Skip to content
  • FR
FR
  • About us
    Building, illuminated glass towers on either side of an old, square, stone building.

    About us

    We're here to help you understand what the Bank of Canada does and how it matters to you.

    About the Bank of Canada

    Find out what the Bank does, who runs the Bank and how it is separate from the political process.

    Connect with us

    We’d love to hear from you! Contact us by email, phone or mail—or join us on social media.

  • Visit

    Visit

    • Plan your visit
    • Group visits
    • Accessibility and special needs
    • Code of conduct
    • Health and safety

    Sensory Sundays

    We’re turning down the lights and the volume for our sensory-sensitive visitors—explore the Museum using more than eyes and ears.

    Connect with us

    We’d love to hear from you! Contact us by email, phone or mail—or join us on social media.

  • Explore

    Exhibitions

    • Permanent exhibition
    • Special exhibitions
    • Travelling exhibitions
    • Past exhibitions

    Blog

    Collection

    • About the Collection
    • Collection Services
    • Canadian Bank Notes Series
    • Search the Collection

    Speculating on the piggy bank

    Ever since the first currencies allowed us to store value, we’ve needed a special place to store those shekels, drachmae and pennies. And the piggy bank—whether in pig form or not—has nearly always been there.

  • Learn

    Learn

    • Activities and games
    • Education blog
    • External resources
    • Lesson plans
    • School programs
    • Video discussion guides
    • Upcoming webinars

    Entrepreneurship: Kids edition

    Learn from the experiences of successful young entrepreneurs, then create your own business model and pitch your business.

    You are the economy

    A set of six lessons to explore economics with your students.

  • Home
  • The Museum Blog

What goes up…

By: Graham Iddon


May 15, 2019
Share this page on Facebook
Share this page on Facebook
Share this page on X
Share this page on X
Share this page on LinkedIn
Share this page on LinkedIn
Share this page on Google Classroom Created with Sketch.
Share this page on Google Classroom
Share this page by email
Share this page by email

Economic bubbles from flowers to bytes

An economic bubble is aptly named. It is a delicate thing that rises and floats on a warm updraft of enthusiastic optimism. But, just like a soap bubble, an economic bubble has a tendency to burst. And somebody, or a lot of somebodies, will get soap in their eyes.

floating soap bubble

An economic bubble? What’s that?

An economic bubble is a buying cycle with a steep price rise followed by a similarly vertical drop. Many such bubbles are boosted by speculators—investors who believe the price will continue to rise and who want to turn a quick profit. Typically, the buying behaviour is best described as frenzied. When the price is so high that buying slows and stops, the price drops and the bubble bursts. An equally frenzied sell-off then follows as speculators scramble to salvage what profit—if any—they can.

Broadly speaking, a bubble has five stages:

  1. Interest: A new technology or buying opportunity catches the attention of investors.
  2. Growth: Investors begin to buy, pushing the price up and creating even more interest.
  3. Intoxication: Optimism reigns. Prices skyrocket. FOMO (fear of missing out) takes hold.
  4. Profit: Nervous—or shrewd—investors begin to sell and take their profits out.
  5. Panic: The price drops. Investors scramble to sell. The bubble bursts. The price crashes.

We can see this familiar cycle appear throughout our economic history.

Human nature is a feature of the economy

There is more than a dash of human psychology in every economic bubble. In his wonderfully titled 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay explored the psychology behind mass belief and gullibility. One of his interests was market speculation or what he called “money mania.”

Every age has its peculiar folly: Some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the force of imitation.

engraving of a 19th century man, Charles Mackay

Charles Mackay, poet and social scientist, made an early study of the psychology of crowds and popular myth. He was a debunker of such things as ghosts, alchemy and fortune telling. Image: Wikimedia, the Gutenberg Project

Mackay cited three historic economic bubbles to illustrate his money mania theories.

Tulip Mania: The Netherlands, 1634–37

satirical painting of monkeys in a flower market

Artist Jan Brueghel the Younger painted a satire on tulip mania around 1640. It’s worth looking at closely to see what the monkeys are up to. Image: Frans Hals Museum

During the early 17th century, the Dutch fondness for tulips became something of an obsession. The prices at tulip markets rose to ridiculous levels as more and more people bought tulip bulbs in the hope of turning a fast profit. It was the first documented speculative bubble. When the bubble burst, the price of certain bulb types fell from that of a fine Amsterdam house to that of an onion.

The South Sea Bubble: England, 1719–20

19th century Illustration of people leaping from a tree into water

“The headlong fools plunge into South Sea Water. But the sly long-heads wade with caution after.” An illustration from Mackay’s book. Image: Wikimedia, from Extraordinary Popular Delusions and the Madness of Crowds

The South Sea Company was a joint-stock company, one that sells shares in its business to raise money. Its aim was to take over England’s massive public debt and pay it off by selling shares. To provide the necessary boost in stock prices, the company led investors to believe it had a monopoly in South American trade. Investors clamoured to buy the stock, and the value rose by 800 per cent in 8 months. The company really did have a monopoly, but there was no trade. And the bubble burst.

The Mississippi Bubble: France, 1718-20

18th century engraving of Law standing on a terrace

John Law enacted many of his pet economic theories, some very advanced, on the French economy. At heart a gambler and a scoundrel, he created corruption and chaos that would take generations to untangle. Image: Wikimedia, Beineckie Library, Yale University

John Law, a Scottish renegade financier, gambler and convicted murderer, became the French government’s financial advisor in 1715. He established a central bank, issued bank notes and secured a monopoly over development in France’s American territories. Investors became desperate for a piece of this lucrative pie, and prices rocketed. Alas, Law’s promises were empty. The stocks crashed and so did France’s economy.

E-Bubbles, 2017-18

price chart of April 2017-Dec 2018 showing Bitcoin’s 2017 bubble

The seemingly modest price spikes following Bitcoin’s epic 2017 peak are actually explosive changes of as much as 200%. Image: Wikimedia, coinmarketcap.com

Speculative bubbles are still with us today. Beginning in early 2017, a buying mania swept the Bitcoin market. From January to November, the price rose from US$1,100 to $6,700. Major investment firms created new Bitcoin investment opportunities and wildly optimistic predictions were made by highly influential people—all pitching buckets of gasoline onto a raging bonfire.

Bitcoin is now at $16,600.00. Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain, or you did not care enough to try. Bubbles are mathematically impossible in this new paradigm. So are corrections and all else.

Tweet: John McAfee, founder of computer security firm McAfee LLC, December 7, 2017.

The price rose in a near-vertical climb, hitting US$20,000 on December 18. Then, with a very loud “pop,” came an equally spirited decline. One volatile year later, the price was around $3,600—a loss in value of roughly 80 per cent. But that price is still around three times what it was in 2016. So, the bubble never entirely deflated, and long-term holders of Bitcoin are still ahead.

Bubble watching

Many people have referred to the recent steep rise in house prices in Vancouver and Toronto as a bubble. While it’s true this currently overheated housing market shows many hallmarks of an economic bubble, it also has a very rational basis: there are simply not enough houses for the people who want them. Several factors have contributed to this rise, including speculation and low interest rates. Borrowing rates have been kept necessarily low in the years following the global financial crisis to stimulate a slow economy, but have had the side effect of heating up the housing market.

Keeping inflation low, stable and predictable preserves the value of money, but central banks such as the Bank of Canada also work to promote a stable and efficient financial system. The Bank pays careful attention to how interest rate adjustments work their way through the economy so that bubbles have a chance to deflate gradually rather than burst.

But as always, “caveat emptor”: let the buyer beware.

Resources and further reading

  • G. Davies, A History of Money: From Ancient Times to the Present Day (Cardiff: University of Wales Press, 2002)
  • N. Ferguson, The Ascent of Money (New York: Penguin, 2008)
  • M. Goodwin and D. E. Burr, Economix: How Our Economy Works (and Doesn’t Work) (New York: Abrams ComicArts, 2012)
  • “What is a Bubble” (Investopedia, Available at https://www.investopedia.com/terms/b/bubble.asp)
  • T. Lane, “Monetary Policy and Financial Stability—Looking for the Right Tools”(speech to HEC Montréal, Montréal, Quebec, February 8, 2016)
  • T. Lane, “Decrypting ‘Crypto’” (speech to Haskayne School of Business, University of Calgary, Calgary, Alberta, October 1, 2018)
  • N. Smith, “Yep, Bitcoin Was a Bubble. And It Popped.” (Bloomberg, December 11, 2018. Available at https://www.bloomberg.com/opinion/articles/2018-12-11/yep-bitcoin-was-a-bubble-and-it-popped)
  • C. A. Wilkins, “The Age of Leverage” (speech to the UBC Vancouver School of Economics and CFA Society Vancouver, Vancouver, British Columbia, March 14, 2019)
We want to hear from you! Do you have an idea for a blog post you’d like to see?
Content type(s): Blog posts
Subject(s): Economics, Social studies
Grade level(s): Grade 08 / Secondary 2, Grade 09 / Secondary 3, Grade 10 / Secondary 4, Grades 11 and 12 / Secondary 5

Subscribe to The Museum Blog
The Museum Blog

September 16, 2013

Notes from the Collection : 2013 RCNA Convention Winnipeg

By: David Bergeron


Another convention of the Royal Canadian Numismatic Association (RCNA) wrapped up in July. This year the convention was held in Winnipeg, Manitoba. It was the first time in over thirty years that the RCNA Convention made a stop there.
Content type(s): Blog posts
September 6, 2013

First Artifacts to Leave the Museum: And they were big

By: Graham Iddon


Before the museum closed for renovations on 2 July, technicians began to remove the heavier artifacts in late May. First to go was the strong box. Built of ¼” thick welded steel plates, this trunk was used by the Bank of Upper Canada in Toronto between 1821 and 1866.
Content type(s): Blog posts
August 30, 2013

Director’s chair : “I don’t know why you say goodbye, I say hello.”

By: Ken Ross


Most of us know the first part of Alexander Graham Bell’s take on opportunity: “When one door closes, another one opens…” What we often don’t recall is the second half of that quote, where he says: “…but we so often look so long and regretfully upon the closed door, that we do not see the ones which open for us.”
Content type(s): Blog posts
July 30, 2013

Remembering Alex Colville (1920-2013)

By: Raewyn Passmore


The Staff of the Currency Museum was saddened to learn of the passing of artist Alex Colville who died on 16 July at his home in Wolfville, Nova Scotia. He was 92. One of Canada’s most celebrated painters, Colville is not as well-known as a sculptor but if you look carefully through your pocket change you might just find an example of his work.
Content type(s): Blog posts
June 21, 2013

Farewell to the Currency Museum c.1980

By: Graham Iddon


The roots of the Currency Museum go back to 1959 when the then Governor of the Bank of Canada, James Coyne, proposed the idea of establishing a currency collection that would reflect the colourful monetary history of Canada. By the time the go-ahead was given in 1963 by Coyne’s successor, Louis Rasminsky, the collection’s mandate had been expanded to include world monetary history, banking and production artifacts and a numismatic library.
Content type(s): Blog posts
  • « Previous
  • 1
  • 25
  • 26
  • 27
Go To Page

30 Bank Street
Ottawa, ON
K1A 0G9, CANADA
613‑782‑8914

  • Things to do

  • Plan your visit
  • Find educational resources
  • Search the Collection
  • Connect with us
  • Things to see

  • Canadian bank notes
  • Exhibitions
  • Blog
  • Videos
  • Things to know

  • Accessibility and special needs
  • Careers
  • Code of conduct
  • Health and safety
  • Privacy
  • Social media
●●
Bank of Canada Museum

Visit the Bank of Canada web site ›

We use cookies to help us keep improving this website.

Accept and continue