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Source link: http://archive.mises.org/12848/austrian-light-on-the-history-of-bubbles/

Austrian Light on the History of Bubbles

May 31, 2010 by

You know you have crossed into the Austrian light when you wake up one morning and everything has become clear. Doug French made his journey into the light when he wrote this, his master’s thesis, under the tutelage of Murray Rothbard. FULL ARTICLE by Andy Duncan

{ 13 comments }

David Dillon May 31, 2010 at 11:19 am

Several references were made to Doug Frence’s book being free. Well, it’s not.

Mises Daily May 31, 2010 at 11:35 am

It’s a free download, just as all the books we publish are.

Eugenia Kaneshige May 31, 2010 at 11:53 am

Thanks so much for the summary of Doug French’s book, from someone who would love to read the whole thing, but always seems short of time. Fascinating story that I will pass on to friends.

Allen Weingarten May 31, 2010 at 12:35 pm

I appreciated the explanation for the tulip bubble. Yet consider the question “how does a bubble expand against a 100-percent physical precious metals store held by a nominally independent bank…?” Although it is advisable to have that store, it cannot be assumed to be sufficient to prevent a bubble. Consider savings banks that loan out several times more money than can ever be fully redeemed. (I am not referring to the situation where this loss is accepted by those with savings accounts, for it is then their loss on their investment.) When these banks are guaranteed coverage by a central bank, it will create a bubble.

So a system of 100% precious metals is necessary but not sufficient to prevent a bubble. Rather at issue is precluding government intervention, which at its root relies on force rather than the free market.

david moore May 31, 2010 at 12:59 pm

It would seem a bubble could form in any money system, even 100% reserve free banking system. Money would move from other investments into the bubble investment, new money would not have to be created. However an aggregate boom or a financial crisis could not occur without money inflation. Since money was not expanded it could not contract. The last people investing in the bubble would be left holding the bag and transfer their wealth to someone else. In the aggregate nothing would change and the general economy would not be affected. Please critic.

BioTube May 31, 2010 at 9:48 pm

But the money supply DID expand – sure, in this case it came from the rest of Europe, but in Holland, inflation was very real.

newson June 1, 2010 at 9:32 am

…note also that the bank of amsterdam ceased to be a fully-reserved bank almost from the get-go, with secret loans to the city (1624), to the dutch east india company, and to the city loan bank, bank van leening (1614).

frb is just too tempting to resist, or so history would seem to suggest.

david moore June 1, 2010 at 12:21 pm

Gold and silver are international currencies, so the only expansion could come from mining and producing more. Dutch species could be spent anywhere and at an appreciation to clipped species. Investment in tulips could also come from anywhere.

newson June 1, 2010 at 9:34 am

note also that the plague might have also shortened the social time preference, in the same way that leper colonies used to be rife with gambling.

fundamentalist June 1, 2010 at 10:02 am

Excellent intro to French’s book. I’m anxious to read it. I would like to know if he discusses bill of exchange, because I ran across an episode of boom/bust in the Dutch economy of the 18th century in which bills of exchange played a major role. Bills of exchange worked exactly like paper money and they predate the tulip episode by centuries. It seems that a free market will invent paper money even if the law specifies gold as money. Anyway, in the 18th century episode, the amount of bills of exchange before the collapse exceeded 30 times the total money stock of the Dutch Republic. I’m curious if bills of exchange might have played a role in tulip mania.

newson June 1, 2010 at 8:02 pm

for me this tulip thing is still far from being a clear case of the abc in action. even with the inflation caused by the influx of monetary metal, the abc is not a given (see hülsmann’s “towards a general theory of error cycles”) – the inflation can be predicted by entrepreneurs, and in the (relative) absence of frb there would seem to be little cause for the classic cluster of errors.

iowa June 2, 2010 at 8:33 pm

Could mises.org please start writing up smaller artciles, it becomes a bit tiring.

tungsten watches July 24, 2010 at 1:57 am

It would seem a bubble could form in any money system, . Money would move from other investments into the bubble investment, new money would not have to be created. a system of 100% precious metals is necessary but not sufficient to prevent a bubble. Rather at issue is precluding government intervention, which at its root relies on force rather than the free market.

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