Chapter 4 examines the bubble in railway shares which occurred in the UK in the mid-1840s. Railway share prices more than doubled between 1843 and the autumn of 1845. In addition, there was a promotion boom with hundreds of new railways being authorised by Parliament. By the autumn of 1845, 562 new railway schemes had been submitted to Parliament. Following several major newspaper editorials regarding this folly, the bubble came to an end. The chapter then moves on to discuss the causes of the bubble. The incorporation of hundreds of railway companies by Parliament resulted in an increase in marketability. In terms of money and credit, interest rates were at an historical low and part-paid shares leveraged the buying of shares. The railway bubble witnessed the democratisation of speculation, with many middle-class individuals buying shares for the first time. The spark which set the bubble fire alight was the Railway Act. This Act signalled that railways had the potential to be very remunerative investments. It also created the Railway Board, which was a means of coordinating applications to build railways so that a national rail network was constructed. The chapter concludes by examining the consequences of the bubble, arguing that the bubble was a deeply inefficient way to create a national rail network, and much too wasteful to be considered useful.

Chapter 11 examines the stock market bubbles which occurred in China in 2007 and 2015. Between the end of 2005 and October 2007, the stock market soared by over 400 per cent. One year later, the market had fallen by 70 per cent. Similarly, in the year before June 2015, the stock market had increased by more than 150 per cent. It then collapsed by more than 50 per cent in under three months. The chapter discusses how, in the space of 20 years, China went from having almost no marketability to having heavily controlled marketability, and then near-free marketability. China also went from having virtually no middle class to having the world’s largest middle class, which then became the new speculating class. Thanks to margin lending, they were able to borrow heavily to finance their investments. Both bubbles are very clear examples of how and why governments engineer bubbles in the first instance. In 2007 the Chinese authorities needed to stimulate privatisation and in 2015 they needed to unwind the largest economic stimulus in history.

Chapter 8 examines the land and stock market bubbles that occurred in Japan in the 1980s. In the seven years before its peak, the Japanese stock market appreciated 386 per cent. Similarly, land prices rose by 207 per cent. By August 1992, the Japanese stock market had fallen 62 per cent from its peak, and by 1995, land was 50 per cent below its peak. Both land prices and the stock market continued to fall into the next decade. The chapter then uses the bubble triangle to explain the Japanese land and stock bubbles. These 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. The chapter concludes by looking at how the collapse of the Japanese bubbles weakened the country’s banking system, which eventually had to be rescued by the government, and resulted in a stagnant economy for over two decades.

Chapter 10 examines the housing bubble which occurred in Ireland, Spain, the UK and the United States in the 2000s. House prices in many parts of these countries more than doubled in the years leading up to 2007. They then crashed with terrible consequences for the global financial system, which imploded in September 2008 when Lehman Brothers entered bankruptcy. The chapter then discusses how the bubble triangle explains this episode. Financial alchemy meant that mortgage finance could be provided to a wider range of people, thus making the family home much more marketable and an object of speculation. The spark which ignited the subprime bubble was a policy decision taken in the late 1990s that attempted to use loose mortgage lending standards as a substitute for government-provided social housing. The chapter concludes by examining the economic, social and political consequences of the bubble. The housing bubble of the 2000s is a perfect example of an economically and socially destructive bubble, despite extraordinary measures taken by governments and central bankers to save the system. The chapter concludes by drawing a line from the housing bubble and its collapse to the rise of populism.

Chapter 12 is the conclusion of the book. The chapter starts by arguing that the bubble triangle can explain why the cryptocurrency bubble occurred in 2017. It then asks whether the bubble triangle is a good predictive tool. The answer to that question is yes, but bubbles are still difficult to predict because the sparks are difficult to discern. The bubble triangle is also able to predict which bubbles will be destructive (politically sparked bubbles with high bank lending) and which will be useful (technology sparked bubbles with low leverage). The chapter then moves on to look at what governments could do to prevent bubbles. However, since political bubbles are often created because they are in the government’s interest, governments cannot be relied upon to take these measures. The question then arises as to whether the news media can alert investors to the presence of bubbles. The answer to this question very much depends on whether they have the incentive to do so, and this incentive appears to be diminishing over time. The chapter concludes by arguing that investors need to build broad mental models, which include history, if they are to have any chance of predicting bubbles.

Chapter 5 examines the bubble that occurred in Australia in the late 1880s. During 1887 and 1888, there was a major bubble in the price of suburban land, particularly in Melbourne. In addition, companies involved in the financing and development of urban land were created at this time and during the first half of 1888, their share prices doubled. After the peak in October 1888, the share prices of these companies and urban land prices fell sharply. We then explain why it took several years for the liquidation of the land boom to affect the wider economy. The chapter then moves on to discuss how the bubble triangle explains this episode. In particular, this was the first major bubble where investors were speculating with other people’s money, provided ultimately by the country’s banks. The spark which ignited the land boom was the liberalisation in 1887 of the restriction on banks’ lending on the security of real estate. This was the final act in a 25-year liberalisation process. The chapter concludes by examining the dire consequences of the bubble. In 1893, the Australian banking system collapsed and, as a result, Australia experienced a very long and deep economic recession

Chapter 1 explains why the study of bubbles is important. Bubbles can have huge economic, social and political costs, but some bubbles may be useful. The chapter discusses the origin of the ‘bubble’ metaphor and the definition of a bubble. It then develops a new metaphor and framework for bubbles based on the chemistry of fire - the bubble triangle - in order to better understand their causes and consequences. The three sides of the bubble triangle are marketability, credit and money, and speculation – these correspond to oxygen, fuel and heat in the fire triangle. The spark which sets the bubble fire alight is either technological change or a government policy decision. This analytical framework helps predict when bubbles will occur, when they will burn out and what their economic effects will be. The chapter concludes by outlining the catalogue of 12 historical bubbles that will be examined in the rest of the book.

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.