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Tulip Mania

One of the most famous manias in history occurred in Holland in the 1500s when tulips were introduced, and by 1634 they were an important fashion/ status symbol. By the time the mania had reached its height in 1636 a single bulb cost 5000 Florins or, in today’s prices, in excess of $20,000!

“At first, as in all gambling manias, confidence was at its height, and everybody gained. The tulip jobbers speculated in the rise and fall of tulip stocks, and made large profits by buying when prices fell and selling when they rose. Many individuals grew suddenly rich; gold bait hung temptingly out before the people, and one after the other rushed to the tulip marts like flies around a honey pot. Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland and pay whatever the price was asked for them. Homes and land were offered at ruinously low prices or assigned in payment of bargains made at the tulip mart. At last, however, the more prudent began to see that this folly could not last forever. Rich people no longer bought the flowers to sell them again at a cent per cent profit. It was seen that somebody must lose fearfully in the end and, as conviction spread, prices fell and never rose again.” --Charles Mackay

The market value of tulip bulbs declined by over 90%, and the economy of Holland lay in ruins. MacKay concluded:

“Many, who for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.”

The above has very little to do with supply and demand. The trading was emotionally generated with greed and fear to the forefront.

Mississippi Madness

A century after the tulip mania in Holland, it was France’s turn to experience a speculative mania. John Law, a Scotsman, who had killed his lady friend’s lover and fled to France, perpetrated this one. A gambler by nature, he set in motion a speculative boom that became known as the Mississippi Madness.

In 1716 Law persuaded the Prince Regan to allow him to set up a bank, and then got the Regent’s consent to turn the bank into a Government institution. Law then simply manufactured money, (it should have been backed with precious metals). The abundance of money flowing into the economy saw interest rates fall, and industry boomed.

In 1717 the Crown granted Law’s Mississippi Company the exclusive rights to trade up and down the Mississippi river. At the time, it was believed the area was awash with precious metals.

The scheme caught the public’s imagination immediately, and Law promised investors an incredible return, (with no substantiation whatsoever). Shareholders were promised a return of 120% annual yield on dividends alone. Mackay writes:

“The public enthusiasm, which had been so long rising, could not resist a vision so splendid.”

The initial stock offering was at 400 livres in 1716 and, so frenzied was the buying, that by 1720 the stock had appreciated 40 times from the original price. Investors created a speculative bubble, inflation increased and prices spiralled by 300% as successful speculators spent their paper profits. Mackay observed:

“The looms of the country worked with unusual activity to supply rich laces, silks, broad cloths and velvet which, being paid for in abundant paper, increased in price... new homes were built in every direction, an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.”

A leading nobleman, the Prince De Conti, started the confidence collapse in Law’s grand scheme by taking three wagons of paper money to the bank and demanding payment in (spece) metal. The bubble burst as people realised they were holding worthless paper. A run on the bank occurred, and the price of Mississippi stock crashed. Shares that had soared from 500 livres in 1716 to 20,000 in 1720, plunged to 200 livres, a 99% loss. Just as the economy of Holland was devastated, so too now was the economy of France.

The South Sea Bubble

On the other side of the Channel, another mania was about to unfold. Robert Harley formed the South Sea Company in 1711. The company was granted a monopoly by the Government of the day to trade with South America and the South Sea Islands. The volume of trade was unlikely to be substantial as Spain ruled most of the area and large trade, without her consent, was unlikely. However, this did not dampen enthusiasm for the company. Harley offered to absorb the national debt of over 30 million by issuing South Sea stock to bondholders. The bill passed through Parliament, and prices skyrocketed from £1281/2 per share in January 1720 to £1000 in August. Mackay recounts the excitement of the day:

“It seemed, at the time, as if the whole nation had turned stockbrokers. Exchange Alley, (a street in the City of London), was every day blocked up by crowds and Cornhill was impassable for the number of carriages. Everybody came to purchase stock.”

The bubble burst in 1720 when news that the directors had been selling stock, and panic ensued. Shares plunged from £1000 to only £135, an 87% decline.

The mood at the time of the South Sea bubble fostered a rash of some of the most preposterous schemes imaginable that gripped the public’s imagination. There was, for instance, a high subscription for a company that was to manufacture a perpetual motion wheel, and another for ‘trading in hair.’ The most ridiculous of all was perhaps a company that was formed, according to Mackay “For carrying on an undertaking of great advantage, but nobody is to know what it is.”

For every £2 invested, subscribers would be entitled to a dividend of £100. This unsubstantiated promise yielded £2000 within five hours. Having made his money, Mackay commented that the promoter “was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.”

“Those who cannot remember the past are condemned to repeat it.” --G. Santayana

Many people would argue that we have become more sophisticated in the twentieth century. However, the fact remains that there is no difference in the crowd psychology that became enmeshed in tulips, as today manias only differ in the degree of madness. R.E. Band, in his excellent book “Contrary Investing” illustrates the point with a company that set up in 1983 with the following in its prospectus:

“This offering is of securities of a start up company with no operating history and no plan of operation. The company will not engage in any business whatever until after completion of this offering and the company does not know what business it will engage in, and has no plan of operation.”

The wording was perhaps inspired by Mackay’s eighteenth century entrepreneur. Did it raise money? Amazingly $3 million!

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