Throughout history, there have been several instances identified as financial bubbles. The Dutch Tulip Bubble, or Tulipmania, is regarded as the first major financial bubble, dates back to the 17th century.4In the late 1500s and early 1600s, tulips were regarded as a sign of affluence. A rare type of tulip, which flowered in a striped, multicolored pattern, rather than the usual solid coloration, was particularly coveted. The high demand for this rare variety of tulip bulb caused the market value of tulips to soar.5Between the end of 1636 and early 1637, the price of tulips increased by twenty times its original value.6Like every financial bubble, this one inevitably burst and prices fell drastically – according to some records, they dropped by as much as 99%.7Tulipmania did not have devastating effects for the Dutch economy, but many people lost their fortunes when the bubble burst.8In order to allay some of the panic, contract holders were permitted by the Dutch government to end their contracts for 10% of their value.9
Since the Dutch Tulip Bubble of the 17th century, many other financial bubbles have been recorded. Another famous instance comes from the early 1700s, when the British government granted the South Sea Company a monopoly on trade with South America’s Spanish colonies. As the East India Trading Company had been a raging success, investors were keen to purchase shares in the South Sea Company. This enthusiasm resulted in a bubble which ultimately burst, leaving serious financial fallout in its wake.10The economic expansion and stock market bubble of the 1920s is cited as a causal factor behind the Great Depression, a period of serious economic crisis.11More recently, the US Housing Bubble, in which real estate’s market value skyrocketed, gave way to a devastating financial crisis that began in 2008.12
In his 1986 book,Stabilizing an Unstable Economy, economist Hyman P. Minsky identified the five stages to a credit cycle – displacement, boom, euphoria, profit-taking, and panic. These five stages are also applicable to financial bubbles and offer important insight into the mechanisms that underlie this financial phenomenon.13
