The Lessons of History and the Most Tumultuous Decades Ever

The monetary history of the last four hundred years has been replete with financial crises. The pattern was that investor optimism increased as economies expanded, the rate of growth of credit increased and economic growth accelerated, and an increasing number of individuals began to invest for short-term capital gains rather than for the returns associated with the productivity of the assets they were acquiring. The increase in the supply of credit and more buoyant economic outlook often led to economic booms as investment spending increased in response to the more optimistic outlook and the greater availability of credit, and as household spending increased as personal wealth surged. One of the earliest bubbles reviewed in this volume was the Dutch ‘tulipmania’ of the 1630s in which the buyers received credit from the sellers. Rational exuberance in the Netherlands morphed into irrational exuberance, the economy briefly boomed — and then the growth rate slowed as bulb prices tumbled. The South Sea Bubble in London and the Mississippi Bubble in Paris both occurred in 1720; each was associated with a new financial institution that arranged for sharp increases in the supplies of credit.