Here is a clue from Jeopardy yesterday:
""Asset" these overpricing events, like of Dutch tulips in the 1630s & of Japanese real estate in the 1980s, always burst eventually"
The correct question was: What is a bubble?
But here is a post from back in 2020.
"What really happened and how did the story of Dutch tulip speculation get so distorted? Anne Goldgar discovered the historical reality when she dug into the archives to research her book, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age.""Here’s where the myth comes into play. According to popular legend, the tulip craze took hold of all levels of Dutch society in the 1630s. “The rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade,” wrote Scottish journalist Charles Mackay in his popular 1841 work Extraordinary Popular Delusions and the Madness of Crowds. According to this narrative, everyone from the wealthiest merchants to the poorest chimney sweeps jumped into the tulip fray, buying bulbs at high prices and selling them for even more. Companies formed just to deal with the tulip trade, which reached a fever pitch in late 1636. But by February 1637, the bottom fell out of the market. More and more people defaulted on their agreement to buy the tulips at the prices they’d promised, and the traders who had already made their payments were left in debt or bankrupted. At least that’s what has always been claimed.In fact, “There weren’t that many people involved and the economic repercussions were pretty minor,” Goldgar says. “I couldn’t find anybody that went bankrupt. If there had been really a wholesale destruction of the economy as the myth suggests, that would’ve been a much harder thing to face.”
That’s not to say that everything about the story is wrong; merchants really did engage in a frantic tulip trade, and they paid incredibly high prices for some bulbs. And when a number of buyers announced they couldn’t pay the high price previously agreed upon, the market did fall apart and cause a small crisis—but only because it undermined social expectations.
“In this case it was very difficult to deal with the fact that almost all of your relationships are based on trust, and people said, ‘I don’t care that I said I’m going to buy this thing, I don’t want it anymore and I’m not going to pay for it.’ There was really no mechanism to make people pay because the courts were unwilling to get involved,” Goldgar says.
But the trade didn’t affect all levels of society, and it didn’t cause the collapse of industry in Amsterdam and elsewhere. As Garber, the economist, writes, “While the lack of data precludes a solid conclusion, the results of the study indicate that the bulb speculation was not obvious madness.”
So if tulipmania wasn’t actually a calamity, why was it made out to be one? We have tetchy Christian moralists to blame for that. With great wealth comes great social anxiety, or as historian Simon Schama writes in The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age, “The prodigious quality of their success went to their heads, but it also made them a bit queasy.” All the outlandish stories of economic ruin, of an innocent sailor thrown in prison for eating a tulip bulb, of chimney sweeps wading into the market in hopes of striking it rich—those come from propaganda pamphlets published by Dutch Calvinists worried that the tulip-propelled consumerism boom would lead to societal decay. Their insistence that such great wealth was ungodly has even stayed with us to this day.
“Some of the stuff hasn’t lasted, like the idea that God punishes people who are overreaching by causing them to have the plague. That’s one of the things people said in the 1630s,” Goldgar says. “But the idea that you get punished if you overreach? You still hear that. It’s all, ‘pride goes before the fall.’”
Goldgar doesn’t begrudge novelists and filmmakers for taking liberties with the past. It’s only when historians and economists neglect to do their research that she gets irked. She herself didn’t set out to be a mythbuster—she only stumbled upon the truth when she sat down to look through old documentation of the popular legend. “I had no way of knowing this existed before I started reading these documents,” Goldgar says. “That was an unexpected treasure.”"
Related posts:
Monetary Policy and the Great Crash of 1929: A Bursting Bubble or Collapsing Fundamentals? (the Fed might have helped cause the Great Depression by trying to prevent a bubble)
Learning the Right Lessons From the Financial Crisis (the housing bubble of 2008)
How Our Brains Help Create Financial Bubbles (It seems like we get excited about the gains, the primitive part of our brains get a little fearful, realizing that the stock prices are too much)
What ends expansions? (or what causes recessions according to Alan Blinder and Austan Goolsbee)
