🫧 Economic History: Booms & Busts

What you’ll learn

1. The Story You Have HeardRecognise the popular tulipmania story in full, and why its neatness is a warning sign.The familiar legend — a whole nation bidding houses on bulbs, ruined merchants drowning in canals, a sailor eating a priceless onion — explains a disaster with one word, greed, and quietly exempts the listener. It is the most famous bubble story in history, and it is the first thing this course takes apart.
2. What the Archives SayKnow what the Dutch archives actually record about tulipmania, and why the losses were largely notional.Goldgar's archival work found a network of a few hundred well-off merchants and artisans — around 37 of them recorded spending more than a craftsman's annual wage — trading forward contracts for bulbs still in the ground. When prices collapsed in February 1637 no bulbs and mostly no money had changed hands, no bankruptcies can be traced to tulips, and the Dutch economy was unaffected. What broke was trust, not household finances.
3. Why the Myth WonTrace the tulip legend to its actual author, and state the course's through-line.Charles Mackay's 1841 Extraordinary Popular Delusions drew on 17th-century satirical songs and Calvinist moral pamphlets and treated them as reportage. The myth survived the correction because it explains, warns, and exempts all at once. Hence the argument this course tests: a bubble is obvious only afterwards, and the afterwards is written by storytellers.
4. What a Bubble Actually IsDefine a bubble precisely enough to see why it cannot be identified in real time.The standard definition depends on fundamental value, which is computed from unobservable forecasts — so calling a bubble is always a claim that your forecast beats the market's. The greater-fool wager explains why buying at a price you think is too high can be rational, and why shorting one can ruin you. Fama and Shiller, who shared a Nobel, disagree about whether bubbles are even a coherent concept.
5. 1720: When the State Was the BubbleUnderstand the South Sea scheme as a debt-conversion machine whose profits required its own share price to rise.The South Sea Company swapped government debt for its shares, which meant a higher share price left more surplus shares for the directors to sell — so talking the price up was the business model. It lent money for people to buy its own stock, gave shares to politicians without requiring payment, and used the Bubble Act to kill rivals. Shares went from roughly £128 in January 1720 to about £1,000 in August and back near £100 by December.
6. Credit Is the AccelerantExplain why leverage, not the size of the fall, determines how much damage a bust does.Buying on ~10% margin means a 10% fall wipes out the buyer's whole stake and triggers a margin call, forcing sales that push prices lower and call in the next tier of borrowers. When borrowers cannot pay, the loss lands on the lender — and if the lender is a bank, it escapes into the wider economy. This is the doorway from 'markets fell' to 'the economy broke'.
7. 1929: The Crash and the Depression Are Two Different ThingsSeparate the 1929 crash from the Great Depression, and see why the causal arrow between them is drawn by hindsight.The Dow rose sixfold to 381.17 on 3 September 1929, fell to 41.22 by 8 July 1932 — 89% down — and did not regain its high until November 1954. But a share collapse alone does not produce a decade of mass unemployment: bank failures, monetary collapse and the gold standard did that, and historians still disagree about their relative weight.
8. 1987: A Crash With No StoryUse Black Monday 1987 as the counterexample: an enormous crash with a mechanical cause and almost no economic damage.On 19 October 1987 the Dow fell 508 points, or 22.6% — still the largest single-day decline — and no depression followed. Investigators found structural causes rather than moral ones: portfolio insurance that mechanically sold into falls, mismatched clearing timelines, and exchanges with no ability to pause. It produced today's circuit breakers and the central-bank liquidity playbook.
9. Dot-Com: When the Story Was True and the Price Was WrongGrasp that a true story and a correct price are different things, using the dot-com boom.The 1999 thesis about the internet was essentially correct, and the Nasdaq still fell from a record close of 5,048.62 on 10 March 2000 to 1,114.11 on 9 October 2002 — about 78% — and took until 23 April 2015 to regain its high. Greenspan's 'irrational exuberance' warning came in December 1996, more than three years before the peak.
10. 2008: When the Safe Thing Was the RiskUnderstand 2008 as a credit bubble on housing, resting on an assumption about correlation.Mortgages were pooled and sliced so that senior tranches looked very safe — a rating that held only if defaults were driven by local, uncorrelated events rather than by a nationwide fall in house prices. Rising prices hid the risk by letting struggling borrowers sell or refinance instead of defaulting. House prices fell ~30% from their mid-2006 peak, the S&P 500 fell 57%, unemployment peaked at 10%, and household net worth fell from roughly $69tn to $55tn.
11. Why You Cannot See It From InsideName why bubbles are invisible from inside, and state plainly what this course does not offer.Hindsight bias deletes the competing signals and the wrong warnings that shared the frame, leaving only what turned out right — which makes the past look far more legible than it was. There is no reliable method for spotting bubbles or timing markets, and nothing here is investment advice. What is knowable is how a thing is financed, what a fall would break, and whether the case has become unfalsifiable.
12. Reading Your Own EraReplace the unanswerable bubble question with questions that public information can actually answer.Across six episodes, fraud, financing, and the truth of the underlying story all varied; only leverage tracked the damage. So ask who is lending and against what, what breaks if the price halves, and whether anyone can still say what would prove them wrong — none of which predicts anything, and all of which is answerable today.

Questions this course answers

Grounded in trusted sources

• Anne Goldgar, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age (University of Chicago Press, 2007)
• Anne Goldgar, 'Tulip mania: the classic story of a Dutch financial bubble is mostly wrong', The Conversation, 2018 — https://theconversation.com/tulip-mania-the-classic-story-of-a-dutch-financial-bubble-is-mostly-wrong-91413
• Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1841)
• Federal Reserve History — 'Stock Market Crash of 1929' — https://www.federalreservehistory.org/essays/stock-market-crash-of-1929
• Federal Reserve History — 'Stock Market Crash of 1987' — https://www.federalreservehistory.org/essays/stock-market-crash-of-1987
• Federal Reserve History — 'The Great Recession' — https://www.federalreservehistory.org/essays/great-recession-of-200709
• Federal Reserve History — 'Subprime Mortgage Crisis' — https://www.federalreservehistory.org/essays/subprime-mortgage-crisis
• FRED, Federal Reserve Bank of St. Louis — NASDAQ Composite Index (NASDAQCOM) — https://fred.stlouisfed.org/series/NASDAQCOM

Every Wunder lesson is built from real, reputable sources — never invented.

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