· Tulipmania (1634-1638)
Perhaps the most famous example of a speculative bubble is the "tulipmania"
that struck 17th century Holland. Known for their passionate love of flowers,
the Dutch highly prized the tulip upon its introduction to Western Europe in
the mid-16th century. Dutch collectors devised a hierarchy of tulip varieties
based upon their species and coloring, assigning values to the various flowers.
Because it was impossible to determine which variegation would bloom from a
particular bulb, the tulip became an object of speculation. During their earliest years in Europe, the bulbs were primarily of interest to the wealthy, but by the mid-1630s the craze caught on with middle-class and poorer families. The increased demand caused the price of the bulbs to soar.1
The market reached its height in late 1636 and early 1637, after the bulbs had
been planted to bloom the following spring. People mortgaged their homes and
industries in order to buy the bulbs for resale at higher prices. Charles Mackay, in his definitive history of early financial bubbles, Extraordinary Popular Delusions and the Madness of Crowds (1841), published a list
of objects (and their prices) which were exchanged for "one single root of the
rare species called the Viceroy":
- Two lasts of wheat (448 florins)
- Four lasts of rye (558 florins)
- Four fat oxen (480 florins)
- Eight fat swine (240 florins)
- Twelve fat sheep (120 florins)
- Two Hogsheads of wine (70 florins)
- Four tuns of beer (32 florins)
- Two tuns of butter (192 florins)
- One thousands lbs. of cheese (120 florins)
- A complete bed (100 florins)
- A suit of clothes (80 florins)
- A silver drinking-cup (60 florins)2
In February 1637, as spring drew near and the bulbs were close to flowering,
consumer confidence evaporated and the market suddenly crashed. As the price
structure collapsed, Mackay reported that "hundreds who, a few months
previously, had begun to doubt that there was such a thing as poverty in the
land suddenly found themselves the possessors of a few bulbs, which nobody
would buy, even though they offered them at one quarter of the sums they had
paid for them."3 Litigation ensued, and a government commission
ruled in May 1638 that tulip contracts could be annulled upon the payment of
3.5 percent of the agreed price.
· The Mississippi Bubble (1719-1720)
The Mississippi Bubble -- which derives its name from the French Mississippi
Company -- grew out of France's dire economic situation in the early 18th
century. By the time of Louis XIV's death in 1715, the treasury was in
shambles, with the value of metallic currency fluctuating wildly. The following
year, the French regent turned to a Scotsman named John Law for help. Law, a
gambler who had been forced into exile in France as the result of a duel,
suggested the Banque Royale take deposits and issue banknotes payable in the
value of the metallic currency at the time the banknotes were issued. Law's
strategy helped the French convert from metallic to paper currency, and
resulted in a period of financial stability, as well as his own increased fame
In August 1717, Law incorporated the Companie des Indes (commonly known as the
Mississippi Company), to which the French regent gave a monopoly on trading
rights with French colonies, including what was then known as "French
Louisiana." In August 1719, Law devised a scheme in which the Mississippi
Company subsumed the entire French national debt, and launched a plan whereby
portions of the debt would be exchanged for shares in the company. Based upon
the expected riches from the trading monopoly, Law promised 120 percent profit for
shareholders, and there were at least 300,000 applicants for the 50,000 shares
offered.4 As the demand for shares continued to rise, the Banque
Royale -- which was owned by the French government but effectively controlled
by Law -- continued to print paper banknotes, causing inflation to soar.
The bubble burst in May 1720 when a run on the Banque Royale forced the government to
acknowledge that the amount of metallic currency in the country was not quite
equal to half the total amount of paper currency in circulation.5 On
May 21, the government issued an edict that would gradually depreciate
Mississippi Company shares, so that by the end of the year they would be valued
at half their nominal worth. The public outcry was such that one week
later, on May 27, the Regent's Council issued another edict restoring the
shares to their original value. On the same day, however, the Banque Royale
stopped payment in specie. When the Banque Royale reopened in June, the bank
runs continued. By November, shares in the Mississippi Company were worthless,
the company was eventually divested of its remaining assets, and Law was forced
to flee the country.
· The South Sea Bubble (1720)
During the same period that French speculators were driving up the price of
shares in the Mississippi Company, English speculators were purchasing stock in
the South Sea Company. Formed in 1711 by Robert Harley, the South Sea Company
was created to convert £10 million of government war debt (incurred during
the War of Spanish Succession) into its own shares. In exchange, the company
would receive annual interest payments from the government and a monopoly on
trade with the South Seas and South America. The exchange was successful and
although the expected trade riches never materialized, the company continued
with several other debt conversions.
In 1720, following John Law's example in France, the company proposed to take
over the entire British national debt. As soon as the plan was announced to
Parliament, the company's share prices began to rise as speculators gambled on
the conversion plan. The House of Lords approved the plan on April 7, 1720,
after government officials had been bribed with secret allocations of shares.
In order to make the deal more attractive, the company inflated the value of
its stock. On April 14, £2 million of South Sea Company stock was offered
to the public at £300 per share and the subscription sold out within an
hour. The company made several more stock offerings, all of which sold out,
with the subscribers representing all social classes.
The apparent success of the South Sea Company's scheme led to the appearance of
many new joint-stock companies, which became known as "bubble" companies.
Charles Mackay described some of the new companies:
One of them was for a wheel for perpetual motion -- capital one
million; another was 'for encouraging the breed of horses in
England, and improving of glebe and church lands, and repairing
and rebuilding parsonage and vicarage houses.' ... But the most
absurd and preposterous of all, and which shewed, more
completely than any other, the utter madness of the people, was
one started by an unknown adventurer, entitled, "A company for
carrying on an undertaking of great advantage, but nobody to know what it is."
Were not the fact stated by scores of credible
witnesses, it would be impossible to believe that any person
could have been duped by such a project.6
Mackay notes that the subscription for this final company sold out, and the
satisfied entrepreneur promptly disappeared to the Continent. Worried about the
competition from the bubble companies and in an attempt to sustain their share
price, the South Sea Company convinced the government to pass the Bubble Act in
June 1720. The act prevented the establishment of new companies without
government permission, and allowed existing companies only to carry out those
activities that were prescribed by their charters.
The price of South Sea stock peaked at £1050 in late June of 1720, before
the scheme began to fall apart. The first large drop in the market occurred in
August, as foreigners and other investors began to withdraw from the market.
British domestic credit was stretched to its limit and the scheme finally
collapsed at the beginning of September, with the stock having fallen by 75 percent in
four weeks. Parliament conducted an investigation, corrupt politicians and
businessmen were imprisoned, and over £2 million was confiscated from South
Sea Company directors.
· The Bull Market of the Roaring Twenties (1924-1929)
The raging U.S. stock market of the late 1920s was hailed by many as evidence of a
"new era" of economic fundamentals. Proponents of this theory pointed to
evidence such as the establishment of the Federal Reserve in 1913; Coolidge
administration policies including the extension of free trade,
anti-inflation measures, and the relaxation of anti-trust laws; and corporate improvements
such as increased worker productivity and expanded research and development.
In reality, the driving factor behind both the inflation and the bursting of
the speculative bubble was the expanding use of leverage (i.e., debt) by
individuals as well as corporations. The decade was marked by an enormous
expansion of consumer credit, which Americans used to finance purchases of new
products such as automobiles and radios, which were created using new techniques of mass
production that additionally helped to drive down prices. Consumers also used
credit to purchase stocks, and as the stock market escalated, investors began
to take advantage of margin loans provided by their brokers. Their primary
targets were industries involving new technologies, such as the automobile,
motion picture, and aircraft industries. Radio stocks boomed, rising by 400 percent in
1928 alone,7 and the stock market attracted an immense public
On Sept. 3, 1929, the Dow Jones reached its high for the year before the
bubble began to deflate. Oct. 24, which became known as "Black Thursday,"
marked the beginning of the stock market's downturn, remembered as the "Crash
of 1929." Almost 13 million shares were traded on that day as an unexpected
panic affected the markets. Although the following Friday was quieter, the Dow
fell by a record 38 points on Monday, Oct. 28, and another 30 points on the
infamous "Black Tuesday," Oct. 29, when a record 16.5 million shares changed
hands. Following the chaos of October, the market briefly rallied through
spring 1930 before plummeting again during the early 1930s.
· The Japanese "Bubble Economy" (1984-1989)
From the 1960s to the 1980s, Japan had one of the highest economic growth rates
in the world. In the 1970s, the government began to deregulate financial
markets, which allowed banks to actively seek out new customers. During the
mid-1980s, Japan took a loose approach to monetary policy, which caused the
money supply to increase and interest rates to fall. The combination of these
two actions was important to the creation of a speculative bubble: with low
interest rates and easier access to credit, new actors entered the financial
The stock market bubble was fueled by a Japanese corporate invention, known as
"zaitech," or "financial engineering," by which speculation became an integral
part of corporate earnings statements. After obtaining low-interest loans,
corporations were easily able to raise funds on the markets. While
these funds sometimes fueled capital investment, they often were recycled back into
further speculative market activities. As the Nikkei kept zooming higher and
higher, corporations were able to report their speculative profits as higher
earnings. Investors would then rush to purchase their stock, driving earnings
even higher and providing more funds for the company's speculative actions. At
the end of the decade, speculation dominated the activities of some businesses:
it is estimated that perhaps 50% percent of total reported profits from Japan's largest
corporations were derived from zaitech.
Land speculation was another important part of the bubble economy. Japanese
land prices were traditionally high, partly due to the mountainous island
nation's small amount of available land. Because of its high value, banks often
accepted property as collateral for loans, and land served as the engine of
credit for the entire economy.
By 1989, Japanese government officials were growing uneasy about the
skyrocketing values of the Nikkei and land valuations. In May 1989, it
tightened monetary policy by raising interest rates, and ordered another hike
on Dec. 25. While the Nikkei reached its all-time high on Dec. 31,
stock prices began to plummet in January. The government increased interest
rates five more times before August 1990, to try and halt the continued rise of
property prices. But as the Nikkei kept falling, it was forced to intervene in
a futile attempt to try and revive the market and stave off recession.
Throughout the 1990s, Japan experienced slower growth than any other major
1. Unless otherwise noted, the information in this article is drawn from Edward
Chancellor's Devil Take the Hindmost: A History of Financial
Speculation. (New York: Penguin, 1999).
2. Charles Mackay, Extraordinary Popular Delusions and the Madness of
Crowds, ed. Martin S. Fridson (New York: John Wiley & Sons, 1996)
3. Mackay, 119.
4. Mackay, 35.
5. Mackay, 54.
6. Mackay, 78.
7. Eileen Glanton, "Seventy Years After Black Tuesday, A Look Back" Associated
Press, October 27, 1999.
8. U.S. State Department, "Country Background Note: Japan," September 2001
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