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Three Classic Bubbles
Tulips (Holland, 1634-37) Mississippi Bubble (France, 1719-20) South Sea (UK, 1720)
Tulip Bubble in Economic Lore
Key story of irrational speculation Indicative of completely crazy pricing“Tulipmania”“X” just like tulipsGarber is not so sure on this
Tulip History
Holland 1593-1637 Tulips infected with virus
Causes spectacular colors in infected tulips Cannot be propagated through seeds Only from buds of mother bulb (limited supply: 1-2
per bulb) Weakens bulbs too
Relatively rare
Bulb Markets: 1634-37
Before 1634: Professional growers onlyFlowers cultivated in JuneMarkets from September - June are
futures marketsDelivery in JuneMost formal markets 1636-37Often meet in taverns
Futures Nature of Trading
Purchase contract for later delivery (June) Some uncertainty as to the exact structure
Small initial amount down (about 1/40 contract price)
Make or lose depending on eventual spot Differences from futures
No margins: positions can be very large No marking to market
Two Markets
Very rare bulbs Serious/informed traders Markets go for entire period Often just spot (not futures)
More common bulbs Start in late (November) 1636 Traded by a wide range of people
Common BulbOudenaerden
Nov 1636: 0.075Dec 1636: 0.080Jan 19, 1637: 0.30Jan 31, 1637: 0.50Feb, 1637, max = 0.8, avg = 0.5
The Crash
First week of Feb, 1637Bulb trading endsMarkets formally shut down in AprilPrices hard to find
Some Price Falls
Witte Croonen (Guilders/1/2 lb.) Jan 1637: 64 Feb 5, 1637: 1668 1642 or 1643: 37.5 Depreciation 76%
General Rotgans (Guilders / bulb) Feb 1637: 805 1642 or 43: 138 Depreciation 35%
Later Data
Rare bulb cyclesGarber finds that 20-30 percent
depreciations are common for very rare bulbs
Economic Impact
Rare bulb price increases had little impact on general agriculture
Common bulb increases occurred after planting (Sept 1636)
Did Holland go into recession?
Key Points
Futures and creditsFinal (last month) frenzyTechnological foundationsHeterogeneous markets
Informed/rare: less bubble like Uninformed/common: more bubble like
Was there a bubble?
2. South Sea Bubble
Stock market event of 1720 Sister bubble in Mississippi company Both show big run ups in stock price and eventual
crashes
Technology Changes
South Sea and Mississippi both issue shares in exchange for government debt (UK and France)
Set to exploit trade with Americas Spanish withdrawing
First publicly traded insurance companies appear
South Sea Share Prices
UK pounds 1720 Jan 1: 150 April 10: 300 July 20: 1000 Nov 1: 150
0
200
400
600
800
1000
1200
Jan Apr July Nov
IPO Bubble Starts
Lots of great stories Crazy companies: Sunlight from
cucumbers “A company for carrying on an undertaking
of great advantage, but nobody to know what it is”
Bubble Act
June 1720: Parliament passes “bubble act” New firms need to be approved by parliament Tries to stop new fraudulent companies Enforced at end of August 1720 Downward pressure on new companies Unwinding margin buyers drives liquidity
scramble South Sea company falls too
Frehen et al.New Evidence on the First
Financial BubbleBreak down stock price movementsDifferent firms, and different informationWere speculators indiscriminant or,Were they following some economic
logic?
Cross Section in London Stock Exchange
South Sea increases about 10xTwo others increase more
London assurance 50x Royal exchange assurance 11x
East India Company Involved in South Asia trade Increases 3.5x
Dutch Shares
Dutch East Indies company Moderate increase (10 percent)
Dutch West Indies company Increases by 10x
Investors again value Atlantic trade Similar patterns to London market Economic causes, financial integration(timing) If bubble then not local
Cause of the Crash
Bubble act Insurance problems
Loss of fleet of 12 ships off Jamaica Burglary of a director’s house
More on Dutch Firms
Dutch firms did not purchase government debt
That could not be the cause for their price rise
Suggest it might not have that much to do with either the South Sea or Mississippi bubbles either
Final Returns over 1720
Three Atlantic trading firms do well South Sea (up 45%) Royal Africa (up 91%) West Indies Company (up 51%)
Fun Quote: Sir Isaac Newton
Newton was one of the losers in the South Sea Bubble
“I have learned to predict the movement of celestial bodies but not the movement of man in markets.”