Famous First Bubbles: The Fundamentals of Early Manias

by Peter Garber

The jargon of economics and finance contains numerous colorful terms for market-asset prices at odds with any reasonable economic explanation. Examples include "bubble," "tulipmania," "chain letter," "Ponzi scheme," "panic," "crash," "herding," and "irrational exuberance." Although such a term suggests that an event is inexplicably crowd-driven, what it really means, claims Peter Garber, is that we have grasped a near-empty explanation rather than expend the effort to understand the event. In this book Garber offers market-fundamental explanations for the three most famous the Dutch Tulipmania (1634-1637), the Mississippi Bubble (1719-1720), and the closely connected South Sea Bubble (1720). He focuses most closely on the Tulipmania because it is the event that most modern observers view as clearly crazy. Comparing the pattern of price declines for initially rare eighteenth-century bulbs to that of seventeenth-century bulbs, he concludes that the extremely high prices for rare bulbs and their rapid decline reflects normal pricing behavior. In the cases of the Mississippi and South Sea Bubbles, he describes the asset markets and financial manipulations involved in these episodes and casts them as market fundamentals.

Genres: Economics, Finance, History, Nonfiction, Historical

Paperback

First published June 12, 2000

Reviews

[Silvio Curtis · Rating 4 out of 5]

The first section is on the speculative tulip market in the Netherlands in 1636-7 and its collapse. The second is on the growth and collapse of two parallel economic experiments in 1720, the Mississippi Company in France and the South Sea Company in England. Although the book is short it turned out to be quite technical, and a lot was over my head, though I still learned the historical basics. The author tries to show that, contrary to what other economists believe, the investors involved in these events were acting according to a calculated strategy and not inexplicable group psychology. As far as I could tell he makes the point successfully, although I thought he was unnecessarily unpleasant about it. On the other hand, he seems to think it's a point in favor of financial markets, when it seems to me that the lesson to be learned is that speculative finance is always unstable.

[Lance Cahill · Rating 2 out of 5]

I enjoy economic histories a la Robert Fogel and Douglass North. While I had no expectation it would match either, I was expecting some level of model-building and assessment of history through the lenses of economics. The book goes nowhere near demonstrating the 'fundementals' of early manias (tulipmania, Mississippi Bubble, South Sea Bubble).

It does provide some useful background to those time periods and the related mechanics, but it does not attempt to link these to why these periods did not represent 'bubbles' and goes into detail on the poor records supporting early mania accounts of tulipmania.

Honestly surprised MIT Press published this book.

[Kurishin · Rating 3 out of 5]

Treatise debunking the commonly held view that three speculative markets were not actually 'bubbles' but relatively normal markets operating by a mix of fundamental investors and speculators.
Garber's partially convincing. These three markets were more complicated than simple speculative bubbles, particularly the South Sea and Mississippi markets, but cheap money that enables speculative excess and a divorce from market fundamentals were certainly Tulipmania characteristics.
Drawing the conculsion that all markets are prone to speculative excess when money remains too cheap was too far for this book.

[Juraj Spilda · Rating 3 out of 5]

Essentially an extended academic paper. Reads like one, dry and factual. Importantly highlights the fundamental aspects /technicalities of transactions that are perceived as the first financial bubbles, explaining that they weren't really that irrational.

[Harry Harman]

(1634–1637) Dutch tulipmania
(1719–1720) Mississippi Bubble
(1720) South Sea Bubble

[JG · Rating 3 out of 5]

Interesting facts and nuanced version of the Tulipmania and other bubbles, still the author have it wrong and you can see it in the next excerpt:

"Kindleberger, in his new edition of Manias, Panics, and
Crashes (1996), which dominates the popular mind on the
history of bubbles, added a chapter on tulipmania, which
had not been in previous editions, to critique my view
that the tulipmania was based on fundamentals. He
argued that in fact there were signs of continuation of the
tulip exuberance because the share prices of the Dutch
East India Company doubled between 1630 and 1639,
which is three years after the end of the mania. (In nine
years, the Dow has quadrupled; but this is not necessarily
the sign of irrationality.)"

However, I do concur with him, we have created a myth around this historical passages. They should serve as a warning not as an obvious truth, because bubbles are only obvious in hindsight.

"The wonderful tales from the tulipmania are catnip
irresistible to those with a taste for crying bubble, even
when the stories are so obviously untrue. So perfect are
they for didactic use that financial moralizers will always
find a ready market for them in a world filled with
investors ever fearful of financial Armageddon"

[Beth Haynes · Rating 4 out of 5]

Analysis of the historical financial "bubbles" of Tulipmania, and the Massachusetts and South Sea Bubbles. When the evidence is carefully examined, each of these demonstrate that they are NOT examples of "irrational exuberance" or the "Madness of Crowds" but in fact were based on reasonable expectations of the market value and asset fundamentals . The author also looks briefly at the negligent perpetuation of these myths by some very influential academicians: Paul Krugman, John K. Galbraith, Paul Samuelson--to name a few of the more well known.

[Martin · Rating 2 out of 5]

Was a boring book, a informative one but boring.