Throughout history, financial bubbles have been a recurring phenomenon that has led to both tremendous wealth creation and catastrophic economic collapse. A financial bubble occurs when an asset’s price becomes detached from its intrinsic value and is driven up by speculative demand, fueled by optimism and irrational exuberance. In this article, we will discuss the five biggest economic bubbles in history.
1. The Dutch Tulip Mania (1637)
The Dutch Tulip Mania is perhaps the most famous economic bubble in history. In the 1630s, tulips became a popular status symbol among wealthy Dutch citizens, and their prices skyrocketed. At the height of the bubble, a single tulip bulb could be sold for the price of a luxurious house. However, the bubble burst in 1637, and prices collapsed, leading to widespread financial ruin for many investors.
2. The South Sea Bubble (1720)
The South Sea Bubble was a speculative frenzy that took place in England in the early 18th century. The South Sea Company, a joint-stock company, was granted a monopoly on trade with South America in exchange for taking on the British government’s debt. The company’s stock price rose dramatically, driven by rumors of huge profits from the South American trade. However, the company’s actual profits failed to materialize, and the bubble burst, wiping out the company’s shareholders and leading to a financial crisis in England.
3. The Mississippi Bubble (1719-1720)
The Mississippi Bubble was another economic bubble that occurred around the same time as the South Sea Bubble. The French government granted a monopoly on trade with Louisiana to the Mississippi Company, led by the infamous Scottish financier John Law. The company’s stock price soared, fueled by rumors of vast riches in the New World. However, the bubble burst in 1720, leading to the collapse of the French economy and the ruination of many investors.
4. The Roaring Twenties (1929-1939)
The decade after 1929 was a dark and unforgettable time for Americans and the world. This was because a severe depression, known as “The Great Depression,” occurred, which dragged the world’s economy into decline for the next ten years.
Initially, the US economy has been showing rapid development since 1920. Even the total wealth of the US doubled. These times were known as the “Roaring Twenties.”
This condition eventually caused Americans from various backgrounds to flock to buy stocks on Wall Street. From businessmen, millionaires, cooks, lawyers, and even janitors, they all poured their money into buying stocks. As a result, Wall Street soared high, and its peak occurred in August 1929.
However, it resulted in a decline in US productivity and unemployment. The stock prices were now far from their actual values. At that time, wages and salaries in the US were very low, leading to a surge in consumer debt. In addition, the agricultural sector suffered from droughts. The banking system was also affected, with many loans being unable to be withdrawn.
Eventually, the US economy experienced a mild recession during the summer of 1929. Consumption growth slowed, production piled up, but stock prices remained high.
On October 24, 1929, investors began to panic and sell their shares en masse. 12.9 million shares were traded that day. Eventually, the moment became known as “Black Thursday.” A week later, panic hit Wall Street, causing 16 million shares to be sold off, known as “Black Tuesday.”
Millions of shares eventually became worthless. Investors who had bought stocks with borrowed money had to close their businesses. Consumer and investor confidence vanished. Eventually, investment plummeted, and those still had jobs experienced wage cuts. Purchasing power was also eroded.
Many Americans were forced to shop on credit and ended up in debt. The lowest point of this event occurred in 1933 when 15 million Americans were unemployed and nearly half of the banks in the United States went bankrupt. The Roaring Twenties’ impact was felt in the United States and countries that adhered to the Gold Standard and relied on the Dollar exchange rate, especially in Europe.
5. Dotcom Bubble (1994-2000)
After that, the most famous bubble in the world was the Dotcom Bubble, which shook the internet world throughout history. At that time, internet growth was very fast, but it was not proportional to the success of digital startup companies. Many companies were successful but failed quickly. For example, Pets.com only survived for nine months before going bankrupt, followed by Boo.com, Webvan, and other telecommunications companies.
The Dotcom Bubble began with technology’s rapid development, attracting many investors to invest in internet-based (dotcom) companies. At that time, the internet was treated as an innovation that benefited many parties.
One internet company that was very confident in releasing shares to the public was Netscape, a browser on par with Internet Explorer. Netscape’s IPO closed at USD 58.25 billion, with a company valuation of USD 2.9 billion. Excite, Lycos, and Yahoo followed this.
However, because the fundamentals of these companies did not match their high stock values, the bubble eventually burst. Over 100,000 employees of dotcom companies lost their jobs since 2000. Two years later, the NASDAQ index fell by 75 percent. By the end of 2002, investors had estimated to have lost as much as $5 trillion due to this bubble phenomenon.
During that time, internet company stocks fell by as much as 75 percent. However, some still survived, such as Amazon, Oracle, Cisco, eBay, and Intel.
In conclusion, financial bubbles have been a recurring phenomenon throughout history. While they can create tremendous wealth and economic growth, they also have the potential to cause significant harm when they burst. Understanding the underlying causes of financial bubbles and their historical precedents can help investors avoid making the same mistakes and protect themselves from the consequences of irrational exuberance.