This financial scandal is not likely to disrupt the growth of cryptocurrency or blockchain. The reason is simple. It isn’ t uncommon for new financial innovations to run into epic problems when they are first introduced. Those blunders are frequently caused by a lack of understanding of the new financial product.
Tulip Mania
Take, for instance, the tulip mania of the 1600s in the Netherlands. Most of the time we hear or read that the country’ s population went mad throwing as much money as possible into the tulip market, which eventually ended in tears, including the jailing of a sailor who accidently ate a tulip bulb mistaking it for an onion. The funny thing is, such events never happened.
Anne Goldgar, author of Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, explained,“ There weren’ t that many people involved, and the economic repercussions were pretty minor. I couldn’ t find anybody that went bankrupt. If there had been really a wholesale destruction of the economy as the myth suggests, that would’ ve been a much harder thing to face.”
However, certain details were true. There was frantic trading, and some people paid huge amounts for bulbs that, once flowered, may have lasted one week. And there was a breakdown in the trading that happened when some bulb buyers refused to pay the exorbitant prices they had originally agreed to pay. That then led to a collapse in the prices.
A key element of the problem is there was no way to enforce payment. Contrast that with the current situation in the commodity markets. If a person engages in a futures contract to buy a specified volume of an item at a predetermined price, they are obliged to pay. The seller will get the money agreed on one way or another. And that may have been the gift that the tulip mania gave the world. Many buyers and producers of commodities depend on these regulated contracts to manage their risks with the knowledge that the contracts won’ t be reneged on by the other party. This guarantee is conducted through what is known as a clearing house— typically a well-financed corporation— that engages in both the buying and selling of a contract. If the clearing house is financially solid, then the traders should have no worries about a default, as the clearing house will cover the costs in the event that one party reneges on the contract.
The Mississippi Bubble
Another example occurred in the early 1700s, when Scotsman John Law became intent on propagating paper money to any country that was interested. At that time, it was a radical change from using precious metals( gold or silver) coins.
In 1716, Law found a taker in France and introduced the country’ s first paper money. Back then, the French government was deep in debt. He also set up the Banque Générale that would print notes. He promised economic growth, as he believed more printed money in circulation would boost the economy. Ideally, the debt level would retreat. And that would be a superb outcome because the then French de facto ruler, The Duke of Orleans, was keen on reducing the country’ s debt burden. Therefore, the country bet on paper money.
However, that wasn’ t the whole story. Law also gained“ exclusive privileges” to trade in the French possession. These included Louisiana in pre-independent America. Effectively, these commercial rights gave him a foreign trade monopoly. On its own that may have been fine, but Law managed to combine his bank with the company.
The duke then encouraged investment in the company, which boomed— fueled by the newly introduced printed money, which had no limit. The bank bought up a slew of the stock in the company and then merged the two entities.
Unfortunately for everyone, especially the investors, the projected profits didn’ t materialize. At the same time, the government decided to sell shares in the company to the public and increase the level of money printing, which in turn created runaway inflation and a reduction in the spending power of the printed bills.
Eventually the stock’ s value plunged, which quickly crushed the stock market in France and other countries. Share prices dropped from 10,000 livres in September
Tulip Price Index from January 1634 to December 1637
Encik Tekateki www. MoAF. org | Spring 2025 | FINANCIAL HISTORY 33