I. Famous stock market bubbles
1. Tulip mania
Tulip mania, also called Tulipomania, Tulip Craze, Dutch Tulpenwindhandel, was a speculative fever in 17th-century Holland over the sale of tulip bulbs. Tulip bulbs arrived in England from Vienna in 1600. The delicately formed, vividly colored flowers soon became a popular although costly item. However, wealthy people, especially in Holland and Germany, sent directly to Constantinople for bulbs, paying high prices for them. The demand for differently colored varieties of tulips soon exceeded supplies, and prices for bulbs of rare types began to rise to unjustified levels in all northern Europe. Before 1633 Holland’s tulip trade had been carry out by professional growers, but rising prices attracted middle-class and poor families to speculate in the market. People mortgaged homes and industries were in order to buy bulbs that resulted in them being more and more expensive. Encyclopedia Britannica reads: “By 1610 a single bulb of a new variety was acceptable as dowry for a bride, and a flourishing brewery in France was exchanged for one bulb of the variety Tulipe Brasserie”.[1] Charles Kindelberg writes: ”Tulip contracts (were) sold for more than 10 times the annual income of a skilled craftsman”[2]More examples prices for one bulb (different varieties) in the height of the craze that took place in Holland during 1633–37 presents Tulipomania.com:[3]
* Admiral Liefken, 400 perits = 4,400 florins
* Admiral Von der Eyk, 446 perits = 1,260 florins
* Shilder of 106 perits = 1,615 florins
* Viceroy of 400 perits = 3,000 florins
* Semper Augustus, 200 perits = 5,500 florins
In order to imagine the value of florin at that time the same source presents prices of some goods at that time:[4]
Four lasts of rye 558
Four fat oxen 480
Eight fat swine 240
Twelve fat sheep 120
Two tons of butter 192
A silver drinking cup 60
The crash came in 1637, when some investors started to doubt whether prices would continue to increase further. Within six months bulb were trading at lost 90%, being traded at a fraction of the value achieved at the top. It left many people in financial ruin. The number of annual bankruptcies in Amsterdam, Leiden, Haarlem, and Groningen from 1635–1800 doubled in the comparison with the period from 1635 to 1637.[5]
2. The South Sea Bubble
The South Sea Bubble was the term given to the first great stock market crash in England. As the war with Spain was coming to the end, there were widespread expectations that the British would be granted a monopoly of all trade to the south seas. As the trade with the rich Spanish colonies in South America was seen as a source of huge profits, such a privilege excited people’s imagination. The South Sea Company was established in 1711 by (among others) the Lord Treasurer Robert Harley and the director of the Sword Blade Company John Blunt, with this aspect in mind. The issue of shares was a success since apart from future profits investors counted on interest rates 6% per year, promised by the company.
However, the treat from Utrecht (1713) that ended war, disappointed investors. The tax was imposed on import of slavers and the South Sea Company got permission for sending only one ship within a year. The first voyage brought a moderate success and the enterprise seemed not to come up to expectations. But when in 1719 King George I took the position of the governor of the company. Moreover, the company paid investors a high dividend for a previous year. Its prestige significantly rose. But hysteria broke out later, when the South Sea directors proposed to assume more than half the national debt of Britain (£30,981,712. On April 12, 1720 the offer was accepted by the Parliament (a number of influential politicians got large bribes to in the form of shares of the company). Simultaneously the company started “to sell” shares to famous people - the heads of government, the King's mistress, etc . (in reality they were allowed to pay for them later, after selling). This method had the advantage of joining their interests to the interests of the Company since in order to preserve their own profits, they had to help drive up the stock. All these circumstances contributed to interest in the enterprise. The share price had risen from £128 in January 1720, to £175 in February, £330 in March and to £550 at the end of May. Then the country developed a feverish interest in investing – all people from peasants to wealthy lords were buying shares. In a few months their price spiked to £1000. Apparent success soon attracted its imitators. The increase in prices of the South Sea Company resulted in sudden rise in widespread interest of the capital market in general. Many dubious companies, not having any real plan for business, took advantage of euphoria selling shares. All kinds of joint-stock companies suddenly appeared. Several had some overseas trade aspect, the others settled for something different – among them for example were a project for improving the fishery of Greenland and importing walnut trees from Virginia. By the end of the year The South Sea Company begun gradually but systematic fall, ending up with panic and triggering bankruptcies among those who had bought on credit. In December 1720 shares cost again £100.[8]
1. Railway mania
In XIX century the Great Britain experienced events that were later called “the Industrial Revolution”. Up to then rural society, dominated by agriculture and confined to their villages, started to rapidly change. With the steam engine, invented in 1769 by James Watt but coming into effect only then, the real impact of steam was fully felt. People who were living in the same place and did not travel beyond the nearest market town for generations, could use fastest thing for communication than a horse, covering several dozen miles a day at best. The much more powerful steam engine made not only travelling faster but also working easier. For example, fields could be ploughed twenty times faster than earlier. Industry developed fast and population in cities and towns was rising since people relocated to find work. It was the main reason that railway networks acquired the great significance, moving increasing amounts of cargo and people. With the economy improving and existing railway companies' blooming, people became increasingly willing to invest in new railways[10]
What is important, the Industrial Revolution created a new affluent middle class with savings to invest. Such people were willing to put money in British businesses and since then ventures had not relied on money of banks, businessmen and wealthy aristocrats. In 1825 the government had rescinded the Bubble Act, bringing in after the South Sea Bubble of 1720 which put limits on the creation of new business ventures and confined number of investors in joint stock companies. As these limits were removed, anyone could invest money in a new enterprise. The modern stock market made trading shares easy and newspapers promotes businesses and helped to provide the means for new investments. Shares could be bought for a 10% deposit. The railways were so intensely promoted as “a foolproof venture” that thousands of people bought large numbers of shares, barely being able to afford the deposit.[11]
The history as every mania ended up in collapse: [12]
As with other bubbles, the Railway Mania became a self-promoting cycle based purely on over-optimistic speculation. As the dozens of companies formed began to operate and the simple unviability of many of them became clear, investors began to realize that railways were not all as lucrative and as easy to build as they had been led to believe. (…) The share prices of railways slowed in their rise, then leveled out. As they began to fall, investment stopped virtually overnight, leaving numerous companies without funding and numerous investors with no prospect of any return on their investment. Many middle class families on modest (but comfortable) incomes had sunk their entire savings into new companies during the Mania, and lost everything when the speculation collapsed.
2. The Roaring Twenties bubble
The Roaring Twenties bubble differed from previous ones. Whereas Tulip Mania, the South Sea Bubble, and Railway mania were caused by exaggerated expectations ensuing from one particular factor, the frenzy of Roaring Twenties was caused by series of events, provoked by post–war relief.
Following harsh reality of the First World War, Americans felt buoyed up and wanted to make up for lost years. They expected the new decade to be a time of change for everyone and in every aspect of life. The roaring twenties originated a new period of American writing with such distinguished authors as William Faulkner, F. Scott Fitzgerald and Ernest Hemingway. A uniquely American music form, known as jazz, appeared and such great artists as Louis Armstrong, Duke Ellington and George Gershwin. Charlie Chaplin and Rudolph Valentino drew people to movie box offices and Walt Disney produced his first cartoon, Alice's Wonderland. The rich style of Art Deco architecture, art, clothing, hairstyles, decor and furnishings flourished. With millions of immigrants and a postwar baby boom the US population rose by 34.7%, to 123 million during the 1930 census.[13]
As far as industry is concerned, the rapid progress was taking place. The airplane invented in 1903 and used in World War I, earlier perceived as impractical, now became a hit. In 1921 radio, then called “voice over the air”, gained popularity and in 1922 Marconi went on to introduce short wave transmission.[14] The big boom was in the automotive industry. [15]
The big boom was in the automotive industry, which moved to first place in both value of product and value added by manufacture. Detroit and other auto centers would turn out 2,798,737 passenger cars in 1929. By 1930, the census would show 4,135,000 autos, 900,000 trucks and 920,000 tractors on the road and in the field. The production of tires and inner tubes doubled. Gasoline production quadrupled.
Similarly, on a steady growth pattern was the textile industries and the reason of it was unexpected:
The textile industry also enjoyed a remarkable prosperity. (…) As the Twenties moved on, more and more farmers acquired automobiles for the Saturday trip to town and to the movies. Imitation of the fashions shown on the silver screen was inevitable, and staples began to fade as the movie influence gained strength.[16]
Production of artificial silk, called rayon, increased from three million pounds in 1919, to 33 million in 1929. The new electrical firms produced the new electrical appliances. Their sales during the decade sales of them rose went from $46 million to $976 million and radios from $15 million to $338 million.[17]
Generally, novelties and buoyant mood created specific atmosphere of optimism and high expectations. People wanted to look on the bright side of life and the future of Americans was thought to improve even further. Families could afford more than ever before since the new concept appeared – buying goods on installment plans. With the mood of the country exuberant, people took their savings out of banks and invested them – many in the stock market. With increasing number of participants, stock prices began to rise. In 1927 an upward trend begun, enticing more and more people to invest and in 1928 the stock market experienced a boom.
In 1928, the stock market had become a place where everyday people truly believed that they could become rich. Interest in the stock market reached a fevered pitch. Stocks had become the talk of every town. (…) As newspapers reported stories of ordinary people - like chauffeurs, maids, and teachers - making millions off the stock market, the fervor to buy stocks grew exponentially.[18]
The stock market seemed to be an infallible investment in the future and an increasing number of people wanted to buy stocks. Unfortunately, not everyone had the money to do so. Soon banks made an effort to meet people needs. Those who cannot to pay the full price of stocks, could buy stocks "on margin." Buyers put down only part of their own money and the rest was borrowed from a broker. According to history1900s.about.com: “In the 1920s, the buyer only had to put down 10 to 20 percent of his own money and thus borrowed 80 to 90 percent of the cost of the stock”.[19] “Times” in the article “Brief History of The Crash of 1929” shows other aspect of this phenomenon: “… by 1929, 2 out of every 5 dollars a bank loaned were used to purchase stocks”.
However, buying on margin carried risk. If the price of stock fell lower than the loan amount, the broker issued a "margin call," which meant that the buyer had to come up with the cash to pay back a loan immediately. Confident in allegedly never-ending rise in prices, many of speculators neglected to recognize the warning signs and continued to engage in risky behavior. Not only individuals were possessed by feverish investing but also companies and banks. Between 1924 and 1929, the Dow Jones Industrial Average gained from 90 to 381. In the autumn of 1929, economist Irving Fisher announced that:
"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." [20]
Other economist John Maynard Keynes stated: "We will not have any more crashes in our time."[21]
However, on March 25, 1929, the first warning sign appeared when the stock market experienced a sudden fall. As prices began to drop, margin calls were made. In order to counteract panic, banks stepped in. They tried to stop the market from declining further by reassuring participants that they would continue to lend money. This behavior assuaged investors and the panic subsided.
Unfortunately, it helped for a short time. Glutted economy started to shrink - fewer homes were being built and steel production was down. The main economic indicators were presenting signs of weakening and knowledgeable people warned that a crash would happen but no one paid attention to warnings. However, prices began to move downward. The market was falling sharply for a month, losing 17% of its value. Over the next week prices recovered more than half of the losses but immediately turned down. On October 24, the decline accelerated into the series of subsequent falls, called later "Black Thursday", “Black Monday” and “Black Tuesday”.
At 1 p.m. on the same day (October 24), several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. (…) With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. (…) The Dow Jones Industrial Average recovered with a slight increase, closing with it down only 6.38 points for that day. [22]
During the weekend, the events were described by the newspapers across the United States. Investors could consider whether the fall in the stock market was temporary or it was only a harbinger of bad times. Majority of them decided to go out of market.
On Monday, when the market opened, prices plunged again. Stock transactions in those days were printed on ticker tape, which could only produce 285 words a minute. Since thirteen million shares changed hands, the tape didn't stop running until four hours after the market closed. [23] the slide continued with a record loss in the Dow for the day of 38 points, or 13%. The next day, "Black Tuesday", October 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.[24]
In total, $25 billion — today's $319 billion – was lost in the 1929 crash. Stocks continued to fall over subsequent weeks, stopped temporarily on November 13, 1929. The next market recovered for a few months and then was sliding again until September 1932, when bottomed out at 14,5. Dow Jones lost from the top to the low over 90%, wiping out many an investor's life savings. [26]
The crash led the country into the Great Depression. Companies suffered huge layoffs, unemployment rose, wages plummeted and the economy shrank. The stock market wouldn't recover to its pre-crash level until 1954. [27]
[1] http://www.britannica.com/EBchecked/topic/608658/Tulip-Mania
[2] http://uvacrisis.com/Lectures_PDF/Past_Financial_Crises.pdf
[3] http://www.thetulipomania.com/
[4] ibidem
[5] http://www.britannica.com/EBchecked/topic/410125/history-of-the-Netherlands
[6] http://www.google.com/imgres?imgurl=http://www.minyanville.com/assets/Image/tulipmania.jpg
[7] http://www.minyanville.com/businessmarkets/articles/8/19/2006/id/11030
[8] Szaleństwo, panika, krach - Kindleberger Charles P.
[9] http://web.rollins.edu/~jsiry/South_Sea-Bubble.html
[10] http://www.bbc.co.uk/history/british/victorians/speed_01.shtml
[11] Edward Chancellor, Wydawnictwo „Muza”, Historia spekulacji finansowych, p. 94-100
[12] http://en.wikipedia.org/wiki/Railway_Mania
[13] http://www.u-s-history.com/pages/h1564.html
[14] http://didyouknow.org/history/radiohistory/
[15] http://www.textileworld.com/textile_resources/History/1920-1930/The_Roaring_Twenties.html
[16] ibidem
[17] http://www.u-s-history.com/pages/h1564.html
[18] http://history1900s.about.com/od/1920s/a/stockcrash1929.htm
[19] ibidem
[20]ibidem
[21] http://www.gold-eagle.com/editorials_01/seymour062001.html
[22] http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
[23] ibidem
[24] http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
[25] http://www.sharelynx.com/chartsfixed/USDJTRANS1929.gif
[26] http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
[27] http://www.time.com/time/nation/article/0,8599,1854569,00.html
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