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Different century, different bubble

In the 1600s, it was Tulip Mania in Holland. In the 1800s, it was railway hype in Britain. Lately, it has been the Internet stock craze. What do they have in common? All ended with a lot of money lost.


© St. Petersburg Times, published February 11, 2001

What do high-flying and fast-falling Internet stocks have in common with tulips in Holland, railroads in England and real estate in Japan?

All of them rank as investments that started with lots of hype and crashed with lots of money lost.

"There have been a bunch of investment manias over the centuries," said David Denslow, an economics professor at the University of Florida. The question is always the same: Is it irrational to invest in highly overvalued assets? One motivator: the Greater Fool Theory. "People will keep paying more and more for an obviously overvalued asset as long as a greater fool is out there," he said.

Edward Chancellor's 1999 history of financial speculation, Devil Take the Hindmost, describes many hyped investments that made, then dashed widespread personal fortunes and frequently dragged down national economies. They range from the colonization of new territories, such as the Americas, to the Japanese bubble economy that popped in the 1990s.

Many bubbles were outright deceptions and manipulations. For instance, South Seas Co., a British venture that raised millions of pounds in 1720 to exploit discoveries in the New World, was really a Ponzi scheme that used new investors money to pay dividends to old investors.

But how the new ventures are sold to investors has not changed much.

Consider the British railways. Between 1825 and 1845, pubs in virtually every small town in England served as the local exchange for the trading of hundreds of railroad stocks. Several railway publications, bankrolled by stock promoters' ads, emerged to hype the latest industry buzz. Railroads were sold to investors as the start of a communications revolution. Stunts to promote the railways were staged in town squares. Trains offered next-day delivery of London newspapers, which featured election results, news that normally took days to reach rural outposts.

The middle class started to buy up shares, even though they had little information on the financial health of the railroads. Government attempts to steer the development of the British railroad network were rejected.

As a result, investors built a network of redundant railroads that provided eight times as much track as Britain needed. About 1,200 new railroad issues hit the market in 1845. Investors' spending created a collective debt that exceeded national income. It was a prelude to the financial crisis of 1847.

"No other panic was ever so fatal to the middle class," historian John Francis wrote. "It reached every hearth. Entire families were ruined."

Not all speculative bubbles, however, crash overnight.

Tulip Mania, the staggering run-up of prices for tulip flower breeder bulbs in Holland, lasted 17 years. The climax came in 1637 when, for no apparent reason, enough buyers decided a single rare bulb no longer equaled the price of 27 tons of wheat, 50 tons of rye, four oxen, eight pigs, 12 sheep, three tons of cheese and a silver beaker.

More recently, Japan's bubble economy deflated over several years like air being let out of a balloon, Chancellor wrote.

Japanese banks and conglomerates hid their shrinking profits behind property and stock investments that soared beyond reality. Corporate Japan bought U.S trophy properties such as Pebble Beach and Rockefeller Center. Japanese people paid $1-million for memberships in a golf club.

As a piece of real estate, Japan was valued in 1990 at four times the value of the United States. The Imperial Palace alone was worth more than all the land in California, according to Chancellor.

All this helped companies prop up their sagging balance sheets. Stock prices grew three times as fast as corporate earnings. Once the property value bubble burst, the stock market sank, followed by the banking system. Some prominent politicians were ousted in financial scandals

"Having manipulated the market on the way up, the mandarins at the Ministry of Finance attempted with less success to control its descent," Chancellor wrote.

"It took time for the perception to change that the Japanese economy would not surpass the U.S. and lead the world in the next century," Denslow said.

The American economy has seen its share of bubbles popping. One example: the rise and fall of the savings and loan industry.

What's unclear is how many Internet companies will survive the shakeout. "All we've seen is people risk trying to be the first big players," said Delos Smith, senior business analyst with the Conference Board in New York.

"We'll see more opportunity in the Internet because the machines behind it will get more and more powerful. The innovation has only begun. We just don't know yet how it will change society."

By the numbers

10: Number of shares $1,000 would buy at the stock's March peak.

888: Number of shares $1,000 would buy at its December low.

5,048.62: Nasdaq Composite Index on March 10, 2000.

2,291.86: Nasdaq Composite index on Jan. 2, 2001.

$82.5-million: How much raised from investors just nine months before the sock puppet company folded.

$191.4-million: How much iVillage Inc. lost last year.

$429.2-million: How much eToys Inc. lost over three years before announcing plans to shut down.

$32-billion: Market value of at the beginning of 2000.

$6-billion: Market value of at the end of 2000.

Five months: Average holding period for a Nasdaq stock.

Three weeks: Average holding period for Nasdaq's 50 most active stocks.

21: Number of times the entire shareholder base of DoubleClick Inc. turned over last year.

$14.95: Cost of trading a listed stock on E-Trade.

$75: Bonus E-Trade will pay for opening a new account.

$302: Cost to E-Trade of adding one new account.

$7-trillion: Total assets of U.S. mutual funds.

$33-trillion: Total trading volume on all U.S. stock exchanges last year.

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