The Bubble Interpretation
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ence of Charles Mackay’s ([1841] 1852) famous descriptions of the frenzied speculative crowds that materialized in Paris and London in 1719 and 1720. I concentrate most on the tulipmania because it is the event that most modern observers view as obviously crazy. I briefly discuss the historical background from which the tulipmania emerged, review the traditional version of the tulipmania, and trace the sources of the traditional version. To understand the nature of tulip markets, we must focus on how the reproductive cycle of the tulip itself determined behavior during the mania. Data on seventeenth-century tulip prices and markets are too limited to construct “market fundamentals” on the supply and demand for tulip bulbs. I simply characterize the movement of prices for a variety of bulbs during and after the mania and compare the results to the pattern of price declines for initially rare eighteenthcentury bulbs. This evidence can then be used to address the question of whether the seventeenth-century tulip speculation clearly exhibits the existence of a speculative mania. I conclude that the most famous aspect of the mania, the extremely high prices reported for rare bulbs and their rapid decline, reflects normal pricing behavior in bulb markets and cannot be interpreted as evidence of market irrationality. The Mississippi and South Sea Bubbles are the other two examples that appear on everyone’s short list of spectacular financial collapses. They provide the most
