Modern financial markets are often traced back to the Dutch, who pioneered new ways to finance opportunities and invited ordinary people into speculation. During the famous Tulip Mania of 1636–1637, contracts for certain tulip bulbs sold for astonishing sums, sometimes more than 10 times the annual income of a skilled worker! It was a bubble, and like all bubbles, it eventually popped.
A bubble is a form of collective enthusiasm, a powerful crowd mentality. When it is directed toward something truly transformative, this same energy can accelerate progress at an extraordinary pace. While Tulip Mania is a cautionary tale, history also offers examples of “good bubbles.”
Inspiration struck in the 1700s when Benjamin Franklin demonstrated that lightning was a form of electricity. Progress was slow at first, yet meaningful breakthroughs soon followed. In 1831, Michael Faraday built the first motor capable of generating electricity. By 1879, Thomas Edison introduced the first commercially viable lightbulb. There was one big problem: there were no power stations.
America’s first power station, built by Edison in New York City in 1882, marked the beginning of the modern electrified future. By 1902, the U.S. had 3,600 plants; a decade later, more than 5,000 plants were powering 75 million lightbulbs. How did this happen so quickly? Through a “good bubble” in electrification.
Edison Electric eventually merged into General Electric, becoming one of the original members of the Dow Jones Industrial Average. Even with all that innovation, GE still faced turbulence. Its stock lost over 90% of its value between 1881 and 1890. Still, the initial wave of investment provided the capital needed to build the national electrical grid. Of course, in the 1900s, GE stock eventually recovered those losses and reached new highs.
When enthusiasm and capital converge around transformative ideas such as railroads, electricity, automobiles, and the internet, they can compress decades of progress into just a few years. This “good bubble” eventually becomes a danger to the economy as it grows reliant on excessive debt. Lofty expectations collide with diminishing enthusiasm, and investors tire of providing additional financing. The fever of speculation breaks; progress endures.
On a personal level, celebrate innovation, embrace new technology, and avoid excessive speculation and debt.
Check out a deep dive into market bubbles on the SFS Power Up Wealth podcast.
