Tulip Mania, South Sea Bubbles, and Other Market Madness

Chapter 2 of A Random Walk Down Wall Street is basically a horror movie. Except the monsters are regular people losing their minds over tulip bulbs, fake companies, and stocks they couldn’t afford. Malkiel walks us through three of history’s wildest financial bubbles, and the pattern is always the same. People get greedy, prices go insane, and then everything falls apart.

Let’s start at the beginning.

People Lost Their Minds Over Flowers

In the 1630s, the Dutch went absolutely nuts over tulips. It started innocently enough. A botany professor brought some unusual bulbs from Turkey to Holland in 1593. The Dutch loved them. A virus called mosaic made some tulips develop colorful stripes on their petals. Instead of seeing this as, you know, a plant disease, people thought the striped flowers were beautiful and rare. They called them “bizarres.” And they were willing to pay insane prices for them.

What started as garden enthusiasm became full-blown speculation. Merchants tried to predict which tulip varieties would be popular next season. Prices climbed. The more expensive bulbs got, the more people saw them as smart investments. Classic bubble logic.

By the mid-1630s, everyone was in on it. Nobles, farmers, sailors, maids, chimney sweeps. People bartered their land, jewelry, and furniture to buy tulip bulbs. They even invented call options (seriously, in the 1600s) so speculators could bet bigger with less money.

One famous story: a sailor ate a valuable Semper Augustus bulb, thinking it was an onion. It would have been worth enough to feed an entire ship’s crew for a year. He went to prison for it.

Then in February 1637, the whole thing collapsed. Some people started selling. Others followed. Panic spread like wildfire. The government tried to calm everyone down. Nobody listened. Tulip bulbs that were worth fortunes became worth less than actual onions.

Isaac Newton Couldn’t Do This Math

Next up: England, 1720. The South Sea Bubble.

The South Sea Company was set up in 1711 to handle government debt. In return, it got a monopoly on trade with South America. Sounds promising, right? Except none of the directors had any experience in South American trade. Their main venture was slave ships, and that didn’t even go well because the mortality rate was so high.

But the company was great at looking important. They rented an impressive London office with fancy chairs. Meanwhile, an actual shipment of wool got sent to the wrong port and rotted on a wharf. The stock price somehow kept rising anyway.

Across the Channel, France had its own bubble with the Mississippi Company. The word “millionaire” was literally invented during this period. At one point, the total value of Mississippi Company stock was 80 times all the gold and silver in France. That’s not a typo.

Back in England, people wanted their own version. The South Sea Company offered to take on the entire national debt of 31 million pounds. Parliament loved it. The stock went from 130 to 300 overnight. The king himself bought 100,000 pounds worth. By summer, it hit 1,000.

Here’s where it gets really wild. People were so desperate to invest that they’d buy into anything. Companies popped up for things like: extracting sunlight from cucumbers, making a perpetual motion machine, and trading in human hair.

The best one? A guy started “A Company for carrying on an undertaking of great advantage, but nobody to know what it is.” He opened subscription books at 9 AM. By 2 PM, a thousand people had handed over their money. The promoter closed up shop and left the country. Nobody ever saw him again.

When the insiders at the South Sea Company realized the stock price had no connection to reality, they quietly sold their shares over the summer. The news leaked, the stock crashed, and panic took over.

Isaac Newton lost a fortune. His reaction? “I can calculate the motions of heavenly bodies, but not the madness of people.” Parliament eventually passed the Bubble Act, banning companies from issuing stock certificates. It stayed in effect for over a century.

Wall Street Lays an Egg

Fast forward to America in the 1920s. The country was booming. Business was practically a religion. One ad exec even wrote a book calling Jesus “the first businessman.”

In 1928, stock speculation became a national hobby. From March 1928 to September 1929, the market gained as much as it had in the entire previous five years. Radio Corporation of America stock went up 434% in 18 months. People talked about stocks the way we talk about memes now. It was the only topic that mattered.

Wall Street had its own tricks. Investment pools were basically organized market manipulation. A group of traders would band together, appoint a manager, and start trading a stock back and forth among themselves. This fake activity showed up on ticker tapes across the country, making it look like something big was happening. Once regular people piled in, the pool members sold their shares and walked away rich.

One bank CEO, Albert Wiggin of Chase, bet against his own bank’s stock right before the crash. He made millions. Today that would be illegal. Back then? Nobody blinked.

On September 3, 1929, the market hit its peak. It wouldn’t reach that level again for 25 years. An adviser named Roger Babson had been predicting a crash for years. Wall Street always laughed at him. But when his warning hit the news ticker that September, the market dropped hard.

Professor Irving Fisher of Yale said stocks had reached “a permanently high plateau.” Herbert Hoover said the economy was “on a sound and prosperous basis.” They were both spectacularly wrong.

On Black Thursday, October 24, trading volume hit 13 million shares. Stocks dropped 40 and 50 points in hours. By October 29, it was total chaos. Over 16 million shares traded in a single day. By 1932, most blue-chip stocks had lost 95% or more. General Electric went from 396 to 8. RCA from 101 to 2.

The show business magazine Variety ran the headline: “Wall Street Lays an Egg.”

The Pattern That Never Changes

Malkiel’s point is pretty clear. Every bubble follows the same script. Something catches the public’s imagination. Prices start rising. Rising prices attract more buyers. More buyers push prices higher. People who said “this is crazy” watch their friends get rich and cave to the pressure. Eventually prices disconnect from anything real. And when the selling starts, it turns into an avalanche.

The consistent losers, Malkiel says, are the people who can’t resist the urge to chase quick money. Making money in the market isn’t that hard. What’s hard is not throwing it away when the next shiny thing comes along.

Three hundred years of financial history, and humans keep making the same mistake. That’s the real lesson of this chapter.

Previous: Two Ways to Value Stocks: Firm Foundations vs Castles in the Air Next: Wall Street Bubbles from the Sixties to the Nineties Part of the series: A Random Walk Down Wall Street Book by Burton G. Malkiel | ISBN: 978-0-393-08169-5