“I knew something was terribly wrong because I heard bellboys, everybody, talking about the stock market,” the investor, Alec Wilder, told oral historian, Studs Terket. He referred to the stock market crash of 1929. What led to this crash and to all crashes and bubbles was ‘irrational exuberance’, i.e. investing unwisely on the basis that values of shares and assets will become ever higher.
Tulip Mania
Holland is famous for its tulips but they were actually introduced into the country from Turkey in 1593. The beautiful flowers were highly prized for their rarity and began to fetch high prices, especially when they had the ‘mosaic’ virus. This caused ‘flames’ of color which made the tulips even lovelier.
The value of the tulips rose and rose until people were trading in their entire properties and life savings for a single tulip bulb. Madness seized the public as they tried to buy the tulips at low prices and sell them at ever higher prices.
The price of tulips had a twenty-fold increase in one month!
When new tulip bulbs started being harvested, the tulips became less rare and it became apparent that they were over-valued. Panicky investors tried to sell and prices crashed by ninety percent in six weeks.
Luckily the Dutch stock market refused to countenance the trade in tulips so it took place on the margins. ‘Tulip mana’ therefore only had a limited effect on Holland’s economy.
South Sea Bubble
In 1720 the South Sea Company agreed with the British government that it would pay off the national debt of £30 million in return for five percent interest. The government also gave the company a trading monopoly with South America.
Investment in the company went crazy and all sorts of dodgy schemes arose, including a plan to buy the Irish bogs! At one stage the directors were offering a fifty percent dividend for twelve years.
The inevitable crash devastated the economy and many people committed suicide. The Postmaster-General took poison.
Robert Walpole became Chancellor of the Exchequer and solved the problem by dividing the national debt between the Bank of England, the Treasury and a new Sinking Fund. Some of the country’s savings were placed into the Sinking Fund every year so that eventually the debt was repaid.
1907 Stock Market Crash
Many factors led to the 1907 crash. The huge San Francisco earthquake of 1906 had a devastating effect on the economy. Theodore Roosevelt, the President, wanted to reduce the power of trust companies. The famous investor, F. Augustus Heinze sold his shares in Montana copper mines for $12 million and bought Knickerbocker Trust. His brothers tried to manipulate the price of copper with money borrowed from the trust.
The National Bank of Commerce eventually brought the trust to its knees by failing to honor its checks and caused a run on the trusts. The President of the trust even commited suicide. This sparked runs on most New York trusts and started general panic.
J.P. Morgan settled the 1907 crisis by putting together a rescue package and organizing a government bailout of banks and trusts. The Federal Reserve System was established in an attempt to prevent such crashes in the future.
The lessons learned from these crashes unfortunately weren't enough to prevent future ones. The 1929 crash led to the Great Depression and is probably the most famous bubble of the Twentieth Century.
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