What was the first ever stock market crash?
History
1929, 1987, 2001, 2008, and of course, 2020.
What these years have in common, is the stock market crash, which left widespread consequences on the world economy. But stock market crashes go a long way back, to the 17th century, and started with the trade of the unlikeliest of commodities- tulips.
Tulips
Before we begin, let us ask you a simple question- how much would you pay for 1 tulip? INR 50, INR 100? Maybe, if it’s very exotic you’d go upto INR 500?
In the Netherlands of late 1630s, the price of a single tulip went as high as 5500 gold coins- amounting to around INR 5.5 crore in present terms. What drove these prices are what we today call an economic bubble.
Some flower history
Tulips arrived in the Netherlands from the East, along the spice trade route. The flowers adorned the gardens of the rich merchants of Amsterdam, who brought them back along with their trading vessels. Because of their rare nature, tulips were immediately considered exotic. A single tulip could take many years to grow and was categorised into luxury goods- owned by the elite few, but coveted by many.
Tulip breaking virus
This one year in the 1600s, an outbreak of something called Tulip Breaking Virus gave selected flower petals flame-like, multi-colored streaks, and made them even more beautiful. And the Dutch population went wild over these rare flowers. Demand for the flowers grew, and prices started to rise. This also gave birth to companies indulging in something called tulip trading.
Tulip-trading
Tulips were listed as a commodity on the Dutch market. As the flowers grew scarce, the demands rose, and prices shot to the moon. At one point, people were taking out loans to buy tulips and their prices were equivalent to buying a mansion in Amsterdam. It seemed like the only place the prices would go was upward, and all was in place to create an economic bubble.
The bubble
A bubble occurs when the price of a security is much greater than its intrinsic value. (Remember when Pokemon cards were all the rage and people bought them with money. Fun times, right?)
And once tulips in the Netherlands became too expensive to buy, the number of buyers fell, and the prices came crashing down. The tulip bubble burst and all those who’d bought tulips at record prices started selling them to avoid bankruptcy.
Prices of tulips normalised to what they are today in dollar value within a couple of days. 17th-century investors who’d treated this flower as a store of currency suffered from heavy monetary losses. Today, a sudden spike in prices of commodities that otherwise hold low value is colloquially termed as Tulip Mania.
Today, as the stock market hits new all-time highs every day, some economists have foreshadowed this as signs of an economic bubble, one where more-and-more people have jumped on the investing bandwagon driving prices higher.
Two schools of thought have emerged out of this- one, that an impending stock market crash is about to occur, and second, that the economy post-COVID will match up to the demand and markets will stabilise.
What do you think? Do you think we’re in for another stock market bubble?
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