Boom and bust phenomena have existed for centuries. During a “boom” period, buyers jump on the bandwagon and find themselves paying increasingly higher prices until the “bust”, at which time the goods and commodities for which they have paid inflated prices end up worth little or nothing.
Some of the more famous boom and busts are:
The Tulip Mania of the 1630s in Holland
Tulip mania or tulipomania was a period in the Dutch Golden Age duri
ng which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. In 1637 at the peak of tulip mania, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble.
The event was popularized in 1841 by the book Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay. According to Mackay, at one point 12 acres of land were offered for a Semper Augustus bulb. Mackay claims that many such investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock.
The California Gold Rush
Gold was discovered January 24, 1848 by James Marshall at Sutter’s Mill in Coloma Valley. Gold was valued from $12
.00 to $35.00 an ounce. At one point, eggs (if you could find them) were $3.00 each; whiskey was $16.00 a bottle, pills were $10.00 each without advice, $100 with. On average, half the gold-seekers made a modest profit, after all expenses were taken into account. Most, however, especially those arriving later, made little or wound up losing money.
Bodie, California is an example of the bust of the California Gold Rush boom.
Bodie began as a mining camp of little note following the discovery of gold in 1859 by a group of prospectors. In 1876, the Standard Company discovered a profitable deposit of gold-bearing ore, which transformed Bodie from an isolated mining camp comprising a few prospectors and company employees to a Wild West boomtown. Rich discoveries in the adjacent Bodie Mine during 1878 attracted even more hopeful people. By 1879, Bodie had a population of 5000 to 7000 people and around 2,000 buildings. Over the years, Bodie’s mines produced gold valued at nearly $34 million.
The first signs of decline appeared in 1880 and became obvious towards the end of the year. Promising mining booms in Butte, Montana; Tombstone, Arizona; and Utah lured men away from Bodie. The get-rich quick, single miners who originally came to the town in the 1870s moved on to these other booms, which eventually turned Bodie into a family-oriented community. The first signs of an official decline occurred in 1912 with the printing of the last Bodie newspaper, The Bodie Miner. In 1913, the Standard Consolidated Mine closed. In 1917, the Bodie Railway was abandoned and its iron tracks were scrapped. The last mine closed in 1942, and mining never resumed.
The first label of Bodie as a “ghost town” was in 1915. Today, Bodie is preserved in a state of arrested decay. Only a small part of the town survives. Visitors can walk the deserted streets of a town that once was a bustling area of activity.
The Dot Come Bubble
The “dot-com bubble” was a speculative bubble covering 1995 to 2000. The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. Companies were seeing their stock prices shoot up if they simply added an “e-” prefix to their name and/or a “.com” to the end.
A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics such as P/E ratio in favor of confidence in technological advancements.
Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble burst. The massive initial batch of sell orders processed on Monday, March 13 triggered a chain reaction of selling that fed on itself as investors, funds, and institutions liquidated positions. In just six days the NASDAQ had lost nearly nine percent, falling from roughly 5,050 on March 10 to 4,580 on March 15.
By 2001 the b
ubble was deflating at full speed. A majority of the dot-coms ceased trading after burning through their venture capital, many having never made a net profit. Some investors referred to these failed dot-coms as “dot-bombs.”
Today
The American subprime lending boom in the 1990s and early 2000s was followed by the subprime mortgage crisis of 2006 and beyond. With major financial institutions and other companies teetering on the brink, the U.S. government poured massive amounts of money into them. The stock market dropped precipitously, and massive layoffs swelled the ranks of the unemployed. Today we are slowly recovering.
