Half Title

Series Page

Title Page

Copyright Page



Chapter 1: Tulip Madness

An Introduction to the Flower in Question

Rise of the Tulip

Market Frenzy

The Bloom Is off the Rose

The Compost Heap

Chapter 2: The Mississippi Scheme

Law’s Early Life

Franco Finances

Paper Money

A Golden Opportunity

An Expansion of Power

Absorption and Ascent

The Frenzy Begins

A New Venue and a Plateau

Cracks in the Mississippi

Economic Dictatorship

A Rush and a Crush


Chapter 3: The South Sea Bubble

Sovereign Debt and an Idea

A Useless Monopoly

The Bubble Companies

Newton’s Folly

Whirlpool in the South Sea

Chapter 4: American Revolution in the Colonies

Prosperous Colonies

Intolerable Changes


Continental Paper

Peaceful Resolution

Economic Constitution

Chapter 5: The Panic of 1837

The Nation’s Central Bank

Jackson’s Mistrust of Paper

Biddle versus Jackson

Death of the Second Bank

Waging a War with Words

A Flood of Paper for Land

The Endangered Specie Act

Chapter 6: California Gold

An Empty State

A Challenging Trek

Disappointed Latecomers

A Distorted Economy

On the Farm

Chapter 7: The American Civil War

Antebellum Nation

The Modern North

The Confederacy

The Greybacks

Bonds before Bombs

Legal Tender

Gold and a Hoax

A Nation Transformed

Chapter 8: The Panic of 1893

The Robber Barons

Silver and Gold

Panic Sets in

Cleveland and Morgan

The Man behind the Curtain

Chapter 9: The Rich Man’s Panic of 1907

A Simpler Time

The Copper Magnate

Cornering United

The Bank Runs Begin

The Stock Exchange Teeters

Roosevelt’s Reluctant Aid

Jekyll Island

Chapter 10: Billion-Dollar Bread—The Weimar Hyperinflation

Funding a War

An Expensive Peace

The Printing Presses

Widespread Suffering

A Nation of Speculators

The Retenmark Miracle

Lingering Aftereffects

Chapter 11: The Roaring Twenties

The Great War’s End

Lower Taxes, Higher Growth

Consumerism Blossoms

The Florida Land Rush

A Nation of Speculators

Chapter 12: The Great Depression

The Orgy of Speculation

Stock Mania

The Market Cracks Wide Open

Smoot-Hawley Tariff

Business Council

The Slide Resumes

The Golden Lattice

The Bonus Army

Regime Change

Grinding to a Halt

Shuttering the Banks

Putting People Back to Work

A Regulatory Framework

The Depressing Facts

A Double Dip

The World Returns to War

Chapter 13: Postwar Prosperity

A Return to the Depression?

The Great Transition

Leader of the Free World

Lifestyle Transition

End of an Era

Chapter 14: Energy, Politics, and War

The Birth of OPEC

War and Embargo

Don’t Be “Fuelish”

Iran and Iraq

Invasion of Kuwait

The Hundred-Hour War

An Uneasy Partnership

Chapter 15: Precious Metals and the Destruction of a Billionaire

Melting Down Saint-Gaudens

The Hunt Fortune

The Hunt Children

The Next Best Thing to Gold

Muammar Gaddafi

The Accumulation Accelerates

A Rising Asset

Hostile Management and Friendly Arabs

Changing the Rules of the Game

Putting an End to It

Silver Thursday

The Bailout

Gold Riding Shotgun

The Double Eagle Returns

Bankrupt Billionaires

Chapter 16: Latin American Debt Crisis

A Healthy Development

Oil Money Hunts for a Home

Interest Rate Shock

Baker and Brady


Subprime Parallels

Chapter 17: The Reagan Revolution and Crash

The Death of Inflation

Rebirth of the Stock Market

A Business-Friendly Nation

Bonds and Inflation Signal a Change

Three Days in October

A Worrisome Weekend

Black Monday

Turnaround Tuesday

Sorting Out the Reasons

Chapter 18: The Rising and Setting Sun of Japan

The Early Economic Structure

The Aftershocks of War

The United States Rebuilds

From Dodge to Independence


The Soaring Sixties

OPEC and Little Japanese Cars

Electronics Giant

The Bubble Swells

Unparalleled Property Prosperity

The Japan That Can Say No

The Big Crash

Damaging Demographics

The Lost Decades

A Perpetual State of Recovery

Chapter 19: The Savings and Loan Debacle

Good Intentions and Honest Growth

Loaning to Lose

Overly Deregulating

The Real Estate Boom Goes Bust

Keating’s Lincoln

A New Foundation

Chapter 20: Fall of the Soviet Union

Back in the USSR


The August Coup

Private Enterprise

Satellites Adrift

Chapter 21: The Asian Contagion

The Booming Decades

Liberal Lending

A Subtle Slowdown

The Thai Baht Bomb

Instantly Expensive

The Big Economies Join the Drop

The World Turns Another Corner

Chapter 22: Russian Crisis of 1998

After the Fall

Loans Instead of Growth

Welcome to the Club

Strains in the Kremlin


The Have-Nots

LTCM in America

Russian Resurgence

Chapter 23: Captured by the Net

Living History

Fuel for the Fire

The Foundation is Laid

Raging Bulls


Yahoo! and Irrational Exuberance

The Cackle Heard around the World

The Madness Goes Exponential

A Las Vegas in Every Home

Century’s End

Analysts as Oracles

Mountains of Money

The WebVan Peak

An Adoring Press

Peak and Fall

Burning Up—The Movie

Horror and Terror

Picking Up the Pieces

The Bubble’s Legacy

Chapter 24: The Great Recession

The American Dream

A Yield-Seeking Ocean of Money

Unreliable Ratings

Bubble Denial

Financial Fissures

Fiscal Free-Fall


A Nation on the Mend

Chapter 25: History in the Making

The Ties That Bind

What Makes an Event a Historical Force?

The Road Ahead

About the Author









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Five Centuries of History and
the Markets


Timothy Knight





This book is dedicated to Lee Barba, a fellow historian
and student of the markets. Thank you for taking the risk
that others lacked the courage to take.


As I suspect the case is with many others, my interest in history did not reveal itself until long after my formal education was complete. A school’s offering of dates, places, and long-forgotten names captures the interest of very few children, and unfortunately it usually snuffs out any latent desire they might have to explore tales of the past that can offer up wisdom, insight, and previously unseen linkages.

For most of my adult life, I have had a deep and abiding interest in two related subject areas: history and financial markets. While the two might seem to be only obliquely related, they are actually engaged in a constant dance, with one informing the actions of the other. Historical events move currencies, stocks, debt, and all other flavors of fiscal instrument, and likewise movements—particularly exaggerated movements—in the financial markets can drive the decisions that shape history in real time.

When I first developed the outline of this book, I tried to gather up what I suspected were the most interesting and market-moving developments of the modern age. To my surprise, some of the events that I thought would have a major impact (such as the Kennedy assassination in 1963 or the London subway bombing of 2005) were, as far as financial markets were concerned, virtually immaterial; it was if they had never even happened. However, other topics I had initially left out, such as the Russian debt crisis of 1998, turned out to be monumentally important.

The completed book you are holding contains two dozen chapters of what I consider the most interesting and important episodes over five centuries that have had an impact on the thinking and behavior of financial markets. There are manias, panics, battles with inflation, the travails of war, and stories of riches both won and lost. The tales extend from early seventeenth-century Holland up to the twenty-first-century United States.

My hope is that, having read these accounts, the reader can gain perspective—specifically, perspective of how consistent human behavior has been over the centuries, and how in spite of extraordinary technological, political, and legal changes, the templates that govern humanity’s relationship with both opportunity and fear are surprisingly steady.

There will undoubtedly be new “chapters” in your own lifetime of globally important events that move both markets and sentiment. In the end, I hope the reader can be better armed to comprehend the world’s complexities and changes by way of the knowledge and insights this book endeavors to provide.

Tim Knight
Palo Alto, California
August 1, 2013


Tulip Madness

In popular culture, there is probably no better-known event in the lexicon of unusual financial history than the tulipmania that seized Holland in the early seventeenth century. Whenever there is a financial bubble in modern times, the term tulipmania is bandied about, but few commentators who use the term have a grasp as to what actual events occurred.

It is a fascinating tale—perhaps somewhat apocryphal—and, if nothing else, entertaining. And it is surely the only chapter in this compendium of financial history that involves not one but two important biological maladies that shaped the story: a flower-distorting virus and a deadly human plague.

An Introduction to the Flower in Question

If you’ve ever grown tulips, you know all too well that, while beautiful, the tulip is a temperamental and relatively weak plant whose bloom is short-lived and whose likelihood of returning the next year is far from certain.

The flower itself was unknown to most of Europe in the sixteenth century, but around 1554, the Pope’s ambassador to the Sultan of Turkey was charmed by the flower and collected seeds and bulbs for distribution. (The word tulip itself is said to be derived from the Turkish word for “turban,” since the bloom somewhat resembles the same).

Cultivation spread throughout the region we today call the Netherlands as tulip bulbs found their way to Vienna, Antwerp, and Amsterdam. Planters took pleasure in the vibrant blooms and the fact that the plants were more tolerant of the harsher climate of the lower countries.

The bulbs themselves were classified into three groups: the single-colored, the multicolored, and the “bizarres.” This last category is most germane to the tale of tulipmania, as bizarres were the rarest and most sought-after tulip. The reason these unusual flowers came about was a virus that interfered with the plant’s ability to create a uniform color on the petal. It is today known as a “breaking” virus, since it breaks the plant’s lock on a single petal color, although it does not kill the plant itself. The effect on the flower was striking, producing mosaic-like flames of color on each petal.

Even regular, single-colored tulips are difficult to grow from seeds. It took anywhere from 7 to 12 years to produce a flowering bulb from a seed, and once the bulb was at long last established, it would create only one or two clones (or “offsets”) in a given year. The mother bulb itself would last only a few years before it died.

As challenging as it was to propagate regular tulips, it was even harder to do so for the exotic varieties, since the virus weakened the plant somewhat, and it usually failed to create offsets, meaning that any bizarre varieties required new plants be created from seeds. The length of time required for that growth meant that the most appealing varieties of tulips remained rare.

As knowledge of tulips spread, collectors of the bulbs began to give the exotic varieties inventive names such as “Admiral” and “General” to suggest the boldness of the plant’s appearance. A sort of one-upmanship developed with the naming, leading to exalted titles like “Admiral of Admirals” and “General of Generals.” For years, the cultivation and selling of tulip bulbs was little more than a curious hobby among horticulturists and the well-to-do.

Rise of the Tulip

As the sixteenth century turned over to the seventeenth, Holland was on the ascent. The area, formerly known as the Spanish Netherlands, had won its independence. Amsterdam, the capital of Holland, found itself as the driving force behind commerce, particularly as a trading partner with the East Indies. Newfound wealth and prosperity flooded the region, with single trading voyages yielding profits upwards of 400 percent to the financiers backing them.

A merchant class arose, and the new money in the area sought ways to show off its wealth. Grand estates begin springing up around Amsterdam, and nothing framed a handsome home better than a vibrant display of flowers in the surrounding gardens. And, naturally, there were precious few flowers more showy and eye-catching than the tulip.

The tulip’s reputation was on the rise, and by 1634, anyone with money but without tulips was judged simply to have bad taste. Whereas tulip bulbs used to be sold by the pound, their rising popularity and prices made them exponentially more precious, and soon much tinier weights were used as the basis of the tulip trade. A concurrent demand from French speculators for the bulbs only pushed the price higher.

The trading of the bulbs was framed by the growing season of the flowers themselves. Tulips bloom in the springtime for just a few weeks, and they enter a dormant phase from June through September. It is at this time they can be safely uprooted and moved about, so actual physical trades took place around this time of the year.

Because speculators did not want to confine their trading to just a few months, they put together what could be considered a futures market. Two traders could sign a contract in front of a notary, pledging to buy a certain quantity, type, and quality of bulb at the end of the season for a certain price. These contracts soon found an aftermarket of their own, so that people begin trading the paper instead of the physical bulbs.

Market Frenzy

In 1636, the tulip bulb was the fourth leading export of Holland (if you are curious, the leading three were gin, herring, and cheese). Because the margin requirements for tulip futures were minimal, the price of the contracts began to soar spectacularly. Some historians have noted that, due to the presence of the bubonic plague at the time, some individuals viewed life quite fatalistically, leading some speculators to trade with complete imprudence.

The Calvinists of Amsterdam viewed with dismay and concern the speculative frenzy that was springing up in their native land. The virtues of discretion, moderation, and hard work seemed to be shoved aside for the easy profits of trading in paper. The appeal of the profits at the time was understandable, however, as prices lurched forward. By 1637, a single bulb could fetch the equivalent of 10 years’ salary of a skilled craftsman. Entire estates—one reported to be a full 12 acres—could be had for a single exotic “bizarre” bulb.

One of these bulbs, named the Semper Augustus (see Figure 1.1), was particularly coveted. In 1636, there were only two such bulbs in all of Holland. As trading spread throughout the country, it became impractical for speculators to make the trip to Amsterdam, so smaller exchanges appeared in the taverns of small towns using similar trading rules as had been established in the capital city. To create an atmosphere of prosperity and opulence, these taverns were often adorned with large vases of tulips in full bloom and sumptuous dinners that traders could enjoy while doing their business.

FIGURE 1.1 Semper Augustus was one of the most-prized varieties of tulip.


The final spasm of buying was promulgated by a decision made in February 1637 by the self-regulating guild of Dutch florists. They agreed that, by their new rules, all the futures contracts that had been put in place since November 30, 1636, could henceforth be considered options contracts. This wasn’t the exact language they used, of course, since such terms for financial instruments did not exist, but the effect was the same.

The difference between a futures contract and an options contract is subtle but crucial: with a futures contract, the buyer agreed to buy a certain quantity of a product at a certain price on a certain date; the obligation to buy was firm. With an options contract, the buyer had the right—but not the obligation—to execute a purchase based on the same terms.

To cite an example, if a person bought an option contract when the underlying asset had a value of 500, and the asset’s value went to 800 by the expiration date of the contract, the buyer would presumably be glad to honor the terms of the agreement and purchase the product at 500 (since the market price was already up 60 percent). However, if the price had dropped to 250, the buyer could simply let the contract expire, losing only a small transaction fee equivalent to about 3.5 percent of the contract price.

With this new rule proposed, which the Dutch Parliament ratified, the risk of engaging in these contracts to the buyers decreased dramatically (indeed, by 96.5 percent). The reason is that those trading in tulip futures now bore very little risk, since they could simply walk away from the agreement if prices didn’t behave favorably. If tulips ascended in price, the speculators made a lot of money. If the tulips fell in price, speculators lost only a small amount of risk capital.

It was at this time that trading reached its peak, in terms of both price and volume. Some bulb agreements changed hands 10 times in a single day.

The market finally broke down during a routine bulb auction held in Haarlem, Holland. A mass of sellers showed up to conduct business, but there wasn’t a single buyer to be found. Some believe a severe outbreak of the bubonic plague kept the buyers away (although it seems to have done nothing to deter the sellers), but the simple fact is that the normal spot market for bulbs was suddenly one-sided and thus nonexistent. All sellers and no buyers does not a market make.

Within days, panic spread across the country, as people soon realized that their enormous trading profits were no more valuable than the paper on which the agreements were written (see Figure 1.2).

FIGURE 1.2 After peaking in early February, tulip prices crashed hard, erasing the entirety of prior gains.

Source: Used with permission from Jay Henry.


The Bloom Is off the Rose

The crash in tulip prices was even more rapid than the ascent. One bulb that had risen in price 26-fold by January 1637 lost 95 percent of its value in just one week. Speculators around the nation were facing losses that were in some cases ruinous.

Citizens demanded that their government do something about it, so the matter was referred to the Provincial Council of The Hague. After three months of discussion and debate, the Council made their announcement, which was this: they had no decision, and they would need more information. Not surprisingly, this provided cold comfort to the distressed populace.

The Council’s follow-up suggestion wasn’t much more helpful: they advised that every seller should meet with each corresponding buyer and, in front of witnesses, offer the tulips to the purchaser for the previously agreed price. If the buyer refused to complete the deal, the tulips could be put up for sale in a public auction, and the buyer would be held responsible for the difference in price.

In a market that had lost virtually its entire peak valuation, this was obviously a bad situation for buyers and sellers alike (but significantly worse for the sellers, who were stuck with bulbs that now weren’t worth much more than onions).

There was no legal recourse to be had, either. The judges in Holland considered all the financial agreements pertaining to the tulip frenzy to be nothing more than gambling debts and, as such, were unrecognized by the legal system. Even if buyers were deemed responsible for the agreed-upon payments to sellers, those sums were unenforceable, and thus everyone who owed money simply ignored the entire matter.

As a final effort to shore up the badly rattled economy, the government offered to void any existing contracts for a fee equal to 10 percent of the contract price. Because prices had already plunged even more than 90 percent, this offer likewise provided no meaningful relief. In the end, most participants in the tulip madness suffered economic hardship, and the psychological scars would be with the nation for decades to come.

The Compost Heap

The events surrounding Holland’s tulipmania have become the stuff of financial legend to this day, but modern historians speculate that perhaps the magnitude of the event was much smaller than some believe. Although there was indeed enthusiastic trading of tulip bulbs around 1636, it may have been confined to a very small number of merchants and craftsman, who for a time wanted to ape the exciting high-finance behavior of the nobility.

Some of the famous stories related to this time seem hard to believe. One oft-cited tale is of a sailor who, hungry while visiting a friend, plucked up a tulip bulb from his friend’s table (thinking it was an onion), slipped it into his pocket, and boiled and ate it later. Once discovered, the poor sailor was pursued, captured, and thrown into jail for consuming a bulb whose value was equal to all the food the entire crew on the sailor’s ship would require for a year.

Setting aside the fact that a tulip bulb bears little resemblance to an onion, eating a tulip bulb would be a wholly unappealing experience. The taste would be terrible, and even if the fellow managed to choke it down, the effects on his body would have been toxic. It seems a story such as this is more of an invention of propaganda than an account of an actual event.

The Dutch lunacy spread somewhat beyond its borders, creating miniature tulip frenzies in London and France, but attempts by brokers to push tulip prices to the levels seen in Amsterdam met with only moderate success. Even if the tale of flower-bulb speculation from long-ago Holland is more fiction than fact, it still is a fascinating anecdote into how the novelty of a new product (in this case, a flower, as opposed to an iPhone) can capture the public’s imagination, if only for a few months (see Figure 1.3).

FIGURE 1.3 Jan Breughel’s famed The Folly of Tulip Mania, painted in 1640 and displayed at the Frans Hals museum in Haarlem.