Wednesday, February 3, 2010

Tulip Mania

The most recognized symbol of an economic bubble is probably the tulip.  Tulip mania struck in the late 1630's, and reached a peak on February 3rd, 1637.  A freefall in tulip prices ensued, impacting other asset prices, and ushering in a period of economic depression. 

In Scott's day, the Panic of 1825/6 was the leading economic crisis.  Scott himself, deeply extended in debt to fund his building of Abbotsford, was caught in its wake.  During the fall of 1825, son-in-law Lockhart brought Scott reports of publisher Archibald Constable's bankers having closed his account.  On January 16, 1826 he heard that Hurst and Robinson, who were Constable's London correspondents, had dishonored one of Constable's bills.  As Constable went down, so did Scott.

Scott's answer to his bancruptcy was to implement some fiscal austerity, and to work even harder than he had previously.  The novel "Woodstock" was written at this time, as well as continued work on "The Life of Napoleon".  Scott worked the rest of his life to wind down his obligations.

The panic itself is interesting historically, representing the first instance of a bank functioning as a central bank.  The Bank of England, though technically private, with the agreement of the government, effectively increased liquidity.  The BOE increased money in circulation and funded various banks to help stave off bank runs.  These efforts were instrumental in resolving the panic, and have been employed by central banks since that time.

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