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The Bright Side of Bubbles

Despite their cost, speculative bubbles may have an enormous upside, a new book argues.

In Pop!, Gross presents a breezy and highly informative history of major U.S. speculative bubbles, seen mainly from the bright side. He argues that bubbles are ultimately beneficial if they create new commercial infrastructures — such as the telegraph, or the railway system, or the Internet — that enable new businesses to grow and old businesses to transform themselves. Crucially, bubbles also create “mental infrastructures,” says Gross, the collective mind-sets that persuade people to change their accustomed ways of doing business — whether sending messages by telegraph, dispatching freight by railroad, or buying and selling via the Internet.

Bubbles, in short, are explosions of entrepreneurial energy that facilitate the rapid rollout and adoption of new technologies. The inevitable excess capacity results in lower prices, making those technologies feasible for general use. Long after the start-up companies have folded and the usual scandals have run their course, the commercial infrastructure remains. Compared with other countries, “we get over bubbles more quickly and do more with what has been left behind,” Gross tells CFO.

Thus, by the time the telegraph bubble finally deflated, the United States was wired coast-to-coast and the cost of telegraphy had dropped to a penny per word. The telegraph liberated value from its geographic confines, says Gross, leading to the creation of national financial markets, stock brokerages (originally known as “wire houses”), Dun & Bradstreet, and the Associated Press. Thomas Edison, Andrew Carnegie, and RCA’s David Sarnoff were all once telegraph operators, he notes.

The inclination to jump in feetfirst and ask questions later is a signature trait of American business, suggests Gross. True, many early telegraph companies were bad investments and investors lost their shirts, while the rollout of the telegraph in Europe was a more orderly affair controlled by the government. But no pain, no gain: by 1852, the United States had strung up more than 23,000 miles of wire. France, in comparison, had a mere 750 miles.

Government as Enabler

This is not to imply that government hasn’t played a key role in America’s bubble dynamic. Gross shows how it has repeatedly helped foment booms — commissioning the first telegraph line in 1843, for example, or granting huge tracts of land to fledgling railway companies, or passing the deregulatory Telecommunications Act of 1996. Without financial, regulatory, and legal help from federal and state governments, America’s bubbles would have trouble getting started.

Meanwhile, the federal government’s response to the 1929 stock-market crash created what Gross lauds as a new financial infrastructure. “It’s difficult to think of anything positive that came of the 1929 stock market crash,” he writes. “[T]he market meltdown and the ensuing long, grisly slide into depression was an unambiguous, searing disaster.” Still, the Securities Act of 1933; the Securities Exchange Act of 1934 and the creation of the Securities and Exchange Commission; the invention of federal bank deposit insurance; the chartering of the Federal National Mortgage Association in 1938; the Investment Company Act of 1940; and more all “laid the groundwork for the remarkable growth of the consumer-driven economy and for the nation’s financial dominance in the second half of the twentieth century,” writes Gross.

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