ECON: Famous First Bubbles: The Fundamentals of Early Manias

From: Chris Rasch (
Date: Thu Apr 12 2001 - 02:32:25 MDT

The Standard
Famous First Bubbles: The Fundamentals of Early Manias
By Steffan Heuer
Aug 14 2000 12:00 PM PDT,1902,23565,00.html

"Now that tech stocks are in a rut, it's
comforting to tell war stories from a different era. A
favorite is the tale of how market madness in 1636
allegedly drove Dutch citizens to squander enough
provisions to last a family a year for a single rare tulip

Indeed, tulip mania has become a catchall for irrational
market behavior, particularly since the Nasdaq tanked in

Such is human nature, as Charles Mackay wrote in his
classic Extraordinary Popular Delusions and the
Madness of Crowds, "that whole communities suddenly
fix their minds upon one object, and go mad in its
pursuit." Had Federal Reserve Chairman Alan Greenspan
been around, he too would have wagged his finger at
Holland's irrational exuberance, right?

Not so fast, says economist Peter Garber in his slim yet
fascinating book Famous First Bubbles. There's almost
always a better explanation than crowd psychology for
sky-high asset prices, he says. Garber, a Brown University
economics professor and global strategist for Deutsche
Bank (DTBKY), takes a mere 160 pages to debunk the
myths surrounding tulip mania, as well as its sisters in
mythology, the South Sea bubble and the Mississippi
There is a difference, Garber writes, between uncertainty
about the future - which drives innovators, risk-taking
entrepreneurs and eventually markets - and mob
psychology. The Netherlands, for example, was a
sophisticated trading center, with well-developed
commodity markets. That rare varieties of tulip bulbs
could fetch high prices among professional traders was
not irrational. The tulips could be used to grow many
more valuable hybrids and often earned their purchasers
far more than they invested. Indeed, this pattern still
exists today. In 1987, serious traders paid as much as
$500,000 for a new breed of tulip, fully intending to make
good on the investment.

That highly specialized market is not to be confused with
the more speculative futures contracts made by Dutch
laymen. Hunkered down in taverns, they traded common
bulbs, and for one month in early 1637 provided the basis
for all those hair-raising anecdotes.

But even those deals, Garber points out, were not spurred
by madness. They were nonenforceable gambles on
futures contracts by people who knew their margins would
never be called. Indeed, when the government suspended
all such contracts in early 1637, authorities let buyers off
the hook on payment of 3.5 percent of the contract price -
hence the legend of a disastrous price decline. "This was
no more than a meaningless winter drinking game,"
Garber writes, "played by a plague-ridden population... ."

Indeed, the Dutch economy chugged along, undamaged by
the "bubble," for another 10 years...."

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