Whether they’re looking at the birth of the railways, the dotcom boom or the rampant economic speculation that followed World War 1, there’s one historical comparison economic commentators seem helpless to resist.
Tulip mania is considered to be the first recorded speculative bubble, as the recently introduced and highly fashionable tulip became the object of intense fiscal speculation in the Netherlands. At the height of the bubble, a single tulip bulb called “the Viceroy” was sold for the equivalent of A$45,600 in today’s money – more than most houses.
Although some dispute how manic tulip mania actually was, it has served for centuries as a byword for an intense market bubble, as rampant speculation of a clearly overvalued product becomes its own fuel until the whole thing collapses, ruining late investors.
Tracing our economic history in The Ascent of Money, Niall observed that fundamental financial innovations are “often accompanied in their initial stages by bubbles,” but that the “inevitable bust doesn’t necessarily kill the innovation”.
Arguing that both cryptocurrency and its underlying distributed ledger technologies have long-term applications in the financial world, he argues that the infamous South Sea Bubble of 1719-21 served as a better historical analogy for the fledgling technology.
Likened to tulip mania by contemporary commentators, the South Sea Bubble was a disastrous joint-stock company founded by the British crown with a monopoly in South American trading rights. A decade after its formation during the War of Spanish Succession, the company’s stock rose in value by almost 1,000% in a year, driven by rumours of extravagant wealth in the region and a public frenzy for investing in stocks.
Then in just four months, confidence in the company collapsed and the share price dropped from £1,000 in early August to just £100 by the end of 1720 – bankrupting thousands, including swathes of the aristocracy. We get the term “bubble” from this incident.
Despite the failure of this national obsession, it “didn’t spell the end of tradeable shares as financial instruments. On the contrary, shares went on to become the foundation of corporate finance,” wrote Niall, demonstrating that not all bubbles reflect poorly on their underlying innovation.
“Money’s ascent has not been, and can never be, a smooth one,” Niall wrote in The Ascent of Monday. On the contrary, financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes.
“Even today, despite the unprecedented sophistication of our institutions and instruments, Planet Finance remains as vulnerable as ever to crises. But not even the worst has set us permanently back. Though the line of financial history has a saw-tooth quality, its trajectory is unquestionably upwards,” he said.
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