Tulipmania
Tulips were introduced into western Europe from Turkey in the 16th century. In the 17th century they gave rise to one of the most curious episodes in Holland’s history. In the early 1600s single-colour tulips were being sold at relatively modest prices in Dutch markets, but as new varieties were created the fashion for tulips intensified and prices soared. By 1623 a particularly admired and rare variety, Semper Augustus, was selling for
1,000 florins for a single bulb, more than six times the average annual wage. Ten years later the price had increased more than fivefold, and then reached a peak at the height of the tulip craze of some 10,000 florins, roughly the same as it cost to buy a fine canalside house in the centre of Amsterdam.
As the mania took hold more and more people sought to cash in on the boom, and
the tulip business developed from dealing in actual bulbs to dealing in what were in effect tulip futures.
It couldn’t last, and it didn’t. In 1637 the bulb bubble burst when it became clear that at the end of the long chain of those speculating in bulb futures there was no one who actually wanted to buy the bulbs at such high prices. Within a period of a few months the market had crashed leaving thousands of people ruined.
The Mississippi Bubble
In 1716 John Law, a Scottish businessman who had come to France two years earlier, persuaded the French government, which was in financial distress, to let him set up a bank that could issue bank notes, which he
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believed would provide a spur to commerce and help get the government out of its financial difficulties. At the time France controlled the Louisiana colony, which covered an area larger than France itself. In August 1717 Law bought a controlling interest in the then derelict Mississippi Company and was granted a 25-year monopoly by the French government on trade with the West Indies and North America. The company acquired other French trading companies and was renamed the Compagnie des Indes, in effect controlling all French trade outside Europe. Law had raised money to fund the Mississippi Company’s activities by issuing shares that could be purchased using notes issued by Law’s Banque de Generale or government bonds.
As Law’s business empire grew and there was more and more excitement about the riches that were to be exploited across the Atlantic, the share price rose dramatically. People from outside France as well as within couldn’t get enough of the shares and Law issued more and more banknotes to enable people to buy them. By the end of 1819, the year of initial issue, the share price had increased twentyfold.
The crunch came at the beginning of 1820 when investors started to sell shares and realise their gains in gold. Law stepped in to prevent people being paid more than a certain amount in gold for their shares, with the rest being payable in notes. Within a year the share price had fallen to a tenth of its value at the peak and Banque de Generale notes were worth only half their face value. A year later the shares were back to their issue price, and Law subsequently took his leave of France. Opinion is divided as to whether Law was in fact a rogue or simply an honest man undone by a misguided scheme.
The South Sea Bubble
In 1711 the South Sea Company was given a monopoly of all trade to the South Seas in return for assuming a
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portion of the national debt that England had
accumulated during the War of the Spanish Succession, which had started in 1703 and was still continuing. It was anticipated that when the war ended, which it did in 1713, there would be rich trade pickings to be had among the Spanish colonies in South America. But the South Sea Company did little trading, preferring to accumulate money from investors attracted by its future prospects.
War between Spain and England broke out again in 1718 and the following year the South Sea Company made a proposal to assume the whole of England’s national debt.
Inducements were offered to influential people and the proposal was accepted. New shares were issued in the company and the stock price was talked up and up.
Speculation fever took hold; a large number of companies that were to trade in the “New World” or which had other supposedly promising futures were set up, many of which were plain and simple scams to separate investors from their money. Confidence in the market was dented and in an effort encouraged by the managers of the South Sea Company to restore it, the “Bubble Act” was passed in 1720 requiring all joint stock companies to have a royal charter. It did the trick: the South Sea Company’s share price increased more than fivefold in four months to reach over £1,000. And then the bubble burst – or rather started to deflate. A gradual slide in the share price accelerated and within three months the company was worthless. Many people were ruined and a committee set up in 1721 to investigate the affair discovered widespread corruption involving businessmen and politicians.
Railway mania
The British “railway mania” of the 1840s and the American railway boom up to 1873 shared many similarities. Rail entrepreneurs used the stockmarket to
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raise huge sums to build proposed lines. Overinvestment led to excess capacity, failing revenues and defaults on loans – so much capital was diverted to railway projects that other businesses suffered and interest rates spiralled.
In America, generous land grants helped railroad construction and around 170m acres was given to some 80 rail companies, though half the projected lines were never built. The railway bubble burst in the “Panic of 1873”, the same year as America’s first successful train robbery.
The Wall Street crash
In 1929 stock prices were 400% higher than they had been in 1924, pushed up way beyond any relationship with the actual worth of their companies, as investors, lured by the prospect of easy riches, piled into the market, accumulating some $6 billion of debt in the process. In early September 1929 prices fell sharply but recovered before falling again. In late October panic selling gave rise to the Wall Street crash, which ushered in a worldwide economic crisis, the Great Depression. Many shareholders were ruined, banks and businesses failed, and
unemployment subsequently rose to around 17m.
Japan’s monetary mistake
When through the Plaza Accord in 1985 Japan agreed to loosen its monetary policy to boost the value of the yen and trim its exports, things did not turn out quite as expected. Rather than restraining Japanese companies, the sudden doubling of the value of the yen against other currencies allowed big multinational firms to go on a buying spree of American and European assets, using bank loans and the rising value of their property portfolios as collateral. Bank lending on property ballooned as the initial loans drove up land prices and the higher land prices made those loans look like good business. At the height of the boom, the property around the imperial palace in Tokyo was worth more than California, and Australia paid off its national debt by selling a small parcel
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of land around its embassy. When the bubble burst after rises in interest rates in the early 1990s, property values slumped. Japan’s banks and corporations have since struggled under the weight of bad debts and the country has endured years of economic stagnation that are partly attributable to the bubble and its bursting.
The dotcom boom and bust
The late 1990s saw a speculative frenzy of investment in internet-related shares as investors took the view that anything that would take advantage of the burgeoning popularity of the new technology was certain to make buckets of money. Venture capitalists threw money at any half-baked scheme as long as the entrepreneurs projected vast profits in a short space of time. Huge sums were spent on notional projects to build market share and vast increases in share price accompanied initial public offerings of the firms that were taken to market, making dotcom millionaires overnight (on paper at least). The dotcom boom rubbed off on other shares, especially technology stocks of any kind. Investors poured money into the stockmarket seeking to benefit from its seemingly inexorable rise.
In 1999 stockmarkets around the world hit record peaks.
The January 2000 Super Bowl featured 17 dotcom companies which had each paid over $2m for a 30-second spot. But not long after, share prices for e-businesses started to fall as it finally struck home that firms were burning through cash with no prospect of ever making a profit. Eventually, all but the most robust dotcoms went to the wall and stockmarkets plunged, with Nasdaq falling by over 70% between 1999 and 2002. In addition to the heavy losses incurred by institutional investors, millions of private investors lost substantial amounts of money, not to mention their confidence in the stockmarket.
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