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!
Fundamentals 3
