also investigate the writings and
speeches of contemporary journalists, politicians and commentators
during each bubble. What were they saying while the fire was going on?
Were they calling the fire brigade or fanning the flames? We do not want
to focus exclusively on the powerful – we are also interested in so-called
ordinary people who were caught up in the fire. Who suffered, and who,
if anyone, benefited from it? Finally, as financial economists, we do not
want our analyses to be purely descriptive – we want to be able to quantify
the size of each fire and the scale of the damage it caused. For famous
bubbles this was straightforward, but for lesser-known bubbles it involved
painstakingly compiling our own data from old records in dusty archives.
The overall result, we hope, is a comprehensive overview of the subject
told over three centuries. Our story begins in 1720 with a seminal
moment in financial history: the invention of the bubble.

15
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 CHAPTER 2

1720 and the Invention of the Bubble

The nation then too late will find,

Computing all their cost and trouble,
Directors’ promises but wind,
South Sea at best a mighty bubble.
Jonathan Swift1

F ew movies have been made about king carlos ii of

Spain. His life does not make for a satisfying story: he suffered
tremendously for 38 years, and in the end his death started a war. The
Habsburg family to which he belonged had almost exclusively married
other family members in order to consolidate its wealth and power. This
end was achieved, but at a severe physical and mental cost to Carlos, who
inherited a range of deformities as a consequence of five generations of
inbreeding. His bone structure made it difficult for him to eat, speak or
walk, and he suffered frequent seizures; his learning difficulties were so
severe that no attempt was ever made to educate him formally. He
ascended to the throne at the age of 3, but even in adulthood, ruling
the country in his own right was effectively impossible.2
Carlos was probably also infertile, and neither of his two marriages
produced any children. His death in 1700 thus sparked a succession
crisis. As his heir, Carlos had named a grandson of Louis XIV of
France, Philip, Duke of Anjou. As Carlos’s grand-nephew, Philip had
the strongest genealogical claim to the throne, but his accession would
have unified the French and Spanish empires. This threatened the
British, Dutch, Portuguese and Holy Roman empires, who instead pro-
posed Archduke Charles of Austria as king. By 1702 their attempts to
solve the crisis through diplomacy had failed, and Britain, the
Netherlands and Austria declared war on Spain.

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 1720 AND THE INVENTION OF THE BUBBLE

The resulting conflict, the War of the Spanish Succession, lasted for 13
years and was resolved in 1715 by the Treaties of Utrecht and Rastatt. The
resolution was straightforward: Philip could remain king of Spain as long as
he renounced any claim to the French throne. The war, however, had been
extraordinarily expensive. In order to fund it, governments had relied on
a relatively new method of war finance: borrowing money from the general
public by issuing debt securities. This resulted in unprecedented levels of
French, British and Dutch public debt. In France the public debt in 1715
stood at over 2 billion livres: between 83 and 167 per cent of GDP, depend-
ing on the estimate used. In Britain the public debt rose from £5.4 million
pre-war to £40.3 million, around 44 to 52 per cent of GDP.3 Holland’s public
debt nearly doubled as a direct result of the war, and the cost of financing it
was just over two-thirds of Holland’s total fiscal revenue.4
These debt levels represented an existential threat, because if cred-
itors doubted a nation’s ability to repay its debts, it would struggle to
finance future wars. The French and British governments were both
acutely aware of this. After the death of Louis XIV in 1715, several of
the new French Regent’s counsellors proposed recalling the French
Parliament (the Estates General) to deal with the disastrous state of the
public finances. Britain was withdrawn from the war by a Tory govern-
ment that campaigned heavily for the reduction of the public debt.5 For
each country the challenge was reducing the debt in a way which mini-
mised both the risk of revolution and the cost of future borrowing. It was
therefore crucial to prevent the cost of additional taxation from landing
too heavily on those with political power. In addition, defaults, which
were normally only partial, must somehow be portrayed as justified and/
or unlikely to be repeated. Ideally, creditors would readily accept them.
France, where the problem was most acute, recycled numerous debt
reduction methods that it had used before. The new finance minister, the
Duc de Noailles, imposed a non-negotiable write-down on creditors, with
some short-term debt being unilaterally devalued by two-thirds.
Financiers were charged with profiteering, and around 110 million livres
were confiscated. The currency was repeatedly debased, with coins re-
stamped with a lower gold and silver content in 1701, 1704, 1715 and
1718. In combination with a substantial austerity programme, this meant
that, excluding interest payments, France had moved from a deficit of

17
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 BOOM AND BUST

over 60 million livres in 1710 to a surplus of 48 million livres in 1715.

However, the problem was that the interest payments on its debt were
around 90 million livres per year.6 And that was just to finance the debt –
reducing it would have cost substantially more. New tricks were required.
The French demand for financial innovation was met, almost single-
handedly, by a Scottish financial theorist called John Law. Describing
Law as a ‘Scottish financial theorist’ invokes exactly the wrong image; his
life was sufficiently fascinating to have inspired not only an extensive
historical literature of its own, but at least one lowbrow romantic novel.7
In 1694, at the age of 22, a Scottish court sentenced him to death for
killing a man in a duel, but he escaped prison and fled to the Continent,
growing rich through a combination of professional gambling, financial
services and networking. At the same time, he wrote several treatises on
economics, most notably Money and Trade Considered, which was published
in 1705. Virtually every serious work about Law has emphasised both his
reckless character and his genius: the famous Harvard economist Joseph
Schumpeter placed him ‘in the front rank of monetary theorists of all
times’.8
Law arrived in Paris in 1715, and immediately met with the Regent to
propose the establishment of a ‘General Bank’ as a branch of govern-
ment. The General Bank foreshadowed the emergence of the modern
central bank, and was more ambitious than the Bank of England, which
had been around since 1694. Its remit was to collect all of the king’s
revenues, issuing in their place bank notes that were exchangeable for
coins. Once the bank was established, it only needed to hold coins worth
a fraction of the value of all outstanding bank notes, since it was unlikely
that a large number of bank notes would be presented for redemption at
the same time. The government could then increase the money supply by
lowering the fraction of bank notes backed with coins. Law argued that
giving the Bank control of monetary policy would encourage economic
growth, thus increasing tax revenues and helping the government to pay
off its debt. Although the scheme was initially rejected, a privately owned
version of the scheme was allowed to proceed a year later.9
Despite the fact that the Bank was nominally a private company, Law
understood that its success depended on the backing of the political autho-
rities. He therefore ensured that a large proportion of its shares were

18
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 1720 AND THE INVENTION OF THE BUBBLE

distributed to influential noblemen. This gave the government a vested

interest in the success of the scheme, which was compounded when the
Regent deposited large sums of money in it at a very early stage.10 This
political support proved invaluable to the scheme, as it led the government
to introduce legislation that virtually guaranteed its success. From
October 1716 onwards, tax collectors were required to redeem bank notes
for cash, and from April 1717 the bank’s notes were accepted as payment for
taxes. At the end of 1718, when the bank was nationalised, its initial sub-
scribers had gained an impressive annualised return of 35 per cent, provid-
ing Law with a track record that lent credibility to his promises of spectacular
capital gains from subsequent ventures.11 Furthermore, the bank’s nationa-
lisation gave the French government the power to print money, dramatically
increasing its control of one side of the bubble triangle.
In 1717, Law was granted a charter for the establishment of the
Mississippi Company, whose original remit was to develop land near the
Mississippi River.12 As soon as the first shares were issued, Law set about
expanding its operations through a series of mergers and acquisitions.
The initial capital was spent in December 1718 on acquiring the Senegal
Company and the French monopoly on tobacco production. Additional
share issues were made in the June, July and September/October of
1719, raising 27.5 million, 50 million and 1.5 billion livres respectively.
These funds were used to purchase the right to conduct almost all French
overseas trade, the right to mint coins, and tax collection rights equiva-
lent to about 85 per cent of French revenues. In February 1720, the
Mississippi Company took over the General Bank.13
The Company’s largest operation, however, was a scheme for the
reduction of the public debt. The essence of this scheme was as follows.
When the final Mississippi share issue of 1.5 billion livres took place,
payment was only accepted in the form of government bonds. The
average yield on these bonds was around 4.5 per cent. The Mississippi
Company then lent money to the government, which used the loan to
buy out its debt. Since the interest rate on the loan was only 3 per cent,
this substantially reduced the government’s debt burden. But the public
needed to be convinced to exchange government debt for shares
in a company whose main asset was government debt with a much
lower yield: a self-evidently bad deal.14 Law’s solution was to create the

19
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 BOOM AND BUST

self-fulfilling belief that the price of the shares would rise after they were
issued. Even if debt holders noticed that they were getting a raw deal in
terms of future cash flows, the prospect of spectacular capital gains on the
shares in the short run would be likely to prove too tempting to resist.
In short, Law solved the government’s debt problem by inventing the
bubble. First, he made sure Mississippi shares were much more market-
able than the debt used to purchase them. Whereas most of the debt had
been highly illiquid, Mississippi shares traded freely on a vibrant second-
ary market. Liquid assets are more desirable, so this added some real
value – though not nearly enough to justify the large reduction in future
interest payments. Second, he used the General Bank to expand the
money supply, ensuring that an abundance of funds were available to
purchase the shares. The total note issue was expanded from 200 million
livres in June 1719 to 1 billion livres by the end of the year. Third, he
made the shares highly leveraged by allowing them to be purchased for
an initial down payment of 10 per cent: a massive extension of credit.15
Finally, Law attracted the attention of speculators by using an array of
‘market management’ tricks to engineer a series of rapid increases in the
Mississippi share price. For example, each successive share issue required
the subscriber to hold existing shares, which increased the demand for
these shares on secondary markets. The rising price of existing shares
then made the current issue look like a much more attractive investment.
When the price started to flag, Law propped it up by publicly committing
to buying derivatives that would allow investors to limit their potential
losses.16 He was also able to use the news media, which was at that time
subject to strict political control, to stimulate demand. Sometimes this
simply amounted to widely broadcasting his commitments: his offer to
buy call options in 1718 was published in the Gazette d’Amsterdam. At other
times the news media was used to spread propaganda. A defence of his
policies was published in several newspapers in February 1720, and he
repeatedly attempted to portray the Company’s assets as far more profit-
able than they really were.17 Law’s popularity with the government,
coupled with the government’s control over the newspapers, meant
that favourable narratives about the scheme went unquestioned.
The scale of the resulting bubble can be seen from Figure 2.1, which
tracks the price of Mississippi shares from 1718 through to the end of

20
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 1720 AND THE INVENTION OF THE BUBBLE

12,000

10,000

8,000

6,000

4,000

2,000

0
9
18

19
19
18
18

19

0
20

20
19

20
19

20
20
71

72
17

17
17
17
17

17

17

17
17

17
17

17
17
r1

l1
ct

n
b
ec
g

ar
ov

ov
p

p
ay

Ju
Ap

Ju
Fe
Au

Au

Ja
Se

Se
O

M
D

N
M
26
3
5

28
2
4
6

28
29

23
30

24
27
Figure 2.1 Mississippi Company share price (livres) and subscription dates18

1720. The potential profit from getting involved early was enormous:
a share costing 140 to 160 livres in 1717 was worth over 10,000 livres two
years later. Even subscribers to the later issues could have doubled their
money in the space of a few months by correctly timing their exit from the
market.
Law’s power over the French economy reached its apex in
January 1720, when he was appointed Minister of Finance. He soon
discovered, however, that he could not sustain prices indefinitely, and
his attempts to do so became increasingly unsubtle. In an effort to
prevent Mississippi shareholders from converting their gains back into
gold and silver coins, a compulsory re-coinage devalued coins relative to
bank notes. Laws were passed banning the export of gold or silver, and on
27 February it became illegal to hold more than 500 livres in coins or to
use coins for transactions above 100 livres in value. The French state,
however, did not have the capacity to enforce such draconian measures.
Many members of the public simply ignored the new laws; others con-
verted Mississippi holdings into diamonds instead. Law responded by
placing similar restrictions on diamonds.19
On 5 March, after a 25 per cent decline in the price of Mississippi
Company shares, Law committed to having the General Bank buy any

21
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 BOOM AND BUST

shares at the price of 9,000 livres, payable only in bank notes. Since this
was well above the market value of the shares, shareholders overwhelm-
ing chose to take him up on the offer. This forced Law to dramatically
increase the supply of bank notes, which rose from 1.2 to 2.7 billion livres
over the course of the next 3 months.20 But this created enormous
inflation, undermining two goals that were crucial to the system: repla-
cing metallic currency with bank notes as France’s main currency, and
keeping interest rates low.
Law attempted to correct this error by introducing a law gradually
reducing the Company share price to 5,000 livres, thereby re-aligning
the value of shares and bank notes with that of gold and silver coins.
This was a political disaster, however, because Law had recently pledged
that bank notes would not be subject to any variation. Within a week, the
law had been revoked by the Regent, stripping Law of the power to fix
perceived flaws in his system and demonstrating his sudden loss of
political influence. Law was dismissed as Minister of Finance on
29 May, and the Company’s share price fell to just over 4,000 livres on
31 May.21
Law was swiftly reinstated as a de facto Minister of Finance and the
market temporarily recovered. But it was clear that the scheme had
failed, and his role thereafter consisted of managing its decline. The
General Bank was closed, and it was announced that bank notes would no
longer be accepted for the payment of taxes. Against Law’s wishes,
a series of punitive measures were visited upon Mississippi investors:
capital was called up, the nominal share price was reduced and subscri-
bers who had sold their shares were forced to buy them back at a penalty
rate. The Mississippi Company’s tax collection and minting rights were
removed. On 8 December 1720, the marketability revolution was
reversed when the king abolished the trading of Mississippi shares.
Nine days later, Law was sent into exile to protect him from angry
investors.22
The government then attempted to rebuild some kind of monetary
and financial system from the ruins of Law’s regime. An instrument
called the ‘Visa’ was set up, to which all assets relating to Law’s regime
were submitted, accompanied by a statement outlining how the assets
were obtained. The purpose of the Visa was ostensibly to convert these

22
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 1720 AND THE INVENTION OF THE BUBBLE

assets into a public debt ‘based on the realm’s abilities and on the rules of
fairness’, which in practice meant favouring those with small holdings.
The political environment was by then so toxic, however, that the govern-
ment was forced to reverse the reduction of its debt repayments that
Law’s system had enabled. When the Visa finally concluded in 1724, debt
servicing cost the state 87 million livres per annum – almost exactly the
same as it had in 1717.23 The French government’s ambitious efforts to
reform its finances had comprehensively failed.
The South Sea Bubble similarly arose from the British government’s
desperation to get its debt under control. In the years following the War
of Spanish Succession, a series of Acts of Parliament attempted to reduce
the government’s interest payments. However, the representative nature
of Parliament, coupled with the political power of debt holders, made it
difficult to tackle the most expensive tranches of the public debt. By the
beginning of 1720 the government was still crippled by substantial sums
of expensive debt: £13.3 million of long-dated annuities paying 7 per cent
interest for almost 100 years and £1.7 million of short-dated annuities
paying 9 per cent interest until 1742.24 The more lucrative the debt was
for its holders, the more of an incentive they had to mobilise politically in
opposition to any effort to reduce its value. The government’s previous
attempt to tackle the annuities, in 1717, failed as a result of an effective
lobbying operation by annuity holders.25
The prospect of John Law’s system succeeding in France, however,
elevated the debt burden to the status of a national emergency. In
January 1720 the directors of the South Sea Company, a slave-trade
firm that had helped the government refinance its debt in the past,
presented a potential solution to Parliament. The essence of the propo-
sal, which borrowed heavily from Law’s ideas, was that the Company
would offer its equity to the public in exchange for government debt.
The Company would then receive a reduced interest rate on this debt,
substantially reducing the government’s financing costs. Furthermore, it
would pay the government a fee of £4 million for the privilege of con-
ducting the scheme, plus an additional fee of up to £3.6 million, depend-
ing on how much debt was converted. Following the payment of several
strategic bribes to wavering MPs, this offer was accepted by Parliament.26
Debt subscriptions, whereby creditors could submit debt for South Sea

23
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 BOOM AND BUST

shares, were arranged for late April, mid-July and early August 1720.
These were accompanied by money subscriptions in April, May, June
and September, which simply involved the purchase of shares at a price
determined by the company.27
The benefit to the government was clear: it received a cash payment
and reduced the costs of financing its debt. If anything, it was surprising
that the measure required so much politicking to pass Parliament. The
benefits to the South Sea directors are less clear and have in the past been
the subject of some debate. Adam Anderson’s influential account sug-
gested that directors could have kept cash from the sales of ‘surplus’
stock, i.e. shares in excess of the amount needed to clear the public
debt.28 Since the mechanics of the scheme were such that a higher
market price meant greater sales of surplus stock, the directors (accord-
ing to Anderson) could profit substantially by generating a bubble.
However, this theory does not add up. Selling surplus stock meant under-
taking additional liabilities which offset the additional assets, leaving
nothing for the directors to pocket.29 Alternatively, the directors could
have used inside information to ride the bubble, as was alleged by the
1721 Commons committee.30 But, surprisingly, this rarely occurred, and
certainly was not widespread enough to have been the motivation under-
pinning the whole scheme. The only explanation we are left with is that
the directors genuinely intended to establish a profitable company to
rival the Bank of England.31
Even more puzzling is why so many debt holders agreed to the deal.
The Mississippi Company had at least held significant wealth-generating
assets, even if they were not sufficient to justify the price of the shares
being offered. The South Sea Company’s wealth-generating assets were
trivial. It could in theory trade slaves to South America, but its right to do
so was disputed by Spain; historians have debated whether this asset was
literally worthless or just very close to being worthless.32 Debt holders
were supposed to exchange government debt for shares in a company
that held (virtually) nothing but the promise of a reduced rate of interest
on this debt, and that had incurred significant additional liabilities in the
form of promised cash payments to the government. Before John Law,
one would have thought it impossible to convince them to agree to such
a deal. But the Mississippi Bubble had demonstrated how the prospect of

24
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 1720 AND THE INVENTION OF THE BUBBLE

capital gains could lure investors into accepting an apparently bad

bargain.
The South Sea directors thus set about creating a bubble. First, South
Sea shares were made extremely marketable, especially in comparison to
the illiquid debt that could be used for their purchase. Not only were the
shares freely transferable, but the secondary market for them was very
active, so it was generally easy to find a buyer or seller. The directors then
expanded credit in several ways. Money was lent directly to those who
wished to invest: 2,300 people borrowed from the South Sea Company
during 1720. The shares were highly leveraged, with only a small propor-
tion of capital on each share called up. Calls on the remainder of the
capital were scheduled over long periods of time, so investors had ample
opportunity to re-sell the shares before they had to make any further
payments. Furthermore, the calls themselves were allowed to be paid on
credit. This not only made the shares appealing to risk-seeking investors,
but freed their remaining cash, which in many cases was used to purchase
yet more shares.33
The ability to buy shares for relatively small down payments opened
up the market to elements of society that could not previously have
afforded to invest. This later proved deeply controversial: critics in the
aftermath of the bubble reacted with horror to a perceived increase in
social mobility, with the undeserving poor said to have made great sums
of money at the expense of the rightfully well-off elites.34 In truth,
however, the vast majority of investment still came from the super-
rich. The average subscriber bought £4,600 worth of shares in the
first subscription, £3,400 in the second, £8,600 in the third and
£4,600 in the fourth, with no long tail of small subscribers. This was
well outside the capacity of the middle classes; the typical annual
income of an army officer, for example, was around £60. Politicians
were deeply engaged in the scheme, with three-quarters of MPs and
peers subscribing to at least one of the issues. This group alone
accounted for 14 per cent of the investors in the first two subscriptions.
Interestingly, when it came to the highly unprofitable third and fourth
issues, this group accounted for only 9 and 5 per cent respectively of
the subscriptions, suggesting that they may have been better informed
than the average investor.35

25
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 BOOM AND BUST

Having increased marketability and expanded credit, the directors

then needed to encourage speculation. As with the Mississippi Company,
subscriptions were divided into ‘tranches’, and in the first instance only
a small proportion of shares was issued. This created a market which was
large enough to remain liquid, but small enough for the directors to
manipulate at a relatively small cost. Early subscribers could thus be
provided with spectacular capital gains, encouraging subscriptions for
future tranches. As subscriptions proceeded, some scarcity was main-
tained by delaying the issue of tradeable receipts, reducing the supply
of shares on secondary markets.36
Unlike Law, the South Sea directors had to reckon with a free and
vibrant press. The expiration of the London Gazette monopoly in 1695 had
led to the publication of several competing newspapers, such as the
Weekly Journal, London Journal, Daily Courant and Evening Post.37 These
newspapers devoted substantial coverage to financial matters and were
widely read in local coffee houses that doubled as stock exchanges.
Why did these newspapers not alert investors to the nature of the
scheme? Part of the problem was that they were not entirely reliable.
Daniel Defoe warned his readers against ‘false news’ spread with the
intention of manipulating share prices.38 At other times, made-up news
was simply sold to investors. Small boats would reportedly leave English
ports pretending to visit Amsterdam, take a turn around the harbour
while making up plausible gossip, then return to the port to sell fake news
to speculators. However, when it came to dispelling outright misinforma-
tion, the financial news appears to have functioned reasonably effec-
tively. Defoe claimed that false rumours were almost always dispelled by
the end of the day, and there is very little evidence that the rumours were
a significant factor in pushing up prices.39
Perhaps the greater problem was that most journalists and writers did
not fully understand the scheme. The debt conversion scheme was some-
what arcane; few had the necessary numeracy to properly value South Sea
shares, particularly when the Company was misrepresenting the potential
value of its slave-trading rights. As a result, an incredibly wide range of
valuations was published. Lord Hutcheson, using cash-flow analysis, cor-
rectly ascertained that the shares in the final subscriptions were being
offered at a price well above their true value.40 At the other end of the

26
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 1720 AND THE INVENTION OF THE BUBBLE

1,200

1,000

800

600

400

200

0
19

20

20

20

20

20

20
72

72
17

17

17

17

17

17

17
r1

l1
ov

ar

ov

ec
Ju
Ap
Ja

Ju

Se
M
N

D
30
21
12

10
2
23

18

27
Debt subscriptions Money subscriptions
Figure 2.2 South Sea Company share price (£) and subscription dates41

spectrum, one infamous article in the Flying Post argued that the higher
the price investors paid for South Sea shares at subscription, the better
the deal they were getting.42 In the absence of established financial
analysts, uninformed investors were unsure whose valuation was correct.
The success of the South Sea scheme in engineering a bubble can be
seen from Figure 2.2. The price of South Sea stock rose from £126 at the
beginning of 1720 to a peak of £1,100 in mid-July. The crash was just as
dramatic, accelerating in October to end the year, symmetrically, at
a price of £126. By then, however, the government’s primary goal had
already been achieved: 80 per cent of non-callable annuities had been
converted into South Sea shares. Tellingly, one of Parliament’s first
actions when it reconvened in December 1720 was to exclude the possi-
bility of rescinding this conversion.43
The fallout from angry investors then had to be managed without
provoking adverse political consequences. These consequences were
potentially serious; P. G. M. Dickson argues that the public mood in late
1720 was foul enough to pose a genuine risk of revolution.44 The govern-
ment’s solution was a combination of carrot and stick. The carrot was

27
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 BOOM AND BUST

partial relief offered to subscribers. The ‘Act to restore the publick

Credit’, which was passed in August 1721, reduced the capital of the
South Sea Company and reduced the lump sum that it had agreed to pay
the government.45 Subscribers to the August debt subscription had their
terms altered so that they were almost identical to those of the May
subscription, thereby reducing the losses of those who had bought at
the peak of the bubble. Still, all subscribers were forced to accept
a substantial reduction in the value of their stock.46
The stick was used against the South Sea directors, in order to satisfy
the public’s thirst for retribution. In January 1721, six directors were
dismissed from public office, and the four who were MPs were expelled
from Parliament. A bill was passed requiring all directors to submit
inventories of their estates to Parliament, and corruption charges were
brought against members of the government. John Aislabie, who had
masterminded the government’s side of the scheme, was found guilty,
expelled from Parliament, and imprisoned in the Tower of London.
A bill confiscating the assets of all the directors was passed in July.47
This scapegoating of the previous administration did more than
channel public rage towards a convenient target. By imposing
a personal cost on those who had implemented the scheme, the British
government could credibly reassure investors that it would not be
repeated, as any politician who tried could expect to be punished and
disgraced. This preserved the government’s ability to issue bonds at
reasonable interest rates. However, the main benefit of the South Sea
scheme to the government was also preserved, since the reduced debt
payments remained in place. Parliament had performed an impressive
feat: a partial default on existing debt with no corresponding increase in
the future cost of its borrowing.
A feature of the South Sea Bubble that had not occurred in France was
a concurrent boom in the establishment of new companies. Julian
Hoppit estimates that around 190 British joint-stock companies were
established in 1719 and 1720, with a subscribed capital of anywhere
between £90 million and £300 million.48 Almost all of these companies
quickly vanished, largely due to regulatory opposition in the form of the
1720 Bubble Act and a series of writs issued against the firms. Only two of
the new companies, London Assurance and Royal Exchange Assurance,

28
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 1720 AND THE INVENTION OF THE BUBBLE

450

400

350

300

250

200

150

100

50

0
19

20
20
20
19

19

20

20
72
17

17
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17

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r1
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Au

Au
O

O
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20

17

14
16
17
21

19

15

13
Old East India Company Bank of England Royal African Company
Figure 2.3 Share prices (£) of the Bank of England, Royal Africa Company and Old East
India Company49

were long-term successes, largely as a result of the monopolies granted to

them by Parliament.50 As Figure 2.3 shows, existing firms also experi-
enced a boom and bust at the same time as the South Sea Company.
Between September 1719 and June 1720, Royal African Company shares
rose from £13 in September 1719 to a peak of £180, while Old East India
Company shares rose from £189 to £420.
The Netherlands, despite also having run up significant public debt,
did not experience a debt conversion like the Mississippi or South Sea
schemes. Similar proposals were suggested but deemed unnecessary; the
government could borrow much more cheaply than in France or Britain,
partly because Dutch debt already traded extensively on secondary
markets.51 The 1720 bubble in the Netherlands consisted entirely of a
promotion boom and stock price reversal. Between June and October
1720, 40 joint-stock companies were projected, with a proposed nominal
capital of 800 million guilders, about three times the Dutch Republic’s
GDP. Almost all of these companies were designed to encourage specula-
tion, having a very low proportion of paid-up capital. Most were either

29
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 BOOM AND BUST

250

200

150

100

50

0
0

20
0

20
20

20
20
72

72

17

17
17

17
17
r1

l1

ct
n

ov
ay

Ju
Ap

Se
Ju

N
M

30
1

18
20

27
11

Figure 2.4 Share price index for the Netherlands52

pure insurance companies or insurance was a large proportion of their

business. Of the 40 companies, only 6 ever became fully operational, and
only one, Stad Rotterdam, was a long-term success.53
An index of Dutch share prices, as reported in Leydse Courant, is shown
in Figure 2.4. This data is presented with the caveat that the source is not
entirely reliable. Prices were sometimes listed before any shares had been
issued, and it is unclear whether the price is that of certificates entitling
the holder to purchase a share, unofficial pre-subscription trading or
simply fabricated by company directors.54 The reported prices never-
theless represent the best available estimate of the amount by which
Dutch shares rose and fell, doubling in the spring and summer to
a peak on 1 October 1720, before losing half their peak value by
December.
The promotion and share price boom has been attributed to the flow
of speculation into the Netherlands as the Mississippi and South Sea
schemes burned out.55 Although movements of exchange rates indicate
that this did occur, it is probably less of a factor than it might appear:
much of the share price movements can be attributed to market manip-
ulation, falsified or misleading price reports and concerns about the

30
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 1720 AND THE INVENTION OF THE BUBBLE

regulatory response to Stad Rotterdam’s proposed business model. It is

also notable how few of the proposed companies achieved full subscrip-
tion, which seems inconsistent with an abundance of speculative money.
Oscar Gelderblom and Joost Jonker hence describe the bubble in the
Netherlands as a ‘damp squib’, lacking the economic, political or cultural
impact of those in France and Britain.
There were also a series of Mississippi-inspired schemes in other
European countries. Debt-to-equity swaps were considered in Spain,
Portugal, Piedmont, Denmark and Sweden, and proposals to set up
colonial trading companies reached Russia, Vienna and Sicily. The moti-
vation in each was broadly similar: a Spanish conversion scheme was sold
to the king as a means to ‘imperceptibly pay off’ his debts, and a proposal
to create a Russian land bank argued that it would enable the Tsar to raise
funds for warfare. Hamburg, Venice, Spain and Portugal also experi-
enced minor financial booms.56 However, the level of marketability in
financial markets was generally too low for any significant bubble to
develop outside of England and France.

CAUSES

As well as being the first documented financial bubbles, the 1720

bubbles were notable for having been explicitly and deliberately cre-
ated by a small number of people. Both John Law and the South Sea
directors had an intuitive understanding of the bubble triangle,
expertly cultivating all three sides with the specific goal of alleviating
the government’s debt burden. Their first and most fundamental move
was to increase marketability by swapping very illiquid debt for highly
liquid equity. A financial asset that was very difficult to buy and sell was
thus replaced by one that could be bought and sold easily. This created
the potential for frequent price changes on a secondary market, which
in turn allowed the assets to become instruments of speculation.
Without this initial increase in marketability, which required the endor-
sement of the French and British governments, neither bubble would
have been possible.
Credit and leverage were then rapidly expanded to help investors
buy shares in the bubble companies. The South Sea Company used

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 BOOM AND BUST

part-paid shares with payments by instalment, also lending money to

individuals to help them buy shares in the company. Similar methods
were used in France, where they were supplemented by a substantial
expansion of the money supply. Law’s control of the General Bank
meant that he could direct France’s entire monetary policy towards
generating the bubble.
Stimulating speculative investment was a cornerstone of both
schemes, as the prospect of quick capital gains was what induced debt
holders to accept a conversion on inferior terms. This was deliberately
stoked through what Hutcheson called ‘the artful management of the
spirit of gaming’.57 Some investors, particularly foreigners, were very
good at speculating and managed to reap large profits; others were
essentially gambling and suffered heavy losses.58 None of this mattered
to the engineers of the bubbles, who simply needed speculative invest-
ment to keep prices rising.
Technically, investors could have speculated in the opposite direc-
tion, betting on the bubble bursting. There were no particular legal
restrictions on forward contracts, so investors could simply enter an
agreement to sell shares at today’s price in a few months and wait for
the price to fall before buying those shares. However, it seems unlikely for
two reasons that short selling South Sea shares was a viable alternative for
informed investors. First, there was a risk of share prices rising further
before the contract became due. The Whitehall Evening Post reported, in
March 1720, of a Jewish stockbroker who lost £100,000 in this way.59
Second, as previously noted, the Mississippi Company and South Sea
Company both had some control over the supply of their own shares.
Short selling on a scale significant enough to affect prices would probably
have been seen as an attack on the company, which could respond with
a corner – buying large numbers of their own shares to drive up prices,
possibly even forcing the short seller to purchase shares from the com-
pany to fulfil the forward contract. The losses for short sellers in such
a scenario could have been extremely high. Perhaps as a result of these
two factors, contemporary sources rarely recommended short selling.
Hutcheson, for all his scepticism of the scheme, did not even mention
the possibility, and strategies incorporating short positions do not seem
to have been used by a significant number of investors.60

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 1720 AND THE INVENTION OF THE BUBBLE

With all three sides of the bubble triangle in place, the emergence of
a bubble only required a spark: an initial burst of price increases that
could kick off the self-perpetuating process of speculation. This was
provided, in the case of Law, through a combination of propaganda,
the temporary restriction of supply, and commitments to buy shares at
prices above market value. Once early purchasers of shares had experi-
enced spectacular capital gains, such measures became less necessary. As
for the South Sea scheme, propaganda was augmented by the issuing of
shares in tranches at successively higher prices, which communicated an
expectation that the price of the shares would rise. Its chief engineers
probably had no intention of prices rising as high as they did in the
summer of 1720: a less dramatic bubble would still have converted most
of the government debt, but with fewer personal consequences for the
directors.61 But once the fire had spread beyond a certain level, it became
impossible to control.
The level of speculation was the most striking aspect of the bubbles,
and has driven most popular accounts of the episodes. The most influ-
ential of these is Charles Mackay’s Extraordinary Popular Delusions and the
Madness of Crowds, which was first published in 1841. Mackay weaves
a compelling narrative in which foolish and greedy investors were swept
up in a gambling mania, and were ruined as a result of their own folly.
The Victorian middle classes loved the neat moral message about fiscal
responsibility, and the book sold exceptionally well.62 Its continuing
popularity owes a lot to a series of colourful anecdotes that supposedly
illustrate the extent of investor stupidity. The most enduring of these
anecdotes concerned a million-pound undertaking entitled ‘A Company
for Carrying on an Undertaking of Great Advantage, but Nobody to
Know What It Is’, for which subscriptions were supposedly filled in
one day, after which the proprietors disappeared. The exceptionally well-
written critical accounts of the bubble by Daniel Defoe and Jonathan
Swift were used to support the narrative, and elements of the abundant
satire of the period were reprinted.63
There are two major problems with Mackay’s account. First, it does not
provide a convincing causal explanation for the bubbles, treating them
instead as spontaneous outbursts of madness. Second, it is mostly fic-
tional. Almost none of the anecdotes can be substantiated. The satirical

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 BOOM AND BUST

pieces were, of course, not supposed to be taken literally, but Mackay also
failed to place them within their cultural context. From 1720 onwards
a growing religious movement concerned with moral decay seized upon
the South Sea Bubble as the embodiment of society’s problems. To
further the goals of this movement, it made sense to exaggerate the
extent to which the bubble was a consequence of greed.64 This spread
a popular conception of the bubble that ignored its political nature in
favour of a simple narrative of an ‘extraordinary popular delusion’.
We also reject the hypothesis, most famously advanced by Peter
Garber, that the prices seen during the bubbles can be fully explained
by unforeseeable changes to the prospects of the Mississippi and South
Sea Companies, with price-distorting speculation playing little role at all.
In Garber’s hypothesis, the high price of Mississippi shares reflected
a potential increase in economic activity resulting from Law’s financial
reforms. The South Sea Company, meanwhile, is characterised by Garber
as ‘finance-first’: having accumulated a large fund of credit and the
backing of Parliament, it was conceivable that the company would have
found profitable investment outlets.65
The problem with this argument is that it is unfalsifiable: there is no
theoretical price level for which it could not be made. A more conven-
tional way of valuing an asset is to compare its price to its associated
discounted cash flows, making allowances for uncertainty and liquidity.
This was the method used by John Law himself, whose calculations
showed that the peak share price of the Mississippi Company was only
consistent with his estimates of future cash flows if he could reduce the
discount rate to a wildly optimistic 2 per cent. François Velde, after
working through various possible scenarios, finds that it is ‘difficult to
avoid the conclusion that the company was overvalued several times
over’.66 Hutcheson’s contemporary analysis of the South Sea
Company’s assets implied a price of £557 per share, well below the peak
share price of £1,100, and even this valuation was based on unrealistically
optimistic assumptions.67 Despite Garber’s contention, there is no evi-
dence to suggest that the South Sea directors made any effort to find new
profitable outlets for its excess capital.68 The peak share prices of the
Mississippi and South Sea Companies are simply not explicable without
the presence of substantial price-distorting speculation.

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 1720 AND THE INVENTION OF THE BUBBLE

CONSEQUENCES

The Mississippi Bubble had three notable negative consequences for

France. The first of these was a short but severe recession. Although its
effect on GDP has not been reliably estimated, the available economic
data supports the abundant qualitative accounts of economic ruin. For
example, the price level in Paris fell by 38 per cent in 1721, a more severe
deflation than the United States experienced during the Great
Depression.69 The second negative consequence was that potentially
beneficial financial reforms were delayed or rejected on account of
their association with Law’s regime. Paper money, for example, became
a pejorative term, and attempts to re-introduce it during a liquidity crisis
in 1789 failed to sustain the confidence of the public. Finally and most
significantly, the experiment cemented France’s failure to reform the
public debt, and its interest rates thus remained high for the rest of the
century. As well as restricting the country’s economic development, this
represented a serious handicap in future conflicts. It has therefore been
linked, albeit indirectly, to both the French Revolution and the ultimate
failure of Napoleon.70
The South Sea Bubble, too, was long thought to have been accompa-
nied by a recession, because qualitative sources from 1721 suggest that
the country was in severe economic turmoil. Contemporary newspapers
and pamphlets were full of opinion pieces, satire and poetry condemning
the scheme. Attempts were made to organise collective action by those
who had lost money, and losses in the bubble were blamed for several
suicides.71 The 1721 Commons committee investigating the bubble
received numerous petitions reporting, in somewhat hysterical terms,
that the economy had ground to a halt.72
These sources, however, had a transparent agenda. Newspapers and
pamphlets faced the usual incentive to be hyperbolic in order to increase
sales, and were often participating in a moral crusade against the per-
ceived greed and excess of the bubble. The petitions, meanwhile, were
submitted when Walpole’s government was in the process of resolving
the scheme, and appear to have been a part of an organised campaign on
behalf of those who had lost money. In fact, the economic effect of the
bubble was small and localised; its most tangible impact was an increase

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 BOOM AND BUST

in bankruptcies in the Greater London area. Export levels were almost

unchanged, agricultural price fluctuations were within normal bounds
and exchange rate movements typically did not indicate an economic or
financial crisis. Estimates of industrial production and GDP also suggest
very little effect.73
Much has been written about the misery of those who lost money in
the South Sea scheme, but there was another side to those transactions.
Many investors made a great deal of money out of the scheme, though
they typically had the good sense to keep quiet about it. These gains were
not limited to insiders: there is evidence to suggest that outgroups
performed very well, their detachment from mainstream financial circles
perhaps granting them a more sober view of the schemes. Women, who
typically accounted for around 20 per cent of investors, were significantly
more likely than men to speculate successfully in Bank of England and
Royal African Company shares. Jewish investors also appear to have
performed better than average, generally by purchasing shares cheaply
after the crash, and Huguenots performed relatively well.74
It is difficult to find any silver lining for France in the Mississippi
Bubble. Improvements in the public finances were reversed and any of
Law’s financial innovations that could have improved the economic
situation were thrown out with the bathwater. The South Sea scheme,
however, was arguably a net positive for Britain, significantly reducing its
debt burden and only having a manageable and short-lived economic
impact. The bubble in the Netherlands, insofar as it even existed, had few
economic consequences beyond the emergence of some new and inno-
vative insurance business models.75
Most histories of the first financial bubble have been framed by the
assumption that its consequences were negative. Typical topics for dis-
cussion include how blame should be apportioned and how modern
policymakers might prevent something similar from happening again.
A more insightful approach might be to compare the bubble across the
three main countries to determine why the economic consequences were
severe in France, but not elsewhere. The key features of each bubble
episode are summarised in Table 2.1. Britain undertook a large debt
conversion scheme while experiencing a concurrent boom and bust in
existing company shares; the Netherlands experienced only the latter.

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 1720 AND THE INVENTION OF THE BUBBLE

table 2.1 Comparing the first financial bubble across France, Britain and the
Netherlands
France Britain Netherlands

Debt conversion scheme Yes Yes No

Promotion boom and bubble pattern in existing No Yes Yes
company shares
Part-paid shares and margin loans Yes Yes Yes
Banking system involved in bubble Yes No No
Sustained reduction of financing cost of public debt No Yes No
Substantial negative economic consequences Yes No No

Private debt, in the form of both part-paid shares and margin loans,
increased in all three countries. Nevertheless, only France experienced
a severe economic downturn.
There are two reasons why the economic impact was so much more
severe in France. First, the Mississippi Bubble involved a direct effort to
overhaul the country’s currency, and thereby drew in a much greater
proportion of the population. In 1720, simply holding gold, silver, jewel-
lery or bank notes was enough to expose any individual to the whims of
John Law’s scheme. The South Sea Bubble was much less ambitious and
had almost no effect on the vast majority of the population, who were too
poor to invest in stocks. Participation in the Netherlands joint-stock boom
was even narrower. In both cases, most of those who lost money could
afford to do so and the scale of bankruptcies was not enough to cause
a chain of defaults that could have led to a full-blown financial crisis.
Second, the banking system was much more deeply involved in the
manufacture and maintenance of the Mississippi Bubble. As a result, the
bursting of the bubble and Law’s attempts to manage it led to an over-
issue of bank notes and high inflation, followed by sharp deflation and
a contraction of credit. These major problems in the financial sector
created a severe economic fallout that affected every class in French
society. In contrast, the Bank of England and Bank of Scotland were
largely detached from the bubble, and in 1721 both institutions actively
worked to sustain credit flows and to maintain monetary stability.76
A final consequence of the bubbles, common to all three affected
countries, was the decline of the joint-stock company form. Such a device

37
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 BOOM AND BUST

was out of the question in France, which was so scarred by the experience
that it reverted to its prior financial system characterised by strict adher-
ence to religious directives on money lending. French financial institu-
tions and markets thus remained stagnant and inefficient for over
a century.77 Britain, under pressure from the South Sea Company, passed
the Bubble Act in 1720, which forbade the formation of any joint-stock
companies in the absence of parliamentary approval. The importance of
this Act may have been overstated – joint-stock companies were already
illegal under the common law – but in any case, very few formed after the
South Sea scheme collapsed.78 The Netherlands passed no equivalent law
but, curiously, the joint-stock format almost disappeared anyway.79 This
resulted in a widespread absence of companies with transferable shares,
removing the marketability side of the bubble triangle. As a result, no
major bubbles occurred for over a century after 1720.

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 CHAPTER 3

Marketability Revived: The First Emerging

Market Bubble

The mania for mining concerns, which raged in London and the empire
generally in 1824 and 1825, after the opening of Mexico and other parts of
Spanish America to our intercourse, forms a remarkable and, we are sorry to
add, disgraceful era in our commercial history.
John R. McCulloch1

Come with me, and we will blow

Lots of bubbles, as we go;
Bubbles, bright as ever Hope
Drew from fancy – or from soap;
Bright as e’er the South Sea sent
From its frothy element!
Come with me, and we will blow
Lots of Bubbles as we go.
The Bubble Spirit2

W hile the advent of mass marketability helped the

British government restructure its debt in 1720, the accompa-
nying bubble led to a cultural and regulatory backlash. Over the next
century, share marketability was successfully suppressed. The Bubble Act,
which had been passed in 1720, forbade any company with marketable
shares from establishing without explicit government approval. In addi-
tion, common law judges, who were by nature very conservative, were
hostile to companies attempting to operate with even a semblance of
share tradability. Even the authorisation of 51 canal companies with
tradeable shares by Parliament between 1790 and 1794 did not result in

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 BOOM AND BUST

a bubble because canal shares all had very high share denominations and,
as a result, the market for them was very thin.3
In 1807–8, marketability threatened to come back when there was
a small promotion boom. However, most promotions were so-called
unincorporated companies: enterprises which did not have parliamen-
tary authorisation to act as a company. This meant that their shares were
not freely transferable, and trading in their shares was illegal.
Consequently, these companies attracted the ire of the Attorney
General, and the Bubble Act was invoked for only the second time in its
history.4 When the next wave of new companies began to form in 1824,
however, politicians did not step in, having rediscovered how they could
use marketability to further their own interests. The result was the first
emerging market bubble, and, unlike after 1720, the marketability genie
could not be put back in its bottle afterwards.
The poet calling himself the Bubble Spirit highlights one of the key
ingredients of this bubble – an avaricious and dishonest politician. The
politician targeted in the poem is John Wilks, elected MP for Sudbury (or
Sudsbury as the Bubble Spirit called it), who earned the moniker ‘Bubble
Wilks’ because of the various far-fetched companies he was associated with
and helped promote.5 One of his earliest (and ultimately unsuccessful
attempts) to float a company was in 1822, when he published
a prospectus for a company to enforce Tudor laws on Sabbath
observance.6 During 1824 and 1825, however, the mining, gas-light, annuity
and railway companies that he helped promote met with varying degrees of
success. One of his main ploys was to give these companies an air of
respectability by persuading MPs and peers to become directors. But he
had not lost his penchant for ludicrous schemes, such as a wood condensing
company to transform soft wood into hard wood by passing it mechanically
between two giant rollers. As The Times sarcastically observed, ‘perhaps it was
discovered that the same process which compressed the fibres of soft wood,
also broke them, and thereby somewhat diminished their strength’.7 His
fraudulent manipulation of the Devon and Cornwall Mining Company then
led to his arrest, bankruptcy, resignation from Parliament and banishment
by his family to Paris. Even in exile, Wilks was unable to resist financial
chicanery, and his rumour-mongering on the bourse resulted in him being
banned from its vicinity and eventually expelled from France.8

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 THE FIRST EMERGING MARKET BUBBLE

The years leading up to the first emerging market boom were marked
by the Napoleonic Wars. Britain’s victory over Napoleon came at a huge
cost. By the time of Waterloo in June 1815, the National Debt stood at
£778.3 million, having risen by nearly £536 million over the previous 22
years of war.9 Unlike in 1720, the government did not need an elaborate
scheme to reduce the cost of servicing this huge debt burden. The
development of the market for government debt and financial engineer-
ing meant that it was simply able to retire debt and refinance it at a lower
cost. This refinancing, plus a growth in surplus savings arising from
a recovering economy, led investors to look for more remunerative
homes for their funds, particularly after 1822.10 Into this void came
Latin American loans, first; Latin American mines, second; and third,
a plethora of joint-stock companies.
The Napoleonic Wars had loosened the grip of the Iberian powers on
Latin America, with the result that, from about 1810 onwards, armed
struggles for independence succeeded one another. By the early 1820s,
many Latin American countries had declared their independence from
Spain and Portugal, while British foreign policy had moved from trying to
mediate between Spain and its rebellious colonies to preparing to recog-
nise the independence of the latter as nations.11
These newly independent countries came to London to raise funds for
their military, possibly at the active solicitation of British financiers.12 The
first batch of Latin American loans was issued in 1822 to Colombia, Chile,
Peru and the mythical country of Poyais in Central America. Poyais was
‘ruled’ by the infamous General Gregor MacGregor, a Scottish adven-
turer, mercenary and narcissistic fraudster. As well as inducing investors
to give him £200,000, he also convinced many Scots that they should
emigrate to Poyais. Most of the first two shiploads (about 250 people)
died soon after reaching the malaria-infested fake country. His con was
eventually exposed, and by 23 January 1824, the Poyais bonds were
worthless. Still the Poyais scam did not deter investors, and Brazil,
Colombia and Mexico issued bonds in 1824 and 1825.
The Latin American loan boom prepared the way for the bubble in
Latin American mining shares in 1824 and 1825, because the bonds were
high yielding and they raised the profile of the region in the minds of
investors. Investor interest in Latin American mines was further

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 BOOM AND BUST

stimulated by British travellers who came back from the newly liberated
countries to educate the British public about the economic potential of
the new states. One such person was William Bullock, who was among the
first British travellers to visit Mexico after it became independent in 1821.
On his return to Britain, he published an account of his travels, and in
1824 staged in London a major exhibition of Mexican artefacts and
fauna, which was visited by 50,000 paying customers.13 In his book,
Bullock emphasised the potential of the abandoned silver mines and
possibility of a vast market for British products in Mexico.
The first of these mines to list on the stock market were the Anglo-
Mexican and United Mexican, both established in early 1824 and listed in
Wetenhall’s Course of the Exchange by July 1824. Thereafter, until the end of
1825 (see Table 3.1), prospectuses were issued for 74 Latin American
mining companies, 44 of which were still operating at the end of 1826.
The narrative that developed around the Latin American mines,
which was used ad nauseam in their prospectuses, went as follows. First,
the abandonment of the silver mines in 1810 was due to political
upheaval rather than exhaustion, meaning that they held untold riches
for those who could resurrect them. Second, the Spanish court had
enjoyed much prosperity thanks to the mines, despite working them

table 3.1 Joint-stock companies formed in 1824 and 182514

Number of companies Nominal capital (£m) Shares (‘000)

Surviving companies 127 102.8 1,618.3

Abandoned companies 118 56.6 848.6
Projected companies 379 212.7 3,494.4
Total 624 372.1 5,961.3
Surviving mines 44 27 359
Abandoned mines 16 6 98
Projected mines 14 6 80
Total 74 39 537

Notes: Surviving companies (mines) are those still in existence at

December 1826; abandoned companies (mines) are those which had issued
shares but had been abandoned by December 1826; and projected refers to
companies (mines) which had issued prospectuses or announced their
projection in the press, but which have left no evidence about their actual
formation.

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 THE FIRST EMERGING MARKET BUBBLE

inefficiently – they had never been fully exploited. The somewhat

hubristic implication was that ‘by the introduction of English capital,
skill, experience and machinery, the expenses of working these mines
may be greatly reduced, and their produce much augmented’.15 Third,
there was an explicit belief that precious metals were abundant in Latin
America. For example, the prospectus of the Imperial Brazilian Mining
Association referred to large lumps of virgin gold being found, and that
of the General South American Mining Association talked of inexhaus-
tible resources of gold, silver, quicksilver and copper.
As well as the promotional boom in Latin American mining compa-
nies, there was a boom in the promotion of other companies. As can be
seen from Table 3.1, 624 companies were promoted in 1824 and 1825.
But by the end of 1826, only 127 of these were still in existence – the
remainder had either been abandoned, failed or had never got far
beyond publishing a prospectus. The total nominal capital of the 624
companies was a staggering £372.1 million, but of this, only £17.6 million
was actually raised.16
Table 3.2 reveals how the trickle of company promotions during the
early part of 1824 grew in the latter part of the year and had become

table 3.2 Major companies projected from February 1824 to

January 182517
Number of compa-
Number of nies with MP or peer
companies as leading director Capital (£’000s) Shares (‘000s)

Feb 1824 5 1 6,360 38

Mar 1824 4 0 6,630 69
Apr 1824 10 7 11,220 197
May 1824 4 3 9,250 188
Jun 1824 4 2 2,330 28
Jul 1824 8 3 5,000 65
Aug 1824 9 3 4,670 69
Sep 1824 4 1 2,000 41
Oct 1824 4 0 3,425 54
Nov 1824 15 2 14,711 167
Dec 1824 16 6 14,015 153
Jan 1825 65 15 56,551 873
Total 148 43 136,162 19,421

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 BOOM AND BUST

a deluge by January 1825, with 65 major companies being promoted in

that month alone. January 1825 was to be the peak of the promotion
boom. In addition to the Latin American mines, there were companies
which provided local public goods, such as gas-light companies and
waterworks, infrastructure companies such as bridges, canals, docks
and railroads, and numerous insurance and annuity companies. The
companies established in these sectors were more likely to survive, and
their share prices did not experience a run-up and subsequent crash.18
Two hundred and three companies promoted during the boom were
put into a miscellaneous category by Henry English in his 1827 study of
the boom – this catch-all group included shipping, agricultural, commer-
cial, land development, manufacturing, trading and textile companies,
around half of which had foreign operations. The business models of
these companies, like those of the mines, were often based on the
assumption that the intellectually superior British could exploit profit
opportunities currently being missed by primitive locals. Somewhat inevi-
tably, many such companies failed due to their disregard for local knowl-
edge. Captain Francis Head, a travel writer and eyewitness of events in
Argentina, described the experience of The Churning Company, which
was set up to supply the people of Buenos Aires with butter for their
bread. Having discovered this gap in the market, it promptly dispatched
a shipload of Scottish milkmaids to Buenos Aires. Head concludes his
account as follows:

But the difficulties which they experienced were very great: instead of
leaning their heads against patient domestic animals, they were
introduced to a set of lawless wild creatures, who looked so fierce that no
young woman who ever sat upon a three-legged stool could dare to
approach, much less to milk them! But the Gauchos attacked the cows,
tied their legs with strips of hide, and as soon as they became quiet, the shops
of Buenos Aires were literally full of butter. But now for the sad moral of the
story: after the difficulties had been all conquered, it was discovered, first,
that the butter would not keep! – and secondly, that, somehow or other, the
Gauchos and natives of Buenos Aires liked oil better!19

Satirists at the time were quick to draw up mock company prospec-

tuses that poked fun at the promotional mania. John Bull, a weekly

44
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 THE FIRST EMERGING MARKET BUBBLE

periodical, showed a prospectus for a company for raising iron cannon-

balls from the seabed around the scenes of great naval encounters.20 The
London Magazine told of a Mr Hop-the-twig forming the Aeronautical
Swine-shearing Lunarian Joint Stock Commercial and Agricultural
Company (or Lunarian A. S. S.) to develop swine wool commerce with
the moon.21 Another satirical prospectus, which appears to have ema-
nated from a wag on the Stock Exchange, was for a company to drain the
Red Sea to recover the gold and jewels left by the Egyptians in their
pursuit of the Israelites.22
Figure 3.1 shows the classic bubble pattern in foreign mining stocks
and new miscellaneous companies. Remarkably, the index of blue-chip
stocks does not show this pattern at all. If an investor had invested £100 in
the foreign mining index in August 1824, it would have been worth an
impressive £511 by February 1825, the peak of the bubble.
At the start of February 1825, Lord Eldon, the Lord Chancellor,
stood up and delivered the King’s speech at the opening of
Parliament. This soaring speech reflected and reinforced the mood
of optimism about the economy.24 It followed the largest 1-month
increase in the two stock indexes in Figure 3.1, and coincided with

600

500

400

300

200

100

0
Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec
1824 1824 1824 1825 1825 1825 1825 1825 1825 1826 1826 1826 1826 1826 1826
New non-mining stocks Foreign mining stocks Blue-chip stocks
Figure 3.1 Stock return indexes, 1824–6 23

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 BOOM AND BUST

the month when the largest number of company promotions had

taken place. There was a lot to boast and be optimistic about. Then,
immediately following his delivery of the King’s speech, Lord Eldon
did a complete about turn and delivered a speech which tried to prick
the growing stock market bubble. Eldon stated that he would bring
legislation before Parliament which would check dealing in the shares
of unincorporated companies, i.e. those companies which had not
been authorised by the Crown or Parliament. This intervention by
the Lord Chancellor caused great panic in the stock market.25 The
Times reported that in the days following the Lord Chancellor’s
remarks, sales were very difficult and large price falls were sustained
when holders insisted on selling.26
A further dampener on the stock market and company promotions
came the very next day, when Chief Justice Abbott invoked the Bubble
Act to rule that the Equitable Bank Loan Company (which had John
‘Bubble’ Wilks as a promoter and company solicitor) was illegal because
it had transferable shares. Moreover, it had a mischievous intent
because it charged a usurious interest rate of 8 per cent, which was
3 per cent above the maximum interest which could be charged.27 This
ruling, in combination with Eldon’s speech, triggered a rush of bills to
Parliament seeking either full incorporation or the lesser right for
owners to be able to sue and be sued collectively. In total, 439 petitions
for private bills came before Parliament in the 1825 session, 206 of
which were passed.28 However, at the end of March, Lord Eldon dra-
matically intervened once more by his judgment in the case of Kinder
v. Taylor, which, on the face of it, was a minor legal dispute about the
company constitution of the Real del Monte, one of the first mining
ventures in Mexico. The Real del Monte had been operating as an
unincorporated company, i.e. it had not been incorporated by
Parliament yet had most of the legal features of a company. Eldon
astounded both parties to the dispute by using the case to argue that
the company, and by implication others like it, was illegal under both
statutory and common law. One implication of his judgment was that
even if the Bubble Act was to be removed from the statute book, the
common law would prevent any ‘slide towards uncontrolled speculation
and chaos’.29

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 THE FIRST EMERGING MARKET BUBBLE

The combined effect of these interventions was that the prices of

foreign mining stocks fell 50 per cent by the end of April and the prices
of new miscellaneous companies stalled (see Figure 3.1). Although these
interventions acted as a brake on trading activity and prices, they did
nothing to slacken the promotion of new schemes coming to market or
seeking parliamentary approval.30
The attempts to burst the bubble produced an active pamphlet
literature opposing them as legislative interference and supporting, in
particular, Latin American mining companies. Among the pamphle-
teers was a 21-year-old solicitor’s clerk by the name of Benjamin
Disraeli, who 43 years later would become Prime Minister. Disraeli
wrote two pamphlets in March and April 1825 and edited a third later
that year. His main aim was to refute what he saw as the erroneous
parallel being drawn between the Latin American mining boom and
the South Sea Bubble. He also puffed the benefits of Latin American
mining companies by means of the following strategy. He first spent
considerable time giving a detailed, somewhat mundane and see-
mingly measured overview of each Latin American mining company.
He then moved on to deal with the ‘very prevalent opinion that the
property of the whole civilized globe is about to be depreciated by the
sudden and immense increase of the circulating medium’ because of
the abundant silver and gold in the Latin American mines.31 Disraeli
showed unconcern at this, arguing that Mexico would require all the
gold and silver coins which her own mines would afford. The final
part of his strategy was to cast aspersions on the domestic joint-stock
enterprises which were being established, suggesting that Parliament
might need to act to restrain them.
Lord Eldon never brought his promised legislation to Parliament, but
on the very day he made the ruling in Chancery on the Real del Monte, an
MP moved in Parliament to repeal the Bubble Act. This was accom-
plished in July 1825, but Eldon’s ruling in the Real del Monte case
meant that the common law courts were still hostile to the unincorpo-
rated company form.32
The repeal of the Bubble Act failed to resuscitate the stock market and
company promotion boom. In June, the rate on first-class discount bills
rose from 3.5 to 4 per cent, making it difficult for speculators to pay

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 BOOM AND BUST

instalments on their shares, having relied on rising prices to help pay

previous calls.33 In addition, investors had discovered ‘that while the calls
for payments were immediate and pressing, the prospect of returns was
become more remote and uncertain; doubts too began soon to arise as to
there being sufficient security for any income’.34 From June onwards,
trading became thin and there was a rapid decline in stock prices for the
rest of the summer.
In September, the deterioration of the market in foreign mines and
new miscellaneous companies had become acute. Information regarding
the poor state of many Latin American mines had got back to the London
market, and it had also become all too clear that the Latin American
market for British manufactured goods was nowhere near as large as had
been anticipated. Many shareholders refused to pay calls and had begun
to sell out, while in London coffee houses, shareholders met to dissolve
their companies before they lost any more money.35 The panic on the
stock market continued into November, and by December had spilled
over into the money market. The banking system experienced a major
crisis, which abated only in January 1826 after extraordinary intervention
by the Bank of England.
News then started to spread about the costs of getting Mexican mines
up and running, together with reports on the extent to which flooding
hindered their operations. In May 1826, The Times reported that shares in
mining companies were unsalable – no broker or jobber was willing to
buy them.36 By the end of 1826, most Latin American mining companies
had folded. The index of foreign mining stocks in Figure 3.1, having been
at 511 in February 1825, had fallen to 27 by the end of 1826. Even those
that survived beyond 1826 produced little in the way of returns for
investors.37
Captain Francis Head, an officer in the Royal Engineers and former
manager of the Rio Plata Mining Association, published a devastating
account of their failure in the autumn of 1826. He attributed their failure
to three factors.38 First, the physical difficulties of getting machinery,
men, provisions and materials to remote mines – roads were poor, rivers
often impassable and mines were usually miles from the nearest port. The
Colombian Mining Association’s chief engineer, the young Robert
Stephenson (of Rocket fame) found that the steam engines and other

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 THE FIRST EMERGING MARKET BUBBLE

machinery were too bulky to transport on mules over primitive roads and
mountain paths.
Second, there were major personnel difficulties. Locals were unwill-
ing to work and to adhere to contracts, most Cornish workers were
permanently inebriated and mines were so difficult to inspect that
a mine manager could easily steal the proceeds. Major disputes over
pay broke out in Mexico, where the local workforce demanded their
traditional payment method – the partido, which was a fixed daily wage
plus a piece rate. The resulting strikes were prolonged and violent.
Third, the newly independent Latin American nations were subject to
political instability, suffering from expropriation by politicians and weak
contract enforcement. Reports by other travellers and officials also
emphasised the instability and corruption of the new countries, as well
as their economic difficulties.39 Indeed, the political instability was such
that bondholders quickly realised that they had little hope of repayment
and by the end of 1827 all Latin American bonds, apart from those of
Brazil, were in default.40
Newspapers played a key role in this first emerging market bubble. On
the one hand, their editorials were sceptical: many company promotions
were branded by the press as ‘bubbles’ or ‘schemes’.41 The Times warned
its readers about the new fanciful company promotions and advised them
‘not to become dupes of their own imaginations’.42 It is perhaps not
surprising that The Times opposed new schemes because it had a long
history of opposing joint-stock enterprise and speculation in shares.
From early in 1824, The Times was warning its readers to be circumspect
and cautious about new schemes that were being projected, drawing
parallels with what they called the South Sea tragedy or mania of
1720.43 Indeed, after the bubble had burst one gentleman praised the
paper for exposing all ‘humbug speculations’ and several readers wrote
letters to the editor of The Times thanking the paper for their prescient
warnings about the ‘mania’ for joint-stock companies.44
On the other hand, newspapers in a variety of ways might have
helped inflate the bubble. Some journalists were paid to puff new
schemes, with the editor of the Morning Chronicle questioning the
integrity of fellow editors who permitted this to happen.45 However,
the role of newspapers during the bubble may have been more subtle.

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 BOOM AND BUST

They began for the first time to publish daily articles on the condition
of the stock exchange, thus reflecting and probably magnifying the
boom psychology which was gripping the market.46 They also printed
(for a fee) prospectuses of new schemes – on the 23 and
24 January 1825, The Times and Morning Chronicle contained prospec-
tuses of 35 new companies. In addition, both The Times and Morning
Chronicle, then the two main daily newspapers, devoted many column
inches to Latin American issues, highlighting the investment possibili-
ties and fabled precious metals of Mexico. It was even suggested that
editorials and opinion pieces were bought in newspapers to laud any
Latin American country that was about to about to issue bonds.47 The
newspapers thus helped to develop and shape the narrative which
encouraged people to invest in Latin American enterprises.

CAUSES

Chief Justice Abbott’s attempts to prick the bubble were partly motivated
by what he saw as gaming and rash speculation – investors buying shares
simply in the hope of a quick profit when they resold. Many other
contemporaries also highlighted the increased spirit of speculation dur-
ing the boom. The Times warned its readers at an early stage about ‘the
spirit of gambling’ and the ‘community of gamesters’ who bought shares
simply in the hope of making money by selling them.48 This view was
echoed in the pamphlet literature of the time. For instance, the conten-
tion of one pamphleteer was that ‘too many people engaged in schemes
of all kinds, not with any consideration of what the undertaking was likely
to produce, not with an intention of contributing their share of the
capital, but as a game on the prices of shares’.49
Joseph Parkes was an experienced company solicitor who, as well as
experiencing the events of 1824 to 1825, made a careful study of the
period. He presented his evidence before a parliamentary select commit-
tee in 1844. He describes as a national epidemic the extraordinary
quantity of speculation which occurred in 1824 and 1825, and he told
the committee how police officers had been employed to keep order in
places where shares were being traded.50 John McCulloch, the first
economics professor at University College London, writing in 1832 of

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 THE FIRST EMERGING MARKET BUBBLE

the events of 1824–5, maintained that ‘many who were most eager in the
pursuit of shares, intended only to hold them for a few days or weeks, to
profit by the rise which they anticipated would take place, by selling them
to others more credulous or bold than themselves’.51
John Francis, a director of the Bank of England, was also an eyewitness
of this national epidemic of speculation. He described the scene around
the entrance to the Stock Exchange during the boom months as follows:
‘some lads . . . whose miscellaneous finery was finely emblematical of rag
fair, passed in and out; and besides these, there attended a strangely
varied rabble, exhibiting in all sorts of forms and ages, dirty habiliments,
calamitous poverty, and grim-faced villainy’.52 Francis recalled that it
took a £5 fine for those who blocked the entrance to disperse the
nuisance. One young speculator, who fits Francis’ description, was
Benjamin Disraeli. Having only £52 to his name in 1824, he had bor-
rowed heavily to make his fortune by speculating in mining stocks.53 In
the spring of 1825, he found himself holding shares in all the great
mining companies. It took him years to pay off his debts – as late as
1849, his stockbroker was still trying to obtain £1,200 plus interest from
him.
The Times argued that this ‘gigantic speculation’ had no parallel but
the South Sea Bubble.54 One major similarity to the South Sea episode
was the widespread use of part-paid shares by new companies. This
feature enabled a moderate rise in share prices to produce a large profit
because only a small instalment (about £5 or less) had been paid on the
shares when they were sold. The possibility of making an enormous profit
while only risking a small sum was ‘a bait too tempting to be resisted’, and
opened up share speculation to the masses.55 As a nineteenth-century
chronicler of commercial crises put it, ‘the old and young, men and
women, rich and poor, noble and simple, one and all, were drawn into
the throng’.56
Short selling was a well-known practice on the London Stock
Exchange in the 1820s, but its usefulness in preventing the escalation
of stock prices during the bubble was stymied by the presence of corners
and rigs, whereby directors of a new company bought up its shares,
making it very costly for short sellers to deliver on their contracts.57
This had also been the case in 1720. Short selling was viewed as morally

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 BOOM AND BUST

suspect and financial markets were happy for this market manipulation
to be used to thwart the pessimistic and opportunistic short sellers.
During the first emerging market bubble, marketability, the second
side of the bubble triangle, increased substantially thanks to entrepre-
neurs pushing for their enterprises to be incorporated and have free
transferability of shares. These shares were usually much more market-
able than those of established companies because they were issued in
much smaller denominations. The average cost of one share in a canal
company in 1825 was £271, compared to £10 for new miscellaneous
companies.58 To put these figures in context, the average labourer at
this time would have been doing well to earn £50 per annum, and the
average teacher £70. Furthermore, unlike the established sectors, unpaid
capital was commonplace in both mining and new miscellaneous com-
panies, with the result that shares with apparently high denominations of
£50 or £100 were accessible even to people who had £10 or less to invest.
The increased marketability of securities in 1825 is reflected in the over-
all liquidity of the stock and bond markets, which reached an all-time
high that would not be surpassed until the next bubble arrived in 1844.59
The final side of the bubble triangle was a major monetary stimulus
and expansion of credit. The government continually injected money
into the economy by buying out its long-term debt, and in 1823 and 1824
it used debt conversion schemes to lower the long-term interest rate.60
Under pressure from the government, the Bank of England reduced its
discount rate for the first time ever, from 5 to 4 per cent in June 1822.61
Furthermore, the Bank engaged in open market operations by purchas-
ing the Dead Weight Annuity, which had been created by the govern-
ment to pay for naval and military pensions and which they had failed to
sell to investors.62 As a result of these actions, the Bank’s note issue in the
3 years before February 1825 increased by 25 per cent. The English
country banks also increased their note issue by around 50 per cent
between 1823 and 1825.63
After 1825, this monetary expansion was seen as a key misstep that
allowed the bubble to occur. The economist Thomas Tooke, anticipating
our fire triangle metaphor, argued that ‘the Bank [of England] had not
kindled the fire, but, instead of attempting to stop the progress of the flames,
it supplied fuel for maintaining and extending the conflagration’.64

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 THE FIRST EMERGING MARKET BUBBLE

According to Tooke, the fire had been kindled by the government’s debt-
refinancing scheme, and the Bank should have reduced its note issue in
1824 to counteract this effect, but instead increased it.65 Furthermore, he
judged that the Bank’s acquisition of government securities added to the
spirit of speculation.66 Others blamed the Bank and government equally for
the monetary and credit easing, but the Bank, naturally, took a different
view.67 The majority view among the witnesses at the 1832 Committee of
Secrecy on Bank of England Charter was that the blame for generating
the stock market speculation and rise in asset prices lay with the country
banks.68
The effect of the monetary and credit easing on stocks was exacer-
bated by the increased leverage available to investors through the unpaid
capital of many new shares. In addition, many investors appear to have,
like Benjamin Disraeli, borrowed heavily to invest in shares which
required only a small down payment.69 This double dose of leverage
meant that individuals with small sums of money to their name could
access the stock market.
The spark which set the fire alight was a change in government policy
towards Latin America and the corporation. Once the Latin American
states had gained their independence from Spain, the policy stance of
Britain was to foster rapprochement between the two sides. However, in
1823, merchant groups from London, Liverpool and Manchester started
to petition Parliament for the formal recognition of the states in order to
protect the infant markets for their goods. George Canning, the Foreign
Secretary from 1822 to 1827, sympathised with the merchants in this, but
faced opposition from the king and fellow politicians. In 1823 Canning
dispatched commissioners to Buenos Aires, Colombia and Mexico and
increasingly his speeches in the Commons pushed for the recognition of
these new nations. Many of the prospectuses of mining companies
launched in 1824 stated that the political stability of the new countries
was almost assured because their independence was shortly to be recog-
nised by the British government.70 Canning’s formal recognition of the
independence of the Latin American countries in December 1824 thus
represented an enormous boost for company promoters. This policy
change was immediately followed by the frenzied promotion boom and
the rapid appreciation of stock prices, as investors focused their attention

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 BOOM AND BUST

on Latin American mines and other companies which could take advan-
tage of the resulting plentiful trade opportunities.71 The ideology under-
lying Canning’s move was used as a marketing tool, with investors
encouraged to play their role in ‘patronising infant liberty and liberal
principles’ by financing the reestablishment of mines in newly indepen-
dent colonies.72
None of this would have resulted in a bubble, however, were it not for
a second policy change: a more permissive attitude towards incorpora-
tion and the trading of shares. During 1824 and 1825, active MPs were
supporting an unprecedented number of incorporation bills and
requests from unincorporated companies to have the right to sue and
be sued collectively. These bills passed easily because of a series of huge
conflicts of interest facing MPs.73 First, MPs were shareholders in com-
panies and yet were able to sit on the committee that examined incor-
poration bills. In one case, 16 members of a committee held shares in the
company whose incorporation bill was about to come before
them. Second, MPs were often recruited to be directors of these new
companies to give them an air of respectability. Many MPs were induced
by the likes of John ‘Bubble’ Wilks to become directors by the gift of
shares in the company, which they were free to sell for a large profit once
the company had been incorporated. Of the 278 directors in Latin
American mining companies listed by Henry English, 45 were MPs, and
about one-third of the major companies promoted had MPs or peers as
a lead or founding director. Thirty-one MPs were directors in three or
more of the newly established companies.74 The Lord Mayor of London,
who was also on the list, later claimed to have received as many as five or
six requests per day to become a director of a company.75

CONSEQUENCES

The boom was well and truly over by the early summer of 1825. Banks had
lent considerable sums of money to investors and merchants who had
been tempted by the rising stock and commodity prices, and were there-
fore extremely vulnerable to a downturn.76 By the autumn, several banks
in the west of England had collapsed, unsettling the money markets and
the Bank of England. Then, at the beginning of December 1825, a major

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 THE FIRST EMERGING MARKET BUBBLE

London bank, Pole, Thornton and Company, which had been investing
in risky securities, failed after experiencing a run. This collapse was
followed by a series of bank runs and failures of English country banks.
The panic peaked on 14 December 1825, the notorious ‘day of terror’, in
which many London and country banks closed their doors; there were
few towns in England where the ‘stoppage of local banks had not
occurred or was not feared hourly’.77 According to The Times, in the
week after the day of terror, banks all over England and Wales faced
severe runs.78
Many of the banks which closed during December eventually reo-
pened. But 30 English banks entered bankruptcy in December 1825
and a further 33 did so in the first quarter of 1826.79 In total, almost
18 per cent of the English banking system failed.80 But this failure rate
does not fully capture the severity of the crisis. Nearly every English
country bank approached the Bank of England for liquidity because
money could not be borrowed from elsewhere, even on the security of
government bonds.81 According to William Huskisson, the President of
the Board of Trade, England ‘was within four-and-twenty hours of a state
of barter’.82 This is corroborated by witnesses before an 1832 parliamen-
tary committee, who judged the entire banking and credit system in
December 1825 to have been within a few days of completely
collapsing.83 Ultimately, the Bank of England brought the panic to an
end by acting as a lender of last resort (i.e. lending to banks when no one
else would) from 14 December onwards. The Bank ‘did all in their power
to relieve the distress, and they discounted as liberally as any body of men
could do, and they deserve the greatest credit from the country for what
they did’.84
Why was the banking system so vulnerable to the collapse of the 1825
boom? Regulation at the time meant that English banks were restricted to
the partnership form of organisation and, if they wanted to issue notes
(which most banks of the time did), they could have no more than six
partners.85 As a result, English partnership banks were very small, making
them vulnerable in three ways. First, shocks to partner wealth gave them
the incentive to invest the bank’s money in risky assets in an effort to
recover losses. Second, the small number of partners meant that banks
had small equity cushions to absorb the losses arising from non-

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 BOOM AND BUST

performing assets. Third, the restrictions on growth effectively forced

banks to restrict their operations to one narrow geographical location,
meaning that they could not adequately diversify their assets and
liabilities.
The vulnerability of the banking system was caused by its regulatory
structure, and hence the 1825 collapse of the English banking system
ultimately had political roots. As a quid pro quo for providing finance to
the government, the charter of the Bank of England meant that other
banks could only operate as partnerships. The aristocracy and landed
gentry, the political elite at the time, supported this regulation because it
restricted the credit extended to small farmers, enabling landlords to
maintain power and social control over them.
The economic effect of the bursting of the first emerging market
bubble and the subsequent banking crisis was substantial. First, the
money supply fell, due to the closure of so many banks. Second, mer-
chants and entrepreneurs found it nearly impossible to obtain finance
because many surviving banks reduced their lending and refused to
discount bills of exchange.86 Bankruptcies increased significantly, and
in 1826 the United Kingdom’s real GDP contracted by 5.3 per cent. To
put this into perspective, between 1800 and 2010, only 3 years experi-
enced a larger fall in GDP than 1826. The damage was not restricted to
the United Kingdom, however, as the bubble also left a negative mark on
Latin America. It would be nearly 50 years before British investors would
once again take an interest in Latin American ventures. Although we can
only speculate, it is likely that the bubble, by hamstringing finances and
discouraging investment, contributed to the post-independence instabil-
ity of Latin America throughout the rest of the century.
On the other hand, the first emerging market bubble brought two
major beneficial changes to the financial system. The first change was the
liberalisation of the banking system, started by an Act passed by
Parliament in 1826, which allowed banks to form freely as joint-stock
companies with unlimited liability. The banking system which was to
emerge from this reform was a paragon of stability, while simultaneously
meeting the monetary and credit needs of the country.87 The second
change was the abolition of the Bubble Act, which marked the move
towards the liberalisation of incorporation law in the United Kingdom.

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 THE FIRST EMERGING MARKET BUBBLE

This made it easier for business people to aggregate their capital and
build the large business enterprises which would transform Britain.
However, it also made it much easier for companies to issue shares
which could be traded in public markets: a substantial increase in funda-
mental marketability. Partly as a consequence, bubbles would be much
more common in the nineteenth century than they had been in the
eighteenth.
Another important legacy of the first emerging market bubble was the
birth of financial journalism.88 After 1825, newspapers began to publish
city columns, cover company annual general meetings (AGMs) and
comment on movements in and the state of the market. The new specia-
lised financial press provided an independent and authoritative source of
information and advice for investors. The events of 1824 and 1825 were
therefore largely responsible for the rise of the press as a watchdog of the
financial system, barking whenever things did not appear right. But how
effective would the press be at preventing bubbles in the future? In
Chapter 4, we will see that a major set of negative editorials in the UK
financial press was instrumental in popping – but not preventing – the
bubble in UK railway shares.

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 CHAPTER 4

Democratising Speculation: The Great Railway

Mania

‘Bless railroads everywhere,’

I said, ‘and the world’s advance;
Bless every railroad share
In Italy, Ireland, France,

For never a beggar need now despair,

And every rogue has a chance.’
William Makepeace Thackeray1

London is as flat as it can be. There is nothing to talk about, but Railroad
shares. And as I am not a Capitalist, I don’t find anything interesting in
that.
Charles Dickens2

W hile the 1825 bubble led to the legalisation of

companies with tradeable shares, marketability was still some-
what limited because only Parliament could grant the right for a business
to incorporate with limited liability. Parliament, however, now had the
power to substantially increase marketability at any time simply by grant-
ing large numbers of charters. In the mid-1840s they did exactly that,
granting charters to hundreds of railway companies during what became
known as the Railway Mania. The Economist, in 2008, described the Railway
Mania as ‘arguably the greatest bubble in history’.3 This is not just
modern hyperbole. Charles Mackay, in the third edition of Memoirs
of Extraordinary Popular Delusions and the Madness of Crowds,
wrote that the Railway Mania was greater than anything that had
preceded it.4 Karl Marx, in Das Kapital, referred to it as the ‘groβen
Eisenbahnschwindel’, which literally means the ‘great Railway Mania’.5

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 THE GREAT RAILWAY MANIA

Two decades prior to the Great Railway Mania, a new and revolu-
tionary technology was beginning to transform Britain: steam-powered
railways. The first such railway in the world had been authorised by
Parliament in 1821 and opened in 1825, the year of the previous
bubble. Parliamentary authorisation was necessary because of the
need to force landowners to sell the land along the railway’s proposed
route, as well as to acquire the right to incorporate.6 The next railway
to be authorised was the Liverpool and Manchester Railway in 1826.
This railway, which was the UK’s first passenger railway, opened in
1830. The official opening was a disaster, with William Huskisson, the
MP for Liverpool, fatally wounded by George Stephenson’s Rocket
locomotive in front of the Prime Minister.7 This tragic beginning,
however, did not prevent the Liverpool and Manchester Railway
from quickly becoming a success – particularly for its shareholders,
as by 1835 its dividend rate was close to 10 per cent. The early success
of the Liverpool and Manchester Railway is perhaps unsurprising
given that it had a monopoly.
The success of the Liverpool and Manchester Railway encouraged
promoters to approach Parliament with railway schemes for other parts
of the country. In 1836 and 1837, Parliament authorised 59 new rail-
ways and 1,500 miles of track. This mini promotion boom was accom-
panied by a boom and bust in railway share prices, with share prices
rising by 65 per cent and then falling by 45 per cent between May 1835
and May 1837.8 This episode is sometimes referred to as the ‘first
railway mania’ because it served as a portentous warning of what was
to come several years later in the Great Railway Mania.9
The collapse of share prices sent the railway industry into a lull, and
very few railways were authorised between 1838 and 1843. In 1840 railway
development even went into reverse, with more miles of railway aban-
doned than were authorised.10 As of 1843, despite the technology being
over 20 years old, England and Scotland together had just over 40 railway
companies with an average of 36 miles of track. The following year,
however, William Gladstone, anticipating that improved economic con-
ditions might re-stimulate railway development, initiated a parliamentary
select committee to consider their future regulation. Gladstone was
particularly keen to constrain their potential monopoly power, but he

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 BOOM AND BUST

was also keen to develop a national rail network, which would avoid
unnecessary duplication. A national rail network would also create net-
work externalities: if the railway network covered most of the country,
people would use trains much more often, benefiting existing railways by
creating lots of extra customers for them.11
The resulting Railways Act was passed in July 1844, requiring at least
one train per day per company to carry passengers at a rate of one penny
per mile. The Act also allowed the government to sanction new compet-
ing lines; they could even nationalise lines authorised after 1844 if the
lines generated dividends of more than 10 per cent. This latter threat
signalled to investors that railways were very profitable enterprises which
were expected to generate huge dividends – well beyond what any other
industry was paying at the time.
A further product of Gladstone’s Railway Act was a new way of proces-
sing applications for railways. The parliamentary private bill system, which
had worked well for all previous transport developments in the UK, such as
the locally based canals and turnpikes, did not operate as effectively for
railways because the national interest was neglected at the expense of the
local.12 Thus in August 1844 a ‘Railway Board’ was established to scrutinise
projected railways, with the purpose of rationing schemes and building an
integrated national rail network.13 The main intention of the Railway
Board was to prevent duplicate and competing lines from being con-
structed. The Economist, cheerleaders for free trade and competition,
declared that whether new railway companies should be established in
competition with existing ones should not be left to the likes of Mr
Gladstone; rather (and somewhat unfortunately as events would prove),
they suggested that those who invest their money are the best judges.14
The excitement generated by Gladstone’s Railway Act in the first half
of 1844 can be seen from Figure 4.1, which charts a railway stock index
and, for the purposes of comparison, an index of returns on the 20
largest non-railway companies in this era. Railways were extensively pro-
moted around this time, and 199 applications for new railways were
presented for consideration in the 1845 parliamentary session, which at
the time typically ran from February to July.15 Since many believed that
the network effects from new railways would make existing railways even
more profitable, railway stock prices skyrocketed, and many more

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 THE GREAT RAILWAY MANIA

2,200

2,000 All railways

1,800 Non-railways

1,600

1,400

1,200

1,000

800

600

400
1843 1844 1845 1846 1847 1848 1849 1850
Figure 4.1 Weekly stock indexes of British Railways and non-railway blue-chip companies16

promoters devised railway schemes for consideration in the 1846 session

of Parliament.
The buoyant atmosphere of the time and the resultant promotion of new
railway schemes was best described in The Glenmutchkin Railway, a satirical
tale published in the aftermath of the bubble.17 The story tells of two
protagonists – Augustus Reginald Dunshunner and Bob M’Corkindale.
Both were hard up, averse to exertion and connoisseurs of the finest Oban
malt whisky. M’Corkindale was the business brains of the pair, having once
leafed through Adam Smith’s Wealth of Nations. In 1844, observing how the
newspapers teemed every week with new railway schemes which were rapidly
subscribed for, they joined the speculative rush with their combined funds of
£300. But in 6 months they never received an allocation of original shares
because of their low social status, and had gained only £20 by buying and
selling railway shares on the stock market.
In 1845, frustrated at their lack of success, Dunshunner and
M’Corkindale decided to promote their own railway, which was to be
12 miles long and based in the mythical valley of Glenmutchkin in the
Scottish Highlands. They drew up a prospectus overnight, which described

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 BOOM AND BUST

Glenmutchkin as a highly populated and prosperous valley. They packed

the provisional board of directors of the railway with names resembling
those of Celtic chieftains or Scottish lairds, which they believed to be
‘sonorous to the ears of the Saxon’. They decided to have a leading
Presbyterian businessman on the board to attract the money of other
Presbyterians, who could supposedly ‘smell a [bargain] from an almost
incredible distance’. To further attract Scottish Presbyterians as investors,
the prospectus stated that the company was opposed to all Sunday travel-
ling and would distribute 12,000 evangelical tracts to the poor.
To set up a railway company, promoters had to make a detailed
application to Parliament in the November preceding the parliamentary
session. This application had to include, among other things, the ration-
ale for the railway, estimates of costs, traffic and working expenses. It also
had to include the names and details of individuals who had jointly
undertaken to provide 75 per cent of the capital that the company
required, and already paid 5 per cent of the capital they had promised.
Scrip certificates (or scrip as they were commonly known) were issued
to individuals who had been allocated shares and paid up their 5 per cent.
The fictional Glenmutchkin Railway issued 12,000 shares of £20 each,
which meant that successful subscribers initially paid only £1.
Dunshunner and M’Corkindale hoped to make a lot of money trading
scrip, which was actively traded even though it was illegal to do so.18 Scrip
were made out to bearer, making them easy to transfer without fear of
legal reprisal. However, the original holder of a scrip certificate
remained legally liable for all the debts of the railway until it was incor-
porated, and buyers of scrip would have been in a dubious legal position
if they had wanted to sue the promoters for losses.19
When an application reached Parliament, it was then sponsored by
MPs using Parliament’s private bill procedure. The private bill was
reviewed by a parliamentary committee, and it could be contested,
which would dramatically increase the costs to the promoters of getting
the bill through Parliament. It also had to get approval from Gladstone’s
Railway Board. If successful, a parliamentary private bill was passed that
authorised the construction of the railway and the purchase of the
necessary lands and incorporated the railway as a limited liability com-
pany. At this stage, the investors who had had shares allotted to them

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 THE GREAT RAILWAY MANIA

were issued with share certificates. They were also expected to meet
future calls on capital as and when they arose. The railway company was
also free at this point to raise additional capital. The application of the
Glenmutchkin Railway failed, much to the relief of Dunshunner
and M’Corkindale, whose scam would have been exposed if their appli-
cation to Parliament had been successful.
During the 1845 parliamentary session, major problems with the rail-
way authorisation process became increasingly clear. The Railway Board
was routinely ignored: 35.5 per cent of its recommendations were not
implemented. It was subsequently disbanded on 10 July 1845.20 This
made it more likely that a railway bill would be evaluated on its local
social costs and benefits, in isolation from national considerations,
a process which took no account of network externalities or the potential
wasteful competition arising from the duplication of routes.21 This
resulted in a mad rush of railway schemes being developed for parlia-
mentary approval in the 1846 session.
By the autumn of 1845, an astonishing 562 new railway petitions had
been submitted to Parliament.22 Notably, many other projected railway
companies never reached the stage of applying for parliamentary author-
isation – The Times estimated that 1,238 new projects were initiated in
1845 alone.23 The scale of railway promotion in the autumn of 1845 is
illustrated in Figure 4.2, which plots the word count of the advertise-
ments promoting new railways in the Railway Times, the leading railway
periodical at the time. The first blip in this series occurred in the autumn
of 1844, when the railways that were applying to be considered during the
1845 parliamentary session were being promoted and raising capital.
However, this was completely overshadowed by the scale of promotion
adverts that were placed in the autumn of 1845. Such was the level of
promotion that the two leading railway periodicals printed up to three
weekly supplements during September and October 1845 to cope with
the demand for advertising new railway schemes in order to attract
investors.24 As can be seen from Figure 4.2, this explosion in promotional
activity coincided with the tipping point of the railway share index.
The boom in share prices and promotion boom were accompanied by
a boom in railway periodicals, with 16 periodicals circulating in 1845.
Most of these were short-lived, lasting no longer than a few months, and

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 BOOM AND BUST

160 2,200
Word count of promotion adverts (’000s)

140 2,000

1,800
120

Railway stock index

1,600
100
right-hand scale
1,400
80
1,200
60
1,000
left-hand scale
40
800
20 600

0 400
1843 1844 1845 1846 1847 1848 1849 1850
Figure 4.2 Railway stock market index and weekly word count of railway company
promotion adverts25

their median circulation was 10,750 per week, compared to circa 355,000
for the Railway Times.26 The Economist also entered the fray of railway
reporting in January 1845, when it introduced a section devoted to the
railways. These newspapers tended to reflect the positivity of the railway
market, with upward price movements typically followed by positive press
coverage. Surprisingly, however, newspapers do not appear to have rein-
forced market sentiment: positive newspaper coverage was not associated
with subsequent price increases.27
The increase in promotional activity that followed the demise of the
Railway Board began to cause concern that duplicate lines would be
authorised.28 In particular, a series of articles in The Times from
July 1845 onwards warned about the detrimental effects of the new
proposed railways.29 The financial press, which had been conceived in
the aftermath of the 1825 bubble, was acting as a watchdog for investors,
barking at signs of trouble. And it was not any old dog which was
barking – The Times was by some distance the leading daily newspaper
in the 1840s in terms of circulation and influence.30 Its editorials were
extremely critical of ‘excessive speculation’ in railway shares. On
18 October 1845, the weekend before the beginning of the market
crash, its editorial was scathing: ‘the mania for railway speculation has

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 THE GREAT RAILWAY MANIA

reached that height at which all follies, however absurd in themselves,

cease to be ludicrous, and become, by reason of their universality, fit
subjects for the politician to consider as well as the moralist’.31 In
a supplement on 17 November 1845, The Times published an exposé
of the madness of railway speculation.32
Henry Tuck, an author of railway shareholder manuals, laid the
blame for the collapse of the market at the feet of The Times.33 The
Railway Times used scurrilous language, accusing The Times and its
reporters of bearing the market for their own gain and of being habitual
liars for fraudulent purposes. Such was its ire that the leading article
in the Railway Times each week between 18 October and 13
December 1845 focused on the role of The Times in causing the collapse
of the market for railway stocks.34 However, a study on the effect of
negative editorials on the market for railway shares suggests that The
Times had a negligible effect on the market.35 Although the newspaper
may have played a role in the crash by calling attention to the railway
promotion boom, it was a confluence of major events at this time which
really caused the bubble to burst.
First, the abolition of the Railway Board and the free-for-all promo-
tion craze meant that, rather than benefiting from the positive extern-
alities of a well-organised network, railway firms began to compete
wastefully against one another. Second, there was a very poor harvest
in England and Scotland, and a disastrous one in Ireland, where the
potato crop failed due to blight. By the middle of October, the severity
of this situation had become clear.36 In December 1845, it sparked
a political crisis when the Prime Minister, Robert Peel, temporarily
resigned his office because his cabinet did not support his desire to
repeal the Corn Laws (which placed tariffs and restrictions on grain
imports).
Third, the outflow of gold due to problems with the harvest prompted
the Bank of England to increase its interest rate from 2.5 to 3 per cent on
16 October and then to 3.5 per cent on 6 November.37 Some commenta-
tors have suggested that the decline in railway share prices was attribu-
table to these rises in the Bank of England rate – the Bank was in essence
pricking the bubble.38 However, The Economist’s analysis at the time is
probably closer to the truth – the rate rise ‘only determined the great

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 BOOM AND BUST

majority of the holders of shares to do then what they contemplated

doing sooner or later, to sell most of the shares they held’.39
Fourth, the sharp fall in railway share prices may have been precipi-
tated by the large calls on capital made by the railways which Parliament
had just authorised in July and August 1845. These substantial calls were
made as railways began the construction of their lines. These calls
dwarfed any that had been made in the previous 3 years and signalled
the beginning of large and frequent capital calls upon railway share-
holders. After the previous heady months, this may have been a reality
check for many investors.
As can be seen from Figure 4.2, after the dark days in the last quarter
of 1845, the market for railway shares stabilised somewhat in early 1846,
with investors neither regaining their former enthusiasm nor succumb-
ing to panic. However, from August 1846 share prices once again
declined. When it finally reached its bottom in April 1850, the market
for railway shares had fallen 66 per cent from its peak of the summer of
1845.
As with many other bubbles, the bust of the Railway Mania revealed
and induced dubious practices. In 1848, a pamphlet was published
which alleged that the railways controlled by George Hudson, the
‘Railway King’, were charging expenses to capital rather than revenue,
allowing them to report artificially high profits and pay higher divi-
dends than were warranted.40 In 1849, several committees of inquiry
established by shareholders found that Hudson had over-allocated
scrip to himself, made related-party transactions between railways
that he controlled and manipulated company accounts to overstate
profits and dividends.41 Hudson was not fraudulently pumping up
earnings and dividends during the boom, but trying to sustain his
empire after the crash. He resigned from his chairmanships and was
sued for various debts. He lost everything and became a bankrupt,
going into exile when he lost his seat as an MP, which had afforded
him legal protection from imprisonment for unpaid debts. However,
Hudson’s fraud appears to have been an isolated incident rather than
a systemic feature of the railway boom. Neither committees of inquiry
into other companies nor a parliamentary report on railway account-
ing found evidence of fraudulent practices.42

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 THE GREAT RAILWAY MANIA

The bursting of the Railway Mania also resulted in the Dissolution Act
being passed in 1846 to enable shareholders to force company promoters
to wind up any railway which had not received parliamentary authorisa-
tion. As for those which were authorised, Parliament passed a bill in 1850
to facilitate their abandonment if 60 per cent or more of the share-
holders requested it.43 Of the 8,590 miles authorised by Parliament in
the 1845–7 sessions, 1,560 miles were abandoned by promoters under
this second Act, and a further 2,000 miles, worth about £40 million of
capital, were abandoned before Parliament’s formal consent had been
granted.44
The magnitude of the Great Railway Mania and transformative effect
on the industry is illustrated in Figure 4.3, which shows the unprece-
dented scale of expansion and investment in railways between 1845 and
1847. The vastly greater part of capital formation (i.e. increase in physical
capital such as railway lines, bridges and locomotives) and increases in
paid-up capital occurred after 1845 because it took time to construct the
new railways, and capital was called up from shareholders on a schedule
which ran parallel to the construction of the rail network. The greatness

180 7
Gross capital formation in railways / GDP (%)
160
6
140
Paid-up capital (£ millions)

left-hand scale 5
120

100 4

80 3

60
2
40
right-hand scale 1
20

0 0
1831

1834

1837

1840

1843

1846

1849

1852

1855

1858

1861

1864

1867

1870

Figure 4.3 Gross capital formation by UK railways as a percentage of GDP and paid-up
equity capital of UK railways45

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 BOOM AND BUST

of the Railway Mania can also be considered in relation to the rest of the
stock market. In 1838, railway shares constituted 14 per cent of all quoted
stocks and 23 per cent of total stock market value. By 1848, railways made
up 48 per cent of quoted stocks and 71 per cent of total stock market
value.46

CAUSES

During the Railway Mania, marketability increased in several ways.

Parliament became much more liberal in granting corporate charters
to railway companies, with hundreds of companies receiving authorisa-
tion. Even before authorisation was granted, the process required pro-
moters to form company-like organisations which had marketable shares
in the form of scrip certificates. The market in railway shares brought an
unprecedented level of activity to the stock market: unlike most other
company shares, the shares of railway companies traded daily during the
Railway Mania.47 Indeed, the marketability of railway equity was such that
15 new stock exchanges opened around the country during the Mania to
meet the demand from the growing speculator franchise.48 Seven of
these new provincial stock exchanges shut down when the Railway
Mania came to an end.49
The next side of the bubble triangle is money and credit, without
which there is no fuel to feed a bubble. In the case of the Railway Mania,
the Bank of England’s discount rate was reduced in September 1844 to
2.5 per cent, an historic low in the 150 years since the Bank had been
established. In addition, the fall in interest rates meant that the yield on
the government’s main debt security fell to 3 per cent for the first time in
over a century.50 According to the Railway Times, one effect of low interest
rates was that it led investors to reach for yield by investing in railway
stocks.51 There is, however, very little evidence of investors borrowing to
buy railway stocks. One reason for this is that the part-paid nature of
railway stocks meant that leverage was built into them – investors could
take highly leveraged positions in railways by simply paying a 10 per cent
initial deposit. This in-built leverage contributed to the increase in share-
holder returns during the boom.52 Indeed, in order to stimulate railway
investment, Parliament lowered the required deposit to 5 per cent in

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 THE GREAT RAILWAY MANIA

February 1844, thus increasing the leveraged nature of railway shares.53

This decision was reversed in July 1845, just as the next tranche of railway
schemes was being prepared for Parliament.
As easy money and credit conditions intensified the boom in railway
share prices, so the tightening of money and credit had the opposite
effect. The raising of interest rates and the calls upon shareholders for
capital accentuated the fall in railway share prices during the bust.
Indeed, the bursting of the Mania coincided with the increase in the
Bank of England’s discount rate, while calls on capital became much
larger and more frequent in late 1845, and continued to grow over the
subsequent 3 years.
Speculation is the final side of our bubble triangle. The share price
rises during the Railway Mania attracted much in the way of speculative
money. Investing in the bubbles of 1720 and 1825 was chiefly limited to
those of means – those from the upper middle classes and gentry who
could, in some sense, afford to lose their investment stakes. However,
during the Railway Mania, thanks to low share denominations and partly
paid shares, many members of the middle and working classes were
enfranchised into the speculating class. In the case of the fictional
Glenmutchkin Railway, which was typical of most real railways, investors
only needed £1 to buy a share in the railway, with the remaining £19 to be
called up if the railway was authorised and as it was built. To put these
figures in context, civil servants at the time earned about £180 per
annum, teachers about £80 and labourers about £50.54
Many speculators of little means would have hoped to flip their shares
before the railway was authorised or before any calls were made. Part-paid
shares had also played their role in 1720 and 1825 in attracting specula-
tors, but the growth of the middle classes and the fact that very low initial
investments were required up front meant that part-paid shares played
a major role in democratising speculation during the Railway Mania. The
appearance of popular investment guides, such as the Short and Sure Guide
to Railway Speculation, The Railway Speculator’s Memorandum Book and How
to Make Money in Railway Shares, further indicates that speculation was
being democratised.
As with other famous bubble episodes, the anecdotal and circumstan-
tial evidence points to naive, amateurish and impecunious individuals

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 BOOM AND BUST

investing during the Railway Mania. Contemporaries even went as far as

suggesting that these amateurish investors in their clamour for railway
shares drove prices up and, in their panic, contributed to the collapse of
railway share prices.55 But many of these representations of investors
come from the satirical press and contemporary literary sources.56 One
of the epigraphs to this chapter is from William Makepeace Thackeray’s
satirical poem The Speculators, where he depicts impecunious rogues
talking about becoming rich through their investments in railways. But
how closely did these caricatures resemble reality?
Historians of the railways have pointed to the participation of inex-
perienced investors such as women and clergymen and the significant
role played by the nouveau riche middle classes.57 For example, literary
giants such as Charlotte Brontë and William Makepeace Thackeray and
leading scientists such as Charles Darwin invested in railway shares
during the Mania.58 Using the lists of subscribers to the railway schemes
that came before Parliament in 1845 and 1846, we are able to look
beyond the caricatures and stereotypes.59 These lists only give an insight
into the initial subscribers who invested in the run-up to the Mania
rather than into the many speculators who bought shares during the
Mania. To that end, the lists will underrepresent the middle classes
because railway promoters preferred to have their subscription lists
packed with the upper classes and gentry. Nevertheless, women made
up 6.5 per cent of subscribers and clergymen 0.9 per cent, which is not
insubstantial, and middle-class professionals made up 13.1 per cent of
subscribers and manufacturers, merchants and retailers made up
another 37.8 per cent. Even the working classes got in on the action,
making up 1 per cent of subscribers.
Short selling during the bubbles of 1720 and 1825 had been inhibited
by squeezes and rigs, whereby insiders had cornered the market for
shares. The same was likely true during the Railway Mania. The presence
of cornering is difficult to prove – it can usually only be observed when
a short seller or their stockbroker are unwilling to pay on their contracts
and are taken to court. However, a corner is the main way that
Dunshunner and M’Corkindale, the promoters of the fictional
Glenmutchkin Railway, made money on their scheme. One of the mem-
bers of their provisional board – a prosperous Presbyterian coffin maker

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 THE GREAT RAILWAY MANIA

called Samuel Sawley – started to bear the shares by short selling. Getting
wind of this, and watching as the share price tumbled back towards £1,
Dunshunner and M’Corkindale launched a corner by buying up every
available share offered for sale. When Sawley’s contract fell due, he had
to buy shares he had sold short. However, nearly all shares were under the
control of Dunshunner and M’Corkindale, and within a matter of days
the shares had risen to £17 because of Sawley’s need to meet his con-
tractual obligations. After a week of paying such high prices, Sawley had
still not managed to fulfil his obligations, and was forced to visit
Dunshunner to see if he would sell him some shares. Sawley arrived in
full funeral costume and ‘a countenance more doleful than if he had
been attending the interment of his beloved wife’. He confessed to short
selling – ‘the devil tempted me, and I oversold’ – and ended up paying
nearly all he had to buy 2,000 shares from Dunshunner.
The development and passage of Gladstone’s Railway Act provided
the spark that ignited the bubble. This Act provided a boon to the market
by suggesting that the government expected future profitability to be so
high that they might later have to consider nationalisation. But more
importantly, this Act established the Railway Board. Railways were not
a new technology – passenger railways had been around for over 15 years
and there were over 1,400 miles of railroad before the Mania – but the rail
network was not an integrated national one. The establishment of the
Railway Board signalled to investors and potential promoters that the
government would only seek to approve new railways which added to the
network. This would create network externalities for existing railways,
greatly increasing their passenger numbers.
The Railway Board was needed because the structure of Parliament
was not suited to building a national rail network. MPs at that time had
much more of an electoral incentive to promote the interests of their
local constituency than to promote the national interest. Politics was thus
dominated by local rather than national interests, and these interests
resulted in competition between towns to obtain railway schemes rather
than a desire to form a national integrated rail network.60 Gladstone’s
failure to give the Railway Board the power to overrule these local inter-
ests was a major political blunder, and when its impotency became clear
in the summer of 1845, it was abolished.61

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 BOOM AND BUST

The abolition of the Railway Board signalled the end of parliamentary

co-ordination in the attempted construction of a national rail network.
Consequently, in the autumn of 1845, Parliament was flooded with
applications, and ultimately authorised many duplicate and uneconomic
schemes that destroyed one another through wasteful competition. The
devastating effect of this competition was commented upon by one
contemporary – ‘the obvious effect of the concession of a competing
line is to diminish, if not destroy, the profits of the old line; and it is not
likely that it can, by entering into competition with the old line, itself be
highly profitable’.62 It is not surprising that this was when railway share
prices started to collapse. Indeed, The Economist later noted that lines
which had emerged in the Mania period had shown little or no profit.63
An illustration of this is that the return on equity on the York and North
Midland’s pre-Mania network was 10.1 per cent compared to -0.3 per cent
for the part of its network constructed during the Mania.64 The Railway
Times summed it up by stating that ‘railway rivalry and railway ruin are
terms nearly synonymous’.65
One change which had taken place since the 1825 bubble was that
MPs could no longer sit on committees reviewing proposals in which they
had a vested interest, whether as a director for the proposal or as the MP
for the constituency in which the railway was based. This should have
reduced the local versus national tension in Parliament. However, poli-
ticians could circumvent this restriction by ‘logrolling’, in which two or
more politicians agreed to vote for each other’s railway schemes.66
Herbert Spencer, the famous biologist and philosopher, suggested that
MPs acted in an opportunistic fashion during the Mania.67 But broadly
speaking this was not the case: they were simply responding to local
constituency rather than national interests. Indeed, there is no evidence
to suggest that MPs profited from their investments any more than other
investors did.68
The construction of rail networks in other parts of the world in this
era is instructive in this regard. The aim in France and other parts of
the Continent was to have no duplicate or competing lines, and this was
achieved through state involvement (or ownership) in the construction
of rail networks.69 This explains why continental Europe did not
experience its own railway mania. In the case of the US railroads,

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 THE GREAT RAILWAY MANIA

which were wholly private enterprises, state governments effectively

rationed railroad charters so as to reduce the effects of harmful
competition.70 Although there was unrestrained charter granting, sub-
national governments in the United States played a key role in the
construction of the rail network by providing capital for the routes
which it had decided were viable. State and local governments provided
half of the capital for early railroads, and every significant American
line constructed before 1860 received finance from sub-national
governments.71 This de facto control over the construction of railroad
routes may partially explain why the United States similarly did not
experience a railway bubble.72
The local versus national tension was built into the British parliamen-
tary system and simply reflected the unique way in which the UK political
system had evolved. In contrast, the political institutions and incentives of
other countries were much more heavily weighted towards national
rather than local interests, which is possibly why they avoided having
railway manias of their own.
An alternative explanation for Parliament’s failure is that, since
Britain was the first country to attempt to develop a national network
via private enterprise, it suffered from a first-mover disadvantage. As the
long-established method of parliamentary procedure had worked well
for the development of canals and turnpikes, which were all local enter-
prises, parliamentarians were lulled into thinking that such a procedure
would be equally good for railways. However, they did not appreciate the
importance of network externalities. On the other hand, during parlia-
mentary debates some MPs noted the danger of using their established
procedure for reviewing applications of railway schemes.73
Why were existing railways so willing to enter into ruinous competi-
tion? In a counterfactual analysis, along with a colleague, one of us has
examined the strategies open to railway companies faced with the threat
of competition from newcomers.74 The main finding was that the worst
thing that they could have done is nothing and the best strategy was the
one they followed, namely to expand their own network to protect
themselves from competition. Railways were willing to build branch
lines that would only bring loss because that was better than having
a rival build them and being driven out of business.75

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 BOOM AND BUST

CONSEQUENCES

How much did the newly enfranchised speculating class suffer in the
downturn? The novelist Charlotte Brontë, while reflecting on her heavy
losses from railway investments during the Mania, thankfully compared
her situation to the thousands of middle-class investors who suffered
immensely because of the collapse of railway share prices. She wrote
‘many – very many are – by the late strange Railway System deprived
almost of their daily bread; such then as have only lost provision laid up
for the future should take care how they complain’.76 Previous bubbles
had investors who lost fortunes, but the Railway Mania involved many
middle-class speculators who had very little to lose. Although many
individuals suffered when railway share prices collapsed, the question
remains as to what the consequences of the Railway Mania were for the
overall economy.
In October 1847, exactly 2 years after railway shares peaked, there was
a financial crisis in the UK. Pressures in the money market had been
experienced since January 1847, with the Bank of England raising its
discount rate four times in the first quarter of 1847. The Bank also rationed
its lending and discounting of bills. This culminated in the so-called ‘week
of terror’ from 16 to 23 October, during which several banks suspended
payments and even well-run banks had to seek help from the Bank of
England. The pressure on the money markets eased only when the Prime
Minister and Chancellor of the Exchequer, at the end of the week of terror,
sent the Bank of England a letter allowing it to disregard the recently
passed Bank Charter Act. As a result, the Bank was able to end the crisis
by expanding its note issue, helping banks facing liquidity difficulties.
The proximate cause of the crisis was the failure of many merchants,
particularly those involved in the corn business. The price of wheat had
doubled in the first half of 1847, following a poor harvest in 1846.
However, the high wheat price eventually attracted imports, which then
resulted in the wheat price collapsing by about 50 per cent in the summer
of 1847. This caught many corn merchants and speculators unawares and
ultimately resulted in their failure. These mercantile failures exacerbated
the already tight pressures on the money market, resulting in the week of
terror in October 1847.

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 THE GREAT RAILWAY MANIA

Although the Railway Mania does not appear to have been responsible
for the financial crisis of 1847, it seems to have indirectly aggravated the
pressures in the money market.77 The fact that railway shareholders paid
up their capital in instalments as railway lines were constructed meant
that there were many calls for capital in 1847.78 As can be seen from
Figure 4.1, there was an enormous increase in the paid-up capital that
entered the railway sector in 1847, and the scale of gross capital forma-
tion in the railways in 1847 was unprecedented. The calls for capital
throughout 1847 meant that shareholders had to withdraw money from
their banks or raise it elsewhere, which put a great deal of pressure on the
money markets.79
Lord John Eatwell suggests that the Railway Mania is a prima facie
example of a useful bubble, in that after the bubble had burst, investments
of real social value were left behind.80 There is no doubt that the national
rail network which emerged as a result of the Railway Mania was transfor-
mative. The huge reduction in the time and money costs of travelling
made journeys possible for the masses, and more frequent (and comfor-
table) journeys possible for the middle and upper classes. Dionysius
Lardner, a contemporary railway commentator, noted that in 1835 there
were only 7 daily stagecoaches between London and Edinburgh that took 2
days, but by 1850, there were several trains per day carrying passengers and
freight, with a journey time of less than 12 hours.81 Insofar as it is possible
to quantify the social benefits of railways to their full extent, economic
cost–-benefit analyses suggest that the railway network which emerged
from the Mania delivered tremendous welfare gains throughout the nine-
teenth century and beyond.82 In order to estimate the welfare gains
ushered in by the railways, economic historians have used the concept of
social savings, i.e. the cost to society of doing the same as the railways did,
without them. One study has estimated that the social savings from railways
in terms of time and money were as much as 2 per cent of GDP by 1850 and
were close to 10 per cent by 1900.83 This was a major boon to the produc-
tivity of the Victorian economy.
However, one must ask whether the social usefulness was as high as it
could have been had the process of authorising the railways and establish-
ing a railway network not been so laissez-faire or ad hoc. One must also
ask if a bubble was a prerequisite for creating a national rail network.

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 BOOM AND BUST

The means of authorising the railways and establishing a railway

network was inefficient and resulted in a sub-optimal rail network
with unnecessary and duplicate lines. One study has estimated that
the circa 20,000-mile rail system which had emerged by 1914 contained
about 7,000 miles more than was necessary – the same social benefits
could have been obtained with substantially less investment.84 The
inefficiencies in the rail system that were locked in during the
Railway Mania contributed to the subsequent poor performance of
the railway companies and widespread inefficiencies which have pla-
gued British railways down to the present day.85 Thus, rather than the
bubble being useful for society, it created a higgledy-piggledy network
and a railway system full of long-term inefficiencies. In addition, too
much investment was wasted in building this sub-optimal network.
A socially useful rail network and one that was profitable in the long
run could have been constructed without the Mania. But this would
only have been possible if the political calculus of Parliament had been
less wed to regional interests and thus better able to create an efficient
national rail network, repressing unnecessary competition and dupli-
cate lines. With such an approach, the Railway Mania would never have
happened.
The Railway Mania democratised speculation. The financial press,
which was meant to protect investors and warn them of bubbles, called
the Railway Mania far too late to be of any use to the new speculating
class. According to its author, the moral of the Glenmutchkin Railway
satire was caveat investor. Investors needed to look out for themselves
because no one else would.
Within a decade of the end of the Railway Mania, any semblance of
government regulation of joint-stock companies in the UK was removed
when enterprises were granted the freedom to incorporate without need-
ing prior government approval. Marketability was unconstrained and
speculation was democratised. However, the only leverage during the
Railway Mania was part-paid shares; the bubble was overwhelmingly
fuelled by money rather than credit. Investors were still risking their
own money. What if they started speculating with other people’s money?

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 CHAPTER 5

Other People’s Money: The Australian

Land Boom

In Melbourne more particularly the spirit of speculation ran mad, and

financiers and adventurers of every kind had a regular carnival of dissipation
with other people’s money: obtained with too little difficulty from the
Melbourne banks, many of which, unfortunately for themselves and the
country, were driven to advancing on unimproved land, yielding no income,
and dead securities of all kinds by the keen competition that existed between
them.
Nathaniel Cork1

B y the end of the nineteenth century, freedom of

incorporation and marketability of ownership shares were
established principles across many countries, and the ability to speculate
had been extended to the middle classes. Apart from the Mississippi
Bubble, however, bubbles had typically not had long-lasting negative
economic effects. Losses were still mostly borne by those who could
afford them, the bankruptcies that occurred did not cascade into wide-
spread defaults, and the affected industries were not so systemically
important that they could undermine the entire economy. As the con-
tinuing popularity of Mackay showed, bubbles were remembered largely
as mildly humorous fables, read by the middle classes as a form of
entertainment.
The Australian Land Boom of the 1880s was different. Its bursting
plunged Australia into the longest and deepest depression in its history,
with widespread poverty, homelessness and hunger. One poignant
account given by Rev. J. Dawborn illustrates the predicament of the masses
in 1893.2 One day a haggard mother of six came to the door of his vicarage

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 BOOM AND BUST

in Melbourne with a baby in her arms. Her husband was a mason and out
of work. She had not eaten in three days and she had fed her children on
the stalks of cauliflowers and cabbages, which she had boiled and mashed.
Yet a few years before, her husband, their family and all of Melbourne were
enjoying a land boom, marking a period of unprecedented prosperity. In
contrast with Mackay’s flippant accounts of previous bubbles, histories of
Melbourne’s land boom are pure human tragedies. One historian com-
pares ‘Marvellous Melbourne’ to the biblical city of Babel: a wealthy and
prosperous place which was eventually subjected to judgement and pla-
gues in the form of financial crises, bankruptcies and lost fortunes.3
This economic catastrophe originated in 1885 when a marriage boom,
a rising population and urbanisation increased the demand for suburban
single unit homes in Melbourne and Sydney.4 Since many Melburnians had
emigrated from dank industrial cities, the suburban lifestyle was particularly
appealing: one historian describes suburbanism in this period as ‘the opiate
of the middle classes’.5 The sudden increase in demand caused land prices
to skyrocket: land which had sold for 15 shillings per square foot in 1884 was
selling for twenty times as much in 1887. For example, land in Burwood,
which was 9 miles from the centre of Melbourne, had risen from £70 to
£300 per acre.6 In the central business district of Melbourne, prices were
doubling every few months, and the quantity of house sales exploded. In its
review of 1887, the Australasian Insurance and Banking Record stated that an
extraordinary amount of property had changed hands during the year,
involving everyone from labourers to property investment companies.7
Much of this boom was fuelled by foreign capital, almost all of which
came from the UK. Attracted by the high rate of economic growth, British
investment in Australia grew precipitously throughout the 1880s, as can be
seen from Table 5.1, and by 1888 it had reached £22.8 million – more than
10 per cent of Australian GDP. Initially this money was mostly invested in
securities, but gradually spilled over into the land boom as the decade
progressed. This process accelerated after January 1887, when the
Associated Banks of Victoria, a coalition of the ten Australian trading
banks headquartered in Melbourne, cut its key interest rate from 6 to
5 per cent. This was followed by a second rate cut in August 1887, this time
to 4 per cent. Somewhat presciently, but with supportive effect, the
Australasian Insurance and Banking Record stated that this would stimulate

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 THE AUSTRALIAN LAND BOOM

table 5.1 Australian GDP, GDP per capita

and overseas borrowing8
British investment
Nominal GDP GDP per capita in Australia
(£m) (£) (£m)

1881 147.8 64 5.7

1886 177.4 62 17.9
1887 195.6 67 15.2
1888 201.5 65 22.8
1889 221.4 68 22.0
1890 214.9 64 15.6
1891 211.6 67 12.6
1892 179.7 57 5.6
1893 160.6 53 -1.0
1899 190.4 55 6.0
1900 198.3 57 5.8

share prices and business activity.9 But this economic stimulus had an
uneven effect, because the reduced interest on safe assets encouraged
investors to take more risks. According to H. G. Turner, then the
General Manager of the Commercial Bank of Australia, savers responded
to these interest rate cuts by searching for a better yield.10
The demand for higher-yielding investments was met by the emergence
of large land and property companies. Since these companies had much
greater access to financial resources than the traditional small contractors
and builders, they were able to purchase large tracts of suburban land and
subdivide them into single-dwelling building plots. These plots were then
either sold to developers for a profit or developed by the companies
themselves.11 With property prices rising rapidly, this business model was
extremely lucrative, resulting in a deluge of new property development
companies. As Figure 5.1 shows, 40 such companies were incorporated in
Victoria alone in 1887. Many of these found additional finance by borrow-
ing from Australia’s 28 established trading banks. Although stipulations in
bank charters forbade loans on real estate, banks regularly found a way
around these regulations. In 1887 the Royal Commission on Banking Laws
gave this practice its unofficial blessing, and in 1888 the Victoria govern-
ment passed legislation removing this regulation for banks incorporated in
the state.

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 BOOM AND BUST

350

300

250

200

150

100

50

0
1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893
New land and property incorporations Total new incorporations
Figure 5.1 New company formations in Victoria 12

As the land boom developed, property financing and speculation

were increasingly dominated by two other types of institution: building
societies, and land-boom companies. Building societies were traditionally
the major providers of housing finance for individuals who wanted to buy
a single-dwelling house. However, during the land boom they began to
change their business model, providing finance for the emerging
builder-speculators and property developers.13 The land-boom compa-
nies had a hybrid business model that combined property speculation,
property investment and mortgage banking. In order to finance their
own property operations or those of others, they took advantage of the
lax banking regulatory environment to morph into shadow banks, raising
funds from the public and from depositors in the UK. They were parti-
cularly aggressive when it came to raising deposits, drawing many deposi-
tors away from the trading banks by offering hugely tempting interest
rates. In New South Wales they were so successful in attracting deposits
that they largely supplanted the building societies.14
Over the first few months of 1888, the value of central Melbourne land
increased by about 50 per cent and the value of suburban property
doubled or even trebled in some cases.15 For example, 6.25 acres of

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 THE AUSTRALIAN LAND BOOM

land on the south side of the Yarra River were bought for £100,000, then
resold for £300,000 only 6 months later.16 In the first half of 1888,
suburban land was often sold three or four times over, without any
enhancements being made to it and with its price trebling.17 Over the
same period, land values in the more desirable parts of the central
business district went from £400 to £1,100 per foot.18 As a result, 12-
storey skyscrapers were erected in the central business district to rival
those of London. The amount of land speculation in September and
October 1888 was such that the Argus, one of Melbourne’s main news-
papers, expanded its land sale advertisements from a page and a half to
four pages. Although Sydney did not experience anything like the boom
in Melbourne, the price of a block of land in Sydney rose in 1888 from
£191 to £304.19
A study of 100 Melburnian land investors, which examines how much
they bought and sold a piece of suburban land for (allowing for subdivi-
sion), finds that, during the 1880s, the average annual return on land was
39.8 per cent. This explains why so many people were keen to participate
in the land boom. In terms of land prices, the same study finds that the
average price per acre rose from £39 in 1882 and £166 in 1885 to £303 in
1888. By 1890, however, average land prices had fallen to £154.20
Figure 5.2 tracks the changes in Melbourne house prices over the last
three decades of the nineteenth century. The index of house prices,
which had been trending upwards from 1880, accelerated upwards in
1887 and 1888 and peaked in 1889, having nearly doubled since 1870.
However, after 1889, house prices fell precipitously until 1895, when they
were 56.5 per cent below their peak. By the end of the century, house
prices had recovered slightly, but only to their 1870 level.
Sydney in the 1880s did not experience the same increase in house
prices as Melbourne – prices over the decade increased by about
32 percent.21 In addition, unlike house prices in Melbourne, those
in Sydney did not start to fall until 1892. However, by 1894 they had
fallen by 50 per cent. The housing market in both cities took a long
time to recover – it was 1912 in Sydney and 1918 in Melbourne before
they got back to their 1889 levels. Land prices also remained low for
a long period: the average price of a block of land in Sydney was £123
in 1907, having been £303 in 1888.22

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 BOOM AND BUST

200

180

160

140

120

100

80

60

40

20

0
1870 1873 1876 1879 1882 1885 1888 1891 1894 1897 1900
Figure 5.2 Melbourne House Price Index23

As well as the boom in the price of land and houses, there was
a promotion boom of land companies in 1888 (see Figure 5.1). Many
deliberately alluded to their status as quasi-banks, with names like the
Australian Land Investment and Banking Company. Shares in land-
boom companies were attractive to ordinary individuals who lacked the
funds to deal directly in land, but wanted to profit from the boom.24
Insolvency records reveal that carpenters, drapers, labourers, priests,
spinsters, teachers and widows invested in land-boom companies.25 The
democratisation of speculation which we witnessed in the Railway Mania
was alive and well 43 years later and over 10,000 miles away.
Such was the demand for shares of land-boom companies when they
came to market that they were vastly oversubscribed and immediately
sold at a premium. One commentator observed that ‘sometimes a newly-
formed company is in the position of some of the creations at the time of
the South Sea Bubble – it does not know exactly what line of business to
take up, its shares going to a premium notwithstanding’.26
Figure 5.3 contains a stock index of the land-boom companies which
were traded on the Stock Exchange of Melbourne. Between December
1887 and July 1888, this index more than doubled. However, this index

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 THE AUSTRALIAN LAND BOOM

250

200

150

100

50

0
Dec 1887 Mar 1888 Jun 1888 Sep 1888 Dec 1888 Mar 1889 Jun 1889
Figure 5.3 Monthly index of land-boom company stocks on the Stock Exchange of
Melbourne27

may lead us to underestimate the increase in the share prices of land-

boom companies because it includes only 25 companies, presumably the
larger ones, and thus ignores the smaller and more speculative ventures
that may have been traded on Melbourne’s other stock exchanges.
The end-of-year values of all the land-boom companies on the Stock
Exchange of Melbourne are shown in Table 5.2. This table illustrates
the growth of the land-boom companies and the way in which market
and paid-up values diverged during the boom years. It also reveals that
the number of transactions on the Stock Exchange of Melbourne
trebled in 1888. The increase in the volume of business was so great
that the clerical staff of the exchange struggled to cope with it, staying in
their offices until late in the evening to process trades.28 This was only
one of six stock exchanges operating in the same city, so the total
number of trades would have been much greater.29 Apart from the
Stock Exchange of Melbourne, all these ‘bubble’ exchanges disap-
peared after the cessation of the land boom.30 The increase in trading
was also reflected in the money earned by brokers and in the price of

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 table 5.2 The Stock Exchange of Melbourne and the land-boom companies31
Number of Number of Total market Total paid-up
non-mining land-boom capitalisation capital Total market capitalisation of Total paid-up capital Number of transactions on Stock
companies companies (£m) (£m) land-boom companies (£m) land-boom companies (£m) Exchange of Melbourne

1886 85 7 25.0 17.9 1.0 1.3 6,494

1887 95 8 34.1 20.0 2.6 1.5 14,913
1888 153 25 44.1 26.9 8.5 3.5 59,411
1889 152 22 47.7 28.8 4.1 3.9 45,118
1890 152 18 48.6 29.6 4.1 3.6 77,282
1891 154 18 23.9 25.5 2.9 3.9 57,018
1892 121 3 23.9 25.5 0.2 0.6 36,440
1893 112 3 10.7 23.7 0.0 0.3 n/a

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 THE AUSTRALIAN LAND BOOM

a seat at the exchange, which rose from £300 in December 1887 to

£1,500 in March of the following year.32
Just as a cut in interest rates by the Associated Banks of Victoria
coincided with the escalation of the land boom, the increase of
1 per cent in their interest rate on 22 October 1888 marked its end.
This increase was accompanied by a new policy of credit rationing by
discriminating against the discounting of land bills. The Associated
Banks took these steps because they recognised that the cheap money
policy which they had introduced in 1887 was contributing to the over-
expansion of credit; the speculation in land and the speculation in land-
boom companies.33 This policy change had an almost immediate effect
on the prices of land-boom companies: by December the index of land-
boom companies (see Figure 5.3) had fallen 35 per cent from its peak.
The credit squeeze also brought speculation in real estate to an abrupt
end.34
In its December issue, the Australasian Insurance and Banking Record
applauded the Associated Banks for their action, because it had brought
to light the unsound condition of the property business.35 Almost imme-
diately, ten small property companies failed and the shares of land-boom
companies became unsaleable. However, the land-boom companies did
not collapse for another 3 years.36
There are four reasons why the liquidation of the land boom pro-
ceeded so slowly. First, there were improvements in the wider economy
which slowed the panic selling of land-boom company shares.37
Following the collapse of the land boom in Victoria, public and private
investment in New South Wales increased.38 After plentiful rainfall, an
abundant harvest, the largest wool clip on record and a rise in the
European demand for wool, the economic prospects for Victoria looked
much brighter.39 Second, there was a boom in silver-mine shares in 1889,
which temporarily stimulated the economy and may have distracted
attention from the perilous condition of the land-boom companies.40
The boom centred around the silver mines of Broken Hill and, in
particular, the Broken Hill Proprietary Company. The shares of Broken
Hill Proprietary increased in value by 188 per cent in 1889.
Third, the trading banks, which had stayed somewhat aloof from the
land boom itself, increased their lending and overdrafts to building

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 BOOM AND BUST

societies and land-boom companies, believing that their troubles were

temporary. This extension of credit meant that, even at the end of 1890, 2
years after the collapse of the boom, very few building societies or land-
boom companies had failed.41 It was only when the trading banks started
calling in their overdrafts in 1891 that large numbers of building societies
and land-boom companies started to fail.42 The extension of credit by
many trading banks after the collapse of the boom in 1888 would ulti-
mately contribute to their own demise.43
Fourth, and most importantly, the land-boom companies, hoping that
the property market would recover, developed survival strategies which
stayed their demise. Most offered fixed-term deposits or debentures with
a 12- or 24-month duration, so when the boom collapsed suddenly, these
institutions were less vulnerable to a run than normal trading banks were.
Nevertheless, as the deposits matured they did face a funding issue. In
response, they intensified their efforts to attract deposits, particularly
from the UK. Many opened offices in London and Scotland; some even
changed their name to include the word ‘bank’ or imply an association
with the UK. For example, in September 1889 the Victoria Freehold Bank
changed its name to the British Bank of Australia.44 Scottish newspapers
teemed with advertisements from these companies, offering unusually
high interest on deposits.45 But these deposits were being used merely to
pay off other maturing debts.46 This ultimately turned these land-boom
companies into Ponzi schemes. Several companies, such as those asso-
ciated with Sir Matthew Davies, the speaker of the Victorian Parliament,
engaged in creative accounting practices, paid dividends out of capital or
borrowed funds, and used company funds to keep their share price from
falling.47
Of course, these zombie banks could only survive for so long. Between
1889 and mid-1891, the only major institution to fail was the Premier
Permanent Building Association of Melbourne. Its failure brought to
light fraudulent balance sheets and directors exceeding their powers.
The Australasian Insurance and Banking Record warned that this financial
impropriety would scare off British savers from putting their money on
deposit in Australia.48 However, British investors began to probe the
situation in Australia more closely only after the collapse of Barings
Bank in November 1890. Table 5.1 shows how the flow of British

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 THE AUSTRALIAN LAND BOOM

investment started to slow down in 1890. By July 1891, with their deposits
maturing and with investors unwilling to renew, the zombie land-boom
companies and building societies in Melbourne and Sydney began to
topple like dominoes. Over the next 6 months each wave of failures
further dented the confidence of British investors.49 By 1892, the flow
of British investment had slowed to a trickle.
By March 1892, 31 major land-boom companies and 9 building socie-
ties had failed in Melbourne and Sydney alone. These 40 institutions had
total assets of £22.8 million and deposits of £12.7 million. Their deposi-
tors did not fare well – about one-eighth of their savings were lost
altogether and the rest were locked up for a long time.50 The institutions
had supposedly been backed by uncalled capital of £5.5 million, theore-
tically available to investors in the event of such a crisis. In practice,
however, depositors received less than 30 per cent of this £5.5 million.
This was because large shareholders were absolved from their liability
through secret ‘compositions’: special bankruptcy proceedings for the
privileged elite that allowed them to evade such responsibilities.51 For
example, F. T. Derham, the Postmaster-General of Victoria from 1886 to
1890, owed his creditors £550,000 over a series of land-boom transac-
tions. The secret composition he made with his creditors kept him
solvent because he only had to pay one old penny to the pound. There
were 240 pennies in a pound at the time, so this allowed Derham to write
off 99.6 per cent of his debt.
By the middle of 1892, the liquidation of the land boom appeared to
have run its course. But in its final stages the established trading banks
were teetering on the brink of calamity. They too, as we shall see below,
would have to pay a price for the excesses of the 1880s.
What role had the media played during the boom and bust? In the
boom phase, occasional misgivings had been expressed by the weekly
journal Table Talk and the Australasian Insurance and Banking Record.52
The daily newspapers did little to question the boom, possibly because
they benefited handsomely from the advertising fees from land-boom
companies and building societies seeking deposits. Indeed, Nathaniel
Cork, when asked about the state of Australian finance by London bank-
ers, would show them a copy of the Argus newspaper he had kept from his
antipodean visit; one glance at their advertisements told them everything

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 BOOM AND BUST

they needed to know.53 As with the Railway Mania, the substantial adver-
tising money that newspapers received from bubble companies gave
them a powerful incentive not to question the boom.
When it came to the bust, the mainstream press avoided investigating
it at all whenever possible. One exception was Table Talk, a weekly gossip
magazine based in Melbourne. Under the editorship of its founder
Maurice Brodzky, who has been described as the original muckraker,
Table Talk ran a series of exposés on unscrupulous behaviour by land-
boom company directors.54 The British press also played an important
role in the bust, particularly after the collapse of Barings, by calling the
attention of British investors to the major structural weaknesses in the
Australian financial system.55

CAUSES

Although previous bubbles had followed the removal of restrictions on

establishing firms with marketable shares, the Australian bubble was the
first in which there was true freedom of incorporation. In other words,
entrepreneurs could establish companies with marketable shares without
requiring prior authorisation from the government or legal system.
As a result of financial engineering, land also became much more
marketable. Land-boom companies raised money from shareholders and
depositors, and used the proceeds raised to buy property and land. These
shares had relatively low denominations and could be bought with a small
deposit, with the remaining balance paid off over 2 to 3 years. During the
boom multiple stock exchanges opened, meaning that investors could
buy and sell shares at several different locations for the first time. The
increase in liquidity was compounded by a threefold increase in trading
volume, making it easy to find a buyer or seller.56 Whereas previously
land speculation was restricted to those wealthy enough to buy and sell
plots of land, this financialisaton of land by the land-boom companies
enabled ordinary investors to speculate in land by simply buying and
selling shares in land-boom companies.
Money and credit, the second side of the bubble triangle, were in
abundant supply during the land boom. The main sources of credit were
the trading banks, the building societies and the land-boom companies,

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 THE AUSTRALIAN LAND BOOM

table 5.3 The growing vulnerability of the Australian

banking system57
Deposits from
overseas Median capital Median
(% of total ratio liquidity ratio Number of
deposits) (%) (%) branches

1870 12.0 52.6 12.9 381

1875 10.0 36.1 12.5 613
1880 12.8 32.8 16.7 844
1885 18.6 21.2 10.4 1,159
1888 22.8 22.3 12.6 1,404
1889 24.4 21.7 11.8 1,465
1890 25.5 19.4 13.2 1,543
1891 27.1 19.6 11.3 1,553
1892 25.4 18.3 12.3 1,519

many of which were de facto banks. During the 1880s, the trading banks
aggressively expanded their deposit-gathering and loan portfolio. As can
be seen from Table 5.3, in the 1880s the trading banks expanded their
branch network to capture domestic deposits and they increasingly
sought deposits from the UK. Some banks even went as far as hiring
touting agents for this purpose. Between 1880 and 1888, the trading
banks doubled their Australian deposits, to £88.5 million, and nearly
quadrupled their overseas deposits, to £24.0 million.58 Table 5.3 reveals
that this expansion of deposits was not matched by a concomitant
increase in capital, with the result that banks became much more
leveraged. In addition, the liquidity ratios in Table 5.3 suggest that, by
1888, a greater proportion of their deposit base was being lent out than in
1880. The deposits raised by many of the trading banks were increasingly
either lent to property speculators and developers or lent against the
security of land.59
The building societies also aggressively expanded in the 1880s, parti-
cularly from 1885 onwards. By 1888 they had more than doubled their
deposits to £5.3 million. Their loans to the property sector in these years
also greatly increased, from £2.5 million of new loans granted in 1887 to
a staggering £4.4 million granted in 1888.60 Much of this credit extended
by the building societies was advanced to property speculators rather
than their traditional borrower – the owner-occupier. The building

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 BOOM AND BUST

societies during the 1880s also made significant changes to their lending
policy. They lengthened their repayment periods on average from 8 to 12
years and they reduced the security that they required of borrowers, both
of which decisions made it much more attractive to borrow from them.
From the perspective of the land boom and property speculators, the
greatest change to their lending policy was that loans could be repaid at
any time without incurring a penalty.61 This greatly facilitated the prac-
tice of flipping, i.e. buying land with borrowed funds, subdividing the
land, quickly selling it at a profit and repaying the loan.
The land-boom companies were highly leveraged institutions, which
in some cases had the appearance of banks because they raised substan-
tial deposits from the domestic and UK public. In 1890, it is estimated,
the land-boom companies in Victoria held £7.3 million in deposits and
debentures.62 However, these deposits, instead of being advanced to
borrowers and invested in safe securities, were invested in property
schemes.
The leveraging of land and property purchases during the land
boom was twofold. First the property developer or land-boom company
borrowed extensively to purchase the land. Then, once they subdi-
vided the land, the usual practice was to offer it on extended credit
terms to those they sold it to.63 This applied also to the purchase of
shares in land-boom companies. Initial subscribers had to pay only
a small initial instalment and were subject to future capital calls. This
practice leveraged the purchasing of shares in highly leveraged
companies.
As in previous bubbles, the element that most caught the attention
of contemporaries was speculation, which was often perceived as the
result of widespread moral weakness. In 1893, a recently repatriated
English journalist attributed the bubble to the inherent inferiority of
Australians, stating that ‘the gambling spirit inherent in the people
forms an element of serious weakness in the national character’.64 As
an explanation for the bubble, this is somewhat undermined by the fact
that vast quantities of the money invested in the bubble came from the
UK. Anecdotal evidence, however, suggests that speculation was wide-
spread. Nathaniel Cork, a UK banking expert, visited Australia in 1888
and observed that:

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 THE AUSTRALIAN LAND BOOM

In Adelaide the street in which the Stock Exchange was situated was
crowded with men, women and boys in a state of excitement from 9
o’clock in the morning. All seemed to be having their fling, and some
men in responsible positions were not ashamed to pass the first half hour
of their day in this scene of excitement. The whole population from
statesmen to servant girls, were in the whirlpool.65

The same held true in Melbourne, with members of the stock exchange
finding it difficult to get into their offices through the vast crowds of
speculators who gathered each day on the streets outside the exchange.66
James Service, the Premier of Victoria until 1886, concurred with this
view, adding that ‘there was not a man and hardly a woman in the colony
who did not go in head-over-heels to make a fortune during the land
boom’.67 Notably, the stories of fortunes being made simply by flipping
land several times generated a get-rich-quick mentality among investors
and encouraged some to speculate well beyond their means.68 The
official history of a notable Melburnian stockbroker suggests that the
speculative fervour of the land-boom years had its roots in the discovery
of new gold and silver mines in the 1880s.69
The spark which ignited the land boom was the 1887 liberalisation of
the restriction on banks from lending on the security of real estate. This
was the final act in a 25-year liberalisation process. By the time of the
boom, Australia was a prima facie example of a free banking system
because it had few legal barriers to entry, few regulations, freedom for
banks to issue their own notes and no central bank or lender of last
resort.70 In 1862, the British Treasury had devolved responsibility for
bank supervision to the individual colonial governments. For a time, the
colonies implemented the regulations bequeathed by the British, the
most important of which was that banks must not grant mortgages on
real estate. However, the colonies gradually diverged from the British
Treasury principles towards ‘a situation in which banks were subject to
a minimum of legal restraint’.71
Despite this laissez-faire milieu, the trading banks were forbidden
from lending on the security of real estate. However, in 1887, the
Victorian government appointed a Royal Commission on the state’s
banking laws, with a particular focus on this last major vestige of

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 BOOM AND BUST

regulation. Reporting in July 1887, it recommended that lending on real

estate by banks should no longer be restricted. The Commission argued
that, although lending against property might be imprudent for English
banks, land in Australia was marketable, and ‘that experience shows that
there are no better securities than those effected on land’.72 The
Victorian government passed this recommendation into law in
December 1888, but puzzlingly, section one of the Act calls the legislation
the Banks and Currency Amendment Statute 1887.73 Quite possibly this
back-dating was to provide legal cover for those banks that had acted in
advance of the legal change, following the fact that the Royal
Commission, before reporting in July 1887, had already directed the
drafting of a bill to pass its recommendations into law.74
The report of the Royal Commission had two effects. First, it signalled
to the public and depositors that land and property were high-quality
assets. This, no doubt, was a huge fillip to the land-boom companies that
were raising deposits and investing in property. Second, banks started
lending in a substantial way on the security of property. Thus, the
Commission helped generate the spark that would kindle the land
boom.
Why did politicians remove the restriction on lending on real
estate? A kind appraisal is that they were asleep, intoxicated with
the growth of Melbourne, or too harassed by lobbyists to take the
necessary action.75 Michael Cannon, in his polemic-cum-exposé The
Land Boomers, is much less kind to the political elite – he argues that
the Victorian Parliament became a land speculators’ club in which
the use of public office for private gain was commonplace.76 Most of
the cabinet of Duncan Gilles, Premier of Victoria from 1886 to 1890,
had directorships in land-boom companies, and some were specula-
tors in their own right who were bankrupted in the crash. Outside the
cabinet, the lower and upper houses were packed full of land spec-
ulators and directors of land-boom companies. No fewer than thirty
members of the legislative assembly were directors in land-boom
companies.77 The Imperial Banking Company, the first of the major
land-boom companies to fail, had been set up by Sir Benjamin
Benjamin, the Lord Mayor of Melbourne between 1887 and 1889.
Notably, the special bankruptcy commissions established in the wake

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 THE AUSTRALIAN LAND BOOM

of the crash let many prominent land boomers evade repaying their
debts.
The influence of the land boomers on politicians and the political
machinery is perhaps best exemplified by Sir Matthew Davies, the former
speaker of the Victorian Parliament, whose network of companies degen-
erated into Ponzi schemes. All four of the main companies within his
‘Davies group’ were chaired by senior politicians. It collapsed in 1892,
precipitating Davies’ own bankruptcy and that of his companies, after
which several unsuccessful attempts were made to prosecute him for
conspiracy to defraud by issuing false balance sheets. This same
Matthew Davies had chaired the 1887 Royal Commission on Banking.

CONSEQUENCES

The liquidation of the land boom did not end with the collapse of the
land-boom companies and building societies. The trading banks – the very
heart of Australia’s financial system – would also pay a heavy price. In
March 1892, two of the twenty-eight Australian trading banks suspended
payment – the Mercantile Bank of Australia and the Bank of South
Australia. This prompted the Treasurer of Victoria to coerce the
Associated Banks of Victoria into a public declaration that they were ‘will-
ing to render financial assistance to each other on such terms and to such
an extent as may seem justifiable to each of them, if and when the occasion
arises’.78 The sense of panic abated.79 However, this public declaration of
mutual assistance proved worthless when, in January 1893, the Federal
Bank, a member of the Associated Banks, closed its doors.
The Associated Banks sought to re-establish public confidence by
declaring that their mutual assistance pact was secure and claiming that
the Federal Bank had not asked for help before closing.80 Subsequently,
the Treasurer of Victoria pressured the Associated Banks into declaring
in March 1893 that ‘the associated banks . . . have agreed to act unitedly in
tendering financial assistance to each other should such be required, and
that the government of Victoria have resolved to afford their cordial co-
operation’.81 However, the Bank of Australasia, which had not been
involved in crafting it, required the statement to be reissued with the
clarification that ‘banks would assist one another to such an extent as to

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 BOOM AND BUST

each might seem fit’, and the Victorian Premier declined to endorse it.82
This undermined the credibility of the mutual assistance pact with the
public. These doubts were proved correct in April 1893 when the
Associated Banks refused to bail out the Commercial Bank of Australia.
A panic ensued and by 17 May a further eleven trading banks had
suspended payment (i.e. they had closed their doors and depositors
could not withdraw their deposits) and the remaining thirteen were
experiencing major runs and deposit withdrawals. At this point, fifteen
of Australia’s twenty-eight trading banks had either failed or suspended.
These fifteen banks controlled 56.8 per cent of the total assets of the
Australian banking system.
In an attempt to stop the panic, the government of Victoria declared
a 5-day bank holiday on 1 May 1893. Instead of calming the situation,
depositor excitement ‘rose to fever heat and it was hastily assumed that all
the banks would have had to suspend had it not been for the
Government’s intervention’.83 As a result, several banks, including the
‘Big Three’, chose to stay open to signal their strength to depositors.84
In contrast to the apparent bumbling of the Victorian government,
the New South Wales (NSW) government approached the crisis with an
assured touch – it passed three measures applicable only to banks with
a head office in NSW. The first measure was to declare that the NSW
government was willing, if necessary, to act as a lender of last resort. This
decree followed the collapse of the Australian Joint Stock Bank, one of
the larger trading banks, on 21 April 1893. The second measure was the
Bank Issue Act. This made bank notes a first charge on assets, gave the
Governor of NSW power to declare bank notes legal tender and granted
the government the right to inspect banks. At the start of May 1893,
Timothy Coghlan, a government statistician, was dispatched to persuade
the five major banks operating in NSW to accept the Act, but without
success.85 However, when the NSW government learned of the imminent
closure of the Commercial Banking Company of Sydney, it declared the
notes of this bank plus the notes of the ‘Big Three’ to be legal tender.
Notably, none of the ‘Big Three’ failed, and within a few days deposit
runs had ceased and the crisis was ended. The final measure that the
NSW government passed in late May 1893 enabled the government to
advance 50 per cent of the sums owed to current account depositors of

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 THE AUSTRALIAN LAND BOOM

suspended banks in the form of Treasury notes which had the status of
legal tender. Put simply, ‘this was the traditional policy of choking a panic
with cash’.86
Most of the banks that suspended during the crisis were allowed to
engage in financial reconstruction through converting some deposits
into preference shares, converting some short-term deposits into long-
term fixed deposits, calling in unpaid capital and raising new capital from
bank shareholders. Such reconstruction was criticised at the time by the
British press, with some advocating the liquidation of failed banks.87
However, liquidation might not have been possible because bank assets
and collateral were unsaleable and might even have been nearly worth-
less due to fire-sale losses.88 It is worth recalling that many depositors at
the time believed that the reconstructions were the best outcome for
them.89
The fundamental reason why the banking crisis occurred is that,
in the 1880s, many Australian banks became much more vulnerable
and fragile because of the risks they were taking in an unregulated
environment. After the liquidation of the property boom in 1891
and 1892, it was only a matter of time before the riskier trading
banks themselves collapsed. The banks which failed or suspended
during the crisis had riskier profiles than the banks which did not
close, in that they: (a) were overdependent on deposits from the UK,
which could quickly dry up; (b) had higher leverage and lower
liquidity, meaning that they had less skin in the game and less of
an ability to meet large deposit outflows; and (c) had a much greater
proportion of their loans in Victoria, the epicentre of the land
boom.90
The land boom helped many Australians fulfil their dream of living in
the suburbs and owning a single unit dwelling, thus escaping the squalor,
cramped conditions and lack of privacy in the city centre. However, for
many, this blissful existence was short-lived because they returned after
the crash to their old landlords in the city centre.91 During the boom too
many homes were built and after the crash vacancies soared to over
12,000.92
The economic costs of the liquidation of the land boom outweighed
any ephemeral benefits while it lasted. As Table 5.1 shows, there was

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 BOOM AND BUST

a long depression in the 1890s, with nominal GDP and GDP per capita
falling substantially. Although there was a global depression at this
time, its depth was minor in comparison to that of Australia. Indeed,
it would be the late 1890s before real GDP returned to the levels
prevailing on the eve of the land boom, and it would be the early
1900s before GDP per capita returned to the levels witnessed in
1888.93 Given that the land boom was concentrated on Melbourne, it
is unsurprising that Victoria experienced a longer and deeper depres-
sion than NSW.94 It was also substantially longer and deeper than that
experienced by Australia during the Great Depression of the 1930s.
The main reason for the severity of the 1890s depression was the 1893
financial crisis. Because deposits were locked up in suspended banks, the
money supply fell dramatically and there was a credit crunch, with
surviving banks becoming much more cautious.95 Furthermore, as can
be seen from Table 5.1, the funds flowing from the UK dried up; as one
history of the crisis put it, ‘the British investor would have rather buried
his money under the floor boards than entrusted it to an Australian
bank’.96 This obliged Australian banks to contract their balance sheets.
In addition, the reconstruction and recapitalisation of the banking sys-
tem during the 1890s resulted in a continuous contraction of credit until
the early 1900s. This crippled businesses for most of the 1890s and very
little investment occurred.97
As in any deep economic depression, the raw numbers conceal
a significant human cost. The contemporary press and subsequent
historians recount stories of destitution among the working classes and
the formerly well-to-do – malnourished families, families broken up and
women forced to turn to prostitution.98 Thanks to the bursting of the
property boom and subsequent financial crisis, Australia endured many
years of economic hardship and human misery. Melbourne was no
longer so marvellous.
The Australian Land Boom showed that bubbles can have substantial
economic and human costs when they are financed with other people’s
money. It also revealed that the financial system can take assets such as
land and turn them into objects of financial market speculation. This
would not be the last time that a property bubble would be financed with
other people’s money, and it would not be the last time that clever

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 THE AUSTRALIAN LAND BOOM

financial engineering would turn land or houses into objects of financial

market speculation. One hundred and twenty years after the peak of the
Australian Land Boom, the world would once again experience a bubble
which not only was devastating for the economy, but which would also
undermine the political stability of major democracies.

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 CHAPTER 6

Wheeler-Dealers: The British Bicycle Mania

Money poured into the coffers of men who had done nothing to build
these businesses; they had only been astute enough to see that the market
was ripe for flotation, and as the public cried for cycle shares they got
them. The result of all the flotations and the buying and selling of the
various concerns was that a limited few made money and a large number
of people, many of them workers in the various businesses, lost their
savings of many years.
W. F. Grew1

A cynical writer has said that, while panics run in cycles, the present mania
began with a run on cycles.
Money2

T he abundant marketability, money and credit in brit-

ain at the end of the nineteenth century meant that, for the first
time, bubbles could form without any specific government involvement.
Any sufficiently interesting innovation, especially if it were accompanied
by high-profile early success stories, could attract enough speculation to
start a bubble. The circumstances that made bubbles more frequent –
abundant money and a preference for risky investments – also provided
fertile ground for fraudulent schemes. Both innovation and fraud were
present during the British Bicycle Mania, which, while sparked by
a series of major improvements to bicycle technology, was abetted by
financial entrepreneurs who were inventive, creative and ethically
questionable.

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 THE BRITISH BICYCLE MANIA

Although bicycles were used from the early nineteenth century, early
models were highly impractical. The penny-farthing design had an enor-
mous front wheel which, by giving the pedals additional leverage, allowed
cyclists to achieve high speeds. However, this also made the bicycles
unstable. When cyclists fell off, as they often did, they had a long way to
fall to reach the ground. Of particular danger was ‘taking a header’:
flipping over the handlebars, often after hitting one of the many potholes
on mid-nineteenth-century roads. The bicycles were usually made entirely
from wood and wrought iron, and as a result had comically poor suspen-
sion. One of the most popular models was nicknamed ‘the boneshaker’ on
account of the uncomfortable riding experience it provided.
Bicycles did not become a serious transport option until the 1880s,
when a series of innovations significantly increased their utility. In 1885
the penny-farthing design was replaced with the ‘safety’ model, which
used a chain to give the pedals leverage without the need for a large front
wheel. The safety model was soon itself superseded by the diamond-
shaped frame, which provided additional stability. Improvements in the
manufacture of weldless steel tubes allowed bicycles to be both stronger
and lighter, and the addition of J. B. Dunlop’s pneumatic tyre in 1888
allowed for a much smoother ride.3 The transformation was remarkable:
in the space of a few years, archaic and impractical devices turned into
something closely resembling the bicycles we still use today.
The British bicycle industry grew steadily in the late 1880s and early
1890s, and was largely based in the West Midlands. In Birmingham the
number of bicycle manufacturers rose from 72 in 1889 to 177 in 1895, and
the number of manufacturers in Coventry more than doubled.4 By the
summer of 1895, there had been a notable increase in the number of
cyclists in British towns and cities; many contemporary writers commented
on how widespread cycling had become, particularly among women, for
whom cycling was said to have become fashionable.5 The breakthroughs of
the 1880s opened the door to further innovations in the field, and the
number of cycle-related patents issued rose from 595 in 1890 to 4,269 in
1896, when it accounted for 15 per cent of all new patents issued.6
Inventions ranged from incremental improvements in tubes or chains to
a raft that allowed bicycles to cross water and a velocipede fire engine.7

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 BOOM AND BUST

Initially most bicycle, tube and tyre firms were privately owned, but in
the early 1890s a few of the larger firms incorporated, with most share
trading activity occurring on the Birmingham Stock Exchange. One such
firm was the Pneumatic Tyre Company, established in 1892 with a nominal
capital of £300,000, which held the patent to produce Dunlop-branded
pneumatic tyres. Because Dunlop tyres had an exceptional reputation, this
company was uniquely well placed to profit from the increasing popularity
of cycles. Its potential was spotted by a local tycoon called Ernest Terah
Hooley, who came up with a plan to profit by buying the company out,
then re-floating it on the stock market at a higher valuation.
The Pneumatic Tyre Company shareholders asked Hooley for
£3 million, ten times its original value and well above the market rate.
Hooley had to borrow almost all of the £3 million; the purchase could be
thought of as an early example of a leveraged buyout. Attempting to re-
float the company for a higher valuation also required an expensive
marketing campaign: gentlemen with ‘good reputations’ were paid to
put their names to the prospectus, and various newspapers were paid to
provide positive coverage. But these efforts were ultimately successful,
and in May 1896 the newly renamed Dunlop Company was launched,
with £5 million of shares successfully issued.8 Hooley later told
a bankruptcy court that the marketing campaign had cost so much that
his profits only amounted to somewhere between £100,000 and £200,000,
a relatively low rate of return considering the riskiness of the venture.9
News of Hooley’s acquisition offer had first reached the market in
March 1896, and the Pneumatic Tyre share price rose accordingly, peaking
at £12.38 on 25 April 1896 – a 1,138 per cent profit for those who had
subscribed to the shares.10 Investors soon learned that another publicly
traded tyre firm, Beeston, was set to pay a 100 per cent dividend in anticipa-
tion of a Hooley-led recapitalisation. Unlike Dunlop Beeston’s fundamen-
tals were poor, and the company was unsuccessful in the long term.
Although it was not proven, there is reason to believe that the money for
the 100 per cent dividend came from Hooley’s own funds for the purposes
of market manipulation.11 If so, this ploy was spectacularly successful:
Beeston shares rose from £1.05 to £7.75 between 7 April and 9 May.12
The enormous capital gains of these two companies brought the cycle
share market to national attention. The Financial Times published its first

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 THE BRITISH BICYCLE MANIA

400

350
Cycle index
300
General stock index
250

200

150

100

50

0
90

91

92

93

94

95

96

97

98

99

00

01

02

03
18

18

18

18

18

18

18

18

18

18

19

19

19

19
n

n
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
31

29

31

31

31

31

31

30

31

31

30

29

28

27
Figure 6.1 Monthly general and cycle share indexes, 1890–190316

article on cycle shares on 22 April 1896, claiming the Birmingham Stock

Exchange had ‘gone mad’ in response to rapid rises in cycle share prices.13
This sentiment was repeated a week later in an editorial that suggested that
the shares would soon become ‘as inflated as the tyres’.14 These price rises
were dismissed as a result of pure gambling, and the newspaper compared
profits in cycle shares to ‘a run of luck at Monte Carlo’.15 But despite its
sceptical editorial line, developments in the cycle share market were
usually reported without comment. As the trade in cycle shares grew
more popular, the Financial Times steadily increased its coverage, devoting
a daily section to the cycle share market from April 1896 onwards. The
resulting publicity probably had a more significant effect on the market
than the newspaper’s sporadic criticism, and prices continued to rise. An
index of cycle shares, shown in Figure 6.1, rose by a total of 258 per cent
between 31 December 1895 and 20 May 1896.
The success of the Dunlop Company in attracting investment encour-
aged large numbers of existing cycle firms to go public. As Table 6.1
shows, 70 cycle, tube or tyre firms had been floated in 1895; in 1896 the
number was 363, with a further 238 floated in the first 6 months of 1897.
Hooley’s promotion of the Dunlop Company established the template:

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 BOOM AND BUST

table 6.1 Capitalisation of cycle companies17

Number of companies Total nominal
established capital (£’000s)

Q1 17 357.5
1895 Q2 12 182.5
Q3 15 1,624.0
Q4 26 1,476.1
Q1 34 1,641.1
1896 Q2 94 13,847.2
Q3 96 5,316.6
Q4 139 6,454.6

1897 Q1 156 7,370.0

Q2 82 4,763.6
Total 671 43,033.2

buy a small bicycle company, issue a prospectus full of unrealistic pro-

mises, pay influential figures to support the flotation and offer it to the
public for a much higher price than you paid. On balance sheets, the
discrepancy between the price paid by the promoter and the price
offered to the public was resolved by placing unjustifiably large valuations
on patents, or by referring to the intangible asset of ‘goodwill’.18 This
practice could be incredibly lucrative: one firm was reportedly issued to
the public for a price ten times as large as the promoter had paid for all its
constituent private firms combined.19
The methods used in promotion could be remarkably creative. For
several years before the boom, J. G. Accles had run an unprofitable
Birmingham bicycle factory which he could not sell privately. In 1896 he
sought to take advantage of the boom by incorporating as Accles Ltd. and
recruiting the services of John Sugden, a former manufacturer of ostrich
feather products with a history of financial chicanery.20 In order to attract
investors, Sugden and Accles formed another company, Lum-in-um Cycles,
and placed an order on its behalf for 20,000 Accles bicycles. This order was
then displayed prominently on the Accles Ltd. prospectus, with no mention
of the fact that the company was effectively buying products from itself (in
fact none of these bicycles was ever produced).21
This strategy initially managed to attract only £85,000 of the
£300,000 required, so the promoters formed another firm, Accles

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 THE BRITISH BICYCLE MANIA

Arms Manufacturing Ltd., which purchased a further £100,000 shares

in Accles Ltd. These shares were then quietly and gradually sold on the
secondary market, with almost half successfully offloaded by
December 1898.22 It is doubtful whether Accles Ltd. ever had any
intention of manufacturing a bicycle: its total revenue for the first 17
months of its existence was just under £71, consisting solely of transfer
fees and interest on overdue share calls, and soon after this it filed for
bankruptcy.23 Although Sugden was declared bankrupt in 1899, neither
he nor J. G. Accles seems to have faced criminal charges for fraudulent
behaviour.24
It was also common for cycle company promoters to make payments to
newspapers, either to publish ‘puffs’ that recommended their company
or simply to keep quiet about its shortcomings. These payments some-
times took the form of call options, which gave the newspaper an incen-
tive to generate as high a first-day share price as possible. During Hooley’s
bankruptcy proceedings, he named the Financial Post, Financial News and
Pall Mall Gazette as three of the papers that he paid off during the
promotion of the Dunlop Company, as well as the financial journal
Corporation of British Investors.25 The two managing directors of the
Financial Post were jailed for libel in January 1898, having published
a defamatory article about a company that refused to pay an extortion
fee.26 However, these conflicts of interest were not made public until
much later; in the short term, a positive press could generate capital gains
that appeared to vindicate the stance of the newspaper.
Other parts of the news media, however, did an excellent job of
informing investors. The Economist frequently criticised cycle share pro-
moters, warning as early as May 1896 that false rumours of consolidation
and strategically placed news articles were being used to manipulate
share prices.27 One cycle company prospectus was so weak that The
Economist accused it of demonstrating ‘a very robust faith in the gullibility
of the average investor’.28 But The Economist could also be somewhat coy,
almost never referring to fraudulent promoters by name.
The most comprehensive analysis of the market was provided by
Money: A Journal of Business and Finance, a twice-weekly publication
consisting of financial news and investment advice. Money identified
three features of the cycle share market that suggested overpricing.

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 BOOM AND BUST

First, vendors generally took very few shares in the companies they
promoted, which, it was ironically suggested, ‘showed the faith these
gentlemen have in their own concerns’.29 Second, the profits of many
cycle companies would clearly be unsustainable in the face of future
competition. Money gave the example of a cycle hire company renting
a £3 bicycle for £0.75 per week in early 1896, resulting in large
profits, on the basis of which the company was quickly recapitalised.
But such pricing was only possible because the sudden increase in
demand had caused a temporary shortage of bicycles, whereas the
company’s valuation assumed that it could be sustained indefinitely.
Third, Money highlighted the vast difference between public and
private valuations. Public firms were much more marketable, but
liquidity advantages could not explain this discrepancy – it could
only be the result of large-scale speculation.30 Furthermore, Money
was not afraid to name promoters it felt were taking advantage of
naive investors. When Harry J. Lawson, a close associate of Hooley’s,
attempted to float the New Beeston Company in May 1896, Money
described it as ‘absolutely certain to fail’, destined for ‘the large grave
which is allotted to Mr. Lawson’s promotions in the financial
cemetery’.31
On the other hand, there were plenty of true believers who did not
need to be paid to publish propaganda about cycle promotions. As
during the Railway Mania, periodicals for enthusiasts were a persistent
cheerleader for the bubble. Cycling ran a weekly financial section in
which it discussed developments in the market, generally with a very
positive slant. Though the main focus was on reporting specific financial
news, the column also frequently criticised the mainstream financial
press for its negativity towards the industry. At first, Cycling argued that
the financial press failed to appreciate the revolutionary nature of the
new technology, stating, ‘the prospects of the trade are so vast and the
possibilities so unlimited, that it is an impossibility to form any idea of
what this enormous growth may bring forth’.32 As the crash intensified,
the magazine often suggested that negative articles were the work of
short sellers trying to engineer a market crash.33 This preoccupation
with motives allowed the magazine to avoid addressing the content of
critical articles, and it is unlikely that Cycling itself was an impartial

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 THE BRITISH BICYCLE MANIA

observer. Its financial columnist almost certainly held bicycle shares,

which may have influenced his decision to repeatedly urge investors to
hold shares in the expectation of a ‘reaction’ or ‘turn of the tide’ in the
spring and summer of 1897.34
Promoters understood that even the most well-informed investor
could be attracted by the prospect of making quick profits by re-selling
them to a ‘greater fool’. Promotional materials made liberal use of stories
in which small investors grew rich overnight as a result of their invest-
ments in cycle shares. The Beeston Tyre Rim Company, one of several
doomed companies to emerge from the reconstruction of the original
Beeston firm, opened its prospectus by selectively quoting a Financial
Times article in which ‘a plunger who invested the lordly sum of 15s
(£0.75) . . . has lately realised a profit of £345’.35 Such dramatic profits
were extremely rare, but investors who managed to time their transac-
tions well could make substantial gains.
The deluge of promotions, many of which had very large capitalisa-
tions, might have been expected to put competitive pressure on existing
firms. But in fact, cycle share prices remained at a relatively high level
throughout 1896, and actually rose during the first 3 months of 1897.
Large positive returns after a firm was listed were common: in the middle
of March 1897, the eighty-one cycle companies listed in the Financial
Times were, on average, trading at 44 per cent above their subscription
price.36 This made it possible to profit by subscribing for shares and
immediately re-selling them on secondary markets. As a result, the com-
pany’s initial owners, the promoters, the aristocrats paid to act as direc-
tors, the newspaper proprietors paid to provide flattering coverage and
some initial subscribers all stood to benefit from the boom. The full
extent of the losses, meanwhile, would fall on whoever was left holding
the shares after the crash.
The bicycle bubble did not so much burst as suffer a slow puncture,
with prices falling gradually over the course of several years. The cycle
share index fell by 21 per cent between its peak in March 1897 and July of
the same year. The decline accelerated in July after the Financial Times
published a pessimistic front-page editorial on the market, noting that,
despite appearing to record impressive sales figures, cycle companies
were still paying fairly modest dividends. The Financial Times also

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 BOOM AND BUST

highlighted the potential for American competition, and that those

working in the industry had expressed concerns about slackening
demand.37 The editorial concluded that ‘the majority of companies are
over-capitalised’ and predicted that ‘the end of the present year will see
disaster’.38 This proved accurate, and by December 1897 the index had
lost 40 per cent of its value in the space of 9 months. In several cases,
profits fell so far short of the promises made in prospectuses that share-
holders instigated legal proceedings.39
The market for cycle shares fared just as badly in 1898, ending the year
71 per cent below its 1897 peak. The cycle share market did not reach its
nadir until the end of 1900, by which time 69 of the 141 cycle firms listed
at the peak of the boom had failed. The industry continued to struggle in
the early years of the twentieth century; by 1910 only 21 of the 141 firms
were still extant. Winding-up orders show that these firms rarely folded
without damage to their shareholders. Forty-three firms declared bank-
ruptcy, which almost certainly resulted in shareholders losing the full
extent of their investment, while 52 were wound up voluntarily or for
unknown reasons, with final share prices suggesting that subscribers
would have lost two-thirds of their initial investment. Twenty-seven others
were reconstructed, which generally meant that shareholders accepted
a reduction of more than 50 per cent of the par value of the shares.40
Of those firms that survived, a small number went on to become
household names. Dunlop struggled in the immediate aftermath of the
crash, but later became a global success by moving into the manufacture
of car tyres. Rudge-Whitworth thrived as a result of a series of astute
managerial decisions: it was one of the very few firms not to recapitalise
at a higher valuation during the boom, it paid relatively low dividends in
order to retain enough capital to prevent bankruptcy during the crash,
and it quickly cut prices in response to keener competition.41 The firm
continued its success after 1912 with the production of a series of iconic
motorcycles. Shifting production into related technology was a recurring
practice for the long-term successes: Riley and Rover moved into motor
car production, and Hughes Johnson Stamping moved into aeroplanes.
Only Raleigh thrived by exclusively producing bicycles, and it did so only
after a series of reconstructions that imposed heavy losses on its initial
investors.42

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 THE BRITISH BICYCLE MANIA

Contemporaries tended to have little sympathy for cycle share inves-

tors. George Gissing’s The Whirlpool, a fictional drama published in 1897,
features a downwardly mobile aristocrat called Hugh Carnaby, who frit-
ters away his inherited fortune to end the book bankrupt and embroiled
in various scandals. In order to illustrate his fiscally irresponsible char-
acter, the author shows him investing heavily in the cycle industry and
persistently holding his shares in the expectation of a recovery.43 Carnaby
neatly illustrated the type of person Victorian society would have
expected to buy cycle shares: wealthy, frivolous and naive.
However, shareholder registers of cycle companies, which are sum-
marised in Table 6.2, suggest not only that the base of investors was much
broader than the stereotype suggests, but that it changed considerably over
time. Rentiers like Carnaby, who listed their occupation as ‘gentleman’ or
‘esquire’ because they were either retired or wealthy enough not to work,
held only 16 per cent of cycle shares before the crash. In comparison,
a sample of shareholder registers from the broader stock market shows
that rentiers accounted for 45 per cent of shares.44 Unlike other companies,
bicycle firms attracted professionals and those close to the industry, parti-
cularly manufacturers, as share buyers. We can also see that, as in previous
bubbles, the Bicycle Mania attracted investors from a wider range of socio-
economic background than was typical for the period.

table 6.2 Proportion of capital contributed by occupational

groups45
Cycle companies Cycle companies Wider stock
pre-crash post-crash market

Manufacturers (of bicycles) 21.3 (10.3) 20.0 (7.0) 5.9

Merchants and retailers 9.5 8.2 11.3
Institutional investors 10.0 7.7 1.2
Financiers 5.7 6.7 2.1
Professional classes 26.1 17.2 12.1
Rentiers 16.0 27.7 43.4
Women 4.3 5.9 13.2
Working classes 5.9 5.1 0.5
Agricultural workers 0.3 0.4 1.5
Military 0.9 1.2 2.1
Executors/trusts - - 4.7
Company directors 25.7 18.7 26.4*

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 BOOM AND BUST

The cycle shareholder base after the crash looks quite different,
suggesting that some groups successfully rode the bubble and exited
before the crash. Company directors reduced their holdings by
27 per cent, exploiting the absence of insider trading laws, while cycle
manufacturers reduced their holdings by 32 per cent. The professional
classes and manufacturers also reduced their holdings substantially. Most
of these shares were sold to rentiers, suggesting that there was some truth
in the stereotype of worthless cycle shares being sold to gentlemen with
more money than sense. The sell-off of insider shares at the peak of the
boom continued a notable theme of the Bicycle Mania: the exploitation
of outside investors by those with privileged information.

CAUSES

Although technological innovation provided the immediate spark for

the bubble in cycle shares, it was only possible because all three sides of
the bubble triangle were present. By 1896 shares in Britain were already
sufficiently marketable for a bubble to occur, and marketability
increased in two important ways. First, large numbers of cycle firms
went public, making it much easier to buy and sell parts of their own-
ership. Before the cycle boom, firms with a profile like theirs had
seldom incorporated, and were thus very illiquid.46 Second, cycle
firms were almost all floated with small-denomination shares, usually
£1 each and sometimes even less.47 In comparison, the average share
denomination prevailing at the time was about £32, equivalent to
around £3,800 today.48 By issuing shares in small denominations,
cycle companies signalled their intention to attract as wide a range of
investors as possible.49 This gave many of the firms a relatively dis-
persed ownership, which further increased liquidity.
By some measures, monetary conditions were looser than they had
ever been. The Bank of England’s minimum discount rate was reduced to
2 per cent, the lowest on record, in February 1894, and not raised until
August 1896. This was the longest period of a 2 per cent bank rate ever in
the Bank’s then-200-year history. Traditional assets were producing very
low returns for investors: in May of 1896, the month in which the Bicycle
Mania initially peaked, the yield on British consols (consolidated

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 THE BRITISH BICYCLE MANIA

annuities) fell to 2.25 per cent, the lowest it had ever been since consols
were first issued in 1753.50
As with other bubbles, contemporary reports of the Bicycle Mania
often commented on speculation in disapproving tones: ‘rampant spec-
ulation’, ‘gambling’ and ‘harum-scarum’ were all used by the financial
press to describe the market for cycle shares.51 Although there was
undoubtedly an element of moralising in this coverage, share transfer
records suggest that speculation was common: many shares were sold
very soon after being allocated.52 One trading strategy, known to con-
temporaries as ‘stag’ investing, was to subscribe for shares with the
intention of selling them at a profit on the first day of trading.53 Often,
these sales would already have been agreed before the shares had even
been allotted. This practice was encouraged by promoters, because
agreed sales at a premium to the subscription price would be reported
in the financial press, advertising to potential investors that they would be
getting a good deal. Inducing speculators to ‘come on the feed’ was said
to be one of the keys to a successful promotion.54
It was also possible to speculate in the opposite direction, selling
shares short in the expectation of future falls in price. Because short
selling was not strictly regulated, this was theoretically simple: a trader
could agree to sell shares in the future at today’s price, then wait until just
before the settlement date to purchase them. If the price had fallen by
then, the bears, as short sellers were known, would profit from the
difference in price.
During the Bicycle Mania, however, directors, promoters and market
manipulators found that they could exploit this bear strategy by buying
a controlling stake in a company that was sold short – a strategy known as
a market corner or short-squeeze. Since bears had entered into a contract
to sell the shares, the market manipulator could then name their price.
The use of this strategy was rare, occurring only three times during the
bubble, but the losses they imposed on short sellers were substantial.
During the Bagot Tyre corner, one investor was forced to pay twenty-one
times the face value of Bagot shares and subsequently faced a loss of
£2,318; executing the strategy successfully would have earned a profit of
only £26. Having initially refused to reimburse his brokers, he was taken
to London’s High Court, where the consensus of the judge and jury was

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 BOOM AND BUST

that short sellers who lost money in a corner were getting what they
deserved.55
The presence of corners during the Bicycle Mania contributed to the
bubble in two ways. First, the risk of cornering created an asymmetry in
speculation: it was much easier, especially for non-specialists, to bet on
prices rising than to bet on prices falling. Financial advice columns at the
time typically cautioned against speculation in general, but were particu-
larly wary of ‘speculating for the fall’ (i.e. short selling), while noting how
rare it was among the general public.56 Second, although corners were
usually engineered by insiders, their beneficiaries were often individual
investors. Only 5.5 per cent of the Bagot Tyre corner profits went to
company directors, industry insiders or those working in the finance
industry. The remainder went to ordinary investors, including several
members of the armed forces, a hotel keeper and a student of theology.57
Since these profits represented quick and spectacular returns, they
undoubtedly played a role in attracting further speculative investors
during the boom of 1897.
The presence of easy money, marketability and speculation poses the
question of why the bubble did not spread to the overall stock market.
There were some features of existing shares, such as their high denomi-
nation, which made speculation less practical. But the most important
reason was that the stock market, like the market for government debt,
was already at a very high level. Railways, banks and industrials, the three
major issuers of shares, were all paying dividends that by historical
standards were small: the 100 largest companies in 1898 had an average
dividend yield of only 3.79 per cent.58 There was therefore little room to
generate the capital gains necessary to attract speculative investors.
Indeed, the limited potential for high returns elsewhere almost certainly
played a role in driving the investment in bicycle shares.
That is not to say that bicycle shares were the only outlet for spec-
ulative investment. The period saw a series of booms in exploratory
mining companies, the volatile nature of which encouraged
speculation.59 The greatest of these was in 1895 when, in response to
excitement about the potential levels of gold in the Witwatersrand
escarpment, shares in the Rand Mines Company rose by 360 per cent in
the space of a few months. Almost all of these gains were lost by the end of

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 THE BRITISH BICYCLE MANIA

the year. This was accompanied by a promotion boom that largely

focused on Western Australia, in which 401 mines floated in 1895
alone, with a total nominal capital of £40.8 million. Trading in these
shares spread to Paris and Berlin, as issuers attempted to further expand
their base of potential investors.60
Breweries provided another outlet for funds, with a wave of new
promotions brought to market in 1896 and 1897. Government restric-
tions on the number of available pub licences, combined with new
refrigeration and bottling technology, left small breweries at a severe
competitive disadvantage. As a result, many tried to grow by incorporating
at large capitalisations: between 1890 and 1900 the total equity of public
brewery companies trebled.61 These companies initially paid high divi-
dends, providing investors with good returns. Many, however, had grown
over-capitalised due to the abundant money and credit in the mid-1890s,
and struggled in the medium term. Shareholders eventually suffered
comparable losses to investors in bicycle firms; between 1897 and 1908
brewery shares lost 84 per cent of their value.62

CONSEQUENCES

The effect of the crash in the cycle share market on the Birmingham area
is difficult to determine. Studies of the area have highlighted the loss of
trade after the closure of so many factories, but they also note how
effectively their machinery could be adapted to manufacture different
products.63 Perhaps the most high-profile example of this flexibility is
Birmingham Small Arms, which initially produced weaponry, moved into
bicycle production during the boom years, and later manufactured
a series of iconic motorcycles. But there was a period of recession before
industry could adapt, and regional estimates show that GDP per capita in
the West Midlands was 7.5 per cent lower in 1901 than it had been in
1891, making it the worst-performing region in England in this period.64
On a national level, the crash does not appear to have had any adverse
macroeconomic effects. On the contrary, the years 1895 to 1900 are
associated with strong economic growth. GDP estimates show the UK
economy consistently growing in real terms in the aftermath of the cycle
boom; the growth rate reached 5 per cent in 1898 and 4 per cent in

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 BOOM AND BUST

1899.65 Unemployment fell from 7.3 per cent in 1895 to 4.3 per cent in
1899.66 Outside the West Midlands, the effect of the bubble’s bursting
was minimal.
Several factors alleviated its adverse effects. First, the bicycle industry
constituted a relatively small section of the economy, and bicycle shares
constituted a relatively small section of the stock market. As a result, the
fall in consumption associated with investor losses and recession in the
industry had little macroeconomic impact. Second, the bicycle industry
was not important to the wider economic system. Recession in a small
industry might spread to the wider economy if it was an important part of
several production chains. But for the bicycle industry this was not the
case: the associated technology was not adapted into the existing econ-
omy in the way that, for example, internet technology later would be.67
Third, relatively few of the shares were leveraged; 145 of the 182 shares
listed by the Financial Times in April 1897 had no uncalled capital at all,
and those that did were typically smaller enterprises.68 As a result, third
parties were not generally exposed to bankruptcies or defaults resulting
from losses on cycle shares.
Finally, and most importantly, financial institutions on the whole did
not invest in bicycle shares, and thus there was no risk of a financial crisis
resulting from the bubble. Notably, none of the shares accounted for in
Table 6.2 was held by a bank. Banks were keen to publicise this fact: in
July 1897, in response to rumours that they were exposed to a crash,
several Birmingham banks issued a statement reassuring the public that
they did not hold cycle shares, and stressing their reluctance to accept
cycle shares as collateral.69 This mirrored their position on mining shares
during the previous year’s boom, when the refusal of major banks to
accept the shares as collateral had precipitated the crash.70
Why were banks so reluctant to involve themselves in speculative
industries? The first thing to note is that institutions in this period rarely
held significant numbers of any shares at all: in the 1890s, institutional
investors accounted for just above 1 per cent of capital in the British
equity market, and very much the greater part of this was held by invest-
ment trusts rather than banks.71 It was therefore rare for a bank to be
directly exposed to a stock market crash. They might have suffered losses
indirectly, however, if they had accepted shares as collateral or issued

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 THE BRITISH BICYCLE MANIA

loans to over-capitalised public companies. But in the case of the cycle

boom, banks publicly distanced themselves altogether from the industry.
Given its minor economic impact, the Bicycle Mania would appear to
offer a particularly clear illustration of the usefulness of bubbles. The
most obvious benefit was technological. A feature of the boom years was
the excessive valuations placed on patents, which, though potentially
irrational from the perspective of an individual investor, encouraged
innovation. These innovations had a general applicability that was not
obvious at the time. The bicycle boom, for example, led to further
improvements in tyre quality, which later helped the development of
the motor car and motorcycle industries. In some instances, the potential
applications were even wider: bicycle production led to improvements in
automated machine tools and the use of ball bearings in construction.72
The forced contraction of the bicycle industry also produced some
positive outcomes for consumers. During the boom years, it was conven-
tional for British bicycles to be relatively expensive, competing mainly on
quality. When Rudge-Whitworth first cut prices in July 1897, rival com-
panies felt entitled to object.73 However, they were soon compelled to
follow suit, and the firms which attempted to maintain high prices often
went bankrupt.74 Firms that branched into alternative industries, such as
motor cars, were more likely to survive the recession. In contrast with the
unnecessary and wasteful competition of the Railway Mania, the Bicycle
Mania is perhaps an illustration of Schumpeter’s principle of creative
destruction, in which the failure of inefficient companies paves the way
for more innovative ones.75
Finally, the overabundance of affordable bicycles resulting from the
bubble had some clear positive social and political effects. Unlike horses
and motor cars, the use of bicycles provided health benefits, did not
produce harmful waste products, and posed significantly less of a threat
to the safety of pedestrians. Numerous commentators have also noted the
positive effects for women’s rights, since cycling gave women an unpre-
cedented level of personal mobility.76 As well as allowing for ease of
congregation, it eroded the social norm that expected upper-class
women to be chaperoned, and the difficulty of riding in the restrictive
corsets of the time resulted in a ‘rational clothing’ movement and the
development of more practical dresses.77 Even before the bubble, cycling

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 BOOM AND BUST

was already becoming popular, but the bubble gave companies addi-
tional capital to innovate and advertise, improving the technology while
helping to bring it to national attention. The combination of minor
economic damage and positive externalities makes it possible that, unlike
many more famous bubbles, the Bicycle Mania brought benefits that
outweighed its costs.

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 CHAPTER 7

The Roaring Twenties and the Wall Street Crash

I decided to go East and learn the bond business. Everybody I knew was in the
bond business, so I supposed it could support one more single man. (Nick
Carraway, in The Great Gatsby)
F. Scott Fitzgerald1

Over-investment and over-speculation are often important; but they would

have far less serious results were they not conducted with borrowed
money.
Irving Fisher2

W hile history often consists of long-term trends,

occasionally a proverbial meteorite arrives: an unforeseen
shock that stimulates enormous change in a very short period of
time. One of the clearest examples is World War I, which precipitated
the breakup of several empires, the emergence of the first great
communist power, and the disintegration of class and gender hierar-
chies all over the world. Whereas in Britain the democratisation of
financial markets took two centuries, World War I brought it to the
United States in the space of only a few years. In the United States,
the decade following the conclusion of the war was then characterised
by abundant money, as the newly unlocked savings of the middle
classes continually looked for new investment outlets. When
a technological spark eventually brought this money into the highly
leveraged market for equities, the result was a bubble that encom-
passed the entire stock market and culminated in one of history’s
most spectacular crashes.

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 BOOM AND BUST

Like many financial developments throughout history, the demo-

cratisation of US financial markets came about as part of an effort to
raise money to pay for war. The United States entered World War I in
April 1917, believing that its outcome hinged on its ability to mobilise
its forces as quickly as possible, creating urgent funding requirements
for the government. Expenditure rose from $1.9 billion in 1916 to
$12.7 billion in 1917, and was to rise further to $18.5 billion in 1918,
far greater sums than could be funded through taxes alone.3
Woodrow Wilson’s administration concluded that the best way to
fund the war effort was to sell vast amounts of bonds to the
American public.
In order to ensure that these bonds were sold, the government
launched a spectacular marketing campaign. The bonds were rebranded
as ‘Liberty bonds’ in a direct appeal to the patriotism of US citizens. In
advance of the initial $2 billion issue in May 1917, a series of posters were
issued, some stressing their potential returns, some appealing to the fear of
a German victory and others appealing to a more general sense of national
pride. Rallies were arranged featuring movie stars such as Charlie Chaplin
and Mary Pickford, and the Boy Scouts of America were enlisted to solicit
subscriptions on doorsteps.4 The marketing drive might not have been so
successful, however, had the government not skilfully used the existing
financial system to make buying the bonds as easy as possible. The recently
established Federal Reserve began accepting Liberty bonds as collateral,
giving financial institutions a strong incentive to hold them. These institu-
tions then acted as a distribution network, with investors able to purchase
the bonds at their local branch. Many institutions also allowed investors to
buy the bonds on credit.5
The first Liberty bond drive was followed by four more, all of which
were heavily oversubscribed. As a result, large numbers of Americans
invested their savings in securities for the first time. The fourth subscrip-
tion alone attracted almost 23 million subscribers, at a time when the
total US population was just over 100 million.6 This included unprece-
dented numbers of working- and middle-class investors. Of those earning
under $1,020 per annum, 36.7 per cent purchased a Liberty bond in
1918–19; to put this into context, the proportion of Americans of equiva-
lent real income holding any security in 2013 was only 11.4 per cent.7

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

The Liberty bond issues introduced the American public to the prin-
ciples of investing and created a distribution network that made doing so
much easier. As the 1920s progressed, record rates of economic growth
created even more money for savers to invest. The decade was thus
characterised by large and increasing sums of capital searching for profit-
able investment opportunities.
Initially, much of this went into corporate bonds, with $1.4 billion in
bonds issued in 1920 compared to $540 million in stocks.8 When the yield
on government bonds fell from 1921 onwards, corporate bonds became
increasingly attractive to investors. At first, large companies were happy
to meet this demand because it was difficult for them to meet their capital
requirements through the banking system: branch banking was
restricted and there were strict limits on the proportion of loans that
could be given to one company.9 But bond issues were outpaced by the
quantity of capital entering the market, causing the price of corporate
bonds to rise to the point where they were no longer such an appealing
investment: the yield on Aaa-rated bonds fell from 6.38 per cent in 1920
to 4.93 per cent in 1922.10 The market was becoming saturated, and
savers began to look for alternatives.
One such alternative was housing. Few houses had been built during
the war because industry had been reoriented towards munitions, result-
ing in a temporary shortage of new homes. After the war, construction
increased to plug this gap: as Figure 7.1 shows, in 1925 work started on
937,000 new houses, up from 247,000 in 1920. This was accompanied by
a nationwide increase in house prices of around 40 per cent.11 The
primary source of finance for these new homes was mortgage debt,
which was rapidly expanded by commercial banks, insurance companies
and savings associations. In contrast to later housing booms, however, the
easing of credit was relatively minor, and by today’s standards the mort-
gage terms were very restrictive. The boom was instead driven by
a combination of easier access to existing credit and increased demand.12
Mortgages allowed investors to speculate on housing using credit,
but many mortgages were also packaged into securities, thereby
increasing their marketability. The level of outstanding real-estate
bonds grew from $500 million in 1919 to $3.8 billion in 1925, at
which point real estate accounted for 22.9 per cent of all new

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 BOOM AND BUST

1,000

900

800

700

600

500

400

300

200

100

0
1917 1919 1921 1923 1925 1927 1929 1931 1933
Figure 7.1 Number of new non-farm houses on which construction started in the United
States, 1917–34 (thousands)13

corporate bond issues. These bonds were conceptually similar to the

mortgage-backed securities that were to wreak havoc in the 2000s, but
unlike in the 2000s, institutions were very reluctant to hold them,
preferring to limit their exposure to mortgages they could monitor
themselves. This stance was ultimately justified, as the real-estate bonds
performed very poorly, losing 75 per cent of their value between 1928
and 1933.14 When the construction boom ended after 1925, house
prices initially remained relatively steady, falling by only 8.1 per cent
nationwide between 1925 and 1929. However, as economic conditions
worsened, the housing market collapsed, and by 1933 prices had fallen
30.5 per cent from their peak value.15
The speculative element of the housing boom can be seen most clearly
on a local level, especially in Florida, where bankers were most successful
in recruiting politicians to their cause in order to bypass regulations.16
Driven by the innovative marketing techniques of the entrepreneur Carl
G. Fisher, the image of Florida was transformed into that of
a Mediterranean-style tourist paradise, driving demand for its land.17 In
Miami, the price of building permits rose by 700 per cent between 1923
and 1925.18 The Floridian land market was structured to make speculation

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

as easy as possible, partly through the extension of short-term credit.

Investors could buy land for a deposit of 10 per cent, with a further
25 per cent not due for another 30 days, at which point it would often
have already been resold for a quick profit.19 The scale of speculation can
be seen from the remarkable increase in the volume of trades: the number
of Miami real-estate transactions rose from 5,000 in July 1924 to 25,000 in
September 1925.20
Florida also saw the growth of new and innovative forms of fraud. The
most famous scheme was that of Charles Ponzi, who provided a template
for fleecing investors that is still followed today. Ponzi issued ‘unit certi-
ficates of indebtedness’ for $310 each, promising a dividend of
200 per cent in 60 days, supposedly the profits of his land development
work near Jacksonville. In practice, most investors agreed to reinvest their
profits with Ponzi, relieving him of the need to pay these dividends. The
small minority of investors who insisted on cash were paid with the money
of subsequent investors. When the scheme eventually collapsed, Ponzi
was convicted of securities fraud and served 7 years in prison after a failed
attempt to escape to Italy.21 However, the willingness of so many investors
to believe in the prospect of such extravagant returns suggests a fertile
atmosphere for legal but misleading promotion schemes.
Another alternative investment was foreign bonds. In August 1924, con-
vinced that the recovery of the German economy was a geopolitical neces-
sity, the US government, along with several major European powers,
negotiated the Dawes Plan. The essence of the Plan was that J. P. Morgan
would sell high-interest bonds to American investors in order to fund
Germany’s economic reconstruction and war reparations. Since most poli-
ticians and bankers agreed that American interest in the bonds was unlikely
to be sufficient to raise the agreed $110 million, the Federal Reserve
encouraged uptake by cutting the discount rate from 4.5 per cent to
3 per cent, the lowest in the world. This rate cut was accompanied by
another extensive government marketing campaign encouraging investors
to buy foreign bonds, and came on the back of a 1922 ruling that deregu-
lated the process for issuing them in the United States.22
This turned out to be overkill: the full quota of bonds was sold within
15 minutes, and the issue was oversubscribed several times over. German
local governments spotted an opportunity and placed their own bonds in

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 BOOM AND BUST

the US market, and German businesses soon followed.23 Demand for

German bonds quickly spilled over into demand for those of other
foreign countries. The quantity of newly issued dollar loans from the
United States, almost all of which were in the form of bonds, rose from
$600 million per annum in 1921–3 to $1.3 billion in 1924–5. Following
another discount rate cut in the second half of 1927, this figure increased
to $1.7 billion, dwarfing the sums raised in London. Thirty-two countries
issued bonds in the United States during the 1920s, with around half of
the total volume issued coming from Europe and another quarter issued
coming from Latin America.24
In early 1928, several factors combined to steer American capital into
domestic stocks. House prices and house production had both peaked,
and real-estate bonds were already performing poorly.25 Germany went
into recession when its central bank raised interest rates, and its foreign
bond issues had begun to fall in 1927.26 In the same year, National City,
the country’s largest investment bank, began to handle stock issues,
having previously restricted itself to bonds in an effort to maintain an
image of conservatism.27 All of the institutional framework and market-
ing nous that had been developed to sell bonds was therefore suddenly
directed towards the stock market. Furthermore, recent history sug-
gested that stocks were a much more promising investment than
bonds or housing. Between August 1921 and January 1928, the Dow
Jones Industrial Average (DJIA), shown in Figure 7.2, had risen by
218 per cent.28
Although these price increases seemed dramatic, they reflected
a genuine increase in profitability: an index of dividend payments by
Dow Jones companies closely tracked the DJIA until January 1928.29 The
economy was in the midst of a remarkable boom: GDP grew at an annual
average of 4.7 per cent between 1922 and 1929. Both the high profit-
ability and economic growth owed much to technological innovation,
particularly in electricity and mass production, both of which contribu-
ted to significant increases in productivity.30 But innovation was by no
means limited to these areas; major breakthroughs also occurred in the
chemicals, food processing and telegraph industries. Investors were
especially keen to invest in firms that spent heavily on research and
development, with innovative firms trading at a premium.31

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

450

400

350

300

250

200

150

100

50

0
18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
n

n
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
Figure 7.2 Dow Jones Industrial Average, 1918–3232

In February 1928 the Federal Reserve, concerned that large price

increases would attract speculative investors, moved to dampen the stock
market. The New York Fed’s discount rate was raised by ½ per cent, and
further increases that summer brought this rate to the relatively high level
of 5 per cent.33 The Federal Reserve also pressured banks to curtail the
issuing of broker loans, whereby money was lent for the purpose of buying
stocks.34 But neither of these measures was effective. The discount rate
increases inadvertently encouraged capital to return to the United States,
because higher interest rates than were available at home had been one of
the most attractive features of foreign bonds. Much of this capital then
found its way into domestic stocks, either directly or via the banking
system.35 When domestic banks were pressured by the Federal Reserve to
reduce broker loans, the gap was plugged by private investors, corpora-
tions and foreign banks. The quantity of these loans continued to grow
despite the sharp rise of the interest rates on them, indicating substantial
demand for buying on margin (i.e. investing with borrowed money).36
During 1928, the DJIA rose by a further 50.9 per cent.
With stock prices at such a high level, equity became a historically
cheap source of finance, and corporations moved en masse to issue more

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 BOOM AND BUST

table 7.1 US corporate

stock issues, 1921–3437
Year Issues ($m)

1921 455
1922 1,146
1923 1,399
1924 740
1925 1,034
1926 829
1927 1,396
1928 3,850
1929 4,808
1930 1,493
1931 223
1932 12
1933 61
1934 36

shares. As Table 7.1 shows, $3.85 billion of shares were issued in 1928,
followed by a further $4.81 billion in 1929, where the previous high had
been $1.4 billion in 1923. Investment trusts issued more capital than any
other sector in 1929, and since these trusts primarily purchased stocks,
equity prices were driven even higher. The numbers of stocks and their
prices were both increasing, and they were changing hands much more
frequently. The daily average trading volume on the New York Stock
Exchange rose from 1.7 million shares in 1925 to 3.5 million in 1928
and 4.1 million for the first 9½ months of 1929.38 Although the DJIA did
not change much during the first 5 months of 1929, it rose a further
27.8 per cent between the end of May and the end of September.
Newspapers were split over whether stock prices were excessive or
representative of a new financial era. Alexander Dana Noyes, the finan-
cial editor of the New York Times, was a notable sceptic, his perspective
informed by having written a financial history of the United States dating
back to 1865.39 His columns were often too diplomatic to attack the bull
market explicitly, however, and his cautious advice was often under-
mined by editors who were reluctant to contradict the more optimistic
views of well-known bankers.40 The Wall Street Journal essentially acted as
a cheerleader for the stock market. One article, in July 1929, argued that
although the market ‘has had big reactions . . . it always comes back . . .

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

because general business refuses to slump with it’.41 This enthusiasm was
usually genuine, but not always: two of its journalists accepted payments
for stock recommendations in the mid-1920s, which the Journal was
forced to cover up by offering them minor jobs at the paper. New York
Daily News, which at the time was the most-read newspaper in the country,
had a more systemic bribery problem: its financial columnist was later
shown to have taken money from traders in exchange for a share of their
profits.42
The summer months were normally quiet on the exchanges, but in
1929, both brokers and investors forwent holidays to continue trading
stocks. The peak was on 3 September, when the DJIA reached a value of
381.2; since the beginning of 1927 it had risen by 231 per cent.43 Prices
then began gradually to fall, which some contemporaries interpreted as
an inevitable levelling-off. The Yale economist Irving Fisher stated on
16 October that stocks had reached ‘what looks like a permanently high
plateau’.44 Prices were extremely volatile, however. A 4.2 per cent drop in
the DJIA on 3 October was followed by a 6.3 per cent gain on 7 October,
which was then the largest movement in the post-war era. These volatile
conditions continued until Tuesday 22 October, when the DJIA sat at
326.5, 14.3 per cent below its peak.
On Wednesday 23 October, a sharp sell-off in automobile shares
precipitated a general fall in stock prices on the New York Stock
Exchange. The volume of shares traded reached 6.4 million, with the
final hour of trading being particularly frantic. The ticker tape, which
telegraphed stock prices around the country, ran for 104 minutes after
trading ended, so traders had an agonising wait to discover how much
money they had lost. When the dust settled, the DJIA had ended the day
down 6.3 per cent, at that time the greatest daily fall since before 1914.
And worse was expected to come because these losses triggered margin
calls – recalls of broker loans that forced leveraged traders to immedi-
ately sell their stocks to avoid default. The sell-off was expected to be so
fierce that the New York Police Department closed off one entrance to
Wall Street, with wagons and men stationed throughout the financial
district.45
The Thursday morning trading was as frenzied as expected, with
1.6 million shares changing hands in the first half hour, mostly from

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 BOOM AND BUST

ruined margin accounts. The downward momentum led many holders

to ‘sell at the market’ – in other words, to accept any price for their
stocks. As news of the crash spread, crowds began to gather outside the
New York Stock Exchange to watch the panic unfold, and the police
presence was doubled. But, remarkably, the market recovered. At
1:30pm, following a meeting with several major bankers, the vice-
president of the Exchange began conspicuously buying large quantities
of blue-chip stocks at above the market price. This deliberately evoked
the panic of 1907 which, it was widely believed, had ended due to the
intervention of a cartel of bankers led by J. P. Morgan. This gambit
initially appeared to have worked because stocks quickly recovered most
of their losses. The DJIA, having at one point been down 10.8 per cent,
ended the day down just 2.1 per cent.46 Although this day later became
known as Black Thursday, the damage was confined almost entirely to
small stocks.
The remainder of the week was relatively calm, and many assumed
that the following week would see a return to normality. The New York
Times praised ‘Wall Street’s banking leaders’ for ‘arresting the decline’,
reporting that ‘the feeling was general that the worst had been seen’.
New York Daily Investment News was much more direct, printing a four-
word front-page headline: ‘Stock Market Crisis Over’.47 The Chairman of
the Irving Trust, one of the country’s largest investment banks, issued
a statement warning that ‘whenever fundamental values are lost sight of
by the unthinking majority it is time for courage on the part of those
investors who have a real sense of basic worth’.48 Remarkably, this was
intended as an argument for buying.
When trading reopened on Monday morning, however, it was imme-
diately clear that there were many more sellers than buyers. Whereas
Black Thursday had been characterised by pockets of illiquidity where
shares could not be sold, on Monday their prices simply dropped sub-
stantially, often by $1–$2 at a time. These sales came primarily from two
sources: shareholders who had been issued with margin calls over the
weekend; and foreign investors, particularly British investors, many of
whom had recently had funds frozen due to the bankruptcy of a major
British financier.49 Prices fell further in the afternoon as it became clear
that neither the Federal Reserve nor the private banks were prepared to

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

intervene. The DJIA finished the day down 12.8 per cent, which was by far
the largest fall in its history.
Once again, the New York Times led the following morning with the
story that ‘the storm had blown itself out’, a conclusion reached on the
basis of ‘statements by leading bankers’.50 This line was repeated by
New York Daily News, giving it the unwanted record of having advised
investors to buy shares on every single day of the crash.51 But when
trading reopened, prices continued to fall. The size of sell orders rose
considerably on the previous day, suggesting that institutional investors
and large shareholders were now leaving the market. This was later
compounded by the withdrawal of local banks, corporations and indivi-
duals from the call loan market, meaning that many would-be buyers
could not borrow money to purchase stocks. The New York Fed decided
to act, purchasing $100 million in government securities to provide the
market with liquidity in order to prevent an immediate credit crisis.52
Nevertheless, the DJIA ended the day down a further 11.7 per cent. The
aggregate loss was barely believable: it had fallen by 23.6 per cent in 2 days
for no obvious reason. To put this fall into perspective, the Japanese
attack on Pearl Harbor resulted in the DJIA falling only 6.3 per cent over
2 days.
The remainder of the week saw a considerable recovery, but this was
immediately reversed when trading resumed the following week, as
stocks continued to display unprecedented levels of volatility. The DJIA
finally bottomed out on 13 November at a value of 198, having lost
48 per cent of its value in 2 months. The new year saw a recovery, and
the DJIA touched 292 in the April of 1930, making it seem as if the crisis
was finally over. However, the stock market fell further during the rest of
1930 as the economy entered a deep depression. The DJIA did not reach
its minimum until July 1932, when it fell to 41, an incredible 89.2 per cent
loss from its 1929 peak.
What role had the news media played during the bubble? Generally
speaking, newspapers were uninterested in valuing the market indepen-
dently, instead uncritically reporting the self-serving words of bankers,
traders and politicians. John Brooks’s financial history of the era mock-
ingly describes the emergence of the ‘transatlantic shipboard interview’,
in which an ‘enigmatic’ major banker or business leader ‘reluctantly’

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 BOOM AND BUST

offered comments to journalists on financial matters while travelling to

Europe on a luxury cruise-ship.53 By 1929 the comments of powerful men
had become so uniformly positive that they were nicknamed ‘the pros-
perity chorus’.54 Newspapers continued to use the chorus’s over-
optimistic opinions in lieu of facts throughout the crash: the New York
Times headline on the morning after Black Thursday was ‘Worst Stock
Crash Stemmed by Banks; Leaders Confer, find Conditions Sound’.55
While previous bubbles also saw the emergence of famous ‘charac-
ters’, the extent to which the press focused on the role of high-profile
individuals in the 1920s bubble is unusual. It could be argued that this
made financial stories more relatable for a general audience, reinforced
the idea that market movements happened for good reasons, and made it
appear as if someone was in charge. Needless to say, most of these articles
aged very badly. Journalists frequently based stories on comments by the
National City Bank directors, but the terms of a proposed merger with
the Corn Exchange Bank gave these directors an enormous vested inter-
est in keeping stock prices high.56 Other high-profile figures eventually
ended up in prison for financial crime, most notably Richard Whitney,
who had been vice-president of the New York Stock Exchange during the
crash.
In addition to making for more compelling stories, the sycophantic
editorial style served three purposes. First, it allowed newspapers to
develop close relationships with the country’s most powerful men, and
thereby access a reliable source of future stories. Second, it ensured that
the newspapers could not be blamed for sparking a panic. If a major
newspaper had correctly predicted the crash, it would have been heavily
criticised for causing it. Third, reporting only what other people were
saying ensured that they could evade responsibility when events did not
transpire as expected. In the aftermath of the crash, newspapers often
mocked the exact theories that they had been citing for several years as
expert opinion. This strategy thus helped the news media to walk the
tightrope of maintaining some credibility without contradicting the spe-
cial interests and access on which they depended.
While the 1920s bubble was primarily an American phenomenon, it
also had an international element. Global stock markets were highly
connected during the 1920s, meaning that several countries experienced

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

a stock market boom at the same time as the United States.57 French
stocks rose by 231 per cent between 1922 and 1929, then fell by
56 per cent between 1929 and 1932.58 Swedish stocks rose by over
150 per cent between 1924 and 1929, but had lost all of these gains by
1932.59 The German stock market more than doubled during 1926, but
the central bank intervened to burst the developing bubble.60 Although
the UK had a stock market crash in 1929, stock prices recovered relatively
quickly, reaching their pre-crash level by 1935.61 None of these countries
came close to experiencing the 89 per cent price drop witnessed in the
United States.

CAUSES

The decade before the crash saw a continuous increase in marketability,

as a series of reforms and innovations made it much easier to buy and sell
securities. The first of these was the financial network set up to distribute
the Liberty bonds, which allowed them to be bought in local bank
branches, department stores and through payroll deductions.62 After
the war, private banks moved to replicate this network in an attempt to
tap into the market for small investors. The total number of brokerage
offices rose from 706 in 1925 to 1,658 in 1929, allowing investors to buy
securities without going near Wall Street. The National City Company
effectively became a financial chain store, selling corporate bonds,
foreign bonds and common stocks all over the country. This was accom-
panied by marketing campaigns that aimed to educate the public in the
basics of investment. This benefited investors directly by making it harder
for fraudsters to take advantage of them in financial markets, but it also
benefited genuine companies, because it was easier to sell stocks and
bonds to more confident investors.63
On secondary markets, transaction costs were remarkably low in
the second half of the 1920s: the average one-way total transaction cost
in 1929 was around 0.5 per cent, lower than any level on record before
the 1980s.64 Traders also benefited from the expansion of communica-
tions technology: telephone use expanded by 70 per cent over the
decade. By 1929 the New York Stock Exchange had installed 323 tele-
phone lines connecting it to brokerage firms.65 As in previous bubbles,

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 BOOM AND BUST

increasing marketability was, to an extent, self-perpetuating: higher mar-

ketability increased the volume of trades, which in turn made stocks even
more liquid.
For the purpose of explaining the stock market bubble, the most
significant form of credit growth was in broker loans. Investment trusts
had barely existed in the United States before 1920, but when they did
arrive, they were much riskier entities than they had been in the UK.
Many were enormously leveraged: trust managers were allowed to pur-
chase stocks on margin for a deposit of only 10 per cent, meaning that up
to 90 per cent of their investments could be purchased with borrowed
money. The number of these trusts grew from 40 in 1921 to over 750 in
1929, when they issued more new capital than any other sector. Trading
on margin was just as common among individual traders, who borrowed
from brokers, who in turn borrowed from banks.66 Margin trading trans-
formed stock trading from a staid and technocratic profession into an
activity that could appeal to compulsive gamblers, who had few other
outlets, because almost all forms of gambling were illegal throughout the
United States. The extent to which this exacerbated the stock market
boom is evidenced by the fact that the quantity of broker loans almost
exactly tracks the DJIA for the period 1926–31.67
The Federal Reserve has often been blamed for allowing the boom to
develop through excessively loose monetary policy during the 1920s. This
argument, however, does not fit the evidence. Given the prevalent eco-
nomic conditions, discount rates in the period 1922–9 were not particu-
larly low.68 In the latter part of the decade, the Federal Reserve became
acutely worried about stock market speculation, raising interest rates
three times in 1928. It successfully pressured banks to curtail broker
loans from the end of 1927 onwards, and the subsequent increase in
these loans came from individuals, corporations and foreign banks,
which the Federal Reserve had little control over. The minutes of its
meetings suggest that the Federal Reserve was, if anything, excessively
concerned with curtailing margin lending when other areas of finance
were more systemically important.69
While the roles of marketability and credit are widely acknowledged,
the popular memory of the bubble is based largely around speculation.
In J. K. Galbraith’s famous history of the crash, he argues that its key

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

feature was that ‘all aspects of [stock] ownership became irrelevant

except the prospect for an early rise in price’.70 This was widely observed
at the time: the New York Times noted in August 1929 that ‘the present
modus operandi in the market appears to be the buying of leading issues
for the purpose of passing them on to someone else at a higher price’.71
Several pools of investors were set up explicitly for this purpose, many of
which involved leading businessmen and financiers. These pools were
soon joined by individual margin traders, many of whom had given up
their jobs to become day traders.72
The spark for the bubble came from technological change.
American society, as well as its economy, was transformed by electri-
fication in the years preceding the crash: per capita electricity pro-
duction grew by 9.2 per cent between 1902 and 1929.73 As well as
providing considerable benefits to consumers, cheaper electricity was
useful in many other industries, and complemented another major
economic shift: the rise of mass production. Famously pioneered by
Henry Ford in the automobile industry, the 1920s saw mass produc-
tion extended into almost every area of manufacturing, dramatically
increasing the quantity of goods produced and lowering the costs for
consumers.74 In combination with electricity, it made all kinds of
consumer goods cheaper to produce, from telephones to washing
machines to refrigerators – many of which could now be purchased
on credit.
New technology sparked the bubble in two ways. First, it provided
companies with extraordinary profits in the mid-1920s, much of which
was paid out to shareholders. The dividends accruing to the DJIA grew by
120 per cent between 1922 and 1927.75 This caused the DJIA to grow by
a similar amount, providing shareholders with large capital gains. It was
these capital gains that initially attracted speculative investors. Second,
new technology provided investors with a powerful rationalisation for the
fact that stock prices far exceeded the level implied by traditional metrics.
The 1920s saw the growth of modernism, a philosophy which contended
that new technology had rendered most previous models for explaining
the world obsolete.76 By the end of the decade this worldview was often
applied to investment. In March 1928 the New York Times reported that
the ‘widely-held opinion of market participants’ was that ‘all former

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 BOOM AND BUST

yardsticks must be disregarded and that new measures, if the market is to

be judged aright, must be adopted’.77
In previous studies of 1929, it has been more common to ask ‘what
caused the crash?’ than to ask ‘what caused the bubble?’ Several possible
triggers of the crash have been proposed, including the bankruptcy of
Clarence Hatry in London, the passage of the Smoot-Hawley tariff and the
New York Fed raising the discount rate on 9 August 1929. However, none of
these can plausibly explain the timing or scale of the crash.78 This has led
some to conclude that the crash was caused either by a sudden unexplained
change in investor sentiment, or was simply a ‘mystery’.79 In fact the crash
was neither a response to a specific incident nor a mystery: it was simply
a consequence of the market’s underlying structure. The quantity of out-
standing broker loans in the autumn of 1929 meant that any sufficient fall in
prices would lead to a significant number of margin calls. This in turn would
force traders to liquidate, depressing prices further. Essentially, the fuel for
the bubble could be removed at any moment. This vulnerability was widely
understood, since the quantity of broker loans was publicly available, and as
a result the market became much more volatile. In such circumstances, any
particularly large noise trade could have triggered a crash, and this is likely
what happened on 22 October 1929.

CONSEQUENCES

The Wall Street Crash was followed by a collapse in consumer spending.

One cannot be certain that these two events were linked: the stock
market’s relative economic importance suggests that it ought not to
have caused Americans to reduce their spending as much as they did.
But US consumer spending overreacting to a stock crash would not be
unusual – consumer spending is historically very responsive to share
price movements – and, while subsequent spending reductions can be
attributed to deflation, there is no other obvious explanation for the
reduction of 1929.80 Although it is difficult to know for sure why con-
sumers would have reacted to the crash in this way, it could be that the
apocalyptic tone of media coverage during the crash led households to
anticipate a disproportionate economic impact, and households cut
spending in response.

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

This reduction in spending was accompanied by the end of the credit

boom. After the crash, the sudden contraction in broker loans was
followed by a similar contraction in mortgages and consumer durable
loans.81 These concurrent falls in spending and lending led to
a deficiency in aggregate demand, ushering in deflation and pushing
the American economy into recession. In the first half of 1930, industrial
production increased because corporations expected the recession to be
relatively mild. However, consumer spending remained persistently low,
and it quickly became clear that the recession would be significant: by the
end of 1930, GDP had fallen by 11.9 per cent for the year. The end of
1930 also saw the period’s first financial crisis when banks holding
$552 million in deposits failed in November and December. This aggra-
vated the economy’s deflation problem: the consumer price index fell by
2.5 per cent in 1930, 8.9 per cent in 1931 and 10.3 per cent in 1932.82
This, in turn, discouraged economic activity while increasing the real
value of bank liabilities, resulting in waves of further bank failures.
The key to escaping this economic spiral would have been to stop
deflation and protect credit channels. The easiest way to do so would
have been to flood markets with liquidity and have the Federal Reserve
act as a lender of last resort to failing banks. But the government feared
that doing either would undermine its commitment to keeping the value
of the dollar fixed to gold.83 As a result, banks continued to fail, and the
economy continued to self-destruct. When the United States finally left
the gold standard in 1933, nominal GDP had fallen by 45 per cent,
unemployment had reached 23 per cent, and the number of banks in
operation had almost halved since 1929.84
The Great Depression was a truly global catastrophe, exacerbated by
the importance of the United States to the inter-war economy. Its severity
varied, however, and was closely linked to how quickly a country left the
gold standard.85 The Japanese economy shrunk by 24 per cent between
1929 and 1931, the UK economy shrunk by 10 per cent between 1929 and
1932, and the French economy shrunk by 33 per cent between 1929 and
1934. The German economy, which had grown dependent on American
credit, was affected especially badly: its GDP fell by 37 per cent in 3 years,
while industrial unemployment reached 44 per cent.86 In human terms,
this meant increased homelessness, increased infant mortality and

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 BOOM AND BUST

increased rates of suicide.87 The secondary political effects were even

worse, with the Depression a major factor in the collapse of several
European democracies and, consequently, World War II.88
The 1920s bubble is often thought of as one of the most destructive.
The extent of margin trading made financial networks much more
vulnerable to a crash than they had been in previous bubbles, and
these networks could have collapsed had the New York Fed not provided
emergency liquidity in October 1929. In practice, however, the number
of important institutions that collapsed due to stock market losses or
broker loan defaults was negligible. If the crash caused the subsequent
recession, it could only have done so through its effect on consumer
spending, a mechanism which not all economists find convincing.89
Assuming that the crash did cause the recession, it still cannot explain
its extraordinary severity. The Great Depression was instead the result of
the vulnerability of banking networks, the rigidity of the inter-war gold
standard, and the failure of governments and monetary authorities to
adequately address the resulting deflation.90
If the aftermath of the bubble had been successfully managed, it
might not be remembered as such a disaster. The boom made it
remarkably easy for highly innovative firms to raise capital.91 One of
the companies to experience the most substantial bubble was the Radio
Corporation of America, which was central not only to radio technology
but to the later development of both black-and-white and colour
television.92 Another company caught up in the boom was Burroughs
Adding Machine, which went on to become one of the world’s largest
producers of mainframe computers. The Columbia Graphophone
Company, which had a market value over 50 times its book value in
1929, survived the crash by merging with the Gramophone Company
and becoming a record label.93 It was later responsible for launching
the careers of Chuck Berry, Pink Floyd and Cliff Richard. Without the
overinvestment of the 1920s, these long-term achievements might have
been impossible.
However, it could also be argued that any positive effects on invest-
ment in new technology were offset by underinvestment in subsequent
years. In the aftermath of the crash it was almost impossible to raise funds
through stock issues. As Table 7.1 shows, in the whole of 1932 only

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 THE ROARING TWENTIES AND THE WALL STREET CRASH

$12 million of stock was issued, a 99.8 per cent fall from the quantity
issued in 1929. This was despite the fact that the gains from new technol-
ogy had not even come close to being realised and innovations were
ongoing. In any recession there is an unobserved cost of companies with
great potential folding early due to a lack of investment, and, given the
severity of the Great Depression, this unmeasurable cost may well have
been substantial.
The experience of the Roaring Twenties offers two key lessons on
bubbles. First, the optics of the crash matter. The economic significance
of a bubble does not straightforwardly derive from its direct effects on the
incentives of shareholders and businesses: how it is viewed by society is
also important. When stock markets become culturally significant,
a spectacular crash can affect consumer behaviour, and thereby have
unexpected economic effects.94 Second, managing the bubble is much
less important than managing its aftermath. In 1928 and 1929, the
Federal Reserve grew obsessed with curtailing stock market speculation,
but none of the measures introduced to do so were effective. As it turned
out, stock market speculation was little more than a sideshow: what really
mattered for the economy was the stability of financial institutions, which
the authorities comprehensively failed to uphold. This failure explains
why the 1920s bubble has remained one of financial history’s most
infamous episodes.

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 CHAPTER 8

Blowing Bubbles for Political Purposes:

Japan in the 1980s

Han ne hachi gake ni wari biki

(When the market has halved, take 80 per cent of that figure and add
a 20 per cent discount; only then should you buy.)
Japanese rice traders’ proverb1

T he 1920s bubble, in the view of the f. d. roosevelt

administration, fatally undermined the case for leaving US stock
markets largely unregulated. The Securities Act of 1933, introduced
almost immediately after Roosevelt assumed the presidency, required
all companies issuing securities to disclose more information to poten-
tial investors, including independently certified financial statements.
This was followed by the Securities Exchange Act of 1934, which
established the Securities and Exchange Commission to oversee secu-
rities markets. Generally speaking, this Act attempted to prevent
future bubbles by targeting speculation and credit, with relatively few
new restrictions on marketability. Insider trading and various forms of
market manipulation were banned, with the Act arguing that manip-
ulation was responsible for ‘sudden and unreasonable fluctuations of
security prices and . . . excessive speculation on such exchanges and
markets’. In response to the extensive margin trading of 1929, strict
limits were placed on how much money could be lent for the pur-
poses of buying shares.2
After World War II the US government was faced with a new chal-
lenge: rebuilding a Japanese economy which it had spent most of the war
destroying. In normal circumstances such a task would be considered, at
best, low priority. But Japan had emerged from the war in a surprisingly

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 JAPAN IN THE 1980S

advantageous position: under the control of the world’s leading capitalist

power, but situated beside the world’s great communist powers. Since
post-war American foreign policy was to do whatever it took to illustrate
the superiority of capitalism, Japanese prosperity became a key strategic
interest. The United States thus made a serious effort to encourage its
economic development.
The occupying forces, lacking in cultural knowledge and language
skills, generally attempted to replicate economic policies that had been
implemented in the United States. Harry Truman’s administration
enacted a series of New Deal-inspired reforms, which encouraged labour
union growth and attempted to dismantle the oligarchical conglomer-
ates (or zaibatsu) that had dominated Japanese industry. It also invested
heavily in education, overhauling the curriculum to better reflect
American interests.3 Japanese financial market regulation was based
heavily on the Acts that had been passed in response to the Wall Street
Crash. The (Japanese) Securities and Exchange Law of 1948 made stocks
much less marketable than they had been before the war. All stock
trading was required to take place exclusively at stock exchanges, and
futures trading was banned. Although these restrictions were gradually
loosened in subsequent years, stock trading remained relatively tightly
controlled.4
Economic policy subsequently evolved to reflect changing American
priorities and renewed Japanese authority. Moves were made to curtail
union power, and efforts to dismantle the zaibatsu grew increasingly half-
hearted. Economic planners instead directed their energy towards
encouraging mechanisation, first in the agricultural and coal sectors,
then in manufacturing. The latter was given a major boost by the Korean
War, which created a boom in demand for Japanese goods, and the
economic recovery quickly gathered pace. By 1955, output had reached
its pre-war level, and the 1960s saw miraculous levels of growth, with GDP
rising by 144 per cent over the course of the decade.5 By 1980 Japan was
a fully developed economy, with comparable income levels to the UK.6
The spectacular growth of the 1960s was achieved through the
economic strategy of developing specialist manufacturing skills, and
exporting the resulting consumer goods. The success of this strategy
was partly due to the efficiency of Japanese companies, who pioneered

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 BOOM AND BUST

the just-in-time method of production to take advantage of the world-

leading engineering abilities of the Japanese workforce. But it was also
important that these goods could be sold abroad at a competitive price.
This was ensured by fixing the yen to an exchange rate which was, by the
mid-1960s, artificially low, making Japanese goods cheap for foreign con-
sumers. This required the co-operation of the countries to which these
goods were sold, who often risked undermining their own manufacturing
industries. But this co-operation was typically forthcoming, for three rea-
sons. First, consumers benefited from cheap, high-quality goods. Second,
Japanese imports initially constituted only a small part of the market, as the
world economy did not rapidly integrate in the immediate aftermath of
the war. Domestic manufacturers, perhaps with a hint of complacency,
rarely felt threatened by Japanese goods. Third, for geopolitical reasons,
the economic success of Japan was considered to be in the interests of the
Western bloc.
From the early 1970s onwards, however, the United States began to
push back against this arrangement. President Nixon, concerned by high
unemployment and inflation, suspended the convertibility of the dollar
into gold in 1971, hoping to allow the dollar to devalue. This heralded
the end of the Bretton Woods System, and by 1973 most major currencies
had moved to a managed float. No longer fixed to a low valuation, the yen
began to appreciate. At the pegged rate, which was sustained throughout
the 1950s and 1960s, $1 had cost ¥360, but in 1973, $1 cost only ¥272.7
From 1980 onwards, however, the appreciation of the yen slowed, largely
because of Japan’s conservative fiscal policies. A large current account
surplus developed, suggesting that the low value of the yen was once
again providing a distinct advantage to Japanese exports.8
Frustrated by exchange rates rendering their products uncompetitive,
American businesses stepped up the pressure on the US government to
find a solution. President Reagan was initially reluctant to devalue, fear-
ing that it would adversely affect the financial sector. However, he was
eventually convinced that devaluation was a necessary alternative to
protectionist measures. The unwanted prospect of protectionism was,
in turn, used to achieve the international co-operation required for
a dollar-devaluation policy to work. The result was the Plaza Accord: an

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 JAPAN IN THE 1980S

international agreement, signed in 1985, in which Japan agreed mea-

sures to increase the value of the yen with respect to the dollar.
The Plaza Accord committed Japan to implementing three major
economic reforms. First, they agreed to pursue ‘vigorous deregulation
measures’ to encourage private sector growth. Second, they agreed to
loosen monetary policy and liberalise financial markets, both with a view
to ensuring that the yen ‘fully reflects the strength of the Japanese
economy’. Third, they were compelled to reduce the government deficit,
thereby reducing the economic size of the state. Since this could cause an
economic contraction, the reduction in demand was to be offset by
‘measures to enlarge consumer and mortgage credit markets’.9 Japan’s
export-led growth model, in which the state had played a significant
economic role, was to be dismantled. The new economic strategy was to
encourage banks to lend enormous amounts of money, particularly for
the purchase of housing, so that the economy continued to grow despite
an appreciation of the yen and a reduction in government spending.
In some ways, the agreement simply gave Japan an excuse to acceler-
ate reforms that had already begun, or to pursue reforms that the
government wanted to implement anyway. Financial liberalisation was
a continuation of policies that had been pursued since the early 1970s.
The oil shock of 1973 had forced the Japanese government to run large
deficits, leading the Bank of Japan to worry that it could no longer
underwrite the full quantity of outstanding government bonds. The
government’s response was to establish secondary government bond
markets, thereby relinquishing control over interest rates for the first
time in the post-war era. The Foreign Exchange Law of 1980 removed
most capital controls, allowing Japanese residents to invest internation-
ally without government authorisation. The potential for investors to
benefit from foreign interest rates created arbitrage opportunities,
which further shifted control of interest rates from the government to
the market. Restrictions on the size and term of deposits that could earn
market-determined interest rates were gradually removed.10
The difference after the Plaza Accord, however, was that financial
deregulation was now accompanied by extremely loose monetary policy.
The Bank of Japan’s discount rate was reduced from 5 per cent when the
Plaza Accord was signed to 3.5 per cent in May 1986 and 2.5 per cent in

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 BOOM AND BUST

February 1987, despite GDP growth having been above 3 per cent in
every year since 1981. This, combined with the unprecedented freedom
of banks to decide how much to lend, dramatically increased the amount
of leverage in the financial system. Japanese household debt rose from
52 per cent of GDP in 1985 to 70 per cent of GDP in 1990, as government
policy eroded cultural norms against borrowing money.11 This in turn
caused a substantial monetary expansion, which was compounded by the
fact that the Plaza Accord implicitly encouraged the movement of funds
into Japan to take advantage of the expected appreciation of the yen. M3,
a broad measure of the money supply, grew by a total of 141 per cent
between 1980 and 1990; for comparison, between 1990 and 2010, M3
grew by only 40 per cent.12
What was all of this money invested in? As a result of low interest rates,
safe assets were unappealing: in 1987, Japanese treasury bills were yield-
ing only 2.4 per cent, at that time the lowest in their post-war history.13
Instead, investors piled into land and stocks.
For many Japanese, land ownership was still closely linked to social
status, perhaps as a result of the country’s relatively recent feudal past.
This was especially true for the older generation, who generally had the
most money to invest.14 Since Japan was one of the world’s most densely
populated countries, land also had scarcity value. Landholders were
often very reluctant to sell at a loss, so the nominal price of land rarely
fell, perpetuating the belief that it was an extremely safe asset. But this
apparent safety did not preclude the possibility of abnormal returns:
there were substantial land price booms in 1961, 1974 and 1980, each
of which was associated with a loosening of monetary policy. But only the
1974 boom was followed by a fall in nominal prices, and even this
correction was relatively modest.15 Land price booms were familiar to
the Japanese public, and previous booms had never ended particularly
badly.
The catalyst for the latest boom, which began after 1985, was the
shifting of the Japanese economy towards the service sector. With jobs
moving from factories to offices, the demand for urban office space
suddenly increased, especially in Tokyo.16 This was quickly compounded
by government efforts to stimulate urban development as a way of
increasing demand. In keeping with its commitment to reducing the

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 JAPAN IN THE 1980S

450

400

350

300

250

200

150

100

50

0
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Figure 8.1 Japanese land price index for six major cities, 1964–201017

economic role of the state, the government decided not to direct urban
development itself. Instead, a series of tax breaks, subsidies and financing
initiatives were granted to private real-estate companies, while the
Ministry of Construction heavily deregulated the process of urban
planning.18 This, combined with the liberalisation of mortgage lending
and ultra-low interest rates, massively increased real-estate investment.
The subsequent effect on urban land prices can be seen in Figure 8.1.
Between 1985 and 1987, the price of land in the six major Japanese cities
rose by 44 per cent. This attracted the attention of Japanese corporations,
who found that capital gains on land were dwarfing the profits from their
main operations. These corporations responded by shifting funds from
core operations to land, creating an additional influx of money into the
sector. Much of this money was borrowed to take advantage of the prevail-
ing low interest rates.19 As a result, prices continued to rise, and the price
of land was soon completely out of proportion with the income it could
generate. By 1991, land in Tokyo cost 40 times as much as comparable land
in London, whereas rents were only twice as high. At this stage, urban land
prices had risen by 207 per cent in 6 years, and the total land value in Japan
was around $20 trillion – five times the value of all the land in the United
States, and twice as much as the entire world’s equity markets.20
Stock markets, meanwhile, had been radically transformed since the
American occupation. Efforts to prevent corporations from controlling

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 BOOM AND BUST

the stock market, as they had done in the pre-war era, were gradually
reversed after the revision of anti-trust laws in 1949 and 1953. Formerly
zaibatsu-owned shares that had been sold to the public were bought up by
zaibatsu-affiliated banks, and conglomerates of corporations began to
hold substantial amounts of each other’s shares. Financial difficulties at
securities companies in the mid-1960s led to the establishment of the
Japan Joint Securities Corporation and the Japan Securities Holding
Association, conglomerates of businesses intended to support stock
prices. In practice, these associations tended to buy from individual
investors and sell to either conglomerates of corporations or financial
institutions, who were themselves closely connected to Japanese business.
As a result, although corporations held only 39 per cent of shares in 1950,
by 1980 this had risen to 67 per cent. Financial institutions alone
accounted for 37 per cent.21
Corporations dominated the stock market because, while shares held
only investment value for individuals, for corporations they also helped
sustain networks of co-operation and collusion. By holding each other’s
equity, corporations created a mutual interest in the continuation of
a beneficial relationship, since any breakdown would lead to a large
number of stocks of both companies being dumped on the market.
This arrangement had the added benefit of guarding against hostile
takeovers. Furthermore, because cross-held shares were rarely traded,
share prices became easier to control. In particular, the Big Four secu-
rities companies – Nomura, Daiwa, Nikko and Yamaichi – were often able
to manipulate prices in order to serve the interests of their business
relationships. As of 1986, the Big Four controlled more than half of all
stock trading and close to 100 per cent of the underwriting market.22
From 1980 onwards, a series of deregulatory measures created an
incentive for companies to treat stocks as a more speculative investment.
A 1983 change in tax law allowed companies to separate long-term stock
holdings from short-term investments, with the latter placed into
a separate investment fund called a tokkin. After 1983, the returns on
the tokkin fund were taxed at a lower rate, creating the unusual situation
in which speculation could be a less expensive investment strategy than
buy-and-hold. As a result, the number of stocks in tokkin funds exploded
from under ¥2 trillion in 1983 to ¥30 trillion in 1987. At the same time,

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 JAPAN IN THE 1980S

3,500

3,000

2,500

2,000

1,500

1,000

500

0
80

81

82

83

84

85

86

87

88

89

90

91

92

93
19

19

19

19

19

19

19

19

19

19

19

19

19

19
n

n
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
Figure 8.2 TOPIX daily index of Japanese stocks, 1980–9323

the Bank of International Settlements announced that it would allow

Japanese banks to count 45 per cent of their unrealised capital gains on
stocks towards fulfilling capital requirements.24 This was spectacularly
misguided, encouraging banks not only to replace safe assets with risky
equities, but to use their considerable market power and lending capacity
to stimulate a stock market boom. The incentive to create a boom was
compounded by the fact that a substantial part of the stock market
consisted of shares in the banks themselves.25
Stock prices soared. The Tokyo Stock Exchange’s TOPIX index, shown
in Figure 8.2, rose by 23 per cent during 1983, 24 per cent during 1984 and
a further 15 per cent during 1985. The boom was then supercharged by
the flow of money into Japan after the Plaza Accord, and 1986 saw the
TOPIX rise by 49 per cent. When it finally peaked in December 1989, it
had risen by a total of 386 per cent in just under 7 years. At this stage,
Japanese stocks were worth a total of $4 trillion, accounting for almost half
of the entire world’s equity market capitalisation.26
The deregulations of 1983 also relaxed listing requirements, making it
much easier for firms to raise money by issuing stocks. As stock prices

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 BOOM AND BUST

soared, equity became an incredibly cheap source of finance, resulting in

a wave of new promotions: the number of initial public offerings (IPOs)
rose from 34 in 1984 to 127 in 1989, and 141 in 1990. These IPOs were
typically accompanied by large first-day returns, which averaged
32 per cent over the period 1981–91, making them an excellent spec-
ulative investment. This was even more pronounced towards the peak of
the boom: new issues in 1988 rose by an average of 74 per cent in the first
week of trading.27
During 1989, the Bank of Japan grew increasingly concerned that the
stock market boom had gone too far. Its response was to incrementally
raise the discount rate from 2.5 per cent in April 1989 to 4.25 per cent in
December of the same year. This signalled the end of the party, and as
soon as the Tokyo Stock Exchange opened at the start of 1990, stock
prices began to fall. The fall was slow at first, more of a deflation than
a bursting of the bubble. The TOPIX fell by 5 per cent in January,
6 per cent in February and 13 per cent in March. Prices remained stable
until mid-summer, but August and September were disastrous, seeing
a cumulative fall of 30 per cent. By the beginning of October 1990, the
discount rate had reached 6 per cent, and the TOPIX had lost 46 per cent
of its peak value.28 The market recovered somewhat in subsequent
months, but from April 1991 prices again began to fall precipitously.
The end of the bubble could be dated to August 1992, by which time the
TOPIX, having lost 62 per cent of its peak value, finally began to recover.
But this recovery was temporary, and in subsequent years the market fell
even further as the fallout from the property and stock market bubbles
began to bite.
The fall in stock prices forced banks to contract their lending, as it
both reduced the value of the collateral they had lent on and wiped out
the profits they had been using to fulfil capital requirements. This con-
traction was compounded by the rise in the discount rate and by the
Ministry of Finance finally introducing regulation on loans to property
companies in April 1990. This withdrew the fuel from the land bubble,
causing the number of new home sales to collapse during 1991. Stripped
of the potential for capital gains, investors were left with only rental
income, which turned out to be much smaller than anticipated.
Although landholders were initially reluctant to sell at a loss, a series of

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 JAPAN IN THE 1980S

bankruptcies at property companies forced their hand, and land prices

began to fall.29 By 1995 urban land had lost almost half of its peak value,
with no sign of the decline slowing down. When prices finally plateaued
in 2005, they had fallen by 76 per cent. At this point, land values in real
terms were almost exactly what they had been in 1980.

CAUSES

The Japanese land and stock bubbles were purely political creations. Not
only did the Japanese government provide the spark, but it systematically
cultivated all three sides of the bubble triangle with the explicit goal of
generating a boom. This process was clearest in the realm of money and
credit, where an expansion was both a central part of Japan’s economic
policy and, after the Plaza Accord, an international commitment. By
lowering interest rates, encouraging the extension of credit and creating
the expectation of an appreciation of the yen, the government generated
enormous amounts of fuel for speculative investment. Most previous
research has identified this monetary expansion as the immediate cata-
lyst for the bubbles.30
An additional consequence of deregulation in Japan was an increase
in asset marketability. In the post-war period, the buying and selling of
stocks had been tightly controlled. Purchases of foreign assets, and the
purchase of domestic assets by foreigners, was restricted until 1980, and
the Securities and Exchange Law of 1968 placed strict limits on the level
of risk that could be taken by securities companies. During the 1980s,
these regulations were gradually removed. Perhaps the most significant
deregulation occurred in 1983, when investment funds were allowed to
buy and sell securities without direct orders from their clients, precipitat-
ing the massive growth of tokkin funds.31
Focusing purely on changes in the law understates the extent of
deregulation, however, because the government simply stopped enfor-
cing many laws. Trillions of yen were kept in illegal eigyo tokkin funds
which the authorities pretended not to notice; one commentator reports
that Nomura even managed an eigyo tokkin fund for the Ministry of
Finance.32 In a reversal of the post-war situation, corporations could
now assume that assets could be bought, sold and repackaged in any

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 BOOM AND BUST

particular way unless the sitting government explicitly forbade it, regard-
less of the letter of the law.
A further increase in marketability resulted from the rise of stock
index futures trading. Futures, which are essentially standardised, mar-
ketable agreements to buy or sell an asset at a set date in the future, were
originally created to allow buyers to reduce their exposure to price
fluctuations. In the absence of other risks to offset, however, stock
index futures trading is equivalent to betting on the short- to medium-
term value of the stock market, so it also appeals to speculators. Futures
trading was first introduced by the Osaka Stock Exchange in 1987, where
it was an immediate hit with traders: between November 1987 and
August 1988, the volume of Nikkei futures trading on Osaka was five
times the combined volume of the spot and margin Nikkei trade. Tokyo
implemented futures trading shortly afterwards, and it soon accounted
for 20 per cent of trades in the TOPIX index. This occurred in the
context of a massive expansion of trading volume generally, with the
total number of shares traded daily rising from an average of 91 million in
1982 to 328 million in 1988. By 1989 the Japanese stock market had one
of the highest turnover rates in the world.33
The presence of stock index futures made speculation much easier,
and contemporary survey data shows that investors often bought shares
with expected short-term rises in mind.34 In 1989, 39 per cent of institu-
tional investors were advising investors to buy shares despite expecting
prices to fall in the long term, because they expected to benefit from
short-term price rises. After the crash of 1990, just 9 per cent of institu-
tional investors were recommending this strategy, and the effect of spec-
ulation on the market had reversed: 55 per cent were advising against
buying stocks despite expecting a long-term rise in prices.35
Speculation in land, labelled ‘land-rolling’ by the media, was equally
common. A new profession arose, called Ji-age-ya, which consisted of
buying multiple plots of land, repackaging them into one plot and selling
at a large profit.36 Mostly this occurred in major Japanese cities, and often
necessitated the forcible eviction of tenants. Interestingly, this was the
opposite activity to the Australian Land Boom companies, which we
covered in Chapter 5, who had broken large plots of land up so that
tenants and homeowners could move in. As the bubble went on,

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 JAPAN IN THE 1980S

institutions also began to invest heavily in land overseas: Japanese invest-

ment in US property rose from $1.9 billion in 1985 to $16.5 billion in
1988. This was in addition to extensive Japanese lending on American
real-estate projects, especially in California, which, not coincidentally,
experienced its own land boom at this time.37
Land speculation was primarily driven by institutions rather than
individuals. Between 1984 and 1990, 38 per cent of land purchases
were by specialised real-estate companies, most of which were relatively
small operations. Unlike most corporations or households, they did not
primarily use the land for living, offices or rental income. Their business
model instead involved selling it for a profit soon after its purchase.
Although they may have engaged in some level of development work,
the vast majority of urban property value consisted of the land rather
than the buildings, so the potential value added by this work was relatively
small. In practice, profits were derived almost entirely from the continu-
ously increasing value of land. These companies were also highly lever-
aged, having been funded by loans of approximately ¥44 trillion. Three-
quarters of this was invested in property; the remainder was invested in
securities.38 Many of these loans were granted by shadow banks known as
‘nonbanks’ or jûsen, which were almost entirely unregulated before
1990.39
The spark then came from Japanese politicians. Japan had explicitly
sought to encourage homeownership since World War II, but were
reluctant to decrease the wealth of existing homeowners. New builds
were therefore accompanied by extensions of mortgage credit, bringing
new buyers into the market and thereby ensuring that demand contin-
ued to outstrip supply.40 As a result, house prices almost never fell. When
it became clear that the export-led growth model could not continue, in
the 1980s the government attempted to use urban regeneration to sti-
mulate the Japanese economy, which increased the price of land for
business use. The National Land Agency’s Reform Plan for the Tokyo Area
of 1985 aimed to turn the city into an ‘advanced space for international
financial business’.41 One of the proposed means for doing this was to sell
public land to private developers. But the ongoing privatisation of land
gave the government an interest in rising land prices, since it allowed
them to receive more money for their sales. An early indication of the

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 BOOM AND BUST

land bubble, and of its potential for generating revenue, was the sale of
a 0.7-hectacre government site for ¥57.5 billion in August 1985, around
three times its perceived market value at that time.42
These policies contributed to the stock market boom, as increasing
land values allowed banks to create money to invest in the stock market.
But the stock price boom was also a separate element of the govern-
ment’s economic strategy: they wanted to ensure that corporations had
low borrowing costs while they navigated the shift away from export-led
growth. A senior Bank of Japan official admitted in the 1990s that both
the land and stock booms had been deliberately engineered in order to
provide a ‘safety net’ for Japanese business.43 As the boom went on,
efforts to support the market became more explicit. In October 1987
and again in October 1990, the Ministry of Finance ordered the Big
Four securities companies to buy stocks in order to support the
market.44
A unique feature of these bubbles was the way in which the Japanese
financial structure created a self-perpetuating relationship between
money and speculation. Banks used land as collateral for lending, so
the higher the value of land, the more they could lend. Since unrealised
stock profits could be used to fulfil capital requirements, stock price rises
also resulted in further extensions of credit. The majority of this bor-
rowed money was then invested in either land or stocks, driving prices
even higher and freeing banks to lend even more money, which was in
turn invested in land and stocks.45 This circular relationship goes some
way to explaining the incredible scale of the real-estate bubble: urban
land rose by 320 per cent in 10 years, before losing all of these gains.
Another unusual feature was the degree to which the bubbles were
driven by businesses and banks, rather than by the general public.
Between 1985 and 1989, the proportion of private land owned by corpora-
tions rose from 24.9 per cent to 28.7 per cent, while the proportion owned
by individuals fell from 75.1 per cent to 71.3 per cent. Similarly, the
proportion of stocks held by corporations rose from an already high
67.0 per cent in 1982 to 72.8 per cent in 1987, most of which was driven
by financial institutions and securities companies. The volume of trades
accounted for by corporations rose from 19 per cent to 39 per cent, under-
scoring the extent to which business was responsible for higher levels of

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 JAPAN IN THE 1980S

speculation.46 Previously, businesses had almost exclusively pursued buy-

and-hold strategies in the stock market.
Commentators at the time often suggested that Japan’s culture of
consensus thinking created social reasons not to express pessimistic
sentiments about land or stocks.47 This was compounded by the extent
of cross-holding, which made it difficult for a corporation to exit the
bubble without offending important business partners. Those who did
not have an interest in the bubble may have had other reasons not to
criticise it. Japanese banks had lent substantial sums of money to Japan’s
organised crime syndicates, usually with almost no oversight. In one
instance, the Industrial Bank of Japan lent $2 billion to the owner of
a restaurant chain popular with gangsters. This money was then used to
invest in stocks based on the advice of ghosts spoken to during séances.48
Whatever the money was used for, bursting the bubble would have made
it much more difficult for gangsters to raise funds, and they presumably
would have been displeased with those deemed responsible. This may
partly explain why Japanese investors, politicians and pundits were so
reluctant to publicly predict a crash. Whatever their private thoughts,
73 per cent of Japanese institutional investors surveyed in
December 1989 stated that they did not believe that stock prices were
too high.49 The small number of sceptics often went to seemingly absurd
lengths to keep a low profile. In September 1990, when Japanese televi-
sion finally decided to broadcast a panel of bearish financial pundits, the
pundits insisted on having their faces blurred out.50

CONSEQUENCES

Although the end of the two bubbles was signalled by the stock market
crash during the first half of 1990, the economy did not immediately
enter a recession.51 GDP growth was 4.9 per cent in 1990, 3.4 per cent
in 1991 and 0.8 per cent in 1992. When growth turned negative in
1993, the Japanese government loosened monetary policy and
increased government spending. By 1995, the discount rate was
0.5 per cent, while the deficit was 4.4 per cent of GDP. When GDP
grew by 2.7 per cent in 1995 and a further 3.1 per cent in 1996, it
appeared that the crisis was over.52 The government, believing that the

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 BOOM AND BUST

storm had passed, implemented austerity measures in an effort to

prevent a persistent large deficit.
The financial system, however, was crumbling. Its problems first
became apparent in the shadow banking system, where 38 per cent of
the ¥12.1 trillion loans were non-performing in 1991. A series of govern-
ment-led debt restructures, having assumed that real-estate prices would
not continue to fall, made the situation worse, and in 1995 the propor-
tion of non-performing loans had reached 75 per cent.53 Acknowledging
the level of insolvency in the sector, the Japanese Parliament agreed
a bailout funded by a combination of financial institutions and taxpayers,
provoking public outrage. In November 1997, the crisis spread to Sanyo
Securities, a mid-sized securities firm, which was adjudged to be systemi-
cally unimportant and allowed to fail. As part of its bankruptcy arrange-
ments, however, it defaulted on its interbank loans. Although the amount
was relatively small, this was the first such default in the post-war history of
the interbank market, leading to a severe contraction in it. The Bank of
Japan was forced to step in to provide the market with liquidity.54
This was followed by the failure of the Hokkaido Takushoku Bank on
14 November 1997, after an attempt to resolve its bad debts via a merger
fell through. On 24 November, Yamaichi Securities, one of the four
largest securities firms with client assets of ¥22 trillion, announced that
it would dissolve. Two days later the Tokyo City Bank declared bank-
ruptcy. Fearing a total financial collapse, the Bank of Japan reiterated its
intention to secure all deposits and provide enough liquidity for deposi-
tors to withdraw their funds. In February 1998, the government approved
a ¥30 trillion taxpayer-funded bailout of the banking sector, massively
reversing its earlier efforts to cut the deficit. But the crisis continued to
deepen, and the largest bank failure of the crisis came in October 1998,
when the government was forced to nationalise the Long-Term Credit
Bank of Japan. Six more major banks were placed under government
control by the end of 1999.55
The government response succeeded in averting a major depression, but
at a significant cost: ¥60 trillion of public money was spent on emergency
financial measures, around 11 per cent of Japan’s GDP.56 The dire state of
the finances at nationalised banks meant that the majority of this money
went on covering bad debts. Furthermore, the continued support for failing

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 JAPAN IN THE 1980S

banks and, by extension, unprofitable businesses had a sclerotic effect on

the economy, making it impossible for more efficient firms to compete. The
result was a prolonged period of underwhelming economic performance,
as the ‘lost decade’ of the 1990s became the ‘lost 20 years’. Japanese GDP in
2017 was only 2.6 per cent higher than it had been in 1997, an annualised
growth rate of 0.13 per cent.57 The contrast with the miraculous growth of
the post-war period was stark.
The poor performance of the Japanese economy during the 1990s was
especially weak in the context of other developed economies: US GDP grew
by 3.4 per cent per year during the decade.58 This may, however, have
resulted in a tendency to overstate the extent of Japan’s problems.
Although the economy was stagnant, the worst annual growth rate was
-1.1 per cent in 1998. Consequently, unemployment never rose above 6 per
cent.59 Furthermore, most contemporary commentary was based on eco-
nomic data that failed to account for Japan’s extremely low population
growth. During the 1993–2003 period, the worst 10 years of the crisis, real
GDP per capita grew by a total of 9 per cent. For comparison, in the 10 years
following the global 2007 crash, the equivalent figure for the UK was
3.6 per cent, and many European countries have performed much
worse.60 Japan’s ‘lost decade’ was a serious downturn, but not on the
same scale as the economic collapse that followed the global financial crisis
of 2008.
Another consequence of the bubble’s bursting was the exposure of
a large number of scandals and frauds. In October 1990 the Chairman of
the Sumitomo Bank, one of Japan’s largest financial institutions,
resigned after it emerged that Sumitomo had persuaded its clients to
lend ¥23 billion for the purposes of market manipulation.61 This was
followed in the summer of 1991 by Nomura, at that time the largest
stockbroking firm in the world, admitting to having used its research
division to pump shares it had recently placed with favoured clients
(some of whom were prominent gangsters).62 At the same time it was
revealed that almost all Japanese securities companies had been com-
pensating their best-connected clients for their losses on stocks. Such
compensation appeared to be in direct contravention of securities law,
but the Ministry of Finance had chosen to interpret the law in a way that
allowed it to overlook the practice.63

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 BOOM AND BUST

A recurring theme in these scandals was the excessively close relation-

ship between the government and the private sector, underlining the
bubble’s political roots. The scandal with the most far-reaching conse-
quences was the Recruit scandal of 1988, whereby shares in a human
resources firm were offered to politicians prior to their issue in return
for favours, implicating the entire cabinet and forcing the prime minister
to resign.64 Real-estate companies were regularly involved, too: in 1992,
a former cabinet minister was arrested for having accepted ¥480 million in
bribes from a Hokkaido property developer.65 In 1993, Shin Kanemaru,
a former deputy prime minister and influential elder statesman, was
indicted for tax evasion, having accepted billions of yen in bribes.66
Combined with economic stagnation, this corruption undermined the
authority of the Japanese ruling classes. In July 1993, Kanemaru’s Liberal
Democratic Party lost its majority in the Lower House for the first time
since 1955.67
Again, however, the venality of Japanese institutions may have been
overstated. It was common in the late 1990s for commentators to encou-
rage Japan to move towards an Anglo-American economic model, in
which there was supposedly a healthy distance between business and
government.68 But as the Japanese crisis unfolded, politicians and
banks were often held accountable, and at times there was an immediate
legislative response. Politicians were arrested, securities companies
implemented internal reforms, and the executives of scandal-ridden
firms voluntarily took substantial pay cuts.69 This is not to say that the
response was satisfactory. But one could argue that it compared favour-
ably to the degree of accountability in the global financial crisis of 2008.
The Japanese bubbles had few positive effects. Whereas some of the
highly innovative companies that formed during the bubbles of the 1920s
eventually went on to be successful, companies that listed during the
Japanese Bubble performed poorly in the long run.70 Of the 52 Japanese
companies listed in the 2017 Fortune 500, none were originally incorpo-
rated during the 1980–92 period – a remarkable failure considering the
number of companies that went public during the bubble.71 The lack of
any silver lining underlines a key difference between technological and
political bubbles. Technology bubbles often involve large sums of money
flowing into extremely innovative sectors of the economy, which might

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 JAPAN IN THE 1980S

otherwise have trouble attracting enough capital to get off the ground. As
a result, they can be beneficial for society.72 During a political bubble
these benefits are absent, as money typically flows into sectors of the
economy with much fewer positive externalities. The episode that came
after the Japanese Bubble made this contrast abundantly clear.

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 CHAPTER 9

The Dot-Com Bubble

Clearly, sustained low inflation implies less uncertainty about the future, and
lower risk premiums imply higher prices of stocks and other earning assets . . .
But how do we know when irrational exuberance has unduly escalated asset
values, which then become subject to unexpected and prolonged contractions
as they have in Japan over the past decade?
Alan Greenspan, 19961

T h e d i s m a nt l i n g of p os t - w a r fi na n c i a l r e g ul a ti on
that led to the Japanese Bubble ushered in an era of abundant
marketability, money and credit. Securities became much more market-
able as a result of the removal of restrictions on foreign ownership of
firms and an accompanying boom in the use of derivatives, especially in
the United States.2 The 1970s and 1980s saw a global decline in the use of
capital controls and fixed exchange rates, making it easier than ever for
money to cross borders. Restrictions on banking were gradually removed,
giving banks, many of which were now operating internationally, unpre-
cedented control over the level of credit. The global economy effectively
became a giant tinderbox waiting for a spark and, as a result, the post-
1980 period has seen major financial bubbles become remarkably
common.
The first spark after the Japanese Bubble came from computer
technology – a literal spark, in one sense, since computing is the use
of electrical currents to perform logical functions. In the post-war
period this proved useful for a range of industrial and military applica-
tions, and by the end of the 1980s it had already had considerable
economic impact. Its true potential, however, has turned out to be

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 THE DOT-COM BUBBLE

even greater, and it may even be the most consequential technology

ever invented. The key to unlocking this potential, and the catalyst for
the bubble, was the creation of a global network of information
exchange: the now-ubiquitous Internet.
Although governments and universities had been developing net-
works of computers since the 1960s, the Internet as we now know it
originated in 1989. Tim Berners-Lee, a scientist at the European
Council for Nuclear Research, suggested that the organisation would
find it easier to keep track of its projects if it had a system which struc-
tured information in an easily accessible way. Berners-Lee conceived of
a decentralised system of documents, to which any member could upload
data. These documents were then connected to one another by hyper-
links. This ‘world wide web’, as Berners-Lee named it, was simply a way of
connecting users and structuring information in order to increase pro-
ductivity. But it created a feedback loop that exponentially increased the
rate of technological change: computing technology was used to create
better networks, and these networks allowed programmers to innovate
more rapidly, thereby producing even larger and more efficient network
systems. The more people used it, the more useful the technology
became.
The world wide web was opened to the public in January 1991,
but at first grew relatively slowly.3 To those without a background in
computing, it was quite inaccessible. This divide was bridged by
browser technology, which provided a means of navigating the web.
Mosaic, launched in January 1993 by a 21-year-old computer science
major called Marc Andreesen, represented a significant step forward.
It was easy to use and install, could be run on all major operating
systems, and introduced features such as a ‘back’ and ‘forward’
button that made it much easier to use the Internet.4 As a result,
the network rapidly expanded: the number of people online globally
rose from 14 million in 1993 to 281 million in 1999 and 663 million
in 2002.5
Hoping to keep control over the next iteration of his invention,
Andreesen then moved to Silicon Valley to found Mosaic Communications
Corporation (later, for legal reasons, renamed Netscape). Start-up funding
of $3 million was provided by Jim Clark, a veteran computer scientist, and

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 BOOM AND BUST

a team of programmers was recruited, largely from those who had worked
on the original Mosaic browser.6 The company’s communications officer
quickly spotted the news potential of a team of young entrepreneurs working
on world-changing technology, which could be leveraged into free publicity.
Netscape received positive press coverage from, among others, Fortune
Magazine and the New York Times.7 The Netscape Navigator was released in
October 1994 and quickly became the world’s most popular browser.
In June 1995, Andreesen and Clark made the unusual decision to have
an initial public offering (IPO) before having turned a profit. In addition
to his desire to cash partially out, Clark recognised that an IPO could be
used as a ‘marketing event’: the process itself would generate significant
publicity for the company. There were also concerns that Microsoft
would soon launch its own browser, which would make it more difficult
to sell shares in the future. However, some board members worried that
markets would be discouraged by the company’s poor performance
according to traditional metrics: firms without a reasonably long track
record of profits to guide investors had struggled in the past to attract
finance from public markets.8
Despite these concerns, Netscape’s IPO was a resounding success.
When its shares went public on 19 August 1995, demand outstripped
supply by so wide a margin that trading could not open for two hours.9
Having been offered at $28 per share, the stock reached a first-day peak at
$75 and closed at $58, a first-day return of 107 per cent.10 Its price
continued to rise following the successful launch of its beta version
later that year – by December it had reached $170 per share, for a total
market capitalisation of $6.5 billion.11
The Netscape IPO has been described as the ‘big bang’ of the dot-
com era, providing a template for subsequent internet IPOs. The
strategy of going public early and using the IPO for marketing pur-
poses was widely copied: the median age of a publicly offered company
in the 1999–2000 period was 5 years, compared to 9 years for the
period 1990–4, 8 years for 1995–8 and 11 years for 2001–16. Since
younger companies could not use a track record of profits to obtain
the trust of investors, they developed a range of new commitment
devices and ways to communicate their potential and trustworthiness.
For example, many were backed by venture capitalist firms with

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 THE DOT-COM BUBBLE

a strong reputation: 60 per cent of IPOs issued in 1999–2000, com-

pared to 38 per cent in 1990–8, were backed by venture capital.12 The
vast majority also committed to lock-up agreements, in which insiders
agreed not to sell shares for some time, usually 180 days, after the
IPO.13
The most notable method of attracting investors, however, was under-
pricing: offering shares to the public for a price much lower than the
expected market valuation. Although under-pricing was already com-
mon, it was taken to a new level in the dot-com era. IPOs issued in the
United States between 1990 and 1994 had an average first-day return of
11 per cent, whereas the average first-day return in 1999 was 71 per cent,
and in 2000 was 56 per cent. Issuers were, on average, selling their
company for less than two-thirds of its market price. This practice was
known as ‘leaving money on the table’, and $130 billion was left on the
table in 1999 and 2000 alone.14 The cost of under-pricing to the com-
pany’s owners was generally much lower than this figure suggests, how-
ever, since they typically retained large majority stakes in the company
after the offering. It was therefore tempting to use under-pricing to
generate positive media coverage on the first day of trading, creating
a momentum that allowed them to sell at a profit later.15 This practice
was further encouraged by the use of directed share programmes, which
allowed shares to be issued to family and friends at the IPO price.16
Whatever the reason for under-pricing, one of its effects was to attract
speculative investors, who could subscribe for shares with the intention of
quickly selling them on the market for a profit.
These financial innovations allowed technology firms to go public in
much greater numbers than had previously been possible. As Figure 9.1
shows, the 1984–91 period saw the issuing of relatively few technology
IPOs, with no single year seeing more than a hundred. They then
increased year on year in the early 1990s, reaching 274 issues in 1996.
After a brief lull, the issue of technology IPOs accelerated, peaking in
1999, when 371 were issued. Their aggregate market value, based on
their first traded price, was even more striking. From a previous high of
$98 billion in 1996, the tech IPOs issued in 1999 and 2000 were valued at
totals of $450 billion and $517 billion respectively. However, this market
immediately collapsed – new technology IPOs issued in 2001 were valued

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 BOOM AND BUST

400 600,000

350
500,000
300
400,000
250

200 300,000

150
200,000
100
100,000
50

0 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Number of tech IPOs (left scale) Total market value at first price
(millions of $, right scale)

Figure 9.1 US technology IPOs, 1980–200517

6,000 3,000

5,000 2,500

4,000 2,000

3,000 1,500

2,000 1,000

1,000 500

0 0
1990 1992 1994 1996 1998 2000 2002 2004

NASDAQ Index (left scale) S&P 500 Index (right scale)

Figure 9.2 S&P 500 and NASDAQ indexes, 1990–200418

at a total of $27 billion, and those issued in 2003 were valued at just
$9 billion.
The IPO boom was accompanied by a boom in the price of existing
equities, shown in Figure 9.2. The S&P 500 index, covering the largest
US-based companies, rose by 115 per cent between January 1990 and

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 THE DOT-COM BUBBLE

December 1996, prompting concern that the equity market was over-
heating. These gains appeared to be somewhat out of proportion with
the money being made by its constituent firms. Robert Shiller’s cyclically
adjusted price-to-earnings ratio (CAPE) stood at 28, meaning that S&P
500 companies were, after adjusting for the business cycle, valued at an
average of 28 times their annual earnings. This was well above the long-
term average of 15, leading Shiller to advise the Federal Reserve that
a correction was due.19 Alan Greenspan, the Federal Reserve’s
Chairman, gave what would become an iconic speech 3 days later, in
which he questioned the point at which rising asset prices could be said to
result from ‘irrational exuberance’ rather than changes in their intrinsic
value. This was accompanied by a warning that inflated asset prices could
eventually result in similar problems to those seen in Japan.
In fact, the stock market was not even close to its peak, and fears of
a correction were soon forgotten. The S&P 500 rose by another
30 per cent in 1997, 26 per cent in 1998 and 20 per cent in 1999. When
it reached its peak in March 2000, its value was 110 per cent higher than
when Greenspan made his speech, and its total capital appreciation since
1990 had been 353 per cent. Shiller’s CAPE ratio at this stage reached 45,
the highest value ever recorded. Before the dot-com era, its highest-ever
value had been 33, on the eve of the 1929 Crash.20
The boom in technology shares was even more dramatic. The
NASDAQ Composite Index, which was heavily weighted towards infor-
mation technology firms, rose by 1,055 per cent between March 1990 and
March 2000. At its peak in March 2000, the index had more than trebled
in value in the space of 18 months. Microsoft and Cisco briefly became
the two most valuable public companies in the world. The largest internet
firm was America Online (AOL), which had acquired Netscape in
March 1999. Having been valued at $61.8 million when it was launched
in 1992, AOL achieved a market capitalisation of $190 billion in
March 2000, making it the tenth most valuable public company in the
world.21 In February 2000, a $164 billion merger was agreed with Time
Warner, at the time the second-largest merger in corporate history.
Much of the money driving these developments came from a massive
increase in stock market participation rates. Excluding stocks held
through defined pension plans, the number of stock-owning individuals

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 BOOM AND BUST

rose from 42.1 million in 1989 to 75.8 million in 1998. This rise was
accompanied by substantial growth in the investment management
industry: of the 33.7 million additional investors, 6.8 million exclusively
held shares directly and the remaining 26.9 million held at least some of
their shares through a retirement account or mutual fund.22 The value of
assets held by equity mutual funds rose from $870 per capita in 1989 to
over $14,000 per capita in 1999. Concurrently, a shift from defined-
benefit to defined-contribution pension plans gave households greater
control over the choice to invest in bonds or in equities. Since individuals
showed a greater preference for equities over bonds than pension-fund
managers had, this had the effect of channelling funds into the stock
market.23
Many investors were also attracted to the stock market by the emer-
gence of specialist financial television. Three dedicated financial news
channels emerged during the 1990s: CNBC, CNNfn, and Bloomberg
Television, all of which offered 24-hour coverage of stock markets inter-
spersed with commercials for investment products. This had the effect of
marketing stocks to an ever-wider audience.24 Whereas previous financial
news was usually a very sober affair, these emerging channels recognised
that more viewers could be attracted by making it as exciting as possible.
As a result, they began to overplay the significance of any development,
with even minor news reported in increasingly breathless tones. If there
was not even any minor news to report, they instead reported analyst
recommendations, treating them as though they constituted news in and
of themselves.25 In practice, this almost always meant puffing stocks,
because by the end of the decade these recommendations were almost
uniformly positive. In 1989, 9 per cent of analyst recommendations were
to ‘sell’ a particular stock; in 1999, only 1 per cent were.26
Many of the articles and books published at this time carried a striking
tone of delusional optimism. Jim Cramer of The Street published an article
in February 2000 criticising ‘troglodyte value managers’ for insisting that
the price-to-earnings ratio was still useful in the new economy, accusing
them of ‘making something psychological into something scientific, and
that is WRONG!’27 Kevin Hassett and James Glassman published a book
entitled Dow 36,000, arguing that the Dow Jones Index, then at around
10,000, would quickly rise to 36,000 (it peaked at around 12,000 before

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 THE DOT-COM BUBBLE

falling below 8,000 in 2002). It is striking how little effect the failure of
these predictions had on their careers: Cramer got his own successful TV
show on CNBC, and Hassett later became the head of President Trump’s
Council of Economic Advisers.
Other elements of the news media were critical of the bubble, advising
investors to avoid technology stocks. Some of this advice came too early:
Fortune, for example, ran an article reporting the willingness of police-
men and baristas to offer stock recommendations as early as April 1996.28
But other advice was well timed, and used arguments that have since aged
well. Martin Wolf of the Financial Times argued in December 1998 that US
equity prices were ‘unsustainable’, and stressed the need to anchor
valuations to a realistic estimate of the equity risk premium.29 Near the
peak of the boom, The Economist published an article disputing the
validity of several common arguments that tried to justify the level of
share prices, concluding that share prices assumed ‘an implausible rate
of growth in profits’.30
Most narratives of the dot-com era date the end of the bubble to
the spring of 2000; Rory Cellan-Jones, for example, calls 14 March
‘the day the bubble burst’.31 The next month saw a series of dramatic
falls in price: between 10 and 14 April the NASDAQ fell by
25 per cent, a record for a single trading week, while the S&P 500
fell by 10 per cent.32 Even those sceptical of technology stocks were
caught out by the speed of the drop. Stanley Druckenmiller of the
Soros Fund quit in April after his portfolio experienced a 4-month
loss of 22 per cent, saying ‘we thought it was the eighth inning, and it
was the ninth’.33 But although the bubble had peaked, it had not
completely burst, and stocks made a considerable recovery during
the summer months of 2000. From a low of 3,321 on 14 April, the
NASDAQ rose 27 per cent to 4,234 on 1 September, only 15 per cent
lower than its March peak. Between a May trough and a second peak
in July, internet stocks rose by 42 per cent.34
Thereafter, however, the bubble gradually deflated. The NASDAQ fell
continuously from September 2000 through to the end of the year,
suffering particularly heavy losses in November, when it fell by
23 per cent. By the end of 2000 it had lost more than half its value in
the space of 8 months. The S&P 500 initially held up relatively well,

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 BOOM AND BUST

ending 2000 only 15 per cent below its peak. But both indexes continued
to fall throughout 2001 and for most of 2002, the economic outlook
deteriorating due to a series of accounting scandals and adverse geopo-
litical developments stemming from the 11 September attacks. When the
market finally bottomed out in October 2002, the NASDAQ had lost
77 per cent of its value in 2½ years, while the S&P 500 had fallen by
a total of 48 per cent.
For internet stocks, the picture is even more remarkable: the sector
experienced returns of 1,000 per cent in the 2 years preceding
February 2000, and had lost all of these gains by the end of 2000.35
Some of the failures were spectacular. Webvan, an online grocery
delivery service, saw its market capitalisation fall from $3.1 billion to
zero in 18 months. VerticalNet, which provided business-to-business
portals, lost $7.8 billion in value during March and April 2000.36 The
merger between AOL and Time Warner fared so badly that the Time
Warner CEO, having overseen a $99 billion loss, called it ‘the biggest
mistake in corporate history’.37 There were, however, some long-term
successes. The most notable of these was Amazon, which fell from
$106 at the peak of the bubble to $6 by September 2001, but later
recovered, eventually reaching over $2,000 per share in
September 2018. As of March 2019 it has a market capitalisation of
$796.1 billion, making it the fourth-largest company in the United
States.38
Although the Dot-Com Bubble is often thought to have occurred
in Silicon Valley, it was in fact an international phenomenon. The
main technology stock indexes for Europe, Japan, and the rest of
Asia, standardised to January 1995, are shown in Figure 9.3. All three
indexes experienced substantial booms and busts concurrently with
the NASDAQ bubble. Between October 1998 and March 2000, the
European index rose by 370 per cent, the Japanese index by
299 per cent and the Asian index by 330 per cent. By
October 2002, the European index had lost 88 per cent of its peak
value, while the Japanese and Asian indexes had fallen by
75 per cent and 67 per cent respectively. The bust was particularly
severe in Germany, where the NEMAX 50, the ‘new market’ stock
index, was discontinued in 2004, having fallen by 96 per cent.39

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 THE DOT-COM BUBBLE

1,000

800

600

400

200

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Europe (SX8P) Asia exc. Japan (MSCI IT) Japan (MSCI IT)
Figure 9.3 Global technology stock price indexes, 1995–2006 40

CAUSES

During the 1990s, the incendiary conditions left in place by global

financial deregulation were aggravated by further increases on all three
sides of the bubble triangle. Marketability increased for four reasons.
First, as a straightforward consequence of the increase in IPOs, firms
which previously would have been privately owned could now be bought
and sold on the stock market. Second, transaction costs fell substantially
throughout the 1990s, partly as a result of new technology making it less
costly to execute trades. The average commission charged by New York
Stock Exchange brokers fell from 0.9 per cent in the mid-1970s to
0.1 per cent in 2000, while the bid-ask spread – the difference between
the price at which brokers will buy a stock and the price at which they will
sell it – fell from 0.6 per cent in 1990 to 0.2 per cent in 2000. Taking both
of these trends into account, the average New York Stock Exchange
transaction cost between 1990 and 2000 fell from around 0.5 per cent
to around 0.2 per cent.41
Third, internet technology made stock trading much easier. Three
per cent of stock trades in 1993 were facilitated by electronic commu-
nications networks (ECNs); by 2000, 30 per cent of trades used ECNs.
Securities Exchange Commission estimates suggest that by 1999 there
were 9.7 million active online trading accounts in the United States

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 BOOM AND BUST

alone. Finally, after-hours trading, although it had been allowed for some
time, became much more widespread, partly as a result of the new
technology. During 1999, most broker-dealers extended after-hours trad-
ing services to small retail investors, who had previously been excluded
on the grounds that the thinness of after-hours markets made them
vulnerable to market manipulation.42 As a result, individual investors
could now buy and sell shares in the comfort of their own homes, at
any time of day, and at a significantly lower cost than before.
Money was relatively abundant during the 1990s, providing sufficient
liquidity for the bubble to develop. Alan Greenspan’s decision to inter-
vene after the 1987 stock market crash led many to believe that the
Federal Reserve would respond to a price drop by cutting interest rates,
thereby limiting the potential losses of investors. This became known as
the ‘Greenspan put’ and acted as an incentive to take greater risks. In
1998, just as the bubble was developing, the Federal Reserve cut interest
rates in anticipation of an economic downturn, further encouraging
investors to reach for yield. The 1990s was also an era of increasing credit,
with US household debt as a proportion of GDP rising from 60 per cent
in 1990 to 70 per cent in 2000.43 As in the 1920s, the number of investors
borrowing to buy shares rose particularly sharply. Between January 1997
and March 2000, margin lending rose by 144 per cent.44
These increases in margin lending and marketability abetted the rise
of speculative investment. As more day traders entered the market, turn-
over increased substantially: the ratio of total shares sold to total shares
listed on the NASDAQ market rose from 86 per cent in 1990 to
221 per cent in 1999.45 This, in turn, made shares even more marketable.
Institutional investors did not conceal the fact that many of their trades
were for speculative purposes, confident in their ability to exit the market
before any crash. One survey of investors in the dot-com era found that
54 per cent claimed to have previously held a stock they thought was
overvalued in anticipation of further price increases.46
This was by no means confined to institutions, with many of the
millions of individuals who invested for the first time in the 1990s also
pursuing speculative trading strategies. Trading data suggest that the
price increases of 1998 to March 2000 were driven by increased demand
from both individuals and institutions. Institutional investors, however,

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 THE DOT-COM BUBBLE

were broadly correct in their belief that they would be more likely than
individuals to time their exit from the bubble: demand from institutions
dipped sharply between March and June 2000, even as demand from
individuals continued to rise. Not every type of institution timed their
exit well, however, with independent investment advisers performing
exceptionally badly.47 Mutual funds with younger managers performed
worse than average, as they were generally much more heavily invested in
technology stocks and more likely to exhibit trend-chasing behaviour.48
Unsurprisingly, insiders also tended to time their exits well in compar-
ison to the average investor. By one estimate, in the month before the
NASDAQ peaked, insiders sold 23 times as many shares as they bought.49
As is often the case, speculative investment strategies were much more
profitable for experienced investors and those with privileged
information.
The spark for the bubble was provided by the realisation that network
effects would vastly increase the usefulness of computer technology. The
1990s saw spectacular growth at existing firms such as Hewlett-Packard and
Microsoft, providing early investors with enormous capital gains. The
initial success of newcomers such as Netscape and AOL further demon-
strated the potential profits that could be made from investing in dot-com
firms. Partly due to the successful integration of information technology
systems, there was a wider economic boom during the 1990s, and earnings
were high even at non-technology firms. The resulting capital gains
attracted speculative investors, whose demand drove prices ever higher.
Prices might not have reached such a high level had these earnings not
been accompanied by compelling ‘new era’ narratives about the transfor-
mative power of the Internet. For the purposes of justifying dot-com price
levels, these narratives consisted of two arguments: first, that the Internet
was an incredibly significant and world-changing technology; second, that
this made traditional metrics for valuing stocks irrelevant. The second
argument was clearly much weaker, but the first argument was a much
more interesting topic of conversation, and therefore formed the basis of
most non-specialist discussion. As a result, one’s opinion on dot-com
valuations was likely to be closely linked to one’s opinion on the potential
of the Internet. Since people used the Internet increasingly often, its
revolutionary potential was widely apparent, and the Internet itself was

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 BOOM AND BUST

a powerful means of spreading the new era narrative.50 In some cases,

these theories encompassed broader sociological and political changes as
well as technological ones. In a nod to Francis Fukuyama’s The End of
History, perhaps the most influential new era narrative of the time,
a 1997 article in Foreign Affairs argued that ‘changes in technology, ideol-
ogy, employment, and finance’ had precipitated ‘the end of the business
cycle’.51
While new era ideas look foolish with hindsight, as of 2000, pessimistic
forecasters had been crying wolf for so long that their warnings were easy
to ignore. While much has been written about the naive optimism of the
late 1990s, curiously little has been written about the equally misplaced
scepticism towards technology firms of a few years earlier. Netscape, for
example, was an exceptional investment: those who bought it for $58
on its first day of trading received an average 35 per cent annual return
until its acquisition in 1999.52 But the New York Times smugly described the
enthusiasm for Netscape as ‘juvenile’, attributing its first-day returns to
‘the belief that these stocks only go up’.53 The Financial Times, often
praised for its sophistication at the peak of the market, was completely
dismissive of Netscape, accusing its investors of having ‘abandoned
reality’.54 There were also plenty of writers who predicted a mid-90s
crash that never arrived. James Grant, a public investment strategist, was
widely praised for his ‘prescient’ pessimism at the turn of the century.55
But Grant had warned of a coming crash as early as 1996, with much of his
argument based upon a dismissal of growth prospects in the computer and
semiconductor industries.56 Stock price levels at this stage were fully
justified by future developments and, from the standpoint of 2019, 1996
seems to have been an excellent time to buy technology stocks.57
While the spark for the bubble was technological, political factors
almost certainly contributed to its scale. In Roger Lowenstein’s narrative
of the bubble, corporate influence over Washington in the 1980s and
1990s led to the removal of regulations that protected investors and the
cutting of funds for prosecuting white-collar fraud. Simultaneously, an
emerging culture of tying executive pay to a company’s share price
created an incentive for companies to overstate earnings, often through
the use of creative accounting.58 Before 1998, there had never been more
than 60 earnings restatements in a single year in the United States; in

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 THE DOT-COM BUBBLE

1998 there were 96, in 1999, 204, and in 2000, 163. As a result, investors
were led to believe in the 1998–2000 period that profits were rising, but
when future revisions were taken into account, they had in fact been
steady or falling.59 This practice culminated in the collapse of Enron in
2001, when it emerged that the $60 billion energy firm had used creative
accounting to fraudulently hide substantial losses.
However, the explanatory power of Lowenstein’s argument is lim-
ited by its exclusive focus on the United States. The stock market crash
was much more severe in Germany, where the major trends identified
by Lowenstein did not occur. Executive pay rises had been several
orders of magnitude smaller than in the United States, and there was
no wave of earnings restatements at German firms.60 Furthermore,
although German governments were generally following deregulatory
policies, dispersed firm ownership and managerial stock options were
extremely rare. As a result, German managers had few, if any, incen-
tives to artificially increase their company’s share price.61 The fact that
the bubble occurred simultaneously in several countries with different
political environments, and was in each case particularly pronounced
in information technology stocks, strongly suggests that its spark was
technological.

CONSEQUENCES

The Dot-Com Bubble in the United States was notable for its limited
macroeconomic impact. The 2001 recession lasted only 8 months, and
was very mild compared to previous recessions, with GDP figures showing
positive growth for the year as a whole.62 There were two reasons for this.
First, consumer spending did not fall. The bursting of a bubble often
results in deficient demand because those who have lost money cut
spending in response. In 2001, this wealth effect was very weak. This
may have been because stockholders tend to be wealthy, particularly
when compared to house owners. Since the rich are generally less likely
to cut spending in response to losses on investments, this will result in
a smaller reduction in demand. Alternatively, the wealth effect could
have been offset by the effect of lower interest rates: while some con-
sumers cut back spending, others borrowed and spent more.63

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 BOOM AND BUST

Second, the banking sector was relatively well insulated from the stock
market bust. Banks held very few technology shares: in one sample of
investors, the portfolio of banks never consisted of more than 4 per cent
of technology stocks, a lower weighting than any other category of
institutional investor.64 Furthermore, the pre-crash profit margins in
the banking sector were particularly high, while default rates were low,
providing a buffer against the economic downturn.65 Banks were thus
able to continue to supply credit after the crash, and the economy
avoided the bank failures, credit crunch and deflation that characterised
the 1930s.
The economic effects were also fairly limited elsewhere. The UK
experienced continued growth until the global financial crisis of
2007–8. The French economy stagnated in 2002–3, but did not experi-
ence a recession, while the Japanese economy experienced a contraction
that was mild in the context of its ongoing economic problems. The only
moderate recession was in Germany, where GDP growth was negative in
both 2002 and 2003.66 The main reason for this appears to have been the
relatively high exposure of German banks to stock market losses.
Although there were no high-profile banking failures, both profits and
capital-to-loans ratios declined. In response, banks reduced lending,
which had a chilling effect on economic activity.67
Given the modest levels of economic damage associated with the
bursting of the Dot-Com Bubble, it may provide an example of
a bubble where the benefits outweighed the costs. There were areas
where it had a positive economic impact. Enormous sums of capital
were channelled to the most innovative sector of the economy, which
might not have occurred if markets had operated efficiently. Some of this
capital was used very effectively: household names such as Amazon and
eBay started as dot-com companies, and established firms like Apple and
Microsoft benefited from increased investment. Firms that did go bank-
rupt often left behind technology that proved useful in the future, and
failures indicated where pitfalls lay in wait for the next generation of
internet firms. The infrastructure constructed by telecoms firms, while
not particularly efficient or optimal, still constituted an investment with
considerable public benefits.68 The bubble was also closely associated
with the emergence of the venture capital industry, which has since

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 THE DOT-COM BUBBLE

provided funds to firms with the kind of high-risk profile that makes it
difficult to source finance elsewhere.
On the other hand, it is not necessarily clear that the long-term
consequences of internet technology will be positive. At the time of
writing, it has become fashionable for the media to express concerns
over its secondary social and political effects, such as misinformation,
oligopolistic market structures and automation. In the long run, these
concerns may even appear trivial. Marc Andreesen, now a leading ven-
ture capitalist, argues that the contemporary discourse severely under-
estimates the impact of computer technology. Software is pervading
every aspect of everyday life; it is, in Andreesen’s words, ‘eating the
world’.69 Others have gone so far as to argue that the only comparable
innovations are language and money.70 We may be no better able to
understand its impact than societies could understand how language or
money would change the world in the decades after their creation.
Another consequence of the Dot-Com Bubble was the emergence of
financial bubbles as a serious academic area of investigation. Academic
finance prior to 2000 was dominated by the belief that markets were
generally efficient, and many considered the idea that asset prices could
diverge substantially from underlying profitability to be faintly ridicu-
lous. On the rare occasion that a prestigious economics or finance
journal published an article about a bubble, it was often to argue that
the supposed bubble was illusory and that prices during it were mostly
‘rational’.71
After the dot-com crash, the academic tradition of attributing bubbles
to market fundamentals continued. The Journal of Financial Economics,
one of the leading finance journals, published an article arguing that
there was no Dot-Com Bubble, and that the dramatic price changes
actually resulted from changes in the expected return associated with
technology shares.72 The basis of this article was that internet shares
justified their peak values because their best-case scenarios were so spec-
tacularly profitable: in the words of the authors, ‘a firm with some prob-
ability of failing and some probability of becoming the next Microsoft is
very valuable’.73 However, even if this were true, it would not account for
internet share prices being 90 per cent lower a few months later, when
many companies still had considerable potential. Another article,

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 BOOM AND BUST

published in the leading economics journal the American Economic Review,

presented a model arguing that the boom and bust resulted from
changes in the risk associated with technology shares during
a technological revolution. But even if one were to accept this model
uncritically, it only predicted that new technology shares would fall by
50 per cent; in reality, internet shares fell by almost 90 per cent.74
Unsatisfied with efficient-markets explanations, academics proposed
a range of alternative explanations. Some focused on the difficulty of
short selling technology shares: borrowing shares to short sell was often
expensive, making it difficult to bet against the bubble.75 However, while
borrowing costs were high for some individual shares, they were relatively
low for the overall NASDAQ market, so this is unlikely to explain the
overall bubble.76 Another possibility was that insiders were temporarily
barred from selling their shares due to lock-up agreements, and that the
crash occurred when these agreements expired. But subsequent research
showed that, somewhat surprisingly, the expiration of lock-up agree-
ments at a technology firm was not strongly associated with a fall in its
share price.77
A more compelling branch of explanations blamed the crash on the
rise of investment institutions, which often created conflicts of interest
and flawed incentive structures. Mutual funds, for example, typically aim
to attract as many new investors as possible. The easiest way to do so is by
demonstrating excess short-term returns, which can most easily be
achieved by taking on more risk. During the Dot-Com Bubble, this
meant investing a higher proportion of funds in the volatile technology
sector. Conversely, institutions which went against the herd by avoiding
technology stocks risked mass withdrawals if the bubble continued to
grow. The Tiger Group of hedge funds began to bet against technology
firms in 1998, underperforming its rivals for the next 2 years as a result. In
the first quarter of 2000, its investors lost patience and withdrew their
funds, forcing its closure only weeks before its strategy would have paid
off.78
Perhaps the most influential explanation to emerge from the Dot-
Com Bubble was that of Robert Shiller, whose bestseller Irrational
Exuberance was published just as the bubble began to burst. While this
book is most famous for emphasising the role of psychological factors in

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 THE DOT-COM BUBBLE

driving share prices, this was only one part of a hypothesis that also
referenced the aforementioned incentive problems, steady inflation,
tax cuts and cultural factors.79 The long list of precipitating factors
made it difficult to ascertain the relative importance of each one, but in
part this reflected the difficulty of explaining a bubble which could not
be neatly attributed to a single cause. The impact of the book undoubt-
edly played a role in Shiller later being awarded the Nobel Prize for
economics.
The dot-com crash was expected to be a wake-up call, but if anything its
modest economic impact engendered an atmosphere of complacency
about the next crash. Central bank and think-tank papers in the years
after 2000 praised the role of financial derivatives and securitisation in
allowing banks to better manage risk, arguing that these innovations made
them less vulnerable to future crashes. The New York Federal Reserve
concluded that banks performed well during the dot-com crash because
they ‘used credit derivatives effectively to prune credit risk’, while RWI,
a German economics think-tank, recommended that banks could increase
lending without increasing risk by ‘hiving off loans into securitisation’.80
Meanwhile, the bursting of the bubble made investors distrustful of stocks,
and many poured capital into the real-estate market instead.81
After 2000, proponents of cyclical models of bubbles became sceptical
that another bubble would develop soon, because the models of
Kindleberger and Minsky suggested that the memory of a recent bubble
would prevent an immediate repeat. John Cassidy, at that time the
New Yorker’s financial correspondent, concluded his 2003 study of the
Dot-Com Bubble by stating that the next speculative bubble ‘probably
won’t be for quite a while’ because America had ‘gotten serious’ in the
aftermath of the crash.82 But money remained abundant, credit was
becoming more and more loose, and the growth of the derivatives market
was substantially increasing the marketability of financial assets.
Speculation had temporarily declined, but with plenty of money sloshing
around the global economy and historically low returns on traditional
assets, it would not take much for the fervour of the late 1990s to return.
All that was needed was a spark.

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 CHAPTER 10

‘No More Boom and Bust’: The Subprime

Bubble

Unlike so many other bubbles . . . this one involved not just another commod-
ity but a building block of community and social life and a cornerstone of the
economy: the family home.
The Financial Crisis Inquiry Commission1

If mortgages did indeed become Dutch tulips, Washington provided a superbly

fertile flower bed.
Nolan McCarthy, Keith Poole and Howard Rosenthal2

T he title of this chapter alludes to gordon brown’s

continual refrain as the UK’s Chancellor of the Exchequer from
1997 to 2007 – ‘no return to boom and bust’ was a phrase he repeated
many times.3 The Dot-Com Bubble led Brown, among many others, to
conclude that bubbles do not have major negative economic or social
consequences and that central banks can save us from the excesses of
irrational exuberance. Devastating housing bubbles and banking col-
lapses only happened in faraway lands or in the distant past. But
Brown’s bubble was well and truly burst with the 2008 global financial
crisis.
There were Cassandras warning that disaster was impending.
A handful of economists such as Yale’s Robert Shiller and Raghuram
Rajan, during his tenure as Chief Economist at the International
Monetary Fund, warned about the housing bubble in the United States.
Morgan Kelly, an economics professor at University College Dublin,
provoked by the inane utterings of professional economists, simply

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 THE SUBPRIME BUBBLE

looked at the data and made the prognosis that not only was Ireland
going to have a substantial fall in property prices, but that its banking
system would implode in the process.4 But these were all voices crying in
the wilderness. Bertie Ahern, at that time the Irish Prime Minister,
dismissed criticism from the likes of Kelly with the line ‘I don’t know
how people who engage in [talking down the economy] don’t commit
suicide.’5
The housing bubble that these Cassandras warned about was unlike all
the property booms that had come before it, which may explain why there
were so few Cassandras and why they were ignored. Previous property
booms had not witnessed the level of financial engineering which turned
homes into objects of financial market speculation to be bought and sold by
investors around the globe. Company shares had long been marketable,
but financial alchemy now meant that people’s homes were, in some ways,
just as marketable. Furthermore, previous property booms and the effects of
their busts had mostly been confined to one country or a region within
a country. The property boom of the 2000s, however, was global in
nature. At least four countries had a simultaneous major property
bubble – Ireland, Spain, the United Kingdom and the United States –
and the financing of the bubbles in these economies extended well
beyond their own borders. Their bursting then caused substantial pro-
blems for several major European banking systems.
Houses in the United States had typically been viewed as a relatively
solid investment, their ‘bricks and mortar’ simplicity contrasting with the
ephemeral and abstract nature of stocks and bonds. From 1890 to 1999,
as can be seen from Figure 10.1, average house prices in the United States
had appreciated by only about 25 per cent in real terms. Then, from
January 2000 to summer 2006, the national house-price figures,
Composite-10 and Composite-20 figures respectively show an 84.6,
126.3 and 106.5 per cent increase. The fall from this peak to the trough
in early 2012 was between 27.4 and 35.3 per cent. However, as Table 10.1
shows, the composite and national indexes masked huge regional varia-
tion within the country.6 Four metropolitan areas experienced increases
of more than 150 per cent and four areas experienced falls greater than
50 per cent. Miami, Las Vegas, Phoenix and Washington, DC stand out
because of the substantial reversal in their house prices.

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 BOOM AND BUST

200

180

160

140

120

100

80

60

40

20

0
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Figure 10.1 Index of real house prices for the United States, 1890–20127

Table 10.1 also reveals the extent of the bubble in the bottom tier of the
housing market for each metropolitan area. Bottom-tier house prices in five
areas appreciated by approximately 200 per cent or more. While only four
areas experienced a fall of 50 per cent or greater in the overall housing
market, ten areas experienced bottom-tier falls greater than 50 per cent. In
most areas, the overall housing bubble peaked in the summer of 2006,
a full year before the problems were manifested in the interbank markets
and a full 2 years before the collapse of the banking system. In those areas
that experienced the most substantial booms, bottom-tier markets usually
peaked much later than the overall market did.
The US housing boom was replicated elsewhere (Figure 10.2). From
1998 to 2007, real house prices in Ireland, Spain and the United
Kingdom increased by 133, 103 and 134 per cent. However, by 2012,
prices had fallen by 51, 39 and 20 per cent respectively. The housing
booms in these three economies peaked one year later than in the United
States.
In each country, the boom in house prices was accompanied by
a boom in house building, the extent of which is shown in Table 10.2.
In the United States, nearly 15 million new homes were completed

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 THE SUBPRIME BUBBLE

table 10.1 Real house price changes in major US metropolitan areas8

Appreciation of Appreciation of Depreciation of
overall market from Depreciation of low-tier houses low-tier houses
Jan 2000 to peak overall market from from Jan 2000 to from peak to bot-
Metropolitan area (%) peak to bottom (%) peak (%) tom (%)

Miami 178.8 50.8 241.1 66.3

Los Angeles 173.9 41.8 239.8 56.5
San Diego 150.3 42.3 196.8 52.6
Washington, DC 150.2 50.8 196.6 46.4
Tampa 138.1 46.9 197.7 65.4
Las Vegas 134.8 61.7 143.9 70.2
Phoenix 127.4 55.9 139.3 70.7
San Francisco 118.4 46.1 176.1 60.7
New York 115.8 27.1 159.7 37.9
Seattle 92.3 32.9 102.4 44.2
Boston 82.5 20.0 119.2 32.4
Portland 81.7 29.0 99.9 36.2
Minneapolis 70.9 38.1 87.7 56.4
Chicago 68.6 39.1 83.6 56.5
Denver 40.3 14.1 37.5 21.0
Atlanta 35.3 39.0 38.1 65.9
Charlotte 29.0 16.0 n/a n/a
Detroit 27.1 49.3 n/a n/a
Dallas 25.7 10.7 n/a n/a
Cleveland 23.2 23.5 n/a n/a
Composite-10 126.3 35.3 n/a n/a
Composite-20 106.5 35.1 n/a n/a
National 84.6 27.4 n/a n/a

between 2000 and 2008, adding up to 1.47 new homes for each new
inhabitant. Given the average household size of 2.57 at the time, this was
many more new houses than was necessary. Some estimates suggest that
close to 3.5 million houses were constructed where they were not needed
during the boom.9 Indeed, unlike previous building booms, this one
increased the number of houses just when the number of new house-
holds was falling steeply.10 The drop in completions after 2008 is remark-
able, falling to about one-third of the level during the boom years.
Housing starts in the United States fell 79 per cent to a 50-year-low.11
In Spain, just over 5 million new houses were completed between 2001
and 2008.12 To put this into perspective, between 2002 and 2006, Spain
built more houses each year than Germany and France combined,
despite having less than one-third of their combined population.13

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 BOOM AND BUST

table 10.2 New housing completions (thousands), 1990–201215

Ireland Northern Ireland Spain Great Britain United States

1990s 22 8 268 181 1,330

2000 40 11 416 165 1,574
2001 42 14 505 160 1,570
2002 58 14 520 168 1,648
2003 69 15 506 176 1,679
2004 77 16 565 188 1,842
2005 81 13 591 193 1,931
2006 105 14 658 195 1,979
2007 74 12 647 212 1,503
2008 48 10 632 178 1,120
2009 22 8 425 149 794
2010 10 7 277 129 652
2011 7 6 179 135 585
2012 4 6 133 136 649

600

500

400

300

200

100

0
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Ireland Spain UK N. Ireland
Figure 10.2 Indexes of real house prices for Ireland, Northern Ireland, Spain and the
United Kingdom, 1973–201214

When the construction boom peaked in 2006, the number of housing

starts in Spain was greater than the combined total number for Germany,
France and the United Kingdom. However, after the bubble burst, the
number of houses under construction dropped dramatically.

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 THE SUBPRIME BUBBLE

In Ireland, the go-go years of 2005 and 2006 saw almost as many
houses completed as in the entire 1990s. From 2000 to 2008, Ireland
built over 0.6 million new homes. However, as can be seen from Table
10.2, in the aftermath of the bubble, new home completions almost
collapsed altogether. Between 2000 and 2008 in both Ireland and
Spain, just over one new home for every new inhabitant in the country
was built, a staggering record for two countries with an average house-
hold size of 2.7 and 2.6 respectively. In both countries it appears to have
been a case of ‘build it and they will come’.
In the United Kingdom just over 1.6 million new homes were
completed between 2000 and 2008. This was one new home for every
1.78 new inhabitants, a high ratio given the UK’s average household
size of 2.4 persons. Although aggregate UK figures suggest a relatively
small housing bubble, one part of the United Kingdom – Northern
Ireland – had a more significant housing bubble than Spain, Ireland or
the United States.16 House prices in Northern Ireland increased by
206 per cent between 1998 and 2007 (see Figure 10.1), and Northern
Ireland added just over 119,000 new homes between 2000 and 2008,
amounting to one house for every 0.81 new inhabitants!
A significant driver of the housing bubble was a dramatic expansion
of credit. During the 2000s, US banks and mortgage companies relaxed
their lending standards to borrowers with poor credit-rating histories –
so-called subprime borrowers. As a result, there was an unprecedented
growth in mortgage credit to high-risk borrowers from the poorer
segments of society.17 Loan-to-value ratios approaching 100 per cent
became common, enabling those on low incomes to buy houses. Many
were given interest-only mortgages or adjustable rate mortgages with
very low ‘teaser’ rates for the first few years, which initially made the
mortgage payments appear much more manageable than they really
were.
High loan-to-value ratios, high earnings-to-loan ratios, interest-only
mortgages and mortgages with low initial teaser rates also became com-
mon in the United Kingdom, Ireland and Spain. In the United Kingdom,
for example, institutions such as Northern Rock lent to subprime parts of
the market on loan-to-value ratios close to or over 100 per cent. Northern
Rock’s infamous Together mortgages, which allowed individuals to

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 BOOM AND BUST

borrow up to 125 per cent of the value of their homes, were aimed at
those on low incomes who needed to borrow to furnish their home, never
mind buy it. Lenders in Ireland introduced 100 per cent mortgages in
2004, and by 2008 they constituted 12 per cent of all new mortgages
granted.18
The expansion of mortgage credit in the United States, Spain and the
United Kingdom was supercharged by growth in the securitisation of
mortgages.19 This involved a bank ‘distributing’ the mortgages which it
had originated by selling their associated cash flows. These cash flows
were then sliced, diced and packaged into mortgage-backed securities
(MBS): financial assets which entitled the holder to the repayments from
a set of underlying mortgages. Despite the fact that these underlying
mortgages were often very low quality, many MBSs received a coveted
AAA credit rating from credit-rating agencies during the boom years,
indicating to potential investors that they were essentially risk-free.
Riskier tranches which could not be repackaged as MBSs were instead
repackaged as Collateralised Debt Obligations (CDOs); these, too, magi-
cally received AAA credit ratings. When securitisation firms ran out of
actual mortgages to securitise, they created synthetic CDOs, which were
essentially a series of bets on other mortgage products.
The securitisation of mortgages during the housing bubble had at
least three effects. First, the originate-to-distribute model meant that the
originators were less likely to screen borrowers carefully because they did
not have to live with the consequences of their lending decision. If the
mortgage defaulted, it was not their problem – the losses would land on
whoever was left holding the MBS or CDO. This resulted in many poor
quality and subprime mortgages.20 Second, securitisation, by allowing
banks to lower their lending standards and thus issue more mortgages,
amplified and pyramided leverage in the economy. In addition, MBSs
and CDOs were themselves debt financed and were often used as collat-
eral for creating other CDOs financed with debt. Third, securitisation
allowed investors to participate in the housing boom without having to
buy and sell houses or lend to homeowners.
A consequence of the easily available mortgage credit was that many of
the poorest members of society were swept up in the Subprime Bubble.
Michael Lewis in his account of the property boom and bust describes

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 THE SUBPRIME BUBBLE

a Mexican strawberry picker in California with an income of $14,000 and

no English, who was lent all of the $724,000 he needed to buy a house. He
also tells of a nanny who had bought six houses in New York City, having
borrowed every penny to do so, and a stripper in Las Vegas who had
mortgages on five properties.21 This phenomenon was not confined to
the United States: Claire Dempsey, a single Northern Irish woman in her
mid-20s, was lent money by her bank in 2006 to buy a £185,000 semi-
detached house, with an interest-only mortgage eight times her salary.22
After the crash she was unable to maintain the mortgage and sold the
property for £65,000.
The middle classes also got caught up in the bubble. Many of them
bought second houses as holiday homes in sunnier climes: about 750,000
UK citizens bought holiday homes in Spain.23 Some became flippers –
buying and selling property quickly without necessarily improving it.24
Others decided to buy houses in the hope that it would provide a pension
in their retirement – houses were perceived to be good investments, as
illustrated by the simile ‘as safe as houses’.25 Indeed, the Commission of
Investigation into the Banking Sector in Ireland stated in its report that
the purchase of a second home by Irish people during the boom was
perceived as ‘a no-brainer’.26 Many people in all four economies entered
the property market on a buy-to-let basis. In the United Kingdom, the
number of buy-to-let mortgages rose from 0.12 million to 1.16 million
between 2000 and 2008. The middle class effectively became the new
landlord class.
David Callaghan was a typical middle-class investor during the
boom.27 Just as prices were peaking, in the autumn of 2007, he spent
£650,000 on a luxury house just outside Newry, a city on the northern side
of the Irish border. He got a £485,000 mortgage to do so. He also
borrowed some more money to invest in a one-bedroom buy-to-let prop-
erty in Belfast. Callaghan, like many borrowers across Ireland, Spain, the
UK and the United States, soon found it impossible to cover his huge
mortgage payments. He was forced to sell his luxury house for only
£240,000 and his buy-to-let investment at 50 per cent below the purchase
price. As a result, he was delinquent on his mortgages.
Mortgage delinquencies started rising in the United States in 2006
and accelerated in 2007.28 From March 2007 onwards, mortgage lenders

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 BOOM AND BUST

started to announce losses and high delinquencies on subprime mort-

gages. Several lenders failed. As a result, the mortgage securitisation
market around the globe had almost ground to a halt by the summer of
2007. Then, in August 2007, the interest rate on the interbank market
(the so-called LIBOR) increased and banks effectively stopped lending to
one another – they did not know who was holding the soon-to-be-toxic
MBSs.
The clogging up of the securitisation machine and the freezing of the
interbank market had a major impact on Northern Rock, then the lead-
ing British mortgage bank. On 13 September 2007, it received liquidity
assistance from the Bank of England. However, when news of this leaked
out, its depositors mounted a run on the bank which ended only when
Chancellor Alistair Darling guaranteed its deposits. This was Britain’s
first bank run in over 150 years. On 17 February 2008, Northern Rock was
nationalised. About one month later, the US bank Bear Stearns was
rescued by the Federal Reserve and taken over by JP Morgan for only
a fraction of what its market value had been the previous week.
Over the next few months, mortgage delinquencies continued to
soar, MBSs continued to default and banks reported ever larger losses.
On 7 September 2008, the US Treasury placed Fannie Mae and Freddie
Mac, two government-sponsored entities (GSEs) that had been estab-
lished to increase the available mortgage finance for affordable homes,
into conservatorship and injected substantial capital funds into them
because of their perilous financial condition.29 Then on 15 September
Lehman Brothers filed for bankruptcy. The government refused to bail
it out, believing that it was not a systemic threat and that it needed to be
allowed to fail in order to reduce the moral hazard problem associated
with bailing out banks. However, it appears that Hank Paulson and the
Bush administration were more motivated by the prospect of
a bipartisan backlash against another bailout, which they feared would
be dubbed ‘socialism’ by those on the right and ‘bailing out their
friends on Wall Street’ by those on the left. Allowing it to fail allowed
them to rescue the system. Ultimately, Lehman was sacrificed so that
Wall Street could live.30 The following day AIG, an American multi-
national insurance company, received a bailout loan of $85 billion from
the Federal Reserve.

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 THE SUBPRIME BUBBLE

AIG Financial Products had used AIG’s AAA credit rating since 1998
to make money as a derivatives dealer. Its chief activity in this sphere was
the issuance of credit default swaps guaranteeing the MBSs and CDOs
held by banks and investors. In return for a stream of payments, it agreed
to reimburse investors in the event of default.31 This business had grown
from a notional amount insured of $20 billion in 2002 to $533 billion in
2007.32 The default of many MBSs and CDOs meant that AIG was having
to pay out substantial sums on its credit default swaps – sums that it had
made little provision for. The failure of AIG would have had major
consequences for the solvency of many financial institutions that had
bought credit default swaps from it.
Following the collapse of Lehman Brothers and AIG, the US Treasury
and Federal Reserve came up with a plan to stave off the implosion of the
banking system: the Troubled Assets Relief Plan (TARP). The TARP
authorised expenditures of $700 billion to help the Treasury buy or
insure ‘toxic’ assets (i.e. mortgages, MBSs and CDOs) from banks. After
being initially voted down by Congress on 29 September, it was signed
into law on 3 October. Within a matter of weeks, the poorly thought out
and hastily put together TARP programme would be changed to provide
capital, guarantees and direct support to banks. On 15 October, the US
Treasury announced the TARP Capital Purchase Program, which
allowed it to take up to $250 billion from TARP and inject it as capital
into troubled banks. In the announcement, the Treasury stated that 9
major financial institutions had already agreed to receive capital
injections.33 A further 42 institutions participated in the programme.
Following its nationalisation of Northern Rock earlier in 2008, the UK
Treasury put together a rescue package to deal with another large mort-
gage bank, the Bradford and Bingley, on 27 September 2008. Then, on
8 October 2008, the UK government announced three measures to
relieve the ongoing financial crisis. First, it extended the Special
Liquidity Scheme, whereby the Bank of England, indemnified by the
Treasury, swapped Treasury bills for a bank’s illiquid assets for up to 3
years. Second, the government established a fund which could be used to
inject capital into banks. Third, it guaranteed interbank lending to
enable banks to refinance their maturing debts. As a result of the crisis,
£132.85 billion of cash was directly injected into UK banks between 2007

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 BOOM AND BUST

and 2011 and, at its peak, the Treasury’s contingent liabilities were just
over £1 trillion, which was 82.4 per cent of GDP.34
In late September and early October 2008, major banks in Belgium,
France, Germany, Italy, the Netherlands, Sweden and Switzerland
received capital injections and loan guarantees from their governments.
Many European banks required rescue because they had invested in the
AAA-rated subprime MBSs and CDOs created in the United States.35
Some also got into trouble because of the problems on the global inter-
bank market. At this stage, the Federal Reserve played a crucial role in
providing dollar liquidity for European banks through its swap line
facility, whereby it provided dollars to the ECB and Bank of England to
help banks that had raised a lot of funding in dollars.36
The Irish government announced on 30 September 2008 that it
was taking the very unusual step of guaranteeing virtually all the
existing and future liabilities of its six domestic banks until
September 2010.37 The gross liabilities it would cover amounted to
€375 billion – twice Ireland’s gross national product.38 Subsequently,
on 14 December 2008, the government announced a €10 billion reca-
pitalisation programme for Irish banks. On 15 January 2009, the now-
notorious Anglo Irish Bank, which had financed a good deal of
property development and speculation in Ireland, was nationalised.
This was followed by the establishment of the National Asset
Management Agency (NAMA) in 2009, a scheme designed to pur-
chase about €90 billion of bad property loans from banks.
As NAMA progressed through 2009 and into 2010, it became clear
that the scale of the loan losses was much greater, and therefore the
recapitalisation of Irish banks would be costlier than expected. However,
the international markets were more concerned about the ability of the
Irish state to cover its liability guarantee and meet the ever-growing costs
of fixing its banking system. This triggered large outflows of foreign
money from Irish banks.39 At the same time, the yield on Ireland’s
sovereign debt soared. Not only did Irish banks need bailing out, but so
did Ireland. In late November 2010, the European Union and the
International Monetary Fund (IMF) provided a bailout package of
€85 billion (which equated to about 53 per cent of Ireland’s GDP) to
help recapitalise the Irish banking system.

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 THE SUBPRIME BUBBLE

Between 10 and 13 October 2008, the Spanish government, in order

to relieve the refinancing pressures of the country’s savings banks (cajas),
established an asset purchase scheme and a debt guarantee scheme for
new debt issues. Then in June 2009, it established a special purpose
vehicle, the Fund for the Orderly Restructuring of the Banking Sector,
which could borrow up to €100 billion to address the insolvency of many
cajas.40 This was carried out mainly by merging cajas and providing asset
guarantees for those who bought insolvent ones. By the end of the
restructuring process, Spain’s 45 cajas had become 17. However, the
restructuring process simply created large systemic entities where there
had been none. In addition, the debt guarantee inextricably linked the
creditworthiness of the Spanish government to that of the banking
system. In the midst of the Eurozone crisis, where Ireland, Greece and
Portugal had already received IMF and EU bailouts, this meant that in
June 2012, Spain was in the situation that Ireland had been in 18 months
before. International markets questioned the credibility of the govern-
ment’s guarantee of the banking system and as a result Spain received
a €100 billion credit line from the European Union to resolve its banking
woes.

CAUSES

When we looked through the ashes of the Australian Land Boom of 1888,
we saw that financial markets played a major role in homes and land
becoming marketable objects of speculation. The same was true in the
2000s, except the scale and global scope was so much larger. The princi-
pal reason for the increased marketability of houses was the greater
availability of mortgage finance to much wider sections of the population
than ever before. Furthermore, the securitisation of mortgages created
highly marketable instruments which allowed investors from around the
globe to speculate billions of dollars on homes in the United States, Spain
and the UK.
This increase in the marketability of homes can be seen from the fact
that the sales of existing homes more than doubled during the bubble.
The popping of the bubble, however, had a major effect on the number
of house sales. House sales in England and Wales in 2008, 2009 and 2010

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 BOOM AND BUST

were 50 per cent lower than they had been on average between 2001 and
2007.41 In Northern Ireland, after 51,000 sales in 2006 and 38,000 in
2007, the average number of sales per annum between 2008 and 2012
(inclusive) was only 14,800.42 In the United States, existing home sales
averaged 4.3 million per annum between 2008 and 2012 (inclusive),
having been about 7.1 in 2005 and 6.5 million in 2006.43
A bubble is not possible without the fuel of money and credit. In the
case of the housing bubble, the metaphorical fuel was available in tanker
loads. Economies such as China, Japan and Germany, with their export-
led growth policies, recycled the earnings from their exports by sending
large amounts of capital to the likes of Ireland, Spain, the United States
and the United Kingdom.44 In the case of the United States, it was
estimated that just over 60 per cent of the increase in mortgage funds
can be directly attributed to this money flowing in from overseas.45
The Eurozone had large sums of capital flowing from core nations,
such as Germany, France and the Netherlands, to the infamous PIIGS
(Portugal, Ireland, Italy, Greece and Spain). Most of the capital directed
to Ireland and Spain was channelled through their banking systems and
was used to finance the housing booms in those countries. Indeed, the
adoption of the euro resulted in deeper integration of the euro-based
wholesale funding market, making it much easier for Irish and Spanish
banks to raise finance from other countries. This money was then lent to
domestic property developers and homebuyers.46
One popular view of the 2008 crisis was that the flood of capital from
overseas lowered the real interest rate across developed economies.
However, some economists have dismissed the role of global imbalances
in driving down interest rates and have suggested that loose monetary
policy and low central bank interest rates were more of a problem.47 The
interest rates of the Eurozone were set to suit the core economies and, as
a result, were too low for economies like Ireland and Spain. The Federal
Reserve kept interest rates low after the dot-com bust and 2001 recession
in order to stimulate the economy by encouraging housing starts and
home sales with low mortgage rates.48 In one sense this worked too well,
because low interest rates prompted US consumers to buy houses in an
unprecedented fashion.

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 THE SUBPRIME BUBBLE

Low interest rates, however, would not have been such a problem had
they not been accompanied by such a dramatic extension of mortgage
credit. The ratio of residential loans to GDP in the European Union as
a whole was 36.4 in 2007; the equivalent figures for Ireland, Spain, the
United Kingdom and the United States were 71.4, 59.8, 74.8 and 63.4
respectively.49 The ratio of mortgage debt to GDP in these four countries
was higher than in any other country in the world, and they all had
a relatively high proportion of lower-income households with
mortgages.50 In the United States, mortgage debt climbed from $5.3
trillion in 2001 to $10.5 trillion in 2007 and mortgage debt per household
rose from $91,500 in 2001 to $149,500 in 2007.51 To put this in context,
mortgage debt in the United States rose almost as much in 6 years as it
had in the period from 1776 to 2000! Similarly, in Ireland, the total
mortgage debt went from €34 billion in 2001 to €123 billion in 2007,
which meant that mortgage debt per household increased from about
€27,000 to €87,000.52
How was such a large increase in mortgage debt possible? As discussed
above, banks and mortgage lenders substantially reduced their lending
standards. The simplest way of doing this was to relax the down payment
constraint on mortgages – the loan-to-value ratio. This enabled credit-
constrained lower-income households to enter the housing market for
the first time.53 In the case of the United States, the subprime sector grew
from 7.6 per cent of mortgage originations in 2001 to 23.5 per cent in
2006.54 The median loan-to-value ratio of subprime mortgages originat-
ing in the United States rose from 90 per cent in 2005 to 100 per cent in
the first half of 2007.55 When comparing countries that experienced
a housing bubble with those that did not, the relaxation of lending
standards and securitisation is the common factor: it occurred in the
United States, the United Kingdom, Ireland and Spain, but not to any-
where near the same extent in other major economies.56
Homes had become marketable objects of speculation and the bank-
ing system was supplying seemingly unlimited amounts of leverage to
potential speculators. But to what extent did speculation exist and how
widespread was it? During the housing boom, more and more people
began to see houses as investments, not so much for the rental income
they would produce as for their potential capital appreciation. Indeed,

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 BOOM AND BUST

economists Karl Case and Robert Shiller suggest that viewing housing as
an investment is a defining characteristic of a housing bubble.57 The
official report into the Irish banking crisis talks of speculators ‘piling into
residential and other real estate projects’ and suggests that rising prices
induced speculative purchases.58 Similarly, many new builds in Spain
were acquired by investors.59
Speculators also played a role in the US housing boom and were
blamed by the popular press for the bubble.60 Across metropolitan
areas investor ownership of property was closely correlated with excess
house price appreciation. In addition, there is strong evidence that the
acceleration of private-label mortgage securitisation in the United States
brought many flippers into the market, whose speculation had a major
effect on house prices and transaction volume before the crash in 2007.61
In an interview with the Financial Crisis Inquiry Commission in the
United States, Angelo Mozilo, the former long-serving CEO of
a financial corporation that collapsed during the crisis, talked of a gold
rush mentality that turned ordinary people into speculators. In his evi-
dence, he stated that ‘housing prices were rising so rapidly – at a rate that
I’d never seen in my 55 years in the business – that people, regular
people, average people got caught up in the mania of buying a house,
make $50,000 . . . and talk at a cocktail party about it’.62
One of the reasons people became speculators during the US boom
was that they were optimistic about future house price growth.63 A 2003
survey of people in four US metropolitan areas who had purchased
houses found that they tended to buy for future price increases rather
than the pleasure of living in the home.64 Over 90 per cent of those
surveyed expected house prices to at least treble in price over the next
decade. These long-term expectations played a major role in raising US
housing demand.65 Those who did not wish to buy physical property
could still speculate on the housing market via MBSs and CDOs. As the
report of the US’s Financial Crisis Inquiry Commission put it, ‘a mort-
gage on a home in south Florida might become part of dozens of
securities owned by hundreds of investors – or parts of bets owned by
hundreds more’.66
What role did the media play in stimulating speculation? As in the dot-
com boom, television played a major part by shaping the popular

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 THE SUBPRIME BUBBLE

narrative about house prices and property investment. Docusoaps about

people looking for new homes or relocating to sunnier climes began to
feature in the United Kingdom in 2000 with Location, Location, Location.67
The show’s presenters, Phil Spencer and Kirstie Allsopp, helped buyers
find the perfect home that matched their budget. The show spawned
a series of spin-offs and rival shows such as Homes Under the Hammer and To
Buy or Not to Buy. In the United States, House Hunters, which first aired in
1999, followed a similar format to Location, Location, Location. Twenty
specials and spin-offs of the show were created throughout the 2000s.68
Property Ladder, which first went out in the United Kingdom in 2001,
followed amateur property developers as they tried to make a profit
from buying and developing property. In the United States, Flip That
House introduced to the viewing public the idea of property as an
investment.
The official report into Ireland’s banking crisis expressed the view
that the media had a major effect on people’s perceptions, discussions
and actions with regard to the housing boom. It went on to state that the
media ‘enthusiastically supported households’ preoccupation with prop-
erty ownership’.69 Irish newspapers became unwitting conduits for exter-
nal economic experts from the financial sector who were cheerleaders
for the property boom.70 This view is supported by a cross-country study
of reporting before and after the global financial crisis.71 Because adver-
tising revenue from traditional sources was falling, Irish papers also grew
dependent on the lucrative (and increasing) income from the advertis-
ing of housing, new builds and real-estate services, who appear to have
pressured them into covering the boom in a particular way.72 The same
pressures were present in Spain, where they were compounded by the
government indirectly or implicitly commanding the media not to
impede the boom.73 In the UK, the number of articles covering the
housing market increased by 300 per cent between 2000 and 2008,
while the BBC News website increased its coverage tenfold.74 The opti-
mism of newspapers appears to have played a role in propagating the
housing booms by stimulating speculation.
Unlike the assets at the centre of other bubbles, housing markets are
very difficult if not impossible to short sell. This means that the specula-
tion pushing house prices up could not be countered by speculators

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 BOOM AND BUST

betting on a fall in house prices. A small number of investors documen-

ted in Michael Lewis’s The Big Short shorted the housing market by buying
credit default swaps on MBSs, which paid out when the MBSs defaulted.
In order to make these trades, however, these investors had to navigate
complex regulations, were ostracised by colleagues and in some cases
risked their jobs as fund managers by going against the herd – perhaps
explaining why there were so few of them.75
What was the spark that converted ordinary people into property
speculators? The answer to this question can be found in government
housing policies. At the end of the 1990s, Western democracies faced
a major challenge. Wealth inequality had grown inexorably since the
1970s, as the economic gains of globalisation bypassed the lower classes
of society. As well as undermining the stability of democracies, politicians
needed the votes of those who had seen their incomes and prospects
stagnate. Many democracies, particularly those of a more social demo-
cratic bent, used fiscal measures to deal with inequality, providing social
housing and generous entitlement programmes. Ireland, Spain, the
United Kingdom and the United States, however, took a different
approach, using housing policy to encourage the bottom-income quin-
tiles to buy houses, while incentivising the financial sector to lend to these
quintiles. In all four countries, this strategy was adopted by the main
parties of both the left and right wing.
The taxes and growth generated by the housing boom enabled local
and national governments to spend more on health, welfare and educa-
tion, without needing to raise taxation.76 In 2006, the tax take in Ireland
from house sales was about 17 per cent of total tax revenue – a decade
earlier, it had constituted only 4 per cent of total tax revenue.77 The UK’s
Parliamentary Commission on Banking Standards stated that successive
administrations during the boom were ‘dazzled by the economic growth
and tax revenues promised from the banking sector’.78 This made gov-
ernments very reluctant to burst the bubble; if anything they wanted to
keep the party going for as long as possible.
The Clinton and Bush administrations had a very explicit housing
policy – they wanted to increase the number of low-income homeowners,
particularly among minorities. For example, in 2002, Bush stated that his
administration wanted by 2010 to increase the number of minority

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 THE SUBPRIME BUBBLE

homeowners by 5.5 million.79 The ostensible reason for this was that
homeownership gave people greater independence, hope and a stake
in the future of the country, making for better citizens and stronger
communities.80
How was this policy goal implemented? In 1992 Congress passed the
Federal Housing Enterprises Financial Safety and Soundness Act. This
legislation required the Department of Housing and Urban
Development (HUD) to mandate affordable housing goals for Freddie
Mac and Fannie Mae. After 1992, this was primarily achieved by creating
a secondary mortgage market via securitisation. HUD increased the
funding that the GSEs could lend to low-income buyers from 42 to
50 per cent in 2000, rising to 56 per cent in 2004.81 By 2007,
20 per cent had to be lent to very low-income individuals. These man-
dates had two effects. First, the GSEs had to lower their underwriting
standards substantially to meet these mandates. Second, because Freddie
and Fannie set the national underwriting standards through buying
conforming loans, they dragged down the underwriting standards of
private lenders.82
As well as HUD’s mandates for the GSEs, from the 1990s onwards, the
1977 Community Reinvestment Act (CRA), which had up to then been
moribund, became a key part of the drive for affordable housing. The
CRA was originally passed to prevent redlining, i.e. the systematic denial
of mortgage loans to districts with high ethnic minority populations.
Later, when US banks wanted to merge after the removal of branching
restrictions, they first had to gain the approval of the Federal Reserve
Board. One of the tests applied by the Federal Reserve was good citizen-
ship, i.e. banks’ service to their local communities – part of which con-
sisted of compliance with the CRA. Consequently, as part of the creation
of large megabanks, there were commitments of about $3.5 trillion
dollars of CRA lending between 1993 and 2007.83
The Financial Crisis Inquiry Commission could not come to
a unanimous view on the causes of the crisis in the United States. The
majority finding was that the HUD’s mandates and CRA had little to do
with the boom and subsequent crash.84 However, Peter Wallison’s dis-
senting view was that government homeownership policies had been the
chief cause of the crisis.85 He pointed to the data to make his point. By

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 BOOM AND BUST

2008, 27 million mortgages (50 per cent of all mortgages) in the United
States were subprime or Alt-A (between prime and subprime) loans. The
GSEs guaranteed 12 million of these, the Federal Housing Association
guaranteed a further 4.8 million and private banks guaranteed
2.2 million under the CRA.
These particular mechanisms did not exist in Ireland, Spain or the
United Kingdom. However, the housing policy among most politicians in
these three economies was to increase owner-occupation.86 In Spain and
Ireland there was a long-standing bias in government policy towards
ownership, meaning that these two countries had some of the highest
homeownership rates in the Western world.87 Concomitantly, they also
had the lowest rates of social housing. After various fiscal crises in the
1980s caused the demise of direct government support for homeowner-
ship and social housing, the governments of Spain and Ireland increas-
ingly relied on their deregulated financial systems to provide homes for
those on low incomes.88
Similarly, the stated policy of successive UK governments from 1980
onwards was to encourage homeownership among the lower classes. In
passing the 1980 Housing Bill, which gave social housing occupants the
right to buy their home, Michael Heseltine, the then Secretary of State
for the Environment, stated that ‘there is in this country a deeply
ingrained desire for home ownership. The Government believe that
this spirit should be fostered’.89 This spirit was still being fostered 25
years later. As Lord Turner, the head of the UK’s financial regulator
during the crisis, put it, if the Financial Services Authority had acted to
curb the expansion of bank credit in the 2000s, politicians would have
accused them of ‘holding back the extension of mortgage credit to
ordinary people’ and ‘preventing the democratisation of home
ownership’.90
Banks got on board with the affordability mandate of their govern-
ments because the financial system was deregulated, meaning that they
could lend to subprime and less-than-prime borrowers. As well as facing
no restrictions on their lending activity from bank supervisors, banks did
not have to hold much in the way of regulatory capital against mortgages.
Almost no capital had to be held against mortgage-backed securities
which carried a AAA credit rating from one of the three credit-rating

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 THE SUBPRIME BUBBLE

agencies.91 In fact, the regulatory system across the developed world at

the time encouraged banks to hold the securities of the GSEs and other
MBSs rather than originated mortgages or commercial loans.
This is not to say that the GSEs, banks and property developers were
innocent bystanders being led astray by the government. According to
the Parliamentary Commission on Banking Standards, politicians in the
United Kingdom tended to succumb to bank lobbying.92 In Ireland and
Spain, there was a deep and unhealthy symbiotic relationship between
property developers, banks and politicians, which strengthened as the
housing boom progressed.93 Irish property developers became the ‘sugar
daddy’ of politicians, and Irish banks used their growing influence to
press for light-touch regulation.94
In the United States, the lobbying efforts of the real estate and financial
industry are part of the public record. This industry influenced politicians
via campaign contributions and direct lobbying efforts. In real terms,
between 1992 and 2008, its campaign contributions increased threefold
and were inclined to flow to whichever party controlled Congress.95
Between 1999 and 2008, the industry became one of the leading contri-
butors to campaign war chests, giving more than $1 billion.96 In terms of
reported lobbying efforts, this industry spent a staggering $2.7 billion
during these 9 years, a near-threefold increase over the previous
period.97 During these years, Fannie and Freddie, in terms of dollars
spent, were the second and third largest lobbying institutions in the
sector.98 According to the Financial Crisis Inquiry Commission, these
efforts exerted pressure on legislators to weaken regulatory constraints.
A study of the effect of lobbying on the legislative outcomes of regulation
bills in Congress found that lobbying caused legislators to switch their
stance in favour of deregulation.99

CONSEQUENCES

The housing bubble of the 2000s is a perfect example of an economically

and socially destructive bubble. When the bubble burst, the fall in GDP
per capita across all four economies was substantial (Table 10.3).
Notably, Spain’s GDP per capita continued to fall until 2013, by which
time it was 10.6 per cent below its 2007 level.100 In each case it took a long

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 BOOM AND BUST

table 10.3 Post-bubble economic malaise in Ireland, Spain, United Kingdom and
United States101
Youth unemployment
Unemployment rate (%) rate (%)

Year when
Fall in GDP per GDP per
capita between capita
2007 and returned to
2009 (%) 2007 levels Q1 2007 Q4 2009 Peak (Year) 2007 Peak

Ireland 11.2 2014 5.70 13.59 15.88 9.15 30.75

(2012)
Spain 4.9 2018 8.09 18.83 26.25 18.10 55.48
(2013)
United Kingdom 6.1 2015 5.48 7.70 8.19 14.25 21.25
(2011)
United States 4.8 2014 4.50 9.93 9.93 10.53 18.42
(2009)

time for GDP per capita to return to its 2007 level – over a decade in the
case of Spain. The recession in the United Kingdom was the longest of
the previous two centuries, and only the recession of the 1920s was
deeper.
One indicator of the human cost of the post-bubble recession was
the very high unemployment rates, particularly among young people
and especially in Ireland and Spain. As can be seen from Table 10.3, at
their post-crisis peak, youth unemployment rates, which measure
unemployment in the 15–24 age bracket, ranged from 18.4 per cent
in the United States to 55.5 per cent in Spain. The young were paying
the price for a housing bubble in which they had not participated.
Another indicator of the human cost, self-reported well-being,
declined sharply during the financial crisis, with reports of higher
levels of stress and anxiety.102
The collapse of the housing bubble had a major effect on families:
many became homeless and had to interrupt their children’s
education.103 In the United States, 8 million homes were foreclosed
and about $7 trillion in home equity was erased.104 In 2011, 11 million
properties (23 per cent of all mortgaged properties) in the United States

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 THE SUBPRIME BUBBLE

had negative equity, rising to 70 per cent of homeowners in some areas

with less salubrious zip codes.105 In the United Kingdom, 8 per cent of
mortgage holders had negative equity in 2011, representing some
£250 billion of wealth wiped out since 2007. However, there were great
regional differences: in parts of northern England and Northern Ireland,
19 to 28 per cent of mortgage holders had negative equity.106 By 2014,
things deteriorated even further for Northern Ireland, when it was esti-
mated that 41 per cent of mortgages were in negative equity.107 By 2012,
37 per cent of Irish households with a mortgage had negative equity and
€43 billion in home equity had been erased by the crash.108
Given that the policy of governments in the four economies was to
extend homeownership to the poor and address inequality, it is helpful to
explore how the housing boom and bust affected homeownership rates
and inequality. In Ireland, Spain, the United Kingdom and the United
States between 2005 and 2015, homeownership rates fell by 8.2, 8.1, 5.7
and 5.2 per cent.109 These steep falls did not occur in other economies.
Even on its own narrow terms, the policy of extending homeownership
was a total failure: in the case of Ireland, the United Kingdom and the
United States, homeownership rates in 2015 were below those in 1990.
The fall in house prices in the United States and elsewhere disproportio-
nately affected poor homeowners and wiped out most of their wealth.110
In other words, the credit-fuelled housing boom ultimately amplified the
inequality it was supposed to address.
The housing boom and bust left behind ghost estates, with vacant
properties, husks of houses, soil heaps, stationary cranes, and abandoned
diggers and cement mixers.111 In October 2011 there were 2,879 unfin-
ished housing estates in Ireland; in 777 of these, the majority of the units
were either vacant or incomplete.112 Ghost estates stand as monuments
not to human folly or irrational exuberance, but as memorials to the folly
of governments who thought that easy credit and homeownership were
the answers to deeper social and economic problems. Unfortunately, in
contrast to other memorials, these will not be preserved to warn future
generations.
Central banks around the globe continued to use extraordinary mea-
sures to address the global financial crisis for the following decade and
more. Interest rates were held at close to zero for the next 10 years,

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 BOOM AND BUST

historically without precedent. In addition, central banks engaged in

what was euphemistically called quantitative easing, whereby they created
money to buy government bonds and other securities. The combination
of quantitative easing and low interest rates distorted financial markets
and may have resulted in overvalued equity and housing markets as
investors reached for yield.
The most significant effects of the housing bubble and subsequent
financial crisis, however, may yet result from the political fallout. The
incompetence and corruption that led to the crisis, coupled with the
utter failure of the political system to hold any of those responsible to
account, resulted in a widespread loss of faith in the political classes. As in
the aftermath of the Great Depression, many voters turned to populist
and nationalist politicians. The election of Donald Trump and Brexit
both have their roots in the housing bubble of the 2000s. This may
ultimately prove to be the most substantial and long-lived effect of the
Subprime Bubble.
The Subprime Bubble taught us many lessons. Most notably, we were
reminded that bubbles do have major negative economic, social and
political consequences – not all bubbles are benign or socially useful.
Three things combined to make the Subprime Bubble so destructive. It
had a political spark. It had seemingly endless amounts of fuel provided by
poorly regulated banks. And it turned an economically crucial asset, the
family home, into a highly marketable object of speculation. Another
lesson of the Subprime Bubble is that, although central banks were power-
less to prevent the boom from occurring, they played a major role in the
clean-up operation after the bursting of the boom. However, in so doing,
they saved reckless banks and distorted asset markets with their extraor-
dinary monetary policy. The long-term effects of this clean-up might there-
fore make the next bubble more likely – and more dangerous.

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 CHAPTER 11

Casino Capitalism with Chinese Characteristics

When the economy is doing well, the stock market drops. When the economy
is doing poorly, the stock market shoots up. It seems like when the economy is
doing well, we all go to work and earn money. When the economy is doing
poorly, we all gather in the village entrance to gamble.
Anonymous social media post1

Against all reason, everyone was pumping stocks in China because the govern-
ment advised them to buy stocks.
Marshall Meyer2

Barely 20 years old and poorly regulated, the [Chinese] stock market
still has more in common with the gambling casinos of Macau than with
global exchanges in western capitals such as New York, London or
Tokyo.
David Pilling3

T h e fi r s t bu b b l e s w h i c h w e l o o ke d a t i n t h i s b o ok ,
those of 1720, occurred in aristocratic regimes. Bubbles were
invented in this era by the ruling elite in the struggle for internal
legitimacy and empire. Fast forward 300 years and the rulers of China,
an autocratic regime, were struggling to build an empire and secure
internal legitimacy. To do so, they created two bubbles in under
a decade. China’s rulers had learned from past bubbles that in
order to have a bubble, there needs to be marketability, speculation
and leverage. In the space of 20 years, China went from having almost
no marketability to heavily controlled marketability and then near-free

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 BOOM AND BUST

marketability. At the same time, China went from having virtually no

middle class to having the world’s largest middle class. This middle
class, looking to provide for their future, became the new speculating
class. Finally, by introducing huge amounts of credit into financial
markets in the form of margin trading, China then allowed investors
to speculate with other people’s money. The playbook from nearly
three centuries of bubble experiences was played out in China in just
over a decade.
In May 2015, we experienced one of China’s bubbles at first hand
during a visit to the city of Shenzhen to meet alumni of our university.
At this time, China was in the grip of what appeared to be an invest-
ment mass hysteria. During a dinner with a former PhD student who
was working as an asset manager for one of China’s leading investment
banks, we were told of how stock prices were divorced from reality and
how many new dubious technology companies were floating on the
Shenzhen Stock Exchange. Everyone in Shenzhen was talking about the
stock market – even the taxi drivers and bellhops.
The growth of the new China is encapsulated in the city of Shenzhen. In
1978, it was a small town with about 30,000 residents; by 2015, it had over
11 million inhabitants. What had caused this transformation? In 1978,
under the leadership of the reformist Deng Xiaoping, the Chinese govern-
ment initiated its policy of ‘socialism with Chinese characteristics’, which
gradually introduced markets into the existing communist structure. As
part of this reform, Shenzhen was designated a special economic zone in
which economic activities were largely driven by market forces, leaving it
free to attract foreign investment, technology and companies. The main
purpose of the zone was to produce manufactured goods for export.
When Deng Xiaoping first came to power, China was an economic
backwater, with a GDP per capita less than one-thirteenth that of Western
Europe. But its subsequent economic transformation was unparalleled in
economic history. Its GDP grew at an average of 9.7 per cent per annum
between 1978 and 2015, compared to 2.7 per cent per annum in the
United States, making it the second largest economy in the world. Its real
GDP per capita in 1978 was about $156, but, by 2015, it had reached
$8,069 – a 51-fold increase.4 This economic growth resulted in an

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

unprecedented reduction of poverty. Nearly 90 per cent of the Chinese

population in 1981 were living below the poverty line (defined as $1.90
per day at 2011 prices). In 2015 only 0.7 per cent of the population lived
below this threshold. Similarly, infant mortality fell from 52.6 per 1,000
live births in 1978 to 9.2 in 2015. China’s astounding economic develop-
ment resulted in the creation of the world’s largest middle class, which is
estimated to consist of 400 million people.
The reform and opening-up policy of Deng Xiaoping moved pragma-
tically and gradually – summarised by Xiaoping himself as ‘crossing the
river by touching stones’ in a famous speech that he made before the
Communist Party Plenary in 1978. As well as setting up special economic
zones, farmers were given land cultivation rights and were empowered to
make their own decisions. The management of state-owned enterprises
(SOEs) was decentralised from central to local governments and SOE
managers were given more autonomy.5 The 1980s saw the rise of town-
and village-owned enterprises (TVEs) – market-oriented businesses
which were typically under the control of local authorities. These enter-
prises were labour-intensive and benefited from the large increase in
labour supply that followed the agricultural reforms. TVEs in the 1980s
played a major role in China’s growth.6
The first step towards a more capitalistic system was taken in 1990 when
China began to incorporate and privatise the SOEs and TVEs. When SOEs
were converted to limited liability corporations, shares were issued to their
own employees and other SOEs. The government, both central and local,
maintained large ownership stakes in these corporations either directly or
indirectly through state-controlled ‘legal persons’ (i.e. companies or insti-
tutions). Some shares were also issued to the public, and so the Shanghai
and Shenzhen Stock Exchanges were created in 1990 and 1991 respec-
tively. These reforms thus introduced some marketability, but it was lim-
ited and highly regulated.
The subsequent development of the Chinese stock market can be seen
from Figure 11.1. Between 1990 and 2005, the number of companies
listed on these two exchanges rose from just 8 to 1,341. However, even in
2005, the largest shareholder in 63.7 per cent of these companies was the
state, either in the guise of the central or local government, or as central
or local government legal persons.7 Even when the largest owner was an

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 BOOM AND BUST

2,000

1,800
Shenzhen
1,600

1,400

1,200

1,000
Shanghai
800

600

400

200

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Figure 11.1 Number of listed companies on Shanghai and Shenzhen stock exchanges,
1990–20168

individual or a non-government legal person, the state was usually

the second largest owner or had a substantial stake in the company. Up
until 2005, the shares owned by the state and by non-state legal persons
were not tradeable on the stock exchanges – only the ‘A’ shares owned by
individuals could be traded. Legal persons and the state could transfer
their shares only with the express permission of the China Securities
Regulatory Commission (CSRC). This meant that in 2005, 62 per cent
of shares in listed corporations were almost untradeable.9
In December 2001, China took a major step towards integrating into
the global economy when it joined the World Trade Organization. As
part of the terms of its accession, however, its listed companies were
banned from receiving state aid and exposed to foreign competition.10
In an effort to iron out inefficiencies at these companies before they were
out-competed, the government announced a further round of privatisa-
tion in which non-tradeable shares were converted into tradeable ones,
allowing the state to transfer more of its ownership into private hands.
However, this reform was abandoned when investors, fearing that an
increase in the quantity of tradeable shares would undermine the value
of their holdings, began to panic sell.

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

7,000 3,500

Shenzhen Stock Exchange Composite Index

Shanghai Stock Exchange Composite Index

6,000 3,000

5,000 2,500
Shanghai Index

4,000 2,000

3,000 1,500

2,000 1,000

1,000 500
Shenzhen Index
0 0
ec 0

ec 4

ec 6

ec 4

ec 0

14
ec 2

ec 8

ec 0

ec 2

ec 6

ec 8

ec 2
9

9
9

1
9

1
19

19

19
19

19

20

20

20

20

20

20

20

20
ec
D

D
19

19

19

19

19

19

19

19

19

19

19

19

19
Figure 11.2 Shanghai Stock Exchange Composite Index and Shenzhen Stock Exchange
Composite Index, 1990–201511

After 2001, the stock market performed abysmally: the Shenzhen

stock index, shown in Figure 11.2, fell by 52.7 per cent between
July 2001 and July 2005. This failure was particularly stark in the context
of China’s spectacular economic growth, which averaged 10.5 per cent
per annum between 2003 and 2005. In response, in 2005 the government
attempted once again to make non-tradeable shares tradeable. This time,
however, the reform was accompanied by measures to prevent the panic
selling that had derailed their earlier effort. Non-tradeable shareholders
were required to compensate tradeable shareholders for adverse price
effects, usually through a transfer of shares.12 A lock-up period of 1 year
was placed on non-tradeable shares, during which they could not be sold,
and limits were placed on how many could be sold in the 2 years after the
expiry of the lock-up period.13 But in order for this second round of
privatisation to be successful, the authorities also needed to manufacture
an ebullient stock market.
They thus set about attracting money to the stock market to push up
prices, a task which turned out to be quite straightforward. The absence
of a developed social security system meant that people had to make

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 BOOM AND BUST

provision for their own old age, but Chinese citizens had few outlets for
their savings. Capital controls prevented money from moving overseas,
and the government’s complete control of the banking system meant
that real deposit rates were very low and frequently negative. At the start
of 2006, bank deposit rates and the discount rate on short-term govern-
ment debt were at a post-1991 low. This left the stock market as the only
viable alternative. Therefore, cheered on by the state-controlled media,
the stock market attracted more and more investors. The stock market
was buoyed further as 2006 progressed when businesses reported high
profits, and economic growth reached 12.7 per cent.14
At the start of 2007, the Shanghai and Shenzhen markets were up 130
and 98 per cent respectively on the year. By this point most of the
transition from non-tradeable to tradeable shares was complete, but
stock prices continued to rise regardless, partly as a result of many first-
time investors entering the market. In the first 4 months of 2007,
10 million new retail investors opened accounts, more than had done
so in the previous 4 years combined.15 Many new investors were complete
novices: the New York Times reported that shopkeepers, maids, farmers
and watermelon hawkers gave up their jobs to become day traders.16
Some estimates suggest that one in ten citizens was directly involved in
stock trading and that the 7 per cent of Chinese citizens’ savings invested
in the stock market in 2005 had risen to over 30 per cent by the end of
2007.17 Many investors had bizarre investment philosophies, choosing
stocks at random or because a stock price had reached a ‘lucky’
number.18 For some, the stock market was the only legal outlet for
a gambling habit, since casinos and betting were illegal.
At the end of May, Zhou Xiaochuan, the head of China’s central bank,
warned that the market was overvalued and raised interest rates. This was
quickly followed by an increase in the stamp duty on share trading in an
effort to dampen trading activity. However, after several sharp falls, the
state-controlled media reassured investors by hinting at state action to
support shares if need be.19 The market once again began to climb. By
October 2007, the Shanghai index had risen by 412 per cent since the
end of 2005, while the Shenzhen index had risen by 425 per cent.
Thereafter, however, the stock market began a precipitous decline,
steadily losing value over the next year despite several attempts by the

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

government to prop it up or let it deflate gently. By the end of July 2008,

well before the world knew the extent of the problems in US, UK and EU
banks, the Shanghai and Shenzhen markets had fallen by 53 and
43 per cent from their levels in October 2007. The chaos of the subse-
quent global financial crises undoubtedly contributed to their further
falls – by the end of October 2008, the two markets had fallen 71 and
68 per cent respectively from their peaks.20 These falls may also have
been accentuated by the end of the lock-ups on the billions of formerly
non-tradeable shares.
The stock market crash had little immediate effect on the Chinese
economy, of which the stock market was a relatively small part. There was
no financial crisis: banks were not heavily exposed to the crash, and even
if they had been, they were safely under the ownership of a government
that was never going to allow them to fail. There was, however,
a consequence for the funding of new firms and new projects: investors’
disenchantment with the stock market made it much more difficult to
raise equity finance. As a result, new technology firms struggled to get off
the ground, while most established companies reverted to debt finance.21
Following the global financial crisis in 2008, the Chinese authorities,
fearing a fall in the Western demand for Chinese exports, engaged in
a massive stimulus programme whereby banks and shadow banks began
lending to corporations, small businesses and individuals.22 This has been
described by some economists as one of the greatest relaxations of mone-
tary policy ever undertaken.23 As a result, China’s non-government debt
rose from 116 per cent of GDP in 2007 to 227 per cent in 2014. By 2014, the
Chinese authorities were worried about the level of debt and the precar-
ious nature of the shadow banking system, as well as the inability of banks
to lend to businesses. They were also concerned about a slowing economic
growth rate (7.4 per cent in 2014 and 6.9 per cent in 2015) and the threat
that this posed to their political legitimacy and stability.24
To address these issues, the authorities engaged in further stimulus by
engineering another stock market bubble. First, at the third plenum of the
18th Communist Party Conference in November 2013, President Xi
announced plans to liberalise the banking system and stock market in
order to give market allocation a decisive role. These plans largely con-
sisted of overhauling corporate governance at public companies and

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 BOOM AND BUST

reducing the role of local government in running them.25 The govern-

ment then reformed the stock market to reduce trading costs and encou-
rage companies to seek a stock market listing.26 It also set up the
Shanghai–Hong Kong Connect, introduced in November 2014, which
effectively invited foreign investors to invest in China. Finally, monetary
policy was eased even further, starting with the reduction of the central
bank’s benchmark rate in November 2014. The monetary stimulus was
given further impetus in February 2015 when the required reserve ratio for
banks was reduced. The benchmark rate was cut again at the start of March
the same year.
In order to attract retail investors, the state-controlled press, including
the People’s Daily, ran laudatory editorials extolling the virtues of the stock
market, explaining how its performance was a sign of present and future
economic prosperity, and describing stocks as ‘carriers of the China
dream’.27 This propaganda mill went into overdrive to encourage people
to put their savings into the stock market.28 For example, when the stock
market fell 8 per cent on 10 December 2014, the China Securities Journal
came out strongly with the view that the bull market had much further to
go.29 When the Shanghai Stock Exchange Composite Index broke
through the 4,000-points level in April 2015, the People’s Daily ran an
editorial suggesting that this was only the beginning of a bull market.30
The state even reached into the social media domain, by paying internet
commentators (purportedly RMB 3.50 or $0.50 per post) to comment
favourably on the economy and stock market.31
As can be seen from Figure 11.2, the Shanghai and Shenzhen stock
markets started to rise in July 2014, accelerating in response to the
interest rate cut of November 2014. When the two indexes peaked on
12 June 2015, the Shanghai market had appreciated by 152 per cent since
the end of June 2014, while the Shenzhen market had appreciated by
185 per cent.
The rise of stock prices lowered financing costs for listed companies
and enabled them to repair their balance sheets by issuing more equity
and reducing their debt. This has led some commentators to refer to the
2015 bubble as the world’s largest debt-to-equity swap.32 However, rising
stock prices also revived the moribund new issue market – the CSRC
permitted IPOs, which had been accumulating since 2011, to go ahead.33

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

Figure 11.1 shows that the number of listed firms on the Shanghai market
grew from 953 in 2013 to 1,182 by 2016, while the number of listed firms
on the Shenzhen market grew from 1,536 to 1,870. This was accompa-
nied by a substantial rise in the number of corporate securities, which
went from 2,786 to 9,647 in Shanghai and 2,328 to 4,481 in Shenzhen.34
As a result of new IPOs and seasoned equity offerings, the number of
shares on the Shanghai market grew from 2.5 to 3.3 trillion between 2013
and 2016, and on the Shenzhen market it went from 0.8 trillion to 1.6
trillion. The increase in companies and stock issues was primarily driven
by new technology companies and attempts by SOEs in non-essential
sectors to restructure, merge and divest to private shareholders.
New IPOs often generated a great deal of excitement. For example,
the shares in the Beijing Baofeng Technology Company, an internet
video platform, were 291 times oversubscribed in March 2015, and its
first-day return was 44 per cent – the maximum first-day increase per-
mitted by the regulator.35 Thereafter its stock price increased by
10 per cent every day for 2 months, 10 per cent being the maximum
daily increase permitted by the CSRC. Its share price increased 42-fold in
those 2 months. In an attempt to cash in on excitement about new
technology, 80 listed companies changed their name in the first 5 months
of 2015 to give themselves more of a hi-tech aura.36 For example, Kemian
Wood Industry shifted from wooden floors to online gaming and was
rebranded as Zeus Entertainment.37 It was later accused of fabricating
stories in order to inflate its share price. Similarly, a hotel was rebranded
as a high-speed rail network, a ceramics manufacturer as a clean-energy
company and a fireworks manufacturer as a peer-to-peer lender.
The first indication that the bubble would soon burst came on 28 May,
when the Shanghai market fell by 6.5 per cent, its largest 1-day fall in 15
years, and the Shenzhen market fell by 5.5 per cent. These falls would
have been greater had it not been for the rule that individual stocks on
the Shanghai and Shenzhen markets could fall by no more than
10 per cent in any given day – 260 stocks on the Shanghai market hit
that limit on 28 May.38 But the market recovered quickly, reaching an all-
time high on Friday 12 June. The following Monday, however, the rout
began, and the Shanghai and Shenzhen composite indexes fell by 13.3
and 12.7 per cent respectively in one week.

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 BOOM AND BUST

Three events had converged to trigger the crash. First, regulators had
moved to clamp down on out-of-control margin lending, fearing that the
market was excessively leveraged. Second, at the start of June, monetary
policy was tightened, presaging an increase in the Shanghai Inter-Bank
Offering Rate. Third, on 10 June, the international index provider MSCI
declined to include Chinese shares, thus preventing a potential
$50 billion of foreign funds from flowing into the Chinese stock
market.39
Front-page commentaries in the state-controlled press urged investors
not to panic, and at the beginning of the following week the markets
steadied.40 However, this stabilisation was short-lived, and the Shanghai
and Shenzhen markets fell by 7.4 and 7.9 per cent respectively on Friday
26 June; on the Shanghai market, 2,049 stocks hit the 10 per cent limit.41
By this date, the two markets had fallen by nearly 20 per cent in two
weeks. The following day, the central bank responded with the extraor-
dinary step of cutting its benchmark interest rate by 0.25 per cent and its
required reserve ratio by 0.5 per cent.
Even these measures, however, were still insufficient to stop the sell-off:
when the markets reopened on Monday 29 June, Shanghai fell 3.3 per cent
and Shenzhen 7.9 per cent. The CSRC responded by introducing a series
of measures aimed at encouraging people to buy stocks. It allowed inves-
tors to use their homes and other real assets as collateral to borrow money
to invest in stocks, it pledged to crack down on market manipulators, it
lowered settlement fees on the two stock exchanges, and it threatened to
punish negative reporting in the media.42 But at the end of the week, the
Shanghai and Shenzhen markets had fallen by a further 12.1 and
16.2 per cent respectively, and were 28.6 and 33.2 per cent below their
12 June peaks.
Between the market’s close on Friday 3 July and its reopening on
Monday 6 July, the CSRC made a further attempt to arrest the stock
market’s rapid decline.43 First, it suspended forthcoming IPOs. Second,
in order to supply capital markets with liquidity, it announced that the
China Securities Finance Corporation (CSF), a state-owned lender to
securities companies, would have its capital quadrupled to RMB
100 billion and would have access to funds from the central bank to
buy shares on the open market. This transformed the CSF into an asset

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

manager tasked with buying stocks to stabilise the market. Third, it

announced a restriction on futures trading, a clampdown on ‘malicious
shorting’ and punishments for negative news media reporting. Fourth,
the CSRC persuaded 21 leading brokerages and 25 major mutual funds
to use both their funds and influence to stabilise the market.
Yet even these measures were ineffective: after a short-lived rebound
on the Monday, the market continued its precipitous fall, potentially
endangering the wider Chinese financial system. China’s Premier Li
Keqiang and Vice-premier Ma Kai intervened at this juncture to throw
the weight of the Party behind the rescue effort.44 After the market closed
on 8 July, a co-ordinated series of measures was announced. First, the
central bank categorically stated that it would provide liquidity to the CSF
to buy shares. Second, the CSF started purchasing small stocks as well as
blue chips. Third, large shareholders and senior managers, many of
whom had cashed out heavily in the months before the bubble burst,
were ordered to buy back 10 to 20 per cent of shares sold in the previous 6
months.45 Fourth, the bank regulator announced that it would allow
banks to make loans with stocks as collateral. Fifth, the insurance regu-
lator increased the proportion of assets that insurance companies could
invest in stocks. Sixth, the Ministry of Finance promised to do whatever it
took to protect market stability. Seventh, the Ministry of Public Security
announced that it was going to prosecute ‘evil’ short sellers. Eighth, state-
owned enterprises were ordered not to sell shares, and 292 committed
themselves to buying their own stocks. Finally, the government used its
propaganda machine to talk up stocks. The People’s Daily ran an editorial
declaring that ‘after the rain and storms, rainbows appear’.46 On 10 July,
the graduands of Tsinghua University, one of China’s most prestigious
universities, were instructed to chant loudly at the start of their gradua-
tion ceremony, ‘Revive the A shares, benefit the people, revive the
A shares, benefit the people.’47
The result of all these measures was that by the end of July the market
had recovered some of its losses. The Chinese authorities soon found,
however, that it was much easier to inflate a bubble than to prevent it
from bursting. In late August and early September, partly as a result of
restrictions on ‘evil’ short sellers drying up liquidity, the market began its
final descent.48 By 15 September, 3 months after its peak, the Shanghai

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 BOOM AND BUST

market was down 46.8 per cent and the Shenzhen market 56.6 per cent.
These broad composite indexes, however, mask the severity of the crash
for smaller and newer stocks, many of which temporarily suspended
trading during the crash.
Just as in 2007, the crash of the Chinese stock market did not result
in a financial crisis. It also appears to have had little effect on the real
economy. Growth did slow after 2015, but it was slowing well before the
stock market crash. If anything, the bubble may have helped China hit
its growth target in 2015 and temporarily conceal the fact that eco-
nomic growth was slowing down.49 However, the politically driven
bubble and heavy-handed efforts to avert the crash called into question
the credibility of China’s efforts to start using free markets to allocate
capital.
Another similarity with 2007 was the entry of millions of novices into
the stock market. Ordinary Chinese citizens, encouraged by government
propaganda and a belief that the government would not let the market
collapse, ploughed their savings into stocks. To meet this demand,
brokerage offices popped up around the country, with several firms
struggling to process the huge demand for new trading accounts.50 By
2015 there were about 90 million individual investors – more than there
were members of the Communist Party. Because institutional investors
and professional money managers were uncommon in China, these
individual investors accounted for about 90 per cent of all the daily
stock market transactions in 2015.51 The growth of interest in investment
from ordinary citizens during the bubble is illustrated by the 30 million
new trading accounts opened by individual investors in the first 5 months
of 2015 – 12 million of them opened in May alone.52
Many of these novices were uneducated – surveys at the time suggested
that two-thirds of investors had not completed high school.53 Many took
incredibly naive approaches to investment. One newcomer, Vector Yang,
simply picked stocks the way he picked vegetables, buying the cheapest
ones at random.54 Another, Ginger Zennge, bought stocks on 15 June,
the day the bubble popped, because it happened to coincide with
President Xi’s birthday.55
During the boom, there were media stories of grandmothers – the so-
called ‘aunties’ – making large returns on the stock market. The ‘aunties’

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

gathered in brokerage offices during the day, watched the stock price
charts change, ate their packed lunch and placed stock orders. One
auntie, a Ms Zhang, said in 2015 that ‘the Chinese stock market is full
of small potatoes like us. You make 10 yuan in the stock market, it means
you can have a nice meal today’.56 The aunties were usually more sophis-
ticated in their approach to stock picking than Vector Yang or Ginger
Zengge – they relied on a mixture of rumours, numerology and feng shui
to help them choose.57 At the younger end of the spectrum, a survey by
the Chinese state media estimated that 31 per cent of undergraduate
students invested in stocks during the bubble, often using the money
their parents had given them to live on. Like so many older investors,
these undergraduates believed that ‘even though there exists risks and
bubbles in China’s share market, the state is able to maintain its health to
prevent the collapse’.58

CAUSES

Both the 2007 and 2015 bubbles were created and sustained by the
government, but the reasons for the inception of the bubble were different
on each occasion. In 2007, the Chinese authorities were attempting to
further privatise listed companies by converting their non-tradeable state-
owned shares into tradeable ones that could be sold to private share-
holders. In order to persuade individual investors to purchase these shares,
the state manufactured a bubble in stocks. In 2015, the issue facing the
Chinese state was a different one – how to unwind the huge stimulus it had
launched following the global financial crisis in 2008 while keeping eco-
nomic growth above the politically acceptable 7 per cent level.
Engineering the 2007 bubble was easy, because the repressed finan-
cial system had given China’s middle classes very little choice over what to
do with their abundant savings – they could either deposit their money in
a government-owned bank that paid interest below the rate of inflation,
or they could invest in stocks.59 Although margin finance had not yet
been legalised, in 2007 China’s Banking Regulatory Commission sug-
gested that individuals had been using car and home loans and credit
card borrowings to invest in the stock market.60

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 BOOM AND BUST

However, given that Chinese investors had been duped once before,
the amount of credit necessary to inflate the market after 2007 had to be
much greater. Margin trading was permitted in China for the first time in
2010; after a pilot period, the number of constituent securities which
could be sold on margin increased from 90 to 280 at the end of
December 2011.61 Restrictions on which individuals could obtain margin
loans were weakened after 2011, and the huge credit stimulus following
the global financial crisis meant that brokerages had all the liquidity they
could want.62 In addition, interest rate cuts by the central bank and
deposit rates below inflation encouraged savers to search for higher
returns elsewhere.
By 2014, licensed security companies were permitted to grant margin
loans on a leverage ratio of 2:1, i.e. every investor could borrow RMB 200
to buy stocks for every RMB 100 in hand. Individuals could obtain margin
loans only if they had cash or securities worth RMB 500,000 (about
$70,000 at the time) and if they had had a share trading account for 6
months or more. However, the run-up to 2014 saw the rise of unofficial or
shadow margin lending through peer-to-peer online lending companies
and money-matching firms. Shadow margin lenders were particularly
popular with small investors because they imposed no requirements or
capital thresholds. In addition, investors could use unofficial margin
finance to buy shares that were not on the approved CRSC list of stocks
suitable for margin lending. They also allowed investors to borrow more:
the maximum leverage ratio at shadow margin lenders was typically 5:1.
In order to compete, official brokerages lowered the qualification cri-
teria for opening margin accounts.63
The scale of margin lending in 2015 was unprecedented in the history of
stock markets – it was estimated that it supported between 20 and 25 per cent
of China’s stock market capitalisation.64 Between October 2014 and
June 2015, the amount of margin loans increased fourfold, from RMB
698 billion ($104 billion) to RMB 2.7 trillion ($404 billion).65 The shadow
margin lending sector was small until the stock market started rising in 2014,
but by the peak of the bubble, it constituted between 55 and 75 per cent of all
margin lending.66 The proliferation of margin calls explains why the market
fell so quickly in 2015 and why government attempts to shore the market up
were largely fruitless. Just as in the United States in 1929, the fact that the

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

bubble was fuelled by margin lending made the crash much more rapid and
dramatic.
Marketability changed fundamentally in China in both the 2007 and
2015 bubbles; the entire basis of the 2007 bubble had been a large-scale
conversion of non-tradeable shares into tradeable shares. In early 2014,
trading costs were substantially reduced after President Xi’s announce-
ment at the third plenum. The number of brokerage offices subsequently
mushroomed, making it much easier for Chinese citizens to buy and sell
shares. Furthermore, as in the United States in the 1920s, the widespread
availability of margin lending and the rise of unofficial margin lending
from 2014 onwards made stocks much more marketable to a wider cross-
section of people. The effect of increased marketability and the excite-
ment generated during the bubbles can be seen from Figure 11.3, which
shows the average daily turnover value on the two stock exchanges. In
the year before each bubble there was an increase in turnover value, and
during each bubble there was a large increase in the volume of trading.
Speculation was rife in the Chinese stock market in both 2007 and
2015. As documented above, millions of novice investors were drawn into
the market during the boom phase of the two bubbles, many of them

6,000

5,000

4,000

3,000

2,000

Shanghai

1,000
Shenzhen

0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Figure 11.3 Average daily turnover value (RMB 100 million) on the Shanghai and
Shenzhen stock exchanges, 1991–201667

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 BOOM AND BUST

pure momentum traders.68 In 2014 and 2015, their entrance into the
market was facilitated by the wide availability of margin finance.69 The
large number of retail investors, who constituted 80 to 85 per cent of
stock market investment at the time, meant that these momentum tra-
ders had a substantial effect on the movements of the Chinese stock
markets. Restrictions on the Internet and news media gave the state
substantial control over the information available to investors, making
it much easier for the state to engineer price increases.70 Just as the
democratisation of speculation in the mid-1840s in the UK created
a huge bubble in railway stocks, so the democratisation of speculation
in China, particularly in the 2015 bubble, resulted in a bubble almost
unprecedented in its magnitude.
In 2007, speculating in the opposite direction was effectively impos-
sible because short selling was illegal.71 These short-sale constraints
enabled momentum traders to push stock prices higher without
informed traders being able to correct prices.72 By 2014, the State
Council of China had permitted short selling in an effort to improve
the efficiency of the stock market, but only on 280 blue-chip securities.73
These 280 securities were a small fraction of the 9,354 corporate secu-
rities listed on the Shanghai and Shenzhen markets in 2015, so for most
stocks there were still significant short-sale constraints.
In many senses, Chinese citizens tended to view the Shanghai and
Shenzhen stock exchanges as casinos. During 2015, margin loans meant
that large swathes of China’s new and growing middle class could now
take a punt on the stock market. The casino capitalism criticised by the
likes of John Maynard Keynes in the 1930s was alive and well in China.
China’s bubbles are some of the best examples of the bubble triangle
in operation. They show that marketability and speculation are key, and
that the scale of bubbles is very much determined by the amount of fuel
available in the form of leverage. They are also clear examples of how
and why governments create bubbles. Unlike some other bubble epi-
sodes, however, the Chinese bubbles were not followed by a recession or
widespread unrest. One reason for this was that the sheer involvement
of the state in the economy was unparalleled, which allowed the govern-
ment to allocate losses across society. Furthermore, the principal banks
were owned by the government and therefore had the full backing of

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 CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

the state and its financial power. There was therefore no risk of them
failing.
In many ways, the Chinese bubbles resembled the very first bubbles of
1720. In both cases the bubbles were deliberately engineered to aid the
conversion of illiquid government debt into liquid equity. In 1720, an
economically dominant French state that controlled the media found it
impossible to prevent a bubble from bursting, despite attempting to
introduce a series of increasingly draconian measures. In 2015, the
Chinese government found itself in exactly the same position. In 1720,
the French and British governments used John Law and the South Sea
directors as scapegoats in an effort to avoid taking responsibility for the
crash. In 2015, the Chinese Communist Party did exactly the same thing,
laying the blame for the bubble at the feet of Xiao Gang, the boss of the
CSRC. Gang was forced to publicly confess his failings and was dismissed
from his role in early 2016.74 History had repeated itself – perhaps as
tragedy, perhaps as farce.

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 CHAPTER 12

Predicting Bubbles

The Bank had not kindled the fire, but, instead of attempting to stop the
progress of the flames, it supplied fuel for maintaining and extending the
conflagration.
Thomas Tooke1

W hen we started writing this book in the summer

of 2016, the monetary environment suggested that another
bubble would develop soon. Interest rates were almost zero, and the
historically low returns on traditional assets, especially government
bonds, made them unappealing to investors. As banks recovered from
the effects of the financial crisis, credit was becoming more widely avail-
able. The continuing development of the Internet meant that the mar-
ketability of financial assets was increasing. Although levels of speculation
appeared to be relatively low, the bubble triangle suggested that a spark
could change this very quickly.
A spark soon arrived in the form of blockchain technology: an
encryption technique that allowed virtual assets known as cryptocur-
rencies to circulate without being managed by any central authority.
The most widely known cryptocurrency was bitcoin. To its advocates,
bitcoin was the money of the future: it could not be devalued
through inflation by a central bank, you could spend it on anything
without having to worry about government interference or taxes, and
it cut out the middleman, namely commercial banks. A bitcoin did
not represent anything of value – its worth lay entirely in the fact that
it was, for some (mostly illicit) purposes, a superior medium of
exchange.2

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 PREDICTING BUBBLES

In August 2016, one bitcoin was trading at $555; in the next 16 months
its price rose by almost 3,400 per cent to a peak of $19,783.3 This was
accompanied by a promotion boom, as a mix of cryptocurrency enthu-
siasts and opportunistic charlatans issued their own virtual currencies in
the form of initial coin offerings, or ICOs. These coins had, on the face of
it, no intrinsic value – to entitle their holders to future cash flows would
have violated laws against issuing unregistered securities – but they never-
theless attracted $6.2 billion of money from investors in 2017 and
a further $7.9 billion in 2018.4
By December 2017, however, it had become clear that bitcoin was
hardly being used as a currency at all. It had promised freedom from
middlemen, but trading it without a third party was cumbersome unless
the user was expert in cybersecurity. Its popularity exposed the inability of
its system to process large numbers of transactions, resulting in long delays
in transferring bitcoins and substantial transaction costs. The impossibility
of reversing mistakes made it impractical, and its volatility made it useless
as a store of value or unit of account. And its much-vaunted decentralisa-
tion meant that no one had the power to fix these considerable drawbacks.
It was simply a speculative asset, and when investors began to cash out,
bitcoin crashed. In the 7 weeks following its peak, it fell by 65 per cent,
reaching $6,698 in February 2018. After a temporary recovery, it collapsed
again. On 17 December 2018, exactly one year after its peak, one bitcoin
was valued at $3,332 – a fall of 83 per cent.5 Other cryptocurrencies fared
even worse: Invictus Capital’s CRYPTO20 index, which tracked the value of
the 20 largest cryptocurrencies, fell by over 93 per cent.6
The bubble triangle presents a framework that applies just as well to
the 2017 cryptocurrency bubble as it does to any of the financial bubbles
over the past 300 years. But how good will it be at predicting future
bubbles?
The three sides of the bubble triangle all need to be present for
a bubble to happen. In terms of money and credit, bubbles are much
more likely to happen when there are low yields on traditional assets, low
interest rates and unconstrained credit provision. Indeed, deregulation
of financial markets can ultimately result in a greater likelihood of
bubbles occurring because it removes limits on the amount of fuel that
can be created. Bubbles are also much more likely when marketability

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 BOOM AND BUST

increases due to legal or regulatory changes, financial innovation or

technological improvements. Speculators are always present in financial
markets, but an increase in their number or an increase in the number of
amateurs can increase the probability of a bubble because there is an
increase in momentum trading. Bubbles start when investors and spec-
ulators react to new technology or political initiatives. Ultimately, the
ability to predict bubbles chiefly comes down to being able to predict
these sparks.
What do the various political sparks of major historical bubbles
have in common? There appears to be no common pattern or grand
socio-economic theory which explains why political sparks are cre-
ated. Several of our bubbles have no politicians lining their own
pockets. The political regimes in which historical bubbles occur
range from absolutist monarchies to full franchise democracies. All
we can say is that the incentives faced by the various governments in
each episode resulted in the deliberate manufacture of bubbles or
the introduction of policies which would necessarily create bubbles.
This absence of common factors makes politically sparked bubbles
difficult, but not impossible, for investors, citizens or the news media
to predict.
Why is it that the same set of policies can produce a bubble in one
instance but not in another? Our explanation is that the other elements
of the bubble triangle are missing. It could be that financial markets are
underdeveloped and so assets have limited marketability or there are
a limited number of public companies. There could also be legal or
cultural restrictions on speculation. Alternatively, the banking system,
financial institutions and the capital markets might be so underdeve-
loped or heavily constrained that there is not enough money and credit
to fuel a bubble.
Technological sparks are also difficult to predict because one must
foresee what the effect of the technology will be, how people will react to
it and whether it will catch on. In addition, one must understand the
narrative surrounding the new technology and whether this makes it
compelling to investors. Not all major technologies are associated with
stock market bubbles. The development of steam technology, for exam-
ple, occurred in an environment where the law was hostile to the

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 PREDICTING BUBBLES

company form and the stock market was underdeveloped, which severely
hampered marketability. Steam technology was thus developed by small
partnerships and private entrepreneurs.
Unlike steam, the new fourth industrial revolution technologies –
biotech, nanotechnology and artificial intelligence – have been devel-
oped by companies, not individual entrepreneurs. However, unlike dur-
ing the dot-com and other technology bubbles, the funding for these
companies comes from venture capitalists (VCs) and institutional inves-
tors rather than stock markets. Notably, press commentators have
referred to the ‘tech unicorn bubble’, a unicorn being a VC-backed
company with a valuation greater than $1 billion. One study found that
the average unicorn was overvalued by about 50 per cent above its fair
value, and some were overvalued by more than 100 per cent.7 Although
private investors may have substantially overpaid for the unicorns, by our
definition – an upward movement of prices that then collapses – this
would not be described as a bubble.
The bubble triangle can also help predict whether bubbles will be
useful or destructive. Table 12.1 considers bubbles along two dimen-
sions – the spark and leverage.8 Four of our historical bubbles are in
the top right box, having a political spark and a bubble fuelled by bank
leverage. Far from being useful, each of these bubbles had
a devastating and prolonged effect on the economy and wider society.
This implies that the combination of a political spark and bank lever-
age creates bubbles that cause great economic harm. The two bubbles
in the bottom left box had few negative effects on the economy or

table 12.1 Bubble sparks and leverage

Political spark China (2007) First emerging Mississippi Bubble
market bubble Australian Land Boom
South Sea Bubble Subprime Bubble
Railway Mania Japanese Bubble
China (2015)

Bicycle Mania
Technological spark Wall Street Bubble
Dot-Com Bubble

Low capital-market High capital-market Bank leverage

leverage leverage

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 BOOM AND BUST

wider society. Indeed, both were instrumental in generating investment

in a new transformative technology which benefited and even liberated
society.
In the episodes in the middle two boxes, the extent of the economic
damage depended on how exposed the financial system was to the
capital-market leverage generated during the bubble. For those which
threatened the financial system, the wider social benefit may have been
bought at too high a price for society to afford. The South Sea Bubble,
however, may be history’s only useful political bubble, putting Britain on
a much firmer fiscal and military footing without any repercussions for
the banking system.
If the bubble triangle is good at predicting bubbles, then it needs to be
able to explain why bubbles have recently been occurring more fre-
quently. More than a century separated the first and second financial
bubbles, and after the Wall Street Crash there were no major bubbles for
over 50 years. However, since 1990 a major bubble has occurred, on
average, once every 6 years. These patterns can be explained by fluctua-
tions in the degree to which credit and marketability were regulated.
After the bubbles of 1720, marketability was regulated to the point where
forming a company with tradeable shares was virtually impossible. This
effectively removed the marketability side of the bubble triangle. The
liberalisation of incorporation law, the development of stock markets
and the growing middle classes joining the ranks of speculators over the
next century increased the likelihood of bubbles, by ensuring that all
three sides of the triangle were present. Similarly, after the Wall Street
Crash, the regulation of financial markets, the stringent regulation of
banks and the deglobalisation of capital both restricted marketability and
limited the potential fuel for bubbles. However, the globalisation of
capital and deregulation of banking since the 1970s has led to an unpre-
cedented extension of credit and increase in debt. In addition, the
deregulation of financial markets has made trading much cheaper and
easier, greatly increasing the marketability of financial assets. The global
economy has essentially become a giant tinderbox, susceptible to any
spark that may come its way.
The question also arises as to whether more recent changes in finan-
cial markets will make bubbles more or less likely in the future. Two of the

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 PREDICTING BUBBLES

major changes in financial markets over the past two decades are the rise
of algorithmic and high-frequency trading and asset management.
Algorithmic trading is where buy and sell trades are automatically exe-
cuted by computers based on pre-programmed instructions, and high-
frequency trading is a type of algorithmic trading that can execute a large
volume of trades in mere fractions of a second. Algorithmic and high-
frequency trading are obvious increases in marketability, suggesting that
they may make bubbles more likely. Recent experience has shown that
such trading has the potential to move stock markets a great deal in a very
short space of time: on 6 May 2010, the Dow Jones Industrial Average
dropped 10 per cent in a matter of minutes, recovering these losses
almost immediately. Algorithmic and high-frequency trading played
a major role in this ‘flash crash’ and one can see how it has the potential
to exacerbate price movements during bubbles.
Some economists believe that bubbles will become less likely in the
future, because the rise of the asset management industry means that
amateurish individuals with many behavioural flaws are being
replaced by sophisticated investors.9 But recent history suggests other-
wise. The Japanese Bubble was largely driven by institutional inves-
tors, and they also played a large role during the Dot-Com Bubble.
During the housing bubble, it was chiefly institutions that invested in
subprime mortgage-backed securities. Indeed, the rise of passive asset
management, whereby funds track stock indexes, means that sectors
or assets that are rising in price because of a bubble will attract even
more funds than they ordinarily would. In other words, the rise of
passive asset management has the potential to pour even more fuel on
bubble fires in the future.

WHAT SHOULD GOVERNMENTS DO?

Bubbles can be very costly for society but, as we have seen, they also can
bestow benefits. This complicates government plans to lean against bub-
bles. Government policy is further complicated by the fact that govern-
ments are, as we have seen, often responsible for sparking the bubble in
the first place. In terms of policy, we ask two questions. First, what are
a government’s options during a bubble that is sparked by new

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 BOOM AND BUST

technology? Second, how might a government prevent itself from, or be

prevented from, creating a socially destructive bubble?
During a technology bubble, the government can attack any area of
the bubble triangle, but it is easiest for them to tighten monetary policy
or macroprudential standards to reduce the money and credit which are
fuelling the bubble. However, such policies are not without their
dangers.10 It is difficult to identify with confidence whether or not
there is a technology bubble or, if there is one, when it will burst.11 Ben
Bernanke, former Chair of the Federal Reserve, has suggested that cen-
tral banks should intervene only in the very unlikely circumstance that
they have greater foresight than other market participants.12 Bernanke
also suggests that too aggressive an approach to dealing with bubbles can
actually do more harm than good. If a central bank hikes up interest rates
or aggressively contracts the money supply to shrink a bubble, it may
succeed only at the expense of substantial falls in economic output.13 For
this reason, central bankers have often been reluctant to prick bubbles
(i.e. act aggressively and decisively in raising interest rates) and have even
been reluctant to adopt a more gradual approach of ‘leaning against the
wind’.14 This reluctance may well have been shaped by historical episodes
where central banks did take action, with detrimental consequences. The
deliberate pricking of the stock market boom in 1927 by the German
central bank, for example, hit Germany at a key point in its post-
hyperinflation recovery, affecting investment and tipping the economy
into a severe depression.15 This depression was then instrumental in the
rise of National Socialism.
For governments, it is very costly to remove oxygen (marketability) or
reduce heat (speculation) during a potential technological bubble;
therefore these options are very rarely chosen. However, controls on
marketability and speculation can be used as a method of preventing
bubbles occurring ex ante. The post-1980 period has seen the emergence
of a political consensus that increased marketability is an unmitigated
positive. But this book covers 300 years, and, for 260 of those, bubbles
were very rare events – largely because societies and their political leaders
understood that marketability is a double-edged sword. What would
policies that restricted marketability look like? Restrictions on securitisa-
tion and derivative securities would prevent mortgages, loans and houses

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 PREDICTING BUBBLES

from becoming highly marketable securities. The European Shareholder

Rights Directive contains several policies which are designed to discou-
rage corporate short-termism, such as additional voting rights, tax incen-
tives, loyalty dividends or loyalty shares for long-term shareholders. These
policies would have the added benefit of reducing the marketability of
shares, and may also reduce speculation. Another policy that would
reduce marketability is a financial transaction tax on each trade of
a share or a house. Such a policy could discourage the formation of
bubbles from the outset if the tax rate was high enough. It would be
equivalent to throwing sand in the gears of the trading system.16 John
Maynard Keynes also suggested that such a tax would limit the influence
of speculators upon stock markets.17
If leaning against technology bubbles is impractical, then govern-
ments and central banks can simply clean up the mess from the collapse
of the bubble by soothing the pain of its bursting.18 The bursting of
bubbles usually coincides in the first instance with liquidity and funding
difficulties for financial market participants. Central banks can provide
liquidity through the lender of last resort function or through central
bank purchases of securities on the open market.19 The lender of last
resort ultimately ‘stands ready to halt a run out of real and illiquid
financial assets into money by making more money available’.20 After
the bursting of the dot-com technology bubble, the Federal Reserve
eased monetary policy. However, this action may have created a moral
hazard problem and therefore increased the likelihood of another
bubble.
What can governments do about political bubbles? Since a political
bubble is generally created because it serves the government’s interest,
the government itself is unlikely to end it. A government might try to
commit to not creating a bubble in the future by passing laws placing
constraints on one or more sides of the bubble triangle. But the govern-
ment would retain the power to repeal these laws, so such commitments
are unlikely to be credible. One cannot simply trust a government to
keep its own hands tied.
An alternative route would be for the government to aim to prevent
only the more economically destructive political bubbles. As Table 12.1
shows, the political bubbles that caused the most damage – the

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 BOOM AND BUST

Mississippi, Australian, Japanese and Subprime bubbles – were those

which were fuelled by bank debt rather than by capital markets. This
suggests that one way to limit the damage from a political bubble is to
implement bank regulation which limits the growth of credit, forces
banks to hold large liquid reserves and directs bank credit away from
speculative activities such as stocks and real estate. One might also
attempt to create firewalls which separate institutions involved in bub-
bly assets from the banking system. Of course, governments have
a range of political incentives, and regulation may end up serving
these incentives rather than the needs of the economy.21 For example,
bank regulation might be used as a tool to encourage credit to flow
towards politically connected borrowers and firms. Governments of
democracies may also be under pressure to remove bank regulations
so that credit flows more freely to all citizens, not only the wealthy elite.
As was the case with the Subprime Bubble of the 2000s, such deregula-
tion brings with it the possibility of excessive credit creation and
a concomitant bubble.

THE ROLE OF THE FOURTH ESTATE

Since the government is unlikely to constrain itself, who can hold it to

account? One possibility is that the news media might act as a check on
political bubbles by bringing them to the attention of citizens. The
news media has the potential to be extremely influential. Alexis de
Tocqueville wrote that ‘only a newspaper can deposit the same
thought in a thousand minds at once’; in the era of television and
the Internet, the news media can now plant the same thought in
a million or more minds at once.22 Recent research by economists
analysing the text of newspapers suggests that the news media move
financial and housing markets and drive market sentiment.23 During
bubbles, the media may publicise price rises through colourful
reports about early investors growing rich, or shape public opinion
with new-paradigm theories seeking to justify high asset prices.24
Robert Shiller argues that the news media are ‘fundamental propaga-
tors of speculative price movements through their efforts to make
news interesting to their audience’.25

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 PREDICTING BUBBLES

What are the incentives of journalists and the news media, and can
they be trusted by investors and citizens? Venal journalism, where news-
papers and journalists are paid or are induced to spread false news or puff
stocks, has existed since newspapers started discussing financial matters.
In the case of the Mississippi and Chinese bubbles, state control of the
press very much dictated what they could print and, as a result, they
printed pieces which puffed the bubbles. During the Bicycle Mania, it
was common for promoters to pay both the mainstream and financial
press to print articles recommending shares in their companies. The
specialised trade press during the Railway and Bicycle Manias had
a strong incentive to inflate the bubble, because their very existence
depended upon its continuation.
On the other hand, the media might have an incentive to develop
reputations as purveyors of truth and exposers of financial folly. Building
such a reputation is costly, but the payoff in terms of future readership
and credibility is potentially huge. During the nineteenth-century bub-
bles in the UK, newspapers such as The Times, The Economist and the
Financial Times often published editorials which clearly stated that there
was a bubble. It is not a coincidence that, unlike many of their contem-
poraries, these three publications are still around today.
However, this reputation as a financial watchdog can easily be under-
mined, for four reasons. First, news media reporting is shaped by consu-
mer demands.26 In the news media market, readers may demand a positive
slant on financial markets. Competition forces newspapers to give readers
what they want and may ultimately marginalise voices of dissent. Second,
journalists need information to report on financial markets, but informa-
tion is sometimes so complex that journalists do not have the time to
process and understand it. This appears to have been the case during
the Subprime Bubble, particularly with regards to esoteric assets such as
mortgage-backed securities. It also appears to have been the case during
the South Sea Bubble: the scheme is still difficult to understand even with
the benefit of 300 years of hindsight.
Third, journalists often build quid pro quo relationships with their
sources where, in return for a positive spin on a favoured company,
government or individual, they get access to private information.27
During a boom, the public’s high level of interest in the market makes

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 BOOM AND BUST

these relationships even more valuable to newspapers, giving them even

more of an incentive to puff the bubble asset.28 This was the case during
the 1920s bubble when, rather than undertaking the difficult task of
valuing assets for themselves, the major American newspapers based
most financial news stories on the heavily biased opinions of high-
profile bankers. Fourth, the incentives of the news media can be distorted
by advertising revenue. If they become over-reliant on advertising rev-
enue which is linked to the boom in asset prices, then their incentive is
not to prick the bubble, but to puff it. This conflict of interest existed
during the Subprime Bubble when the revenue from property advertise-
ments was welcomed by the traditional news media just as it faced an
existential threat from the Internet. It also existed for the railway period-
icals which carried advertisements of new railway schemes in the 1840s,
and for the Australian press during the land boom of the 1880s.
The role of the media in bubbles therefore largely depends on the
incentives that they face. Increasingly, the nature of the news media is
shifting in a direction that makes it very difficult for informed voices to be
heard above the noise. This problem was clearly illustrated by the Bitcoin
Bubble, during which many well-informed sceptics were limited to writ-
ing self-published books and running personal blogs with small
readerships.29 The average investor was much more likely to encounter
cranks, uninformed journalists repeating the misinformation of cranks,
bitcoin holders trying to attract new investors to increase its price and
advertisements for bitcoin trading platforms. In addition, the pressure
on the business models of the news media makes investigative financial
journalism costlier to support. More fundamentally, the move away from
the written word to television financial news, docusoaps and social media
may corrode the ability of investors to think clearly and understand the
complexities of the financial system.30

CAVEAT INVESTOR

Governments are typically unwilling to prick technology bubbles, and are

often reluctant to tie their own hands to prevent themselves from creat-
ing political bubbles. The incentives for the fourth estate mean that it
cannot be relied on to prick bubbles either. What then can citizens and

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 PREDICTING BUBBLES

investors do in the face of bubbles? Does our study of bubbles offer

investors insights in terms of timing bubbles so that they can get in
early and sell at the peak? Or do our historical bubbles simply offer
salutary lessons in how to spot bubbles and avoid them?
The lessons from the ashes of past bubbles for amateur investors are
particularly pertinent. During bubbles, amateur investors often rush into
the market, whether for stocks or houses. In nearly every bubble episode,
there are instances of what George Akerlof and Robert Shiller call ‘phish-
ing for phools’ – attempts to persuade people to part with their money
and put it into some nebulous scheme.31 The main takeaway from this
book for amateur investors is that they are better off sitting out bubbles in
stocks and particularly in houses. Get-rich-quick investments are always
enticing, but typically only highly experienced investors and insiders
profit from a bubble, generally at the expense of newcomers.
Nevertheless, investors can benefit after the bubble has burst because
asset prices have a tendency to overcorrect, meaning that investors can
acquire such assets at bargain prices.
Riding or shorting bubbles will be out of reach for most investors.
Riding a bubble requires investors to sell near the top, but markets are
notoriously difficult to time. This means that unless an investor has very
deep pockets, shorting bubbles is out of the question, because the
longer the duration of the bubble, the costlier it is to hold a short
position.
How should investors approach technology bubbles? Since the
returns on technology shares are extremely uncertain, perhaps the
best way to think about them is as lotteries.32 Most will produce
a large negative return, but a few will generate huge profits for share-
holders. If an investor had invested $100 in Amazon’s IPO in 1997 and
held it until its 20th anniversary in 2017, the stake would have been
worth about $49,000, 155 times what investing in the S&P 500 would
have earned.33
The chief lesson for investors from our book is that they need to act
like fire-safety inspectors, examining each situation to see if the elements
of the bubble triangle are present and looking out for political or tech-
nological sparks. This will require investors to think long and hard about
the incentives of politicians and the structure of the political system. Our

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 BOOM AND BUST

ultimate clarion call is that investors need to understand much more

than the intricacies of finance and economics – sociology, technology,
psychology, political science and, most importantly, history are required
to inform the mental models of investors.34 The bubble triangle has been
sinking investors since 1720. Lest we forget.

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 Notes

CHAPTER 1: THE BUBBLE TRIANGLE

1. Anon., The South Sea Bubble, pp. 160–1.

2. Radio address given by President Obama on 10 August 2013 – reported by Bloomberg.
3. Harris, ‘Handel the investor’, 533.
4. HM Land Registry Open Data, ‘UK House Price Index, Northern Ireland’.
5. Scherbina and Schlusche, ‘Asset price bubbles’; Farhi and Panageas, ‘The real effects
of stock market mispricing’.
6. On the destructiveness of banking crises, see Friedman and Schwartz, The Great
Contraction; Bernanke, ‘Nonmonetary effects’; Calomiris and Mason, ‘Consequences
of bank distress’; Dell’Ariccia, Detragiache and Rajan, ‘The real effect of banking
crises’. For estimates of the costs of banking crises, see Hoggarth, Reis and Saporta,
‘Costs of banking system instability’; Laeven and Valencia, ‘Resolution of banking
crises’.
7. Deaton, ‘The financial crisis’.
8. Eatwell, ‘Useful bubbles’.
9. Olivier, ‘Growth-enhancing bubbles’. See also Martin and Ventura, ‘Economic growth
with bubbles’.
10. Janeway, Doing Capitalism, p. 237.
11. Zimmer, ‘The “bubble” that keeps on bubbling’.
12. Garber, Famous First Bubbles, p. 124.
13. Engsted, ‘Fama on bubbles’, 2; Fama, ‘Two pillars of asset pricing’, 1,475.
14. Engsted, ‘Fama on bubbles’.
15. Kindleberger, Mania, Panics, and Crashes, p. 16.
16. Garber, Famous First Bubbles, p. 4.
17. On the relationship between trading volume and bubbles, see Barberis et al.,
‘Extrapolation and bubbles’; Greenwood, Shleifer and You, ‘Bubbles for Fama’;
Hong and Stein, ‘Disagreement and the stock market’; and Scheinkman, Speculation,
Trading and Bubbles.
18. Allen and Gale, ‘Bubbles and crises’; ‘Bubbles, crises, and policy’; ‘Asset price bubbles’;
Allen, ‘Do financial institutions matter?’
19. Allen and Gale, ‘Bubbles and crises’; Minsky, Stabilizing an Unstable Economy;
Kindleberger, Manias, Panics and Crashes.

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 NOTES TO PAGES 6–14

20. Bagehot, ‘Investments’, Inquirer, 31 July 1852. John Bull was a popular nineteenth-
century personification of the UK in political satires, meant to represent
a straightforward common-sense Englishman.
21. Kaldor, ‘Speculation’, 1.
22. O’Hara, ‘Bubbles’, 14; Blanchard and Watson, ‘Bubbles’.
23. Abreu and Brunnermeier, ‘Synchronization risk’, ‘Bubbles and crashes’;
Brunnermeier and Nagel, ‘Hedge funds’; Xiong and Yu, ‘Chinese warrants bubble’.
24. Haruvy and Noussair, ‘The effect of short selling’; Ofek and Richardson, ‘Dotcom
mania’; Scheinkman and Xiong, ‘Overconfidence’; Shleifer and Vishny, ‘The limits
of arbitrage’.
25. Quinn, ‘Squeezing the bears’.
26. Brunnermeier, ‘Bubbles’; Gjerstad and Smith, ‘Monetary policy’, 274.
27. Perez, ‘The double bubble’.
28. Hickson and Thompson, ‘Predicting bubbles’.
29. Later writers appear to have embellished this with the result being the well-known
aphorism attributed to Newton – that he ‘could calculate the motions of the heavenly
bodies, but not the madness of people’ – see Odlyzko, ‘Newton’s financial
misadventures’.
30. Kindleberger, Mania, Panics, and Crashes; Galbraith, A Short History of Financial Euphoria;
Shiller, Irrational Exuberance; Akerlof and Shiller, Animal Spirits.
31. Akerlof and Shiller, Animal Spirits; Barberis, Shleifer and Vishny, ‘A model of investor
sentiment’; Daniel, Hirshleifer and Subrahmanyam, ‘Investor psychology’; Lux, ‘Herd
behaviour’.
32. Barberis, Shleifer and Vishny, ‘A model of investor sentiment’; Daniel, Hirshleifer and
Subrahmanyam, ‘Investor psychology’.
33. Lux, ‘Herd behaviour’.
34. Donaldson and Kamstra, ‘A new dividend forecasting procedure’; Garber, Famous First
Bubbles; Pástor and Veronesi, ‘Technological revolutions’.
35. Dale, Johnson and Tang, ‘Financial markets can go mad’; Garber, Famous First Bubbles;
Shiller, Irrational Exuberance.
36. Opp, ‘Dump the concept of rationality’.
37. These criteria are very close to those used by Goetzmann, ‘Bubble investing’ and
Greenwood et al., ‘Bubbles for Fama’.
38. Greenwood et al., ‘Bubbles for Fama’.
39. See Posthumus, ‘The tulip mania’.
40. Goldgar, Tulipmania.
41. Garber, ‘Tulipmania’; Garber, Famous First Bubbles.
42. Thompson, ‘The tulipmania’.
43. Mackay, Memoirs of Extraordinary Popular Delusions, 2nd edition.
44. Goldgar, Tulipmania, p. 6.
45. Goldgar, Tulipmania, pp. 6–7.
46. Englund, ‘The Swedish banking crisis’; Moe, Solheim and Vale, ‘The Norwegian banking
crisis’; Nyberg, ‘The Finnish banking crisis’; Radlet et al., ‘The East Asian financial crisis’.

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 NOTES TO PAGES 14–23

47. Radlet et al., ‘The East Asian financial crisis’; Mishkin, ‘Lessons from the Asian crisis’.
48. Radlet et al., ‘The East Asian financial crisis’, 38; Aumeboonsuke and Tangjitprom,
‘The performance of newly issued stocks in Thailand’.
49. On the justification for this approach to economic history, see Lamoreaux, ‘The future
of economic history’.

CHAPTER 2: 1720 AND THE INVENTION OF THE BUBBLE

1. Swift, ‘The Bubble’.

2. Ceballos and Álvarez, ‘Royal dynasties’.
3. Dickson, The Financial Revolution, pp. 79–80. GDP estimates from Hills, Thomas and
Dimsdale, ‘The UK recession’. Britain at this time used the Julian calendar, which was
approximately 11 days behind the Gregorian calendar used on the Continent. For
consistency, all dates in this chapter have been converted to the Gregorian calendar.
4. Hart, Jonker and van Zanden, A Financial History, pp. 70–1.
5. Stasavage, Public Debt, p. 106, 132.
6. Dale, The First Crash, pp. 56–7; Velde, ‘John Law’s system’, 6–7.
7. Historical literature on Law includes: Blaug, Pre-Classical Economists; Hamilton, ‘John
Law’; Mackay, Extraordinary Popular Delusions, 2nd edition, chapter 1; Murphy, John Law;
Neal, ‘I Am Not Master of Events’. The lowbrow romantic novel referenced is Emerson
Hough’s The Mississippi Bubble: How the Star of Good Fortune Rose and Set and Rose Again, by
a Woman’s Grace, for One John Law of Lauriston.
8. Dale, The First Crash, p. 58; Hamilton, ‘John Law’; Law, Money and Trade Considered;
Schumpeter, History of Economic Analysis, pp. 294–5.
9. Davis, ‘An historical study’, 23.
10. Dale, The First Crash, p. 59; Davis, ‘An historical study’, 26; Velde, ‘John Law’s system’,
18.
11. Velde, ‘John Law’s system’, 20.
12. The company’s original name was ‘The Company of the West’, but we have used the
term ‘Mississippi Company’ for consistency with previous research.
13. Murphy, John Law, p. 166; Velde, ‘Was John Law’s system a bubble?’, 105.
14. Velde, ‘Was John Law’s system a bubble?’, 107.
15. Dale, The First Crash, p. 66; Velde, ‘Was John Law’s system a bubble?’, 105.
16. Carswell, South Sea Bubble, p. 88.
17. Darnton, ‘An early information society’, 6; Velde, ‘John Law’s system’, 110; Velde,
‘Government equity’, 10.
18. Sources: Murphy, John Law, p. 208; Gazette d’Amsterdam, 1719–20.
Notes: Vertical lines indicate the dates of subscriptions to Mississippi Company shares.
19. Murphy, John Law, pp. 221–3.
20. Murphy, John Law, pp. 227–30, 237–8.
21. Velde, ‘John Law’s system’, 30.
22. Dale, The First Crash, pp. 128–30; Murphy, John Law, p. 266
23. Velde, ‘John Law’s system’, 36–9.

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 NOTES TO PAGES 23–33

24. Dickson, Financial Revolution, pp. 92–3.

25. Neal, The Rise of Financial Capitalism, p. 94.
26. Dale, The First Crash, p. 75.
27. Kleer, ‘Riding a wave’, 266.
28. Anderson, ‘The origin of commerce’, 8–9.
29. Kleer, ‘Folly of particulars’, 176.
30. House of Commons, The Several Reports.
31. Kleer, ‘Folly of particulars’; Kleer, ‘Riding a wave’.
32. Carswell, South Sea Bubble; Paul, South Sea Bubble.
33. Dale, The First Crash, pp. 98–101; Dickson, Financial Revolution, pp. 144–5.
34. Dale, The First Crash, p. 6.
35. Dickson, Financial Revolution, p. 108; Hoppit, ‘Myths’, 150.
36. Dale, The First Crash, pp. 98–101; Dickson, Financial Revolution, pp. 144–5.
37. Dale, The First Crash, pp. 14–16.
38. Paul, ‘The “South Sea Bubble”, 1720’.
39. Dale, The First Crash, p. 18; Kleer, ‘Riding a wave’, 274–5; Wilson, Anglo-Dutch Commerce,
p. 104.
40. Hutcheson, Some Calculations.
41. Source: European State Finance Database.
42. Chancellor, Devil Take the Hindmost, p. 65.
43. Dickson, Financial Revolution, pp. 134, 168–9.
44. Dickson, Financial Revolution, pp. 159–60.
45. House of Commons, An Act for Making.
46. Dickson, Financial Revolution, p. 185.
47. Dickson, Financial Revolution, pp. 172–4; Statutes at Large, pp. 299, 354–8.
48. Hoppit, ‘Myths’, 143–5.
49. Source: European State Finance Database.
50. Frehen et al., ‘New evidence’, 594–6.
51. Velde, ‘John Law’; Gelderblom and Jonker, ‘Public finance’, 25.
52. Sources: Yale International Center for Finance, South Sea Bubble 1720 Project, https://
som.yale.edu/faculty-research/our-centers-initiatives/international-center-finance/d
ata/historical-southseasbubble, last accessed 18 February 2019.
Notes: Price-weighted index of 23 Dutch companies, with the index set to 100 on
1 April 1720.
53. Gelderblom and Jonker, ‘Mirroring’, 9–10.
54. Gelderblom and Jonker, ‘Mirroring’, 11–12.
55. Neal, The Rise of Financial Capitalism, p. 79.
56. Condorelli, ‘The 1719–29 stock euphoria’, 25, 52.
57. Hutcheson, Several Calculations, p. 64.
58. Neal, The Rise of Financial Capitalism; Temin and Voth, ‘Riding’.
59. Whitehall Evening Post, 24–26 March 1720.
60. Hutcheson, Several Calculations; Hutcheson, Some Calculations.
61. Kleer, ‘Riding a wave’, 278.

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 NOTES TO PAGES 33–42

62. Hoppit, ‘Myths’, 164.

63. Defoe, Anatomy; Swift, ‘The Bubble’.
64. Hoppit, ‘Myths’, 159–62.
65. Garber, ‘Famous first bubbles’, 46–7, 52.
66. Velde, ‘Was John Law’s system a bubble?’, 114–19.
67. Dale, The First Crash, pp. 114–17; Hutcheson, Some Calculations.
68. Dale, The First Crash, pp. 158–9.
69. Hamilton, ‘Prices and wages’, 78.
70. Bonney, ‘France’; Bordo and White, ‘A tale of two currencies’; Ferguson, The Ascent of
Money, p. 127.
71. Daily Post, 7 January 1721, pp. 2–4; London Journal, 7 January 1721, p. 2; Weekly Journal or
British Gazetteer, 14 January 1721, p. 4.
72. Hoppit, ‘Myths’, 154–5.
73. Broadberry et al., British Economic Growth; Hoppit, ‘Myths’, 152–7.
74. Carlos, Maguire and Neal, ‘A knavish people . . . ’; Carlos, Maguire and Neal, ‘Financial
acumen’; Carlos and Neal, ‘The micro-foundations’; Dickson, Financial Revolution,
p. 282; Wilson, Anglo-Dutch Commerce, pp. 104–5.
75. Frehen, Goetzmann and Rouwenhorst, ‘New evidence’.
76. Hoppit, ‘Myths’, 158.
77. Murphy, ‘Corporate ownership’, 195.
78. Harris, ‘The Bubble Act’; Turner, ‘The development’, 127.
79. Frehen, Goetzmann and Rouwenhorsts, ‘New evidence’, 588.

CHAPTER 3: MARKETABILITY REVIVED: THE FIRST

EMERGING MARKET BUBBLE

1. McCulloch, A Dictionary, pp. 187–8.

2. This poem was entitled An Incantation and was sung by the Bubble Spirit – letter to the
Editor of The Times, 18 April 1826, p. 2.
3. Ward, The Finance of Canal Building, p. 164. The absence of reported price data and the
very thin market for canal shares also makes it very difficult to assess the extent of the
boom in canal share prices in this era.
4. Day, A Defence of Joint Stock Companies.
5. Davenport-Hines, ‘Wilks, John’.
6. The Times, 20 September 1826, p. 2.
7. The Times, 19 October 1826, p. 2.
8. Davenport-Hines, ‘Wilks, John’.
9. Hills, Thomas and Dinsdale, ‘The UK recession in context’, Data Annex.
10. Tooke, A History of Prices, p. 148.
11. Randall, Real del Monte, p. 33.
12. Fenn, British Investment in South America, p. 61.
13. Costeloe, ‘William Bullock’.
14. Source: English, A Complete View of Joint Stock Companies.

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 NOTES TO PAGES 43–8

15. Prospectus of the Anglo-Mexican Mining Association in English, A General Guide to the
Companies, pp. 4–8.
16. English, A Complete View of Joint Stock Companies, p. 30.
17. Sources: Anon., The South Sea Bubble, pp. 171–9; Report of the Select Committee on Joint Stock
Companies, 1844, Appendix 4, pp. 334–9.
18. Gayer, Rostow and Schwartz, Growth and Fluctuation, Vol. I, pp. 377–410.
19. Head, Rough Notes Taken During Some Rapid Journeys Across the Pampas, pp. 303–4.
20. Cited in Dawson, The First Latin American Debt Crisis, p. 101.
21. Excerpt in Anon., The South Sea Bubble, pp. 160–1.
22. Francis, History of the Bank of England, Vol. II, p. 3. Francis recalls seeing this prospectus
at the time and refers to it as jocularity emanating from the Stock Exchange.
Subsequent accounts such as King, History of the London Discount Market, p. 36;
Andreades, History of the Bank of England, p. 250; Chancellor, Devil Take the Hindmost,
p. 105, have reported it as being a real rather than satirical prospectus.
23. Sources: Authors’ calculations based on biweekly editions of Wetenhall’s Course of the
Exchange, 1824–6; Campbell et al., ‘What moved share prices?’
Notes: These indexes of capital appreciation are weighted – the previous month’s
market capitalisation is used as a weight for this month’s return. The foreign mining
index contains all the foreign mining companies listed in Wetenhall’s Course of the
Exchange between August 1824, when the first foreign mining company was quoted,
and December 1826. The new non-mining index contains all companies that listed
between August 1824 and December 1826. The blue-chip index is based on the 30
largest stocks by market capitalisation on the London stock market from 1824 to 1826.
The constituents of the index are based on the 30 largest stocks at the end of December
in the previous year. We assume that shares are issued at their par value and incur a
-100 per cent return if they delist, which is consistent with bankruptcy proceedings
reported in the press at the time. The indexes are set equal to 100 in August 1824. We
use the last reported price of the month and in the very rare instance where no price is
reported, we use the previous month’s share price. Returns of individual companies are
adjusted to take account of any calls on capital.
24. Wright, History of the Reigns of George IV and William VI, p. 56.
25. Draft of unsent letter, c. April 1825, Disraeli, Letters, 1815–1834, p. 28.
26. The Times, 7 February 1825, p. 3.
27. See Harris, Industrializing English Law, p. 252.
28. Emden, Money Powers of Europe, p. 38.
29. Harris, ‘Political economy’, 688.
30. The Times, 15 March 1825, p. 2.
31. Disraeli, An Inquiry into the Plans, Progress and Policy, pp. 82–90.
32. Harris, Industrializing English Law, p. 245.
33. Hunt, The Development of the Business Corporation, p. 45.
34. Tooke, A History of Prices, p. 159.
35. Dawson, The First Latin American Debt Crisis, p. 113.
36. The Times, 10 May 1826, p. 3.

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 NOTES TO PAGES 48–53

37. See, for example, Randall, Real del Monte.

38. Head, Rough Notes Taken During Some Rapid Journeys Across the Pampas, pp. 278–81.
39. See, for example, Ward, Mexico in 1827.
40. Fenn, British Investment in South America, p. 60.
41. Morning Chronicle, 10 March 1825, p. 2 and 21 March 1825, p. 2.
42. The Times, 23 November 1824, p. 3.
43. The Times, 12 April 1824, p. 3; 15 April 1824, p. 2; 5 May 1824, p. 4; 1 June 1824, p. 3.
44. The Times, 31 October 1825, p. 3; 27 March 1826, p. 2; 20 September 1826, p. 2.
45. Chancellor, Devil Take the Hindmost, p. 106.
46. Anon., Remarks on Joint Stock Companies, p. 5.
47. Rippy, ‘Latin America’, 125.
48. The Times, 15 April 1824, p. 2.
49. Taylor, Statements Respecting the Profits of Mining, p. 55.
50. Report of the Select Committee on Joint Stock Companies, 1844, Q. 2345, 2354–5.
51. McCulloch, A Dictionary, p. 188.
52. Francis, Chronicles and Characters of the Stock Exchange, pp. 263–4.
53. Disraeli, Letters, 1815–1834, p. 27 – draft of an unsent letter to Robert Messer, his
stockbroker.
54. The Times, 15 April 1824, p. 2.
55. Martineau, A History of the Thirty Year’s Peace, Vol. II, p. 7; Tooke, A History of Prices,
p. 150. See also Hunt, The Development of the Business Corporation, p. 33 and Gayer,
Rostow and Schwartz, Growth and Fluctuation, Vol. I, p. 378.
56. Hyndman, Commercial Crises of the Nineteenth Century, pp. 27–8. See also Anon., Remarks
on Joint Stock Companies, p. 4.
57. Fenn, British Investment in South America, p. 98; The Times, 25 March 1825, p. 3.
58. Acheson, Turner and Ye, ‘The character and denomination’, 868.
59. Campbell, Turner and Ye, ‘The liquidity of the London capital markets’.
60. Neal, ‘The financial crisis’, p. 60; Committee of Secrecy on the Bank of England
Charter, P.P. 1831–2 VI, Evidence of J. Horsley Palmer, q. 606.
61. Hawtrey, A Century of Bank Rate, p. 14; Gayer et al., Growth and Fluctuation, Vol. I, p. 185.
62. See Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Appendix 6.
63. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of
George W. Norman, q. 2666; William Beckett, q. 1392; and John Wilkins, q. 1638;
Turner, Banking in Crisis, p. 69.
64. Tooke, A History of Prices, p. 179.
65. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of
Thomas Tooke, qq. 3852, 3857.
66. Select Committee on Banks of Issue, P.P. 1840 IV, Evidence of Thomas Tooke, q. 3762.
67. Clapham, The Bank of England, Vol. II, p. 94; Committee of Secrecy on the Bank of
England Charter, P.P. 1831–2 VI, Evidence of George W. Norman, q. 2557; Evidence of
Vincent Stuckey, q. 1186; Samuel J. Loyd, q. 3466; George Grote, q. 4646; John Easthope,
q. 5795. Hilton, Corn, Cash and Commerce, p. 202, suggests that the boom was precipitated
by a lack of co-ordination between the government and Bank of England.

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 NOTES TO PAGES 53–8

68. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of
William Ward, q. 1992; Jeremiah Harman, q. 2330; George W. Norman, q. 2667; John
Richards, q. 5019; and Thomas Tooke, q. 3852, 3911.
69. Michie, Money, Mania and Markets, p. 35. Indeed, The Times, 1 July 1825, p. 3, warned
against the practice.
70. See the prospectuses in English, A General Guide to the Companies.
71. Emden, Money Powers of Europe, p. 39; Gilmore, ‘Henry George Ward’, 36–7; Chancellor,
Devil Take the Hindmost, p. 100.
72. Jenks, The Migration of British Capital, p. 53.
73. Harris, ‘Political economy’, 686–7.
74. The Times, 7 February 1825, p. 3.
75. The Times, 27 August 1825, p. 3.
76. Powell, The Evolution of the Money Market, p. 326.
77. Pressnell, Country Banking, p. 487.
78. The Times, 20 December 1825, p. 2. See also The Times, 16 December 1825, p. 2.
79. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Appendix 101.
80. Turner, Banking in Crisis, pp. 53–4.
81. Gayer, Rostow and Schwartz, The Growth and Fluctuation, Vol. I, p. 191; Committee of
Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of N. M. Rothschild,
qq. 4895–6.
82. Stuckey, ‘Thoughts on the improvement’, 424.
83. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of
John Richards, q. 5006 and Jeremiah Harman, q. 2262.
84. Committee of Secrecy on the Bank of England Charter, P.P. 1831–2 VI, Evidence of
N. M. Rothschild, q. 4897.
85. In practice, partnerships would have been very small even without this regulation,
because partnership law forbade the separation of ownership and control. See
Turner, Banking in Crisis, pp. 103–8; Acheson, Hickson and Turner, ‘Organizational
flexibility’.
86. The Times, 8 December 1825, p. 2; Pressnell, Country Banking, p. 491.
87. Collins and Baker, Commercial Banks and Industrial Finance; Turner, Banking in Crisis.
88. Emden, Money Powers of Europe, p. 61; Taylor, ‘Financial crises and the birth of the
financial press’.

CHAPTER 4: DEMOCRATISING SPECULATION: THE GREAT RAILWAY MANIA

1. William Makepeace Thackeray, The Speculators.

2. Letter written by Charles Dickens in 1845 – see Dickens, The Letters of Charles Dickens,
p. 361.
3. The Economist, ‘The beauty of bubbles’, 20 December 2008. See also Campbell, ‘Myopic
rationality’; Kostal, Law and English Railway Capitalism, p. 29; Odlyzko, ‘Collective
hallucinations’.

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 NOTES TO PAGES 58–64

4. Mackay, Memoirs of Extraordinary Popular Delusions, 3rd edition, p. 84. Interestingly,

Mackay, despite being the great chronicler and student of manias and bubbles, was not
so perceptive during the Railway Mania – he did not think that there had been a bubble
until well after it burst (Odlyzko, ‘Charles Mackay’s own popular delusions’).
5. The English translation of Das Kapital rather unfortunately translates this phrase as the
‘great railway swindle’ (Marx, Capital, p. 538). However, this is inaccurate (McCartney
and Arnold, ‘The railway mania’, 836).
6. Jackman, The Development of Transportation, p. 522; Kostal, Law and English Railway
Capitalism, p. 16; Turner, ‘The development of English company law’.
7. Francis, A History of the English Railway, p. 140.
8. Authors’ calculations based on data from Wetenhall’s Course of the Exchange, 1834–7.
9. Simmons, The Railway in England and Wales, p. 24; Odlyzko, ‘Collective hallucinations’.
10. Federal Reserve Economic Data, ‘Mileage of New Railway Lines Authorized by
Parliament for Great Britain’.
11. Cleveland-Stevens, English Railways, p. 102.
12. Cleveland-Stevens, English Railways, p. 155.
13. Junner, The Practice before the Railway Commissioners, p. xix; Lewin, Railway Mania, p. 18;
Casson, The World’s First Railway System, p. 277.
14. The Economist, 6 July 1844, p. 962.
15. Railway Times, 9 November 1844, p. 1,309.
16. Sources: Campbell, ‘Myopic rationality’; Campbell, ‘Deriving the railway mania’;
Campbell and Turner, ‘Dispelling the myth’; Railway Times (1843–50) and Wetenhall’s
Course of the Exchange (1843–50).
Notes: The All-Railway index includes all railway shares. The Non-Railways blue-chip
index includes the 20 largest non-railways by market capitalisation. Capital gains for
each stock are weighted by the previous week’s market capitalisation to produce weekly
market indexes of capital appreciation. Each index is set equal to 1,000 in the first week
of January 1843.
17. Aytoun, ‘How we got up the Glenmutchkin Railway’.
18. Anon., The Railway Speculator’s Memorandum Book, p. 7; Reed, Investment in Railways,
p. 89.
19. Anon., A Short and Sure Guide, p. 10; Kostal, Law and English Railway Capitalism, pp. 76–7.
20. Lewin, The Railway Mania, p. 17; Railway Times, 19 July 1845, p. 1,208.
21. Casson, The World’s First Railway System, p. 277.
22. Railway Times, 25 April 1846, p. 578.
23. The Times, 17 November 1845, p. 4. This figure probably underestimates the extent of
promotion because 335 companies not on this list went on to petition Parliament – The
Times, 14 January 1846, p. 6.
24. See Railway Times, 4 October 1845, p. 1,768.
25. Sources: Campbell and Turner, ‘Managerial failure’, 1,252 and Campbell, Turner and
Walker, ‘The role of the media in a bubble’, 479.
Notes: The word count of promotion adverts was obtained by scanning in all the
company adverts in the Railway Times and running the scans through the Linguistic

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 NOTES TO PAGES 64–9

Inquiry and Word Count software. The Railway share index includes all railway shares.
Capital gains for each stock are weighted by the previous week’s market capitalisation to
produce weekly market indexes of capital appreciation. The stock index is set equal to
1,000 in the first week of January 1843.
26. Return of the Number of Newspaper Stamps at One Penny, P.P. 1852, XLII.
27. Campbell, Turner and Walker, ‘The role of the media in a bubble’.
28. The Economist, 4 October 1845, pp. 950–3
29. The Times, 1 July 1845, p. 4; 30 July 1845, p. 4; 17 November 1845, p. 4.
30. Brown, Victorian News, pp. 27–9, 50; Simmons, The Victorian Railway, p. 240.
31. The Times, 18 October 1845, p. 5
32. Simmons, The Railway in England and Wales, p. 40.
33. Tuck, The Railway Shareholder’s Manual.
34. Railway Times, Editorials from 18 October 1845 to 13 December 1845, pp. 1,962, 2,057,
2,137, 2,185, 2,233, 2,281, 2,313, 2,345 and 2,377.
35. Campbell, Turner and Walker, ‘The role of the media in a bubble’.
36. The Economist, 25 October 1845, p. 1,029.
37. The Economist, 15 November 1845, p. 1,126.
38. Lambert, The Railway King, p. 167.
39. The Economist, 8 November 1845, p. 1,109
40. Smith, The Bubble of the Age.
41. York and North Midland Railway, Report of the Committee of Investigation; Railway Times,
28 April 1849, p. 441; Railway Times, 14 July 1849, p. 690; Railway Times,
27 October 1849, p. 1,086.
42. Arnold and McCartney, ‘It may be earlier than you think’; Reports of the Select
Committee of House of Lords on Audit of Railway Accounts, P.P. 1849, XXII.
43. The Abandonment of Railways Act (1850).
44. Clifford, A History of Private Bill Legislation, p. 89.
45. Sources: Gross capital formation is from Mitchell, ‘The coming of the railway’, p. 335;
and nominal GDP is from Mitchell, British Historical Statistics, p. 831. Paid-up capital of
British railways is from the authors’ calculations based on data from Wetenhall’s Course of
the Exchange, 1831–70 and Acheson et al., ‘Rule Britannia’.
Notes: The paid-up capital of British railways is based upon the end-of-year value of
those railways listed on the London Stock Exchange.
46. Acheson et al., ‘Rule Britannia’, 1,117.
47. Campbell, Turner and Ye, ‘The liquidity of the London capital markets’.
48. Killick and Thomas, ‘The provincial stock exchanges’, 103; Thomas, The Provincial Stock
Exchanges, pp. 28–69; Michie, The London Stock Exchange, p. 117.
49. Thomas, The Provincial Stock Exchanges, p. 50; Killick and Thomas, ‘The provincial stock
exchanges’, 104.
50. The Economist, 13 April 1844, p. 674.
51. Railway Times, 4 May 1884, p. 510.
52. Campbell, ‘Deriving the railway mania’.
53. Anon., ‘History of Bank of England’, 515; Campbell and Turner, ‘Dispelling the myth’.

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 NOTES TO PAGES 69–76

54. Williamson, ‘Earnings’, 474.

55. Broadbridge, ‘The sources of railway share capital’, 206.
56. Taylor, ‘Business in pictures’, p. 118; Michie, Guilty Money, pp. 23–9.
57. Francis, A History of the English Railway, p. 195; Spencer, Railway Morals, p. 14; Anon.,
‘History of Bank of England’, 512; Broadbridge, ‘The sources of railway share capital’,
204; Lee, ‘The provision of capital’, 39; Kindleberger, Mania, Panics and Crashes, p. 25;
Michie, Money, Mania and Markets, p. 96.
58. Odlyzko, ‘Collective hallucinations’, 4–5.
59. Return of Railway Subscribers, (P.P. 1845, XL); Return of Railway Subscribers (P.P.
1846, XXXVIII).
60. Casson, The World’s First Railway System, p. 278.
61. Lewin, The Railway Mania, p. 18.
62. Gale, A Letter to the Right Hon. the Earl of Dalhousie, p. 5.
63. The Economist, 21 October 1848, p. 1,187.
64. McCartney and Arnold, ‘Capital clamours for profitable investment’.
65. Railway Times, 9 March 1844, p. 285.
66. Esteves and Mesevage, ‘The rise of new corruption’.
67. Spencer, Railway Morals, p. 14.
68. Campbell and Turner, ‘Dispelling the myth’, 19.
69. Dobbin, Forging Industrial Policy, p. 175; Railway Times, 23 August 1845, p. 1,321.
70. Gordon, Passage to Union, pp. 17–22.
71. Dobbin, Forging Industrial Policy, pp. 40–2.
72. The US railroad system expanded greatly in the 1850s, but the extent of the asset price
reversal was much smaller in the US than in Britain. See Pástor and Veronesi,
‘Technological revolutions’, 1,475.
73. Gale, A Letter to the Right Hon. the Earl of Dalhousie, pp. 9–15.
74. Campbell and Turner, ‘Managerial failure’.
75. The Economist, 4 November 1848, p. 1,241; Jackman, The Development of Transportation;
p. 599.
76. Letter written by Charlotte Brontë in 1849 – see Brontë, The Letters of Charlotte Brontë,
p. 267.
77. Secret Committee of the House of Lords on Causes of Commercial Distress, P.P. 1847–8
I, Evidence of James Morris and H. J. Prescott, q. 2674. See also The Times,
1 October 1847, p. 6.
78. Campbell, ‘Deriving the railway mania’, p. 22.
79. The Economist, 20 November 1847, p. 1,334.
80. Eatwell, ‘Useful bubbles’.
81. Lardner, Railway Economy, p. 49.
82. Hawke, Railways and Economic Growth; Leunig, ‘Time is Money’.
83. Leunig, ‘Time is money’.
84. Casson, ‘The efficiency of the Victorian British railway network’.
85. Crafts, Mills and Mulatu, ‘Total factor productivity growth’.

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 NOTES TO PAGES 77–83

CHAPTER 5: OTHER PEOPLE’S MONEY: THE AUSTRALIAN LAND BOOM

1. Cork, ‘The late Australian banking crisis’, 177.

2. Cannon, The Land Boomers, p. 43.
3. Davison, The Rise and Fall of Marvellous Melbourne.
4. See Butlin, ‘The shape of the Australian economy’; Kelley, ‘Demographic change’.
5. Davison, The Rise and Fall of Marvellous Melbourne, p. 12.
6. Cannon, The Land Boomers, p. 24.
7. Australasian Insurance and Banking Record, Vol. XXII, 1888, p. 3.
8. Sources: Butlin, Investment in Australian Economic Development, pp. 11–13; Butlin,
Australian Domestic Product, pp. 6–7, 33, 424.
Notes: GDP and GDP per capita figures are in constant prices based on 1911.
9. Australasian Insurance and Banking Record, Vol. XXI, 1887, p. 1.
10. Australasian Insurance and Banking Record, Vol. XXIII, 1889, p. 314.
11. Boehm, Prosperity and Depression, p. 152.
12. Sources: Butlin, Investment in Australian Economic Development, p. 143.
13. Butlin, Investment in Australian Economic Development, p. 261; Davison, The Rise and Fall of
Marvellous Melbourne, pp. 77–8.
14. Butlin, Investment in Australian Economic Development, p. 266; Wood, The Commercial Bank
of Australia, p. 142.
15. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 140.
16. House of Were, The History of J. B. Were and Son, p. 127.
17. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 351.
18. Cannon, The Land Boomers, p. 25.
19. Daly, Sydney Boom Sydney Bust, pp. 148–9.
20. Silberberg, ‘Rates of return on Melbourne land investment’.
21. Stapledon, ‘Trends and cycles’, 315.
22. Daly, Sydney Boom Sydney Bust, pp. 148–9.
23. Sources: Knoll, Schularick and Steger, ‘No place like home’, based on data in Stapledon,
‘Trends and cycles’, and Butlin, Investment in Australian Economic Development.
Notes: This house price index is set equal to 100 in 1870.
24. Boehm, Prosperity and Depression, p. 251.
25. Weaver, ‘A pathology of insolvents’, 125.
26. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 140.
27. Sources: Authors’ calculations based on the share price tables in the Australasian
Insurance and Banking Record, a monthly publication which reported the mid-month
share prices of companies traded on the Stock Exchange of Melbourne.
Notes: This index of capital appreciation is a weighted index, where the previous
month’s market capitalisation is used as a weight for this month’s return. The index
contains all companies listed in the Australasian Insurance and Banking Record’s monthly
table of mortgage property and investment companies. We assume that shares are
issued at their par value and a -100 per cent return when stocks delist. We use the mid-
point of the bid-ask spread when both are reported, otherwise we use the bid or ask
prices. The index is set equal to 100 in December 1887.

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 NOTES TO PAGES 83–8

28. Australasian Insurance and Banking Record, Vol. XIII, 1889, pp. 28–9.
29. Cannon, The Land Boomers, p. 25; Australasian Insurance and Banking Record, Vol. XIII,
1889, pp. 28–9.
30. Hall, The Stock Exchange of Melbourne, p. 164; Australasian Insurance and Banking Record,
Vol. XIII, 1889, p. 721.
31. Sources: Authors’ calculations based on the share price tables in Australasian Insurance
and Banking Record, a monthly publication which reported the mid-month share prices
of companies traded on the Stock Exchange of Melbourne. The number of transac-
tions on Stock Exchange of Melbourne are from Hall, The Stock Exchange of Melbourne,
p. 162.
Notes: To calculate market capitalisation, we use the mid-point of the bid-ask spread
when both are reported, otherwise we use the bid or ask prices. The number of
transactions data is for the year ending 30 September.
32. Australasian Insurance and Banking Record, Vol. XIII, 1889, pp. 28–9.
33. Boehm, Prosperity and Depression, p. 254.
34. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 811.
35. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 811.
36. Wood, The Commercial Bank of Australia, p. 143; Boehm, Prosperity and Depression, p. 255;
Australasian Insurance and Banking Record, Vol. XIII, 1889, p. 149.
37. Wood, The Commercial Bank of Australia, p. 147.
38. Boehm, Prosperity and Depression, pp. 159–60.
39. Australasian Insurance and Banking Record, Vol. XIII, 1889, p. 639 and Vol. XIV, 1890,
p. 1.
40. Hall, The Stock Exchange of Melbourne, p. 123; Australasian Insurance and Banking Record,
Vol. XIII, 1889, p. 639.
41. Butlin, Investment in Australian Economic Development, p. 428.
42. Cannon, The Land Boomers, p. 26.
43. Peel, The Australian Crisis of 1893.
44. Boehm, Prosperity and Depression, p. 256; Bailey, ‘Australian borrowing in Scotland’.
45. Australasian Insurance and Banking Record, Vol. XIII, 1889, p. 802.
46. Australasian Insurance and Banking Record, Vol. XV, 1891, pp. 561–2; Vol. XVI, 1892,
p. 866.
47. Sykes, Two Centuries of Panic, p. 147.
48. Australasian Insurance and Banking Record, Vol. XIV, 1890, p. 78.
49. Australasian Insurance and Banking Record, Vol. XVI, 1892, p. 97.
50. Australasian Insurance and Banking Record, Vol. XVI, 1892, pp. 247–8.
51. Australasian Insurance and Banking Record, Vol. XVI, 1892, pp. 80, 317; Cannon, The Land
Boomers, p. 56.
52. Cannon, The Land Boomers, p. 130.
53. Cork, ‘The late Australian banking crisis’, 179.
54. Cannon, The Land Boomers, pp. 130–3.
55. Boehm, Prosperity and Depression, p. 256.
56. Boehm, Prosperity and Depression, p. 252.

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 NOTES TO PAGES 89–94

57. Sources: Calculations based on banks’ balance sheets, which are in Butlin, The Australian
Monetary System; Butlin, Investment in Australian Economic Development, p. 161.
Notes: The capital ratio equals the sum of capital plus shareholder reserves plus profit
and loss reserves divided by the sum of total deposits and note issue. The liquidity ratio
equals the sum of bank holdings of coins and bank notes divided by total assets.
58. Hickson and Turner, ‘Free banking gone awry’, 158.
59. Ellis, ‘The Australian banking crisis’; Cork, ‘The late Australian banking crisis’;
Cannon, The Land Boomers, p. 109; Boehm, Prosperity and Depression, pp. 219, 252;
Wood, The Commercial Bank of Australia, p. 143.
60. Boehm, Prosperity and Depression, pp. 216–17.
61. Butlin, Investment in Australian Economic Development, p. 264.
62. Boehm, Prosperity and Depression, p. 215.
63. Cannon, The Land Boomers, p. 36; Boehm, Prosperity and Depression, p. 252.
64. Bankers’ Magazine, ‘Australia’s dark day’, Vol. LV, 1893, p. 902. Notably, among devel-
oped economies 100 years later, gambling expenditure per capita was highest in
Australia – see Public Inquiry into the Australian Gambling Industry.
65. Cork, ‘The late Australian banking crisis’, 178.
66. Australasian Insurance and Banking Record, Vol. XIII, 1889, pp. 28–9; Cannon, The Land
Boomers, p. 97.
67. Cork, ‘The late Australian banking crisis’, 179. See also Boehm, Prosperity and Depression,
p. 224.
68. Australasian Insurance and Banking Record, Vol. XII, 1888, p. 351; Vol. XIII, 1889, pp.
28–9, 314.
69. House of Were, The History of J. B. Were and Son, pp. 125–6.
70. Dowd, ‘Free banking in Australia’; Hickson and Turner, ‘Free banking gone awry’;
Merrett, ‘Australian banking practice’; Merrett, ‘Preventing bank failure’; Pope, ‘Free
banking in Australia’.
71. Butlin, The Australian Monetary System, p. 89.
72. Report of the Royal Commission on Banking Laws, p. vi.
73. 52 Vict., No. 1002.
74. Report of the Royal Commission on Banking Laws, p. viii.
75. Australasian Insurance and Banking Record, Vol. XIII, 1889, p. 217; Blainey and Hutton,
Gold and Paper, p. 83.
76. Cannon, The Land Boomers, p. 49.
77. Cannon, The Land Boomers, p. 61.
78. The Economist, 25 March 1893, p. 364.
79. Coghlan, Labour and Industry, p. 1673.
80. Merrett, ‘Preventing bank failure’, 126.
81. Australasian Insurance and Banking Record, Vol. XVII, 1893, p. 236.
82. Coghlan, Labour and Industry, p. 1,743.
83. Coghlan, Labour and Industry, p. 1,747.
84. In 1892, the ‘Big Three’ controlled 31.0 per cent of all the assets of the banking system.
85. Coghlan, Labour and Industry, pp. 1,677–8.

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 NOTES TO PAGES 95–103

86. Shann, An Economic History of Australia, p. 330.

87. The Economist, 13 May 1893, pp. 555–6; Cork, ‘The late Australian banking crisis’, 188.
88. ‘Some lessons of the Australian crisis’ in Bankers’ Magazine, Vol. LVI, 1893, p. 660.
89. Coghlan, Labour and Industry, p. 1,745.
90. Hickson and Turner, ‘Free banking gone awry’.
91. Davison, The Rise and Fall of Marvellous Melbourne, p. 15.
92. Butlin, Investment in Australian Economic Development, p. 143; Cannon, The Land Boomers,
p. 48.
93. Fisher and Kent, ‘Two depressions’, 14.
94. Haig, ‘New estimates’, 23.
95. Boehm, Prosperity and Depression, pp. 313–14.
96. Blainey and Hutton, Gold and Paper, p. 255.
97. Butlin, Investment in Australian Economic Development, p. 143
98. Cannon, The Land Boomers, pp. 37–43; Gollan, The Commonwealth Bank, pp. 36–8

CHAPTER 6: WHEELER-DEALERS: THE BRITISH BICYCLE MANIA

1. Grew, The Cycle Industry, pp. 71–2.

2. Money, ‘The history of panics’, 30 May 1896.
3. Harrison, ‘The competitiveness’, 287.
4. Harrison, ‘The competitiveness’, 289.
5. Rubinstein, ‘Cycling’, 48–50.
6. Quinn, ‘Technological revolutions’, 17.
7. Cradle of Inventions.
8. Stratmann, Fraudsters.
9. The Times, ‘Queen’s Bench Division’, 28 July 1898.
10. Financial Times, ‘The cycle share market’, 25 April 1896.
11. Stratmann, Fraudsters.
12. Prices obtained from the Birmingham Daily Mail and Financial Times respectively.
13. Financial Times, ‘The cycle trade boom’, 22 April 1896.
14. Financial Times, ‘Cyclomania’, 27 April 1896.
15. Financial Times, ‘The cycle market’, 22 May 1896.
16. Source: Quinn, ‘Technological revolutions’, 19.
17. Source: Birch, Birch’s Manual.
18. Money, ‘The growth of goodwill’, 25 November 1896.
19. Money, ‘Cycle promotions’, 20 June 1896.
20. The Times, ‘Queen’s Bench Division’, 30 June 1899.
21. Financial Times, ‘Accles, Ltd.’, 6 June 1896; ‘Prospectus promise and report perfor-
mance’, 30 December 1897.
22. National Archives (Kew), BT31 Files, Accles Ltd., Summary of Capital and Shares.
23. Financial Times, ‘Prospectus promise and report performance’, 30 December 1897.
24. The Times, ‘Queen’s Bench Division’, 30 June 1899.
25. The Times, ‘Queen’s Bench Division’, 28 July 1898.

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 NOTES TO PAGES 103–10

26. Manchester Times, ‘The action by “Commerce Limited”’, 28 January 1898.

27. The Economist, ‘The cycle boom’, 16 May 1896.
28. The Economist, ‘Cycle company promotion’, 27 June 1896.
29. Money, ‘Cycle promotions’, 20 June 1896.
30. Money, ‘The cycle cataclysm’, 20 June 1896.
31. Money, ‘Lawson’s latest’, 23 May 1896.
32. Cycling, ‘Financial’, 9 January 1897.
33. Cycling, ‘Financial’, 12 June 1897; ‘Financial’, 11 September 1897.
34. Cycling, ‘Financial’, 27 March 1897, 10 April 1897, 1 May 1897, 8 May 1897, 15 May 1897,
29 May 1897, 5 June 1897.
35. Scotsman, ‘The Beeston Tyre Rim Company (Limited)’, 4 May 1896.
36. Quinn, ‘Technological revolutions’, 33.
37. Financial Times, ‘The cycle outlook’, 1 May 1897; ‘Cycle shares and American over-
production’, 6 July 1897.
38. Financial Times, ‘The cycle outlook’, 1 May 1897.
39. Financial Times, 25 October 1897, 30 December 1897.
40. Quinn, ‘Technological revolutions’.
41. Harrison, ‘The competitiveness’.
42. Lloyd-Jones and Lewis, ‘Raleigh’, 82.
43. Gissing, The Whirlpool, pp. 130, 174.
44. Acheson, Campbell and Turner, ‘Who financed’, 617.
45. Sources: National Archives (Kew), BT31 Files, Summaries of Capital and Shares; Acheson,
Campbell and Turner, ‘Who financed’; Braggion and Moore, ‘Dividend policies’.
Notes: The table summarises the self-reported occupations of shareholders before
and after the March 1897 crash in a sample of 25 cycle companies.
* indicates the average proportion of capital contributed by directors to the
companies in Braggion and Moore, ‘Dividend policies’. Company directors also listed
an occupation, and so the analysis of their capital contribution in the table is also
conducted separately.
46. Money, ‘The growth of goodwill’, 25 November 1896.
47. Quinn, ‘Technological revolutions’, 9.
48. Acheson, Campbell and Ye, ‘Character and denomination’, 869.
49. Acheson, Campbell and Ye, ‘Character and denomination’.
50. Bank of England, A Millennium of Macroeconomic Data.
51. The Economist, ‘The “boom” in cycle shares’, 25 April 1896; Financial Times, ‘The cycle
market’, 22 May 1896.
52. National Archives (Kew), BT31 Files, Concentric Tube, Summary of Capital and
Shares, 3 September 1896.
53. The Economist, ‘The “boom” in cycle shares’, 25 April 1896.
54. Kynaston, The London Stock Exchange, 142–3.
55. Quinn, ‘Squeezing the bears’.
56. Bath Chronicle, ‘Hints to small investors’, 1 October 1896.
57. Quinn, ‘Squeezing the bears’, 18.

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 NOTES TO PAGES 110–18

58. Kennedy and Delargy, ‘Explaining Victorian entrepreneurship’, 55–7.

59. Van Helten, ‘Mining’, 163–73.
60. Parsons, ‘King Khama’, 11–12.
61. Acheson, Coyle and Turner, ‘Happy hour’, 3–5.
62. Acheson, Coyle and Turner, ‘Happy hour’, 16.
63. Grew, The Cycle Industry, pp. 71–5; Harrison, ‘The competitiveness’; Millward, ‘The
cycle trade’.
64. Geary and Stark, ‘Regional GDP’, 131.
65. Bank of England, A Millennium of Macroeconomic Data.
66. Boyer and Hatton, ‘New estimates’.
67. Quinn, ‘Technological revolutions’.
68. Financial Times, ‘The cycle share market’, 30 April 1897.
69. Money, ‘Cycles and banks’, 31 July 1897.
70. Van Helten, ‘Mining’, 172; Parsons, ‘King Khama’, 11–12.
71. Acheson, Campbell and Turner, ‘Who financed?’, 617.
72. Harrison, ‘The competitiveness’, 287, 294.
73. Harrison, ‘The competitiveness’, 297.
74. Harrison, ‘The competitiveness’, 301–2.
75. Schumpeter, Capitalism, Socialism and Democracy, pp. 82–5.
76. Rubinstein, ‘Cycling’, pp. 48–50; Guardian, ‘Freewheeling to equality’, 18 June 2015;
Independent, ‘How the bicycle set women free’, 9 November 2017.
77. Vivanco, Reconsidering the Bicycle, p. 33.

CHAPTER 7: THE ROARING TWENTIES AND THE WALL STREET CRASH

1. Fitzgerald, The Great Gatsby, p. 3.

2. Fisher, ‘The debt-deflation theory’, 341.
3. Jordá, Schularick and Taylor, ‘Macrofinancial history’.
4. Kang and Rockoff, ‘Capitalizing patriotism’, 46–52.
5. Hilt and Rahn, ‘Turning citizens into investors’, 93.
6. Kang and Rockoff, ‘Capitalizing patriotism’, 57.
7. Hilt and Rahn, ‘Turning citizens into investors’, 94.
8. Archival Federal Reserve Economic Data; Federal Reserve Economic Data.
9. White, ‘The stock market boom’, 69.
10. Federal Reserve Economic Data; Basile et al., ‘Towards a history’, 44.
11. White, ‘Lessons’, 10.
12. White, ‘Lessons’, 24–9.
13. Source: Federal Reserve Economic Data.
Notes: Annual data.
14. Goetzmann and Newman, ‘Securitization’, 24, 28; White, ‘Lessons’, 30.
15. Gjerstad and Smith, Rethinking Housing Bubbles, p. 102.
16. White, ‘Lessons’, 44.
17. Turner, The Florida Land Boom.

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 NOTES TO PAGES 118–26

18. Frazer and Guthrie, The Florida Land Boom.

19. Crump, ‘The American land boom’, Financial Times, 10 November 1925.
20. Vanderblue, ‘The Florida land boom’, 254.
21. Zuckoff, Ponzi’s Scheme.
22. Costigliola, ‘The United States’, 490; Edwards, ‘Government control’.
23. Costigliola, ‘The United States’, 495.
24. Eichengreen, Hall of Mirrors, p. 55; Wigmore, The Crash, pp. 198–200.
25. Goetzmann and Newman, ‘Securitization’, 23.
26. Voth, ‘With a bang’; Flandreau, Gaillard, and Packer, ‘Ratings performance’, 6.
27. Klein, Rainbow’s End, p. 57.
28. The DJIA was reasonably representative of the performance of the overall stock market
at this time. The S&P All Common Stock index rose by 141 per cent during the same
period.
29. White, ‘The stock market boom’, 73.
30. Klein, Rainbow’s End, p. 84,
31. Nicholas, ‘Stock market swings’, 221.
32. Source: Bloomberg.
33. Federal Reserve Economic Data.
34. White, ‘The stock market boom’, 74.
35. Eichengreen, Hall of Mirrors, pp. 59–60.
36. White, ‘The stock market boom’, 75–6.
37. Source: Federal Reserve Economic Data.
Notes: Includes issues by railroad, industrial, public utility and financial companies,
but not issues by banks, trusts or insurance companies. Includes refunds and issues by
foreign corporations in the United States.
38. Wigmore, The Crash, pp. 26, 660.
39. Noyes, Forty Years.
40. New York Times, ‘Topics in Wall Street’, 1 September 1929.
41. Klein, Rainbow’s End, p. 186.
42. Gentzkow et al., ‘Circulation’; Klein, Rainbow’s End, p. 151.
43. Wigmore, The Crash, pp. 4–5; Federal Reserve Economic Data.
44. Klein, Rainbow’s End, p. 201.
45. Klein, Rainbow’s End, pp. 207–9.
46. Wigmore, The Crash, p. 7.
47. New York Daily Investment News, ‘Stock market crisis over’, 25 October 1929.
48. New York Times, ‘Worst stock crash stemmed by banks’, 25 October 1929.
49. Wigmore, The Crash, p. 13.
50. New York Times, ‘Stock prices slump’, 29 October 1929.
51. New York Daily News, ‘Avoid speculative buys’, 25 October 1929; ‘Market fireworks
ended’, 28 October 1929; ‘9,212,000-share turnover’, 29 October 1929.
52. Klein, Rainbow’s End, p. 226.
53. Brooks, Once in Golconda, pp. 86–7.
54. Klein, Rainbow’s End, p. 239.

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 NOTES TO PAGES 126–32

55. New York Times, 25 October 1929.

56. Huertas and Silverman, ‘Charles E. Mitchell’.
57. Choudhry, ‘Interdependence’.
58. Le Bris and Hautcoeur, ‘A challenge’, 182–3.
59. Frennberg and Hansson, ‘Computation’, 22.
60. Voth, ‘With a Bang’.
61. Barclays’ Equity Gilt Study, 2016, p. 74.
62. Hilt and Rahn, ‘Turning citizens into investors’, 93.
63. Klein, Rainbow’s End, pp. 53–6, 147.
64. Jones, ‘A century of stock market liquidity’, 43.
65. Klein, Rainbow’s End, p. 84, 146.
66. Eichengreen and Mitchener, ‘The Great Depression’, 10; White, ‘The stock market
boom’, 69; Wigmore, The Crash, p. 660.
67. White, ‘The stock market boom’, 75.
68. White, ‘Lessons’, 19.
69. Minutes of the Board of Governors of the Federal Reserve System, 1928.
70. Galbraith, The Great Crash, 46.
71. New York Times, ‘Topics in Wall Street’, 21 August 1929.
72. Chancellor, Devil Take the Hindmost, pp. 201–2; Klein, Rainbow’s End, pp. 149–50.
73. Hausman, Hertner and Wilkins, Global Electrification, p. 26.
74. Hounshell, From the American System.
75. White, ‘Stock market boom’, 73.
76. Klein, Rainbow’s End, pp. xvii–xviii.
77. New York Times, ‘Topics in Wall Street’, 13 March 1928.
78. White, ‘The stock market boom’, 78–80.
79. James, ‘1929’, 29.
80. Romer, ‘The Great Crash’.
81. Gjerstad and Smith, Rethinking Housing Bubbles, p. 94; Olney, Buy Now, Pay Later,
p. 108.
82. Jordá, Schularick and Taylor, ‘Macrofinancial history’.
83. Eichengreen, Golden Fetters, pp. 258–9.
84. Bernanke, ‘Nonmonetary effects’, 259; Eichengreen and Hatton, ‘Interwar unemploy-
ment’; Jordá, Schularick and Taylor, ‘Macrofinancial history’.
85. Eichengreen, Golden Fetters.
86. Eichengreen and Hatton, ‘Interwar unemployment’, 6; Jordá, Schularick and Taylor,
‘Macrofinancial history’.
87. Fishback, Haines and Kantor, ‘Births, deaths, and New Deal relief’; Schubert, Twenty
Thousand Transients.
88. De Bromhead, Eichengreen and O’Rourke, ‘Political extremism’.
89. Bernstein, The Great Depression; Friedman and Schwartz, A Monetary History.
90. Bernanke, ‘Nonmonetary Effects’; Eichengreen, Golden Fetters; Friedman and Schwartz,
A Monetary History.
91. Nicholas, ‘Stock market swings’.

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 NOTES TO PAGES 132–41

92. Janeway, Doing Capitalism, pp. 155–6.

93. Wigmore, The Crash, p. 28.
94. Romer, ‘The Great Crash’.

CHAPTER 8: BLOWING BUBBLES FOR POLITICAL PURPOSES:

JAPAN IN THE 1980S

1. Wood, The Bubble Economy, pp. 9–10.

2. Securities Act of 1933; Securities Exchange Act of 1934, pp. 3, 82.
3. Totman, A History of Japan, p. 454.
4. Takagi, ‘Japanese equity market’, 544–5.
5. Totman, A History of Japan, pp. 458–9; World Development Indicators, ‘GDP (constant
LCU) for Japan’.
6. Tsuru, Japan’s Capitalism, p. 182.
7. Federal Reserve Economic Data, ‘Exchange rate to U.S. dollar for Japan’.
8. Lincoln, ‘Infrastructural deficiencies’.
9. Plaza Accord, para. 18.
10. Frankel and Morgan, ‘Deregulation and competition’, 584.
11. Federal Reserve Economic Data, ‘Discount rate for Japan’; ‘Total credit to households
and NPISHs, adjusted for breaks, for Japan’; World Development Indicators, ‘GDP
(constant LCU) for Japan’.
12. Federal Reserve Economic Data, ‘M3 for Japan, national currency, annual, not season-
ally adjusted’.
13. Federal Reserve Economic Data, ‘Interest rates, government securities, treasury bills for
Japan’.
14. Wood, The Bubble Economy, p. 49.
15. Dehesh and Pugh, ‘The internationalization’, 149.
16. Oizumi, ‘Property finance’, 199.
17. Source: Land Institute of Japan.
Notes: Average land price index for Tokyo ward, Yokohama, Nagoya, Kyoto, Osaka
and Kobe. Index is set to 100 in 2010.
18. Dehesh and Pugh, ‘The internationalization’, 153; Oizumi, ‘Property finance’, 202;
Plaza Accord, para. 18.
19. Dehesh and Pugh, ‘The internationalization’, 154; Tsuru, Japan’s Capitalism, p. 163.
20. Noguchi, ‘Land prices’, 13–14; Stone and Ziemba, ‘Land and stock prices’, 149.
21. Takagi, ‘The Japanese equity market’, 557–8.
22. Takagi, ‘The Japanese equity market’, 558, 563, 568.
23. Source: Bloomberg.
Notes: Contains all companies listed in the First Section of the Tokyo Stock
Exchange.
24. Dehesh and Pugh, ‘The internationalization’, 157; Takagi, ‘The Japanese equity market’,
559.
25. Wood, The Bubble Economy, p. 26.

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 NOTES TO PAGES 141–8

26. Stone and Ziemba, ‘Land and stock prices’, 149.

27. Hebner and Hiraki, ‘Japanese initial public offerings’; Jenkinson, ‘Initial public offer-
ings’, 439; Takagi, ‘The Japanese equity market’, 552; Warrington College of Business
IPO Data, ‘Japan, 1980–2018’.
28. Federal Reserve Economic Data, ‘Discount rate for Japan’.
29. Dehesh and Pugh, ‘The internationalization’, 158; Mitsui Fudosan, ‘New home sales’;
Oizumi, ‘Property finance’, 210.
30. See, for example, Cargill, ‘What caused Japan’s banking crisis?’, 46–7; Okina,
Shirakawa and Shiratsuka, ‘The asset price bubble’; Wood, The Bubble Economy, p. 12.
31. Frankel and Morgan, ‘Deregulation and competition’, 582; Takagi, ‘The Japanese
equity market’, 549, 559.
32. Laurence, Money Rules, p. 150; Reading, Japan: The Coming Collapse, p. 177.
33. Takagi, ‘Japanese equity market’, 550–1, 553; Tesar and Werner, ‘Home bias’, 481.
34. Shiller, Kon-ya and Tsutsui, ‘Why did the Nikkei crash?’
35. Shiller, Kon-Ya and Tsutsui, ‘Why did the Nikkei crash?’, 161
36. Tsuru, Japan’s Capitalism, pp. 161–2.
37. Oizumi, ‘Property finance’, 203; Zimmerman, ‘The growing presence’, 10.
38. Noguchi, ‘The “bubble”’, 296.
39. Wood, The Bubble Economy, pp. 38–9.
40. Hirayama, ‘Housing policy’, 151–4.
41. Oizumi, ‘Property finance’, 202.
42. Dehesh and Pugh, ‘The internationalization’, 157; Oizumi, ‘Property finance’, 202.
43. Murphy, The Real Price, p. 154.
44. Wood, The Bubble Economy, p. 124.
45. Harvard Business Review, ‘Power from the ground up: Japan’s land bubble’, May–
June 1990.
46. Dehesh and Pugh, ‘The internationalization’, 153–4; Takagi, ‘The Japanese equity
market’, 558–9.
47. Wood, The Bubble Economy, p. 19.
48. Murphy, The Real Price, p. 152.
49. Shiller, Kon-Ya and Tsutsui, ‘Why did the Nikkei crash?’, 161.
50. Wood, The Bubble Economy, p. 91.
51. Although the standard Japanese definition of a recession at this time was growth below
3 per cent, in order to remain consistent with other chapters, we use the term to mean
negative growth for two successive quarters.
52. Federal Reserve Economic Data, ‘General government net lending/borrowing for
Japan’, ‘Discount rate for Japan’; World Development Indicators, ‘GDP (constant
LCU) for Japan’.
53. Hoshi and Patrick, ‘The Japanese financial system’, 14.
54. Nakaso, ‘The financial crisis in Japan’, 6–9.
55. Nakaso, ‘The financial crisis in Japan’, 9–11, 55; Japan Times, ‘Government nationalizes
Long-Term Credit Bank of Japan’, 23 October 1998.
56. Nakaso, ‘The financial crisis in Japan’, 6.

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 NOTES TO PAGES 149–55

57. Hoshi and Kashyap, ‘Japan’s financial crisis’; World Development Indicators, ‘GDP
(constant LCU) for Japan’.
58. Federal Reserve Economic Data, ‘Real gross domestic product for the U.S.’
59. Federal Reserve Economic Data, ‘Unemployment rate: aged 15–64: all persons for
Japan’; World Development Indicators, ‘GDP (constant LCU) for Japan’.
60. Federal Reserve Economic Data, ‘Constant GDP per capita for Japan’, ‘Constant GDP
per capita for the United Kingdom’.
61. Wood, The Bubble Economy, p. 21.
62. New York Times, ‘Nomura gets big penalties’, 9 October 1991.
63. Shindo, ‘Administrative guidance’, 71–2.
64. Shiratori, ‘The politics of electoral reform’, 83.
65. Wood, The Bubble Economy, p. 69.
66. New York Times, ‘Shin Kanemaru, 81, kingmaker in Japan toppled by corruption’,
29 March 1996.
67. Yamamura, ‘The Japanese political economy’, 293.
68. Yamamura, ‘The Japanese political economy’, 295.
69. Wood, The Bubble Economy, pp. 69, 97–8; New York Times, ‘Japan penalizes Nomura and
big bank for payoffs’, 31 July 1997.
70. Cai and Wei, ‘The investment and operating performance’.
71. Fortune, Japan Exchange Group.
72. Janeway, Doing Capitalism.

CHAPTER 9: THE DOT-COM BUBBLE

1. Alan Greenspan, ‘The challenge of central banking in a democratic society’,

5 December 1996, www.federalreserve.gov/boarddocs/speeches/1996/19961205
.htm, last accessed 11 March 2019.
2. Versluysen, ‘Financial deregulation, 13, 18–20.
3. Naughton, A Brief History, p. 239.
4. Cassidy, Dot.Con, pp. 51–2.
5. www.internetlivestats.com/total-number-of-websites/, last accessed 21 November 2019.
6. Cassidy, Dot.Con, p. 58
7. Fortune, ‘Fortune checks out 25 cool companies for products, ideas, and investments’,
11 July 1994; New York Times, ‘New venture in cyberspace by silicon graphics founder’,
7 May 1994.
8. Fortune, ‘Netscape IPO 20-year anniversary: Fortune’s 2005 oral history of the birth of
the web’, 9 August 2015.
9. Cassidy, Dot.Con, pp. 84–5.
10. Bransten and Jackson, ‘Netscape shares touch $75 in first-day trading’, Financial Times,
10 August 1995.
11. Cassidy, Dot.Con, p. 88.
12. Warrington College of Business IPO Data, ‘Initial public offerings: VC-backed’.
13. Karpoff, Lee and Masulis, ‘Contracting under asymmetric information’.

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 NOTES TO PAGES 155–62

14. Warrington College of Business IPO Data, ‘Initial public offerings: underpricing’.
15. Aggarwal, Krigman and Womack, ‘Strategic IPO underpricing’.
16. Ljungvist and Wilhelm, ‘IPO pricing’, 724.
17. Source: ‘Initial public offerings: Technology stock IPOs’.
Notes: Total market value is based on the IPO’s first market price.
18. Source: Bloomberg.
19. Fama, ‘Two pillars’, 1476.
20. Shiller, Irrational Exuberance, p. 7.
21. Data on market capitalisations and share prices are from Bloomberg.
22. New York Stock Exchange Market Data, ‘The Investing Public’.
23. Brennan, ‘How did it happen?’, 5.
24. Shiller, Irrational Exuberance, p. 48.
25. Lowenstein, Origins, pp. 70, 85.
26. Shiller, Irrational Exuberance, p. 49.
27. Cramer, ‘Cramer rewrites an opening debate’, The Street, 11 February 2000.
28. Fortune, ‘When the shoeshine boys talk stocks’, 15 April 1996.
29. Wolf, ‘Cauldron bubble’, Financial Times, 23 December 1998.
30. The Economist, ‘Bubble.com’, 21 September 2000.
31. Cellan-Jones, Dot.Bomb, p. 6.
32. Financial Times, ‘US Stock Markets take wholesale battering as inflation worries rise’,
15 April 2000.
33. Norris, ‘Another technology victim’, New York Times, 29 April 2000.
34. Ofek and Richardson, ‘DotCom mania’, 1116.
35. Ofek and Richardson, ‘DotCom mania’, 1113.
36. Market capitalisation data obtained from Bloomberg.
37. Barnett and Andrews, ‘AOL merger was “the biggest mistake in corporate history”,
believes Time Warner chief Jeff Bewkes’, Daily Telegraph, 28 September 2010.
38. Bloomberg.
39. Deutsche Börse Group, ‘Nemax 50’.
40. Source: Bloomberg.
Notes: Each index includes only companies for which technology is the primary
source of revenue, as categorised by the ICB Industry Classification Benchmark.
The SX8P includes shares of the 600 largest European technology companies,
and the two MSCI IT indexes include a varying number of information
technology shares for their respective regions. All indexes are set equal to 100
in January 1995.
41. Jones, ‘A century of stock market liquidity’, 42–3.
42. US Securities and Exchange Commission, ‘After-hours trading: understanding the risks’;
‘Electronic communications networks’; On-line brokerage’, p. 1.
43. International Monetary Fund Global Debt Database.
44. Financial Industry Regulatory Authority, Margin Statistics, www.finra.org/investors/
margin-statistics, last accessed 20 August 2019.
45. Shiller, Irrational Exuberance, pp. 56–7.

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 NOTES TO PAGES 162–9

46. Dhar and Goetzmann, ‘Bubble investors’, 21.

47. Griffin et al., ‘Who drove?’, 1,262–3, 1,268.
48. Greenwood and Nagel, ‘Inexperienced investors’.
49. McCullough, How the Internet Happened, p. 168.
50. Shiller, Irrational Exuberance, p. 42.
51. Weber, ‘The end of the business cycle?’, Foreign Affairs, July/August 1997.
52. DeLong and Magin, ‘A short note’, 2–3.
53. Eaton, ‘Market watch; Netscape fever: will it spread?’, New York Times, 13 August
1995.
54. Brennan, ‘How did it happen?’, p. 18; Urry, ‘Surfers catch the wave of a rising tide’,
Financial Times, 12 August 1995.
55. Authers, ‘Profit from prophesies of doom’, Financial Times, 23 November 2008; Kotkin,
‘A bear saw around the corner’, New York Times, 3 January 2009.
56. Grant, The Trouble with Prosperity, pp. 294–8.
57. DeLong and Magin, ‘A short note’.
58. Lowenstein, Origins.
59. Brennan, ‘How did it happen?’, 9–11.
60. Fabbri and Marin, ‘What explains the rise in CEO pay’, 8; Coffee, ‘A theory of corporate
scandals’.
61. Coffee, ‘A theory of corporate scandals’, 204–5.
62. National Bureau of Economic Research, ‘US Business Cycle Expansions’.
63. Kliesen, ‘The 2001 recession’, 28–30.
64. Griffin et al., ‘Who drove?’, 1,260.
65. Schuermann, ‘Why were banks better off?’, 6.
66. GDP data obtained from the World Bank.
67. Nehls and Schmidt, ‘Credit crunch’.
68. Eatwell, ‘Useful bubbles’, 43.
69. Andreesen, ‘Why software?’, Wall Street Journal, 20 August 2011.
70. Rao, ‘A new soft technology’, Breaking Smart.
71. See, for example, Garber, ‘Famous first bubbles’; Stone and Ziemba, ‘Land and stock
prices’; Donaldson and Kamstra, ‘A new dividend forecasting procedure’.
72. Pástor and Veronesi, ‘Technological revolutions’; Pástor and Veronesi, ‘Was there
a NASDAQ bubble?’.
73. Pástor and Veronesi, ‘Was there a NASDAQ bubble?’, 62.
74. Pástor and Veronesi, ‘Technological revolutions’; Ofek and Richardson, ‘DotCom
mania’, 1,113.
75. Ofek and Richardson, ‘DotCom mania’.
76. Lamont and Stein, ‘Aggregate short interest’.
77. Schulz, ‘Downward-sloping demand curves’.
78. Janeway, Doing Capitalism, p. 193.
79. Shiller, Irrational Exuberance, pp. 39–70.
80. Schuermann, ‘Why were banks better off?’, 6; Nehls and Schmidt, ‘Credit crunch’,
18.

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 NOTES TO PAGES 169–75

81. Case and Shiller, ‘Is there a bubble?’

82. Cassidy, Dot.Con, p. 324.

CHAPTER 10: ‘NO MORE BOOM AND BUST’: THE SUBPRIME BUBBLE

1. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 4.

2. McCarthy, Poole and Rosenthal, Political Bubbles, p. 11.
3. Channel 4 News, ‘FactCheck: no more boom and bust?’, 17 October 2008, www
.channel4.com/news/articles/politics/domestic_politics/factcheck+no+more+boom
+and+bust/2564157.html, last accessed 19 August 2019.
4. Kelly, ‘On the likely extent of falls in Irish house prices’.
5. RTE, ‘Ahern apologises for suicide remark’, 4 July 2007, www.rte.ie/news/2007/0704/
90808-economy/, last accessed 19 August 2019.
6. Sinai, ‘House price movements’, 20.
7. Sources: Robert Shiller’s house price index – www.econ.yale.edu/~shiller/data.htm, last
accessed 7 June 2018. See Shiller, Irrational Exuberance, pp. 11–15 for details.
8. Sources: Standard and Poor’s CoreLogic Case-Shiller Home Price Indexes, https://us.spin
dices.com/index-family/real-estate/sp-corelogic-case-shiller, last accessed 19 November
2019.
Notes: The Composite-10 index is a market-weighted average of the following
metropolitan areas: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami,
New York City, San Diego, San Francisco and Washington, DC. The Composite-20
index composes all 20 of the metropolitan areas above. The National Index tracks
the value of single-family housing across the United States.
9. Haughwot et al., ‘The supply side of the housing boom’, 70.
10. Glaesar and Sinai, ‘Postmortem for a housing crash’, 9.
11. Case, Shiller and Thompson, ‘What have they been thinking?’, 2.
12. Ruiz, Stupariu and Vilarino, ‘The crisis’, 1,460.
13. Jiménez, ‘Building boom’, 263; Dellepiane, Hardiman and Heras, ‘Building on easy
money’, 23.
14. Sources: Real house price indexes for Ireland, Spain and United Kingdom are from
OECD statistics. The Northern Ireland index is the nominal index provided by the
Nationwide Building Society, adjusted for inflation using the Retail Price Index.
Notes: The index for each country is set at 100 in 1973.
15. Sources: Data for Ireland is based on changes in the housing stock and is from the
Department of Housing, Planning and Local Government; data for Great Britain and
Northern Ireland is from the Office for National Statistics; data for Spain is from the
European Central Bank’s Statistical Data Warehouse; and data for the United States is
from the US Census Bureau.
Notes: The figure for the 1990s is the average. Great Britain excludes Northern Ireland.
16. Terraced housing in many northern cities increased in value during the boom by
100 per cent and fell by 50 per cent or more during the bust – see Guardian,
29 August 2015.

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 NOTES TO PAGES 175–82

17. Mian and Sufi, ‘The consequences’; Goodman and Mayer, ‘Homeownership’, 32.
18. Norris and Coates, ‘Mortgage availability’, 198.
19. Task Force of the Monetary Policy Committee of the European System of Central
Banks, ‘Housing finance’, p. 43.
20. Purnanandam, ‘Originate-to-distribute model’.
21. Lewis, The Big Short, pp. 97–8, 152.
22. Guardian, 29 August 2015.
23. Jiménez, ‘Building boom’, 263–4.
24. Honohan, ‘Euro membership’, 138; Connor, Flavin and O’Kelly, ‘The U.S. and Irish
credit crises’, 67.
25. Dellepiane, Hardiman and Heras, ‘Building on easy money’, 29; Jiménez, ‘Building
boom’, 263.
26. Commission of Investigation into the Banking Sector in Ireland, Misjudging Risk, p. ii.
27. See Guardian, 29 August 2015.
28. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, pp. 213–14.
29. US Treasury Department Office of Public Affairs, Treasury Senior Preferred Stock Purchase
Agreement, 7 September 2008.
30. Ball, The Fed and Lehman Brothers, p. 222.
31. Although credit default swaps are sometimes viewed as credit insurance, they are unlike
real insurance in that the issuer is under no requirement to hold reserves and the
purchaser need have no insurable interest in the asset.
32. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 140.
33. US Department of the Treasury Press Room, Treasury Announces TARP Capital Purchase
Program, 14 October 2008.
34. Turner, Banking in Crisis, p. 168.
35. Claessens et al., ‘Lessons and policy implications’; Hüfner, ‘The German banking
system’; Xiao, ‘French banks’.
36. See Tooze, Crashed, chapter 8.
37. Whelan, ‘Ireland’s economic crisis’, 431; Kelly, ‘The Irish credit bubble’, 15; Honohan,
‘Resolving Ireland’s banking crisis’, 220–1.
38. Commission of Investigation into the Banking Sector in Ireland, Misjudging Risk, 77.
39. Whelan, ‘Ireland’s economic crisis’, 432.
40. Banco de España, Report on the Financial and Banking Crisis in Spain, pp. 109–12.
41. Turner, Banking in Crisis, p. 96.
42. HM Revenue and Customs, Annual UK Property Transaction Statistics, 2015.
43. Figures from National Association of Realtors.
44. Rajan, Fault Lines, p. 6; Regling and Watson, A Preliminary Report, p. 19; Jiménez,
‘Building boom’, 264; Financial Crisis Inquiry Commission, The Financial Crisis Inquiry
Report, p. 104; Turner Review, pp. 11–12.
45. Gjerstad and Smith, Rethinking Housing Bubbles, p. 66.
46. Regling and Watson, A Preliminary Report, p. 29. Ireland and Spain were the two
EU countries with the widest gap between deposits from domestic non-financial
sectors and loans to domestic non-financial sectors – see Task Force of the

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 NOTES TO PAGES 182–6

Monetary Policy Committee of the European System of Central Banks, ‘Housing

finance’, 43.
47. Taylor, ‘The financial crisis’; Gjerstad and Smith, ‘Monetary policy’, 271; Taylor,
‘Causes of the financial crisis’, 53.
48. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 88.
49. CESifo DICE Database, www.cesifo-group.de/de/ifoHome/facts/DICE/Banking-and-
Financial-Markets/Banking/Comparative-Statistics.html, last accessed 19 November 2019.
50. Lam, ‘Government interventions’, 5; Task Force of the Monetary Policy Committee of
the European System of Central Banks, ‘Housing finance’, 73.
51. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 7.
52. Norris and Coates, ‘Mortgage availability’, 196.
53. Andrews and Sánchez, ‘The evolution of home ownership rates’.
54. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 7.
55. Mayer, ‘Housing bubbles’, 564, 574.
56. Mian and Sufi, ‘The consequences’; House of Debt; Dell’Arriccia, Igan and Laeven,
‘Credit booms’; Mayer, ‘Housing bubbles’; Santos, ‘Antes del diluvio’; Ruiz, Stupariu
and Vilarino, ‘The crisis’; Norris and Coates, ‘Mortgage availability’; ‘How housing
killed the Celtic Tiger’; Dellepiane, Hardiman and Heras, ‘Building on easy money’;
Turner, Banking in Crisis, pp. 93–9.
57. Case and Shiller, ‘Is there a bubble?’, 335.
58. Commission of Investigation into the Banking Sector in Ireland, Misjudging Risk, p. ii, 20.
59. Jiménez, ‘Building boom’, 263.
60. Mayer, ‘Housing bubbles’, 574.
61. Mian and Sufi, ‘Credit supply and housing speculation’.
62. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 6.
63. Glaesar, ‘A nation of gamblers’, 38.
64. Case and Shiller, ‘Is there a bubble?’, 321.
65. Case, Shiller and Thompson, ‘What have they been thinking?’
66. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 8.
67. Kelly and Boyle, ‘Business on television’, 237
68. Washington Post, 28 January 2016.
69. Commission of Investigation into the Banking Sector in Ireland, Misjudging Risk,
p. 50.
70. Casey, ‘The Irish newspapers’.
71. Knowles, Phillips and Lidberg, ‘Reporting the global financial crisis’.
72. Mercile, ‘The role of the media’.
73. Schifferes and Knowles, ‘The British media’, 43; Müller, ‘The real estate bubble in
Spain’.
74. Walker, Housing booms’; ‘The direction of media influence’.
75. Glaesar, ‘A nation of gamblers’, 4.
76. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 7; Turner,
Banking in Crisis, p. 217; Munoz and Cueto, ‘What has happened in Spain?’, 212. For the

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 NOTES TO PAGES 186–91

dependence of Spanish city and town finances on housebuilding, see Jiménez,

‘Building boom’, 266; Dellepiane, Hardiman and Heras, ‘Building on easy money’, 29.
77. Connor, Flavin and O’Kelly, ‘The U.S. and Irish credit crises’, p. 74; O’Sullivan and
Kennedy, ‘What caused the Irish banking crisis?’, 230.
78. Parliamentary Commission on Banking Standards, Changing Banking for Good, p. 12.
79. Andrews and Sánchez, ‘The evolution of home ownership rates’, 208.
80. Béland, ‘Neo-liberalism and social policy’, 97–8.
81. Rajan, Fault Lines, pp. 35, 38.
82. Calomiris and Haber, Fragile by Design, pp. 234–5.
83. Wallison, ‘Government housing policy’, 401.
84. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. xxxvii.
85. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 445;
Wallison, ‘Cause and effect’.
86. Dellepiane, Hardiman and Heras, ‘Building on easy money’, 29.
87. Belsky and Retsinas, ‘History of housing finance’, 2–3; Andrews and Sánchez, ‘The
evolution of home ownership rates’.
88. Norris and Coates, ‘Mortgage availability’, 193.
89. Hansard, House of Commons Debate, 15 January 1980, Vol. 976, cols 1,443–575.
90. House of Commons Treasury Committee, Banking Crisis: Regulation and Supervision,
p. 11.
91. On the role of the three credit-rating agencies in the housing boom and bust, see
White, ‘The credit-rating agencies’.
92. Parliamentary Commission on Banking Standards, Changing Banking for Good, p. 12.
93. Dellepiane, Hardiman and Heras, ‘Building on easy money’, 14, 20; Kelly, ‘The Irish
credit bubble’, 24; Connor, Flavin and O’Kelly, ‘The U.S. and Irish credit crises’, 73–4;
Ó Riain, ‘The crisis’, 503.
94. Kelly, ‘What happened to Ireland?’, 9.
95. McCarthy, Poole and Rosenthal, Political Bubbles, p. 83.
96. Johnson and Kwak, 13 Bankers, p. 5; Johnson, ‘The quiet coup’; Financial Crisis
Inquiry Commission, The Financial Crisis Inquiry Report, p. xviii.
97. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. xviii.
98. McCarthy, Poole and Rosenthal, Political Bubbles, p. 83.
99. Igan and Mishra, ‘Wall Street’.
100. Based on OECD data.
101. Source: OECD.
102. Deaton, ‘The financial crisis’.
103. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 409.
104. Goodman and Mayer, ‘Homeownership’, 31.
105. Mian and Sufi, House of Debt, p. 26.
106. Purdey, ‘Housing equity’, 9.
107. BBC News, ‘Negative equity afflicts half a million households’, www.bbc.co.uk/news/
business-26389009, last accessed 19 November 2019.
108. Duffy and O’Hanlon, ‘Negative equity’.

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 NOTES TO PAGES 191–9

109. Goodman and Mayer, ‘Homeownership’, 33.

110. Mian and Sufi, House of Debt, p. 22.
111. Kitchin, O’Callaghan and Gleeson, ‘The new ruins of Ireland’; Financial Crisis Inquiry
Commission, The Financial Crisis Inquiry Report, p. 408; Dellepiane, Hardiman and
Heras, ‘Building on easy money’, 3; Munoz and Cueto, ‘What has happened in
Spain?’, 209.
112. Kitchin, O’Callaghan and Gleeson, ‘The new ruins of Ireland’, 1,072.

CHAPTER 11: CASINO CAPITALISM WITH CHINESE CHARACTERISTICS

1. Post on Freeweibo.com as reported by the Washington Post, 7 November 2015.

2. Knowledge@Wharton, ‘What’s behind China’s stock market gamble?’, https://
knowledge.wharton.upenn.edu/article/whats-behind-chinas-stock-market-gamble/,
last accessed 19 November 2019.
3. Financial Times, 30 July 2015, p. 7.
4. World Bank indicators – based on current US dollars.
5. Steinfeld, Forging Reform in China; Zhan and Turner, ‘Crossing the river’.
6. Huang, ‘How did China take off?’; Zhu, ‘Understanding China’s growth’.
7. Zhan and Turner, ‘Crossing the river’, 241.
8. Allen and Qian, ‘China’s financial system’, 535.
9. Sources: Shanghai Stock Exchange Fact Book, 2017, pp. 217, 220; Shenzhen Stock Exchange Fact
Book, 1998, pp. 6–7; Shenzhen Stock Exchange Fact Book, 2001, pp. 6–7; Shenzhen Stock
Exchange Fact Book, 2007, pp. 6–7; Shenzhen Stock Exchange Fact Book, 2008, pp. 6–7;
Shenzhen Stock Exchange Fact Book, 2016, pp. 6–7.
10. Zhan and Turner, ‘Crossing the river’, 238–9.
11. Sources: Shanghai and Shenzhen Stock Exchanges
Notes: The Shanghai Stock Exchange Composite Index starts on 19 December 1990
and is set at 100 on that day. The Shenzhen Stock Exchange Composite Index starts on
3 April 1991 and is set at 100 on that day. The graph above stops at the end of
September 2015, when the bubble bottomed out.
12. Beltratti, Bortolotti and Caccavaio, ‘Stock market efficiency’, 126.
13. Liao, Liu and Wang, ‘China’s secondary privatization’, 504–5.
14. Li, ‘The emergence of China’s 2006–2007 stock market bubble’.
15. Financial Times, 19 April 2007, p. 1.
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25. Qian, ‘The 2015 stock panic’.

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44. Financial Times, 29 August 2015, p. 7.
45. International Financial Law Review, 23 September 2015.
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50. Washington Post, 22 August 2015.
51. Lu and Lu, ‘Unveiling China’s stock market bubble’, 148.
52. Financial Times, 11 April 2015, p. 9; Financial Times, 2 July 2015, p. 10.
53. Washington Post, 12 May 2015, 8 July 2015.
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56. Washington Post, 7 October 2015.
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58. Lu and Lu, ‘Unveiling China’s stock market bubble’, 149.
59. Financial Times, 31 January 2007, p. 14; Financial Times, 7 June 2007, p. 14.

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60. Financial Times, 31 January 2007, p. 17.

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69. Financial Times, 10 July 2015, p. 11.
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73. Shanghai Stock Exchange Fact Book, 2016, p. 13.
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CHAPTER 12: PREDICTING BUBBLES

1. Tooke, A History of Prices, Vol. II, p. 179.

2. Foley, Karlsen and Putniņš, ‘Sex, drugs and bitcoin’.
3. www.coindesk.com/price/bitcoin, last accessed 19 November 2019.
4. Securities Exchange Commission, ‘In the matter of Tomahawk Exploration LLC and
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7. Gornall and Strebulaev, ‘Squaring venture capital valuations with reality’.
8. The inspiration for this table comes from Janeway, Doing Capitalism, p. 233.
9. See Jones, ‘Asset bubbles’ for a discussion of how the rise of asset management industry
affects the various theories of bubbles.
10. Posen, ‘Why central banks should not burst bubbles’.
11. Bernanke and Gertler, ‘Should central banks respond to movements in asset prices?’;
Trichet, ‘Asset price bubbles’.
12. Bernanke, ‘Asset price “bubbles” and monetary policy’.
13. Assenmacher-Wesche and Gerlach, ‘Financial structure’.
14. Trichet, ‘Asset price bubbles’.
15. Voth, ‘With a bang, not a whimper’.

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16. Tobin, ‘A proposal’.

17. Keynes, The General Theory, chapter 12.
18. Brunnermeier and Schnabel, ‘Bubbles and central banks’.
19. For an overview of the literature, see Bordo, ‘The lender of last resort’ and Freixas et al.,
‘Lender of last resort’.
20. Kindleberger, Manias, Panics and Crashes, p. 146.
21. Calomiris and Haber, Fragile By Design.
22. de Tocqueville, Democracy in America, p. 600.
23. Tetlock, ‘Giving content to investor sentiment’; García, ‘Sentiment during recessions’;
Griffin, Hirschey and Kelly, ‘How important is the financial media?’; Walker, ‘Housing
booms’.
24. Akerlof and Shiller, Animal Spirits, p. 55.
25. Shiller, Irrational Exuberance, p. 105.
26. Gentzkow and Shapiro, ‘Media bias and reputation’.
27. Dyck and Zingales, ‘The bubble and the media’.
28. Dyck and Zingales, ‘The bubble and the media’.
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31. Akerlof and Shiller, Phishing for Phools.
32. See Barberis and Huang, ‘Stocks as lotteries’.
33. Wall Street Journal, ‘Amazon’s IPO at 20: That amazing return you didn’t earn’,
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34. On this, see Hagstrom, Investing: The Last Liberal Art.

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 Index

1720 bubbles outside of Britain, France or role in the South Sea Bubble, 24, 37
the Netherlands, 31 Bank of International Settlements, 141
Bank of Japan, 137, 142, 146, 148
Abbott, Chief Justice, 46 banking crisis. See financial crisis
academic theories of bubbles during and Banks and Currency Amendment Statute
after the Dot-Com Bubble, 167–9 1887, 92
Accles, Ltd., 102–3 Banque Générale. See General Bank
Act to restore the publick Credit 1721, 28 Banque Royale. See General Bank
Ahern, Bertie, 171 Bear Stearns, 178
algorithmic trading, 215 Berners-Lee, Tim, 153
Amazon.com, 160 Big Four Japanese securities companies,
America Online, 157, 160, 163 140, 146
American International Group (AIG), Birmingham Small Arms, 111
178–9 bitcoin, 210–11
Andreesen, Marc, 153, 167 Black Thursday, 24 October 1929, 123–4,
Anglo Irish Bank, 180 126
Argus, 81, 87 blockchain, 210–11
austerity Bloomberg Television, 158
after the Japanese bubbles, 148 Bretton Woods System, 136
Australasian Insurance and Banking Record, brewery boom of the 1890s, 111
78, 85, 86, 87 Brodzky, Maurice, 88
broker loans
bank failures. See financial crisis in relation to the 1920s stock market
Bank of Australasia, the, 93 bubble, 123, 128, 130
Bank of England in relation to the Chinese bubbles, 205–7
in relation to the British Bicycle Mania, in relation to the Dot-Com Bubble, 162
108 regulation of after the 1920s stock market
in relation to the financial crisis of 1825, bubble, 134
48, 54–6 Brown, Gordon, 170
in relation to the financial crisis of 1847, Bubble Act 1720, 28, 38, 40, 46
74 repeal of, 47, 56
in relation to the first emerging market bubble triangle, the
bubble, 52–3 as a predictive tool, 211–12
in relation to the Great Railway Mania, description of, 4–9
65–6, 68 diagram of, 5
in relation to the Subprime Bubble, 178, bubbles
179 consequences of, 9–10

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 INDEX

criteria for inclusion, 12 Dow Jones Industrial Average, 215

definition of, 4 in relation to the 1920s, 120–5
etymology of, 3–4 Dunlop Company, The, 100–102, 106
investing in, 220–2
list of included, 13 Economist, The
prevention of, 216–18 in relation to the British Bicycle Mania,
rationality/irrationality of, 10–11 103
reasons for changes in frequency of, 214 in relation to the Dot-Com Bubble, 159
reasons for end of, 9 in relation to the Great Railway Mania,
riding of, 7, 221 58, 64, 65, 72
eigyo tokkin funds, 143–4
capital controls, 198 Eldon, Lord, 45–6
capital flight. See foreign investment European Union sovereign bailouts, 180–1
central banks. See Bank of England; Federal export-led growth
Reserve, the; Bank of Japan in post-war Japan, 135–6
China Securities Regulatory Commission, role in the Subprime Bubble, 182
196, 200, 202, 209
Chinese Ministry of Finance, 203 Fama, Eugene, 4, 11
Cisco, 157 Fannie Mae and Freddie Mac, 178, 187, 189
CNBC, 158 Federal Reserve, the
CNNfn, 158 in relation to the 1920s, 116, 119, 121,
collateralised debt obligations (CDOs), 176 124, 128
Community Reinvestment Act of 1977, 187 in relation to the Dot-Com Bubble, 162
Corn Laws, repeal of, 65 in relation to the Great Depression, 131
cornering the market in relation to the Subprime Bubble,
as a constraint on short selling, 8 178–9, 180, 182, 187
in relation to the British Bicycle Mania, female investors
109–10 in relation to the British Bicycle Mania,
in relation to the bubbles of 1720, 32 107–8
in relation to the first emerging market in relation to the Great Railway Mania, 70
bubble, 51 in relation to the South Sea Bubble, 36
in relation to the Great Railway Mania, financial crisis
70–1 connection to bubbles, 2–3, 6
credit default swaps, 179 of 1825, 48, 54–6
credit-rating agencies, 176, 189 of 1847, 74–5
cyclically adjusted price-to-earnings ratio of the 1890s in Australia, 95
(CAPE), 156–7 of the 1930s in the United States. See
Cycling Magazine, 104–5 Great Depression, the
of the 1990s in Japan, 148–9
deflation of the 2000s, 177–81
in relation to the Great Depression, financial deregulation, 9
131–2 after 1825, 56
in relation to the Mississippi Bubble, 35 global, after 1970, 152, 214
Defoe, Daniel, 26 in relation to the 1920s, 119
democratisation of investment in relation to the Australian Land Boom,
in relation to the Great Railway Mania, 69 79, 91–3
in the United.States, 115–17 in relation to the Chinese bubbles, 196–8,
derivatives 199–200, 205–6
in relation to the Dot-Com Bubble, 169 in relation to the Great Railway Mania,
Disraeli, Benjamin, 47, 51, 53 68
dot-com bubbles outside the United States, in relation to the Japanese bubbles, 137,
156, 157, 160, 165, 166 139–41, 143–4

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 INDEX

financial deregulation (cont.) futures trading

in relation to the Subprime Bubble, in relation to the Japanese bubbles, 144
188–9 post-war regulation in Japan, 135
financial innovation
in relation to the Australian Land Boom, Galbraith, John Kenneth, 11
88 gangster involvement in the Japanese
in relation to the Mississippi Bubble, bubbles, 147
18–20 Garber, Peter, 34
Financial Post, The, 103 Gazette d’Amsterdam, 20
financial sector lobbying in relation to the General Bank, 18–19
Subprime Bubble, 189 Gissing, George, 107
Financial Times, The Gladstone, William, 59–61
in relation to the British Bicycle Mania, Glenmutchkin Railway, The, 61–3, 69, 70–1,
101, 105–6, 112 76
in relation to the Dot-Com Bubble, 159, global financial crisis. See financial crisis of
164 the 2000s
first railway mania, 59 government debt
flipping. See speculation in relation to the first emerging market
Florida land boom. See US housing boom of bubble, 41
the 1920s in relation to the Mississippi Bubble,
Ford, Henry, 129 17–18, 20
foreign bond boom of the 1920s in the US, in relation to the South Sea Bubble,
119–20 17–18, 23–5, 27–8
Foreign Exchange Law of 1980, the government response to the Australian
(Japan), 137 Land Boom, 93–5
foreign investment government-sponsored entities. See Fannie
in relation to the 1920s, 119–20 Mae and Freddie Mac
in relation to the Australian Land Boom, Great Depression, the, 130–2
78–9, 95 Great Railway Mania, the
in relation to the Chinese bubbles, magnitude of, 63–4, 67–8
199–200 Greenspan, Alan, 152, 157, 162
foreign investors
in relation to the Subprime Bubble, 181, Hassett, Kevin, 158
182 Hatry, Clarence, 130
Fortune Magazine, 154, 159 herding, 11
fraud high-frequency trading, 215
in relation to the 1920s stock market Hokkaido Takushoku Bank, 148
bubble, 123 Hooley, Ernest Terah, 100–102, 103
in relation to the Australian Land Boom, Housing Bill of 1980 (UK), 188
93 Hudson, George, 66
in relation to the British Bicycle Mania, Hutcheson, Lord Archibald, 26, 32
100, 102–3
in relation to the Dot-Com Bubble, 164–5 Industrial Bank of Japan, the, 147
in relation to the first emerging market inexperienced investors
bubble, 40–1 in relation to the Australian Land Boom,
in relation to the Great Railway Mania, 66 82
in relation to the Japanese bubbles, in relation to the British Bicycle Mania,
149–50 107–8
in relation to the US housing boom of the in relation to the Chinese bubbles, 198,
1920s, 119 204–5
Freddie Mac. See Fannie Mae and Freddie in relation to the Dot-Com Bubble, 158,
Mac 161–2, 163

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 INDEX

in relation to the Great Railway Mania, in relation to the 1920s stock market
69–70, 74 bubble, 128
in relation to the Subprime Bubble, in relation to the Australian Land Boom,
176–7, 184 90
initial public offerings in relation to the British Bicycle Mania,
in relation to the Chinese bubbles, 200–1 112
in relation to the Dot-Com Bubble, 156 in relation to the bubbles of 1720, 20–2,
in relation to the Japanese bubbles, 142 25, 32
insider investors in relation to the first emerging market
in relation to the Australian Land Boom, bubble, 51
92–3 in relation to the Great Railway Mania, 68
in relation to the British Bicycle Mania, Liberty bonds, 116–17, 127
107–8 LIBOR, 178
in relation to the Dot-Com Bubble, 155 liquidity assistance
in relation to the South Sea Bubble, 25 in relation to the Australian Land Boom,
institutional investors 94–5
in relation to the Dot-Com Bubble, 162–3 Liverpool and Manchester railway, the, 59
in relation to the Japanese bubbles, logrolling
139–40, 145, 146–7 in relation to the Great Railway Mania, 72
potential role in future bubbles, 215 Long-Term Credit Bank of Japan, 148
Internet, The loose credit
effect on securities trading, 162 as of 2016, 210
origins of, 152–3 in relation to the 2000s housing bubbles,
investment trusts 175–7
in relation to the 1920s stock market in relation to the Australian Land Boom,
bubble, 128 88–90
irrational exuberance, 152, 168, 170 in relation to the Chinese bubbles, 205–7
in relation to the Dot-Com Bubble, 162
Janeway, William, 3 in relation to the Subprime Bubble, 181,
Japan Joint Securities Corporation, 140 182–3
Japan Securities Holding Association, 140 loose monetary conditions
Japanese land booms before the 1980s, 138 after the Subprime Bubble, 191–2
Japanese Ministry of Finance, 142, 143, as of 2016, 210
149 connection to bubbles, 6–7
joint-stock companies in relation to the Australian Land Boom,
after 1825, 56 78–9, 88–9
decline after 1720, 37–8 in relation to the British Bicycle Mania,
108–9
Kanemaru, Shin, 150 in relation to the Dot-Com
Kelly, Morgan, 170 Bubble, 162
Kindleberger, Charles, 4, 11, 169 in relation to the Great Railway Mania,
King Carlos II of Spain, 16 68–9
in relation to the Japanese bubbles,
land development companies 137–8, 143
in relation to the Australian Land Boom, in relation to the Mississippi Bubble, 22,
79–80, 82–7, 90 31–2
in relation to the Japanese bubbles, 145 in relation to the Subprime Bubble,
Latin American sovereign bond boom of 182–3
the 1820s, 41 Lowenstein, Roger, 164–5
Law, John, 18–23, 31
Lehman Brothers, 178 MacGregor, Gregor, 41
leveraged shares Mackay, Charles, 10, 14, 33, 58

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 INDEX

margin calls in relation to the 1920s stock market

in relation to the 1920s stock market bubble, 129–30
bubble, 123, 130 in relation to the Dot-Com Bubble, 163–4
margin loans. See broker loans New York Daily News, 123, 125
market manipulation New York Investment News, 124
in relation to the British Bicycle Mania, New York Times, The
100, 109–10 in relation to the 1920s stock market
in relation to the bubbles of 1720, 33 bubble, 122, 124–6, 129,
in relation to the Mississippi Bubble, 22 in relation to the Chinese bubbles, 198
marketability in relation to the Dot-Com Bubble, 154,
as of 2016, 210 164
between the 1720 and 1825 bubbles, news media
39–40 after the first emerging market bubble,
definition of, 5–6 57
in relation to the 1920s stock market after the South Sea Bubble, 35–6
bubble, 127–8 in relation to the 1920s stock market
in relation to the Australian Land Boom, bubble, 122–3, 125–6
88 in relation to the Australian Land Boom,
in relation to the British Bicycle Mania, 81, 87–8
108 in relation to the British Bicycle Mania,
in relation to the bubbles of 1720, 31 100–1, 103–5, 109
in relation to the Chinese bubbles, 207 in relation to the Chinese bubbles, 198,
in relation to the Dot-Com Bubble, 161–2 200, 203
in relation to the first emerging market in relation to the first emerging market
bubble, 52, 54 bubble, 49–50
in relation to the Great Railway Mania, in relation to the Great Railway Mania,
68 63–5
in relation to the Japanese bubbles, in relation to the Mississippi Bubble, 20
143–4 in relation to the South Sea Bubble, 26–7
in relation to the Subprime Bubble, in relation to the Subprime Bubble, 185
181–2 role in past and future bubbles, 218–20
Marx, Karl, 58 Northern Ireland housing bubble of the
Microsoft, 154, 157, 163 2000s, 2, 175, 177, 182
mining booms of the 1890s, 110–11 Northern Rock, 178
Mississippi Company, 19–22 Noyes, Alexander Dana, 122
modernism, 129
momentum trading. See speculation Panic of 1907, the, 124
mortgage-backed securities (MBS) Peel, Robert, 65
in relation to the Subprime Bubble, 176, penny-farthing, 99
177–9, 185–6 People’s Daily, 200, 203
in relation to the US housing boom of the Plaza Accord, the, 136–7, 141
1920s, 117–18 Ponzi, Charles, 119
Mosaic internet browser, 153 Poyais. See Macgregor, Gregor
promotion boom
NASDAQ index, 156–7, 159–60 in Australian Land Boom companies,
National Asset Management Agency, 180 82–3
National City Bank, 120, 126, 127 in relation to the 1720 bubbles, 28–30
National Land Agency (Japan), 145 in relation to the first emerging market
Netherlands in relation to the bubbles of bubble, 41–5
1720, 29–31, 36 in relation to the Great Railway Mania, 63
Netscape, 153–5, 163, 164 of 1807–8, 40
new era narratives, 8, 218 of railways in 1836–7, 59

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 INDEX

quantitative easing, 192 short selling

Chinese efforts to curtail, 202–4
Railway Act 1844, 59–61, 71–2 definition of, 7
railway authorisation process in relation to difficulty of, 221
the Great Railway Mania, 62–3 in relation to the British Bicycle Mania,
Railway Board, 62–3, 71–2 109–10
railway booms in the United States, 72–3 in relation to the bubbles of 1720, 32
Railway Dissolution Act 1846, 67 in relation to the Chinese bubbles, 208
Railway Times, 63, 64, 65, 68, 72 in relation to the first emerging market
Raleigh Company, The, 106 bubble, 51–2
reaching for yield in relation to the Great Railway Mania,
definition of, 6 70–1
during the Great Railway Mania, 68 in relation to the Subprime Bubble,
in relation to the Subprime Bubble, 162 185–6
recession Smoot-Hawley tariff, the, 130
after the 1920s stock market bubble. See South Sea Company, the, 1, 23–6
Great Depression, the South-East Asian booms of the 1990s, 14
after the Australian Land Boom, 96 spark
after the British Bicycle Mania, 111 description of the concept, 8–9
after the Dot-Com Bubble, 165–6 for the 1720 bubbles, 33
after the first emerging market bubble, for the 1920s stock market bubble,
56 129–30
after the Japanese bubbles, 148–9 for the 2000s housing bubbles, 186–7
after the Mississippi Bubble, 35 for the Australian Land Boom, 91
after the Subprime Bubble, 189–91 for the Bitcoin Bubble, 210
Reform Plan for the Tokyo Area of 1985, 145 for the British Bicycle Mania, 99–9
for the Chinese bubbles, 196–8, 199–200
S&P 500 index, 156–7, 159–60 for the Dot-Com Bubble, 152–3, 163
Sanyo Securities, 148 for the first emerging market bubble, 53
satire for the Great Railway Mania, 71
in relation to the bubbles of 1720, 34, for the Japanese bubbles, 145–6
35–6 predicting a, 213–14
in relation to the first emerging market speculation
bubble, 44–5 definition of, 7
in relation to the Great Railway Mania, in relation to the 1920s stock market
61–3, 69–70 bubble, 128–9
Scandinavian housing boom, 14 in relation to the Australian Land Boom,
scrip certificates, 62 90–1, 92–3
Securities Act of 1933, 134 in relation to the British Bicycle Mania,
Securities and Exchange Law of 1948 109–10
(Japan), 135 in relation to the bubbles of 1720, 32–4
Securities Exchange Act of 1934, 134 in relation to the Chinese bubbles, 198,
shadow banks 207–8
in relation to the Australian Land Boom, in relation to the Dot-Com Bubble, 163
80, 88–9 in relation to the Great Railway Mania, 69
in relation to the Chinese bubbles, 199, in relation to the Japanese bubbles,
205–7 144–5
in relation to the Japanese bubbles, 145, in relation to the Subprime Bubble,
148 183–4
in relation to the Subprime Bubble. See in relation to the US housing boom of the
American International Group (AIG) 1920s, 118–19
Shiller, Robert, 11, 157, 168, 170, 184, 218 state-owned enterprises, 195

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 INDEX

stock market bubbles of the 1920s outside in relation to the Japanese bubbles, 142
the United States, 126–7 unicorn bubble, the, 213
Sumitomo Bank, 149 US housing boom of the 1920s, 117–19
useful bubbles, 3, 75, 213–14
Table Talk, 87–8 the British Bicycle Mania as an example,
technological innovation 113–14
in modern financial markets, 214–15 the Dot-Com Bubble as an example,
in relation to the 1920s stock market 166–7
bubble, 120, 129–30, 132
in relation to the British Bicycle Mania, Visa, the, 22–3
99–9, 113 volatility
in relation to the Dot-Com Bubble, 153, 163 in relation to the 1920s stock market
in the fourth industrial revolution, 213 bubble, 123
role in bubbles, 3, 8
unaccompanied by a bubble, 213 Wall Street Crash, the, 123–5
television cause of, 130
rise of financial television in relation to connection to the Great Depression,
the Dot-Com Bubble, 158 130
role in the Subprime Bubble, 184–5 Wall Street Journal, The, 122
Thai stock market bubble, 14 War of the Spanish Succession, The, 17,
Time Warner, 157, 160 23
Times, The Wilks, John ‘Bubble’, 40, 46
in relation to the first emerging market Windhandel. See Netherlands in relation to
bubble, 40, 46, 48, 49–50, 51 the bubbles of 1720
in relation to the Great Railway Mania, World Trade Organisation
63, 64–5 Chinese accession to, 196
tokkin funds, 140, 143–4 World War I, 115–16
Tokyo City Bank, 148 World War II, 132, 134
TOPIX index, the, 141, 142 World Wide Web. See Internet, The
town- or village-owned enterprises, 195
transaction costs Xiaochuan, Zhou, 198
in relation to the 1920s stock market Xiaoping, Deng, 194–5
bubble, 128
in relation to the Dot-Com Bubble, 161 yakuza. See gangster involvement in the
Tulipmania, 11, 13–14 Japanese bubbles
Yamaichi Securities, 148
underpricing
in relation to the Dot-Com Bubble, 155 zaibatsu, 135, 140

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