An economic bubble can form during a period of strong economic growth when unsustainable investments are made. Overzealous speculation and unjustified optimism can fuel these bubbles and cause havoc for the economies involved. We can learn a lot from by looking at some of the biggest financial bubbles in history, from the events that led up to them.
1. Tulip mania
In the 1600s, the tulip was considered a status symbol of the Dutch upper classes. Speculators began buying up the flower from the Ottoman Empire and selling them at higher and higher prices, causing one of the earliest examples of a speculative financial bubble. As the price of tulips escalated, the bubble increased before finally it burst. This threw the Netherlands into economic depression and turmoil.
2. South Sea Company
The South Sea Company was a British company granted a monopoly by the government to trade with South America and the surrounding area. No significant trade ever took place, but the company’s stock price continued to rise. When the bubble finally burst, the stock price plummeted, and the company collapsed. This lead to the Bubble Act of 1720 which forbade the formation of similar companies.
3. Mississippi Company
Another example of a monopoly-centric economic bubble is the Mississippi Company. The French company held a monopoly in the French colonies in North America and the West Indies. The company encouraged immigration to Louisiana, advertising the territory as one of considerable wealths. This caused share prices to rise, sparking a need for more paper banknotes and causing an imbalance between notes and the metal coinage at the central bank. In 1720, when masses of people went to the bank to exchange their paper notes for coins, the central bank was crippled.
4. British Railway Mania
In early 1800s Britain, the price of railway company shares began to increase. By 1846, the railway industry was overly optimistic and rife with speculation. Parliament passed at least 272 Acts of Parliament which set up new companies, promising 9,500 miles of a
5. Encilhamento – Brazil
In the 1880s, when the Brazilian government decided to entice investment in industrialization, they adopted a policy of unrestricted credit for those who were willing to invest. To fulfill these promises, the government had to issue more and more money which lead to a concentration of wealth amongst a small number of people and ultimately, the collapse of the national economy.
6. Wall Street crash of 1929 – USA
Considered the end of the “Roaring 20’s”, the 1929 stock market crash is a textbook example of a financial bubble. Before the crash, the stock market had been expanding at enormous speed and millions of shares trading hands each day. On October 29, the market crashed, and billions of dollars were lost. This event ushered in the Great Depression which lasted for over a decade.
7. Japanese stock and asset bubble
In the mid- to late-1980s Japan saw the value of the yen increased by 50%. This appreciation of value caused the real estate and stock market prices to be significantly inflated, creating a financial bubble. When the bubble burst in the early 1990s, it caused what had come to be known as the Lost Decade when GDP plummeted, and real wages fell.
8. Black Monday stock market crash
On October 19, 1987, Wall Street saw a 22.5% drop in stock values – the most significant single drop in the market’s history. Much like the other bubbles in this list, it was caused by heavy speculation but also suffered from insider trading, junk bonds, and other shady trading tactics.
9. Dot Com Bubble
The internet was a growing phenomenon in the 1990s. Because of this, many investors chose to put their money in companies that capitalized on that phenomenon such as pets.com and Webvan. As these companies went public, their valuations increased out of proportion with earnings. The market reached a tipping point in March 2000, causing these stocks to plummet and economic recession.
10. Housing Bubble – USA – 2007
After the Black Monday stock market crash and Dot Com bubble, the US economy saw the housing market bubble grow. Real estate prices continued to grow until house prices had nearly doubled in 2006 from the last decade. When prices started to fall drastically many financial institutions were left in ruins, such as Lehman Brothers.
Knowing what caused these bubbles in the past can help investors and society overall watch for signs of other bubbles before they cause havoc on economies. Currently, there is believed to be a bubble for the US student loan industry and a housing market bubble decline in Australia. But even more pressing is the Covid crisis which can lead, in theory, a collapse bigger than the 2008’s economic crisis.