Stock market crashes over the centuries are the same but different.
Like the proverbial horse and carriage, stock market panics and bank scares tend to go together. But there's usually a range of other issues too.
As market historian David Schwartz points out: "The very big crashes are invariably triggered by a series of different events which unfold one after the other. One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees."
Technically, those different blows vary in nature. Over the centuries, it's been high levels of debt, runaway inflation or (as in the early seventies in Britain) stagflation, overvalued stock markets, plain idiotic investments, or just a general sentiment that it's all going to blow.
The human angle
Yet the basic human factors haven't changed at all. In rough order of priority, they're credulity, greed and panic.
In Tulipmania in the early 1600s, we saw all three when the Dutch went mad for diseased bulbs because the disease gave the flowers spectacular colours. At the peak of the market, one bulb could buy a lot of land while, at the bottom, it bought an onion.
The South Sea Bubble in the early 1700s was an exercise in credulity. Many Britons lost their shirts on the South Sea Company that had secured (or so it said) all the riches and trade in those exotic climes in perpetuity.
Everybody piled into the stock -- prime ministers, bankers, kings and queens, nobility and ordinary people with a few coins to spare. As Alexander Pope wrote:"Britain was sunk in lucre's sordid charms."
Around the same time, the Mississippi Scheme was also based on little more than hope. The much-reviled Scot John Law hatched a plan for replacing France's coin with paper money, just like today's fiat currency. The trouble was that fiat currencies are supposed to be backed by strong economies -- gross domestic product in today's language -- while Law's was based on the presumed untapped riches of the New World.
When the riches never turned up, the paper became worthless except in museums. "Historians are divided in opinion as to whether they should designate [Law] as a knave or a madman," wrote Scotsman Charles Mackay in "Extraordinary Popular Delusions and the Madness of Crowds."
Here are ten big collapses in chronological order:
Frightened by the assassination of President McKinley and a severe drought at a time when the America economy depended greatly on agriculture, Wall Street plunged 46% between 1901-1903.
Three years later, between 1906 and 1907, Wall Street did it again. The markets collapsed 48% because of little more than President Teddy Roosevelt's threat to curb the rampant industrial monopolies such as railways. Today the same threat would probably boost markets.
Between 1919-1921, "The Street" managed a 46% because of investors' fears the automobile sector was on the brink of collapse, this on the dubious grounds that car ownership had reached saturation point. Investors failed to factor in Americans' desire to buy the latest model.
Unsurprisingly, the Wall Street Crash between 1929 and 1932, triggering the Great Depression, heads the all-time list. The market fell 89% because of a toxic mix of runaway household credit, dishonest investment banking and risky buying of shares on margin.
Between 1937-38, Wall Street was the culprit once again. Having barely recovered from the Depression, it declined a further 49% because of fears that President Roosevelt's New Deal, economy-boosting measures had failed.
Nearly 35 years later, panic crossed the Atlantic when the Footsie took a 73% dive in 1973-74. This time investors were worried about rising oil prices, a miner's strike and the collapse of the Heath government, any one of which would be worrying enough.
The 1987 crash was a global one, but nothing like as severe as we like to think. Although the Dow plummeted 22.6% in a single day, the markets bounced back remarkably quickly thanks to some deft work from Alan Greenspan.
In 1997-1998, an overheated Hong Kong stock market fell 64% in a madcap flight from Asian shares.
In 2000-2003, the London markets collapsed 52% because of the bursting of the dotcom bubble. It was worse in America, home of the bubble, where the Nasdaq dived 82% in two years.
You'll remember this one. Massive overlending to the US housing market caused financial markets to freeze and banks to topple like dominoes. The FTSE fell 48% from its June 2007 peak.
And this one in the summer of 2011? For the moment at least, it doesn't even rate because the market fundamentals have hardly changed from six months ago, or even six days ago for that matter.
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