Chapter 9 examines the bubble in internet and other technology stocks that occurred at the end of the 1990s. This bubble witnessed the coming to market of many young firms which had never generated a profit. The excitement resulted in the NASDAQ index trebling in value in the 18 months prior to its peak in March 2000. By the end of 2000, however, it had lost more than half of its value. This bubble in tech stocks was not confined to the United States – it was a global phenomenon. The chapter then uses the bubble triangle can explain the causes of the dot-com bubble. The spark was provided by the new internet technology. Marketability increased as a result of new technology and many more companies floating on stock exchanges. Monetary conditions were loose in the runup of the bubble and there was a sharp rise in margin lending. Speculation was rampant in the runup, thanks to the rise of the day trader. The chapter concludes by arguing that the modest levels of economic damage associated with the bursting of the dot-com bubble suggest it could have been useful. However, its minor economic impact might also have made the authorities and investors complacent about the housing bubble which followed on its heels.

Chapter 3 examines the bubble that occurred in the UK in 1824 and 1825. This bubble concerned the promotion of Latin American mining companies and various new companies on the London stock market. The price of mining shares quintupled and those of other new companies more than doubled between August 1824 and February 1825. Over the next year, the prices of these stocks plummeted. This was then followed by one of the most serious banking crises ever to hit the UK. The chapter then moves on to discuss how all three sides of the bubble triangle were in play. Marketability had been revived by the liberalising attitudes of MPs in the UK Parliament. Part-paid shares leveraged the buying of shares and, allied to low denominations and low returns on other assets, stimulated speculation. The spark which set the bubble fire alight was a change in government policy towards Latin America and the corporation. The chapter concludes by examining the consequences of the bubble. The post-bubble banking crisis which started in December 1825 resulted in the collapse of many banks and was followed by a very deep recession.

Chapter 6 examines the bubble that occurred in the UK bicycle company shares in the 1890s. The modern bicycle emerged in the late 1880s after a series of revolutionary technological innovations, ranging from the pneumatic tyre to weldless steel tubes. Between 1895 and 1897, nearly 700 cycle companies were floated on the stock exchange, many of which were promoted by very questionable characters. An index of cycle shares appreciated 258 per cent in the first five months of 1896. The index remained high until the early months of 1897. By the end of 1898, the index was 71 per cent below its peak. The chapter then moves on to explore how the bubble triangle and the spark provided by the new technology explains the British bicycle mania. Marketability was high because so many cycle companies had floated their shares on the stock market and these shares had very low denominations. Monetary conditions were as loose as they ever had been up to that point and returns on traditional assets were very low. Speculation was rampant, but the presence of corners limited speculation in the opposite direction. The chapter concludes by arguing that the bicycle mania is a good example of a useful bubble.

Chapter 2 examines the first financial bubble, which occurred in 1720. Following the War of the Spanish Succession, the countries of Europe, particularly France and Britain, were heavily indebted. John Law invented the bubble in order to help the French government reduce their debt burden. He did so by creating a scheme whereby the Mississippi Company would refinance the government debt. Following Law’s lead, the directors of the South Sea Company proposed a similar scheme to refinance Britain’s public debt. Subsequently, the shares prices of the both the Mississippi Company and South Sea Company exploded and then dramatically collapsed. In addition, in Britain there were nearly 200 bubble companies floated on the stock market and the shares of existing companies also experienced a bubble. The chapter briefly discusses similar episodes elsewhere, especially in the Netherlands, but none of these were on the same scale as in Britain or France. The chapter then moves on to discuss the causes of the bubble. The debt conversion schemes turned unmarketable government debt into very marketable company shares. Part-paid shares leveraged the buying of shares in both countries and John Law’s bank meant that France’s entire monetary policy was directed towards creating the bubble. The bubble’s creators were also adept at stimulating speculative investment. The chapter concludes by examining the consequences of the bubble, which were severe and long-lasting in the case of France and minor in the case of Britain.

Chapter 7 examines the bubble that occurred in the United States in the 1920s. The roaring twenties in the United States was a decade of increasing prosperity, the democratisation of investment and the development of transformative technology. Between the start of 1927 and October 1929, the Dow Jones Industrial Average increased 127 per cent. Then at the start of October 1929, the Wall Street crash occurred, and the market had lost 48 per cent of its value in a matter of five weeks. The chapter then moves on to explore how the bubble triangle explains the US bubble during the roaring twenties. The spark was electrification, which rapidly transformed the American economy. Marketability was high due to the new financial-market infrastructure in place to channel the massive savings of the middle classes towards governments and firms. Monetary conditions were not excessively loose, but the rapid rise of broker loans and buying on margin meant that there was a lot of credit underpinning investment in stocks. Speculation was rampant, with many ordinary people buying stocks in the hope of a quick capital gain. The chapter concludes by examining the contribution of the bubble and Wall Street crash to the subsequent Great Depression.

In exploring how Huizhou men created and used village institutions for their commercial and financial benefit, Chapter 2 analyzes the ascendance of a venerable Confucian institution, the ancestral hall, in the villages of Huizhou and much of southeast China from the late fifteenth through the sixteenth centuries. It won widespread acceptance in Huizhou villages not only as a center of ancestral worship but also as a credit association or proto-bank. In general, it issued two kinds of loan, one at high interest rates to non-hall members to build up the hall’s assets for eventual construction and repair, and another at reduced rates of interest to hall members to provide them with cheap capital. This chapter will investigate the links between ancestral hall finances, ancestral worship ritual, and “grassroots capitalism.”

Chapter 4 develops the analysis of Chapter 3 by exploring how some wealthy Huizhou merchants carved out a dangerous approach to dealing with the government’s salt monopoly. Ingeniously adapting a strategy similar to that tried with their ancestral halls, they sought to place themselves inside an authorized institution of the state, the salt monopoly, and then turned the humble salt certificate into a financial instrument to their great advantage. By tricking the court’s incompetent representatives, Huizhou salt merchants were able not just to create great fortunes at government expense, but also from 1617 turn the government’s massive debt to them into a set of highly lucrative hereditary salt monopoly appointments for them and their sons. This chapter also deals with the private, secular variants of pawnshops that Huizhou merchants increasingly set up in the much of east China and the Yangzi Valley from the sixteenth century onward. It describes a reduction of the reported interest rate, both for individuals and for merchants, over the course of the dynasty, from 50 percent down to 20 percent, as more and more ordinary people relied on short-term infusions of capital for their living needs.