By the time he was a teenager, he had adopted the name Ken, and later disliked being called John. His mother, a homemaker and a community activist, died when he was fourteen years old. Both of his parents were supporters of the United Farmers of Ontario in the s. His early years were spent at a one-room school which is still standing, on Willey Road, in Iona Station . Later, he went to Dutton High School and St.
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The Notes It should be accepted that speculative euphoria and financial ruin are inherent in the system. Only a clear understanding of euphoric characteristics can help, but not a guarantee. Participants defend their vested interest. And it is equally protected by the will to ignore, exorcise, or condemn those who express doubts.
The more money, the greater the genius needed to attain it. And superior intelligence is endowed on leaders of financial institutions. It ignores a vast history of wealth attained by luck, illegal gain, or inheritance. Individuals are just as likely to believe themselves intelligent, as they do others, after making money off a stroke of luck. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.
Eventually, others recognize it and pile in. Financial innovations are less innovation and more a twist on a past financial concept or product, unknown to a new generation of speculators. Crash: The innovation finally receives the scrutiny it deserved, albeit too late.
Regulation and reform are debated. Once praised promoters and their genius of said innovation are scorned. The euphoria and optimism are ignored. The blame gets a rational response, while the irrational acts get ignored.
There had to be another reason other than naivety. The assumption that the market is free from error, so something else, external or an abuse, had to cause the crash. Notes could be exchanged for coin. Revenue to support the notes came in the form of monopoly rights to trade in the Louisiana Territory. The public took to it, prices rose quickly, and speculation ran wild. It turned out to be a scheme. Proceeds from the sale of stock went to pay off government debt. The notes that paid the government debt were used to buy more stock, stock prices rose and demand for more shares rose, more shares were issues, paying off debt — it created a vicious circle that fueled speculation.
Ultimately, the number of notes created by the Banque Royale far exceeded the coin available to cover the notes.
It was pure leverage. The scheme came crashing down in with a run on the bank. People demanded coin for their notes instead of stock. Of course, there was none. Shares of the Mississippi Company tanked. Law went from financial genius to condemned overnight. Shares of the company were offered to the public. By December the price was back to its January high. But the episode produced many other joint-stock companies based of imaginative ideas — horse insurers, perpetual motion machines, soap maker, attempt to turn mercury into other metals — trying to take advantage of the boom.
Nobody blamed the credulity and avarice of the people — the degrading lust of gain…or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors. These things were never mentioned. Two of the biggest bubbles came from shifts in transportation — canals busted in and railroads busted in — mostly funded by British money. Prices doubled after a few weeks. It collapsed in Blame was placed on two hurricanes that fall.
Investment trusts were the new innovation. The trusts levered up spectacularly. Trading corporations, like the Goldman Sachs Trading Corp. All leveraged to the hilt, speculating in stocks.
Then the inevitable reversal of these expectations because of some seemingly damaging event or development or perhaps merely because the supply of intellectually vulnerable buyers was exhausted. Whatever the reason and it is unimportant , the absolute certainty, as earlier observed, is that this world ends not with a whimper but with a bang. A rational response to an irrational episode.
This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius. So alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.
John Kenneth Galbraith
A Short History of Financial Euphoria by John Kenneth Galbraith