Week 2: September 3, 2019

Tulipmania: Tulip bubble

- Taken to be the first modern financial crisis
- Dutch Republic 1636-7
- Netherlands, Amsterdam is the center of the international trade network
o transaction costs are the lowest
o “Open across institutions”
o Bank of Amsterdam 1600
 Not a central bank
 Facilitating long distance trade
o Dutch republic= richest place in the world with this trade network
- Tulip story—Tulip bubble
o Tulip bulbs are rare and expensive—you don’t know what it will look like until it
blooms
o People start gambling on the attractive tulips which creates a “bubble”
o Prices rise over time which makes it harder to buy
 To combat this, they started a credit system
 Futures contract—gambling that the price will increase so you save
money
 Greatest Fool Theory: prices will continue to rise as long as you can find
someone more foolish than you to buy at a higher price
 Tulipmania was not a financial crisis because it was only concentrated in
a few cities: mainly Haarlem by high end commodity traders

September 5, 2019

Credible commitment—you defaulted once but it won’t happen again

- Collective action- Genoese would collectively agree to impose harsher terms on the King
if he defaulted again

Bill of Exchange: main financial instrument of early modern Europe.

- Method of making payments
- Acts like a check. Write a bill of exchange for a certain amount of money. Give the bill of
exchange to landlord. At the end of the period the banks get together and clear their
accounts. Net the accounts. Bill of exchange can sign on by someone else. Landlady can
use bill of exchange to pay her landlady. Circulate widely spreading credit risk because
no one has actual cash. Can pay one big purchase with various bills of exchange.

September 10, 2019

Financial Revolution
1688
1689—National Debt
1694—BOE (Bank of England) subscribers

debt
lotteries
tontine— unredeemable
Life annuity – unredeemable

- Stock market
1695-96: Great recoinge

Bank run: Staging bank runs on your competition

Sword Blade
S. Sea Company
East India Company

South sea scheme

Mississippi scheme
Debt-for-equity swap

Asiento: monopoly contract on the slave trade