As old as the markets. (Bubbles).

One thing we can learn from history is that stock market players don't learn from history.

In 1711, the British government started up an enterprise called the South Sea Company. Its aim was to open up trade with South America. For eight years, the company snoozed quietly, living off a single contract to supply slaves to Latin America.

In 1720, the government decided to privatize the South Sea Company by selling shares in it to the public. The plan was put together by Sir John Blunt, described by some as a "wily operator."

The government liked the deal because it hoped to raise enough money to pay off the national debt. It liked it so much it even loaned money to investors to buy the shares.

Very quickly, there was a buzz around the South Sea Company; trade with South America was going to boom said those with inside knowledge. There were going to be lavish dividends paid out. The shares started out at 128 [pounds sterling] each. By March 1720, they were trading at 330 [pounds sterling]. In May, the price was 550 [pounds sterling] and twice that by late June.

That's when the smart money left the company. Some very high profile figures had bought shares at the bottom and sold them at the top. How high profile? The Prince of Wales, The Chancellor of the Exchequer (Finance Minister) Sir Robert Walpole, the Duke of Argyll, and a whole slew of Members of Parliament all profited enormously by selling their shares at the right time.

When word reached the street that the high and mighty were getting out, the value of South Sea Company shares collapsed. The bubble had burst, as all stock exchange bubbles eventually burst. By December 1720, company shares were trading at 124 [pounds sterling] each, and hundreds, if not thousands, of people were ruined financially. There was a government enquiry, which discovered that--surprise, surprise--the company's accounts had been falsified.

Confidence was shattered. It was not until the next century that people in general felt comfortable buying and selling shares. Then, came the railway boom. Trains hauled by steam locomotives made travel fast and cheap. This was the dawn of a new age and investors were eager to jump on board before the train left the station.

Not everyone was enthusiastic. The Duke of Wellington, who beat Napoleon at the Battle of Waterloo and later became Britain's Prime Minister, gave it as his opinion that "Railroads will only encourage the lower classes to move about needlessly." Others saw a lot of profit in this needless movement.

By 1842, 66 railway companies were listed on the London Stock Exchange; some of them even made a profit. But, many people rushed to put their life savings into railways that were never built and others that could not pay the wages of their engine drivers, let alone dividends.

As with the South Sea Bubble, thousands of people became poorer but wiser.

On our side of the Atlantic Ocean, the same thing happened. Word quickly spread that there were fortunes to be made in railroad stocks. Indeed, vast fortunes were made in railroading but rarely by the folks who bought shares in the railroad companies. The big money was made by rogues such as Cornelius Vanderbilt and Daniel Drew.

In a world that moved much more slowly than ours the railroad boom was mindboggling. In 1830, there was just 37 kilometres of track in the United States. By 1835, there was 1,767 km, and by 1848 it had become 9,650 km. Building on that scale required a lot of capital, and much of it came from selling shares to the public. And, the public was keen to buy because its members believed they were going to make a lot of money.

Stock promoters convinced the gullible that the companies would pay big dividends to shareholders. Not only that, the value of shares was going to go through the roof.

Shares did in fact go through the roof, but they didn't stay there. The bubble burst in 1873, and the value of many railroads dropped to just a tiny fraction of their original pricing. Another generation of poorer but wiser investors was created.

Canada was a little behind the United States, but the railway fever took hold here too. Sir Francis Hincks, described by historian Desmond Morton as "cunning," proposed building a railroad. It was to run "throughout the entire length of the province of Canada." Sir Francis found many willing investors in England, and the Grand Trunk Railway of Canada (GTR) was incorporated in 1852.

Sir Francis had become prime minister of the United Province of Canada in 1851. From this high position he was able to fashion massive swindles in GTR stock, all of which enriched him massively. By 1867, the GTR was the biggest railway system in the world, with 2,055 km of track. It was also effectively bankrupt. Most of those British shareholders lost their shirts, but Sir Francis Hincks emerged from the wreckage with a nice, fat bank balance.

The biggest scare involved the building of the Canadian Pacific Railway (CPR)--the ribbon of steel reaching out to the Pacific Ocean. Promoted by Canada's first prime minister, Sir John A. Macdonald, the CPR was going to bind the new nation together. More than 800,000 shares in the CPR were handed out as bribes. While investors pumped millions into shares of the railway very little of this money was used to build the thing. Most of the private investment was diverted back to the investors as dividends; the cost of construction was picked up by taxpayers. The brains behind this thievery belonged to Prime Minister Macdonald's minister of finance, none other than Sir Francis Hincks.

During the 1920s, the world went nuts again. Millions of people began buying shares in companies for the first time. Some borrowed up to 90% of the traded value of the stocks they bought. Where was the risk? Everybody knew that share prices would just keep going up and up. You could sell the shares at a profit long before the loan came due for payment.

People were hearing about their neighbour's cousin's neighbour who made millions in a week on a mining company in Ecuador. Another stock market bubble was inflating.

Money was flooding into the market pushing up the price of shares. Few of the new investors understood that the market valuation of most companies was many times higher than their real value.

There is a story that one smart investor in New York overheard two shoeshine boys giving each other stock tips. He correctly understood that it was time to get out and sold all his shares. He felt that when shoeshine boys see themselves as stock exchange wizards something is wrong.

The next day was 29 October 1929--known forever as Black Tuesday.

During 1929, there had been several mini-crashes. But, it was hard to kill the optimism of investors and the market recovered from each downturn.

The day after Labour Day, stock exchanges opened in a down mood. But, many believed this was the start of another mini-crash. The crisis would pass and the stock exchange would rise to new highs. The Financial Post put on a happy face and told its readers: "The long term outlook for shareholders in sound Canadian companies remains good."

The clever ones were taking their profit and getting out. This time, however, the selling went on for six weeks, and nervousness crept in. On 24 October, almost 13 million shares changed hands, three times more than the previous single-day trading record. On 29 October, panic set in. A tidal wave of selling hit stock exchanges in New York, Montreal, Toronto, and elsewhere. But, there were few buyers. The value of shares crashed.

Millions of investors lost everything they owned. Many people were deeply in debt because they could not repay the money they had borrowed to buy stocks that were now worthless. In Ottawa, Prime Minister William Lyon Mackenzie-King said: "While a number of people have suffered owing to the sharp decline [in the value of stocks], the soundness of Canadian securities generally is not affected. Business was never better."

During the years following the crash, most investors refused to put any more money in stocks. Without the flow of new capital, many businesses failed and others laid off many workers because they could not afford to pay them. The lack of investment capital was one of the causes of the Great Depression of the 1930s, an economic crisis that left millions out of work and resulted in widespread poverty.

Fast forward to the 1980s. Another generation is ready to get a painful lesson they could have learned from reading their history books. Black Monday was waiting to bite them.

Coming out of a nasty business downturn in the early 1980s, stock exchanges and share prices had roared ahead with unchecked enthusiasm for five years. Tax cuts and deregulation under U.S. President Ronald Reagan boosted business in America. Also, government po]icy of cutting the value of the U.S. dollar created a buzz around the world's biggest economy. Wide-eyed investors from around the world rushed to put their money into shares trading on the New York Stock Exchange (NYSE). As shares on the NYSE rose to new highs, stock exchanges elsewhere in the world became pumped up by the mood of optimism.

If you've been paying attention, you'll know what happened; another stock market bubble formed. As with all previous bubbles, this one also burst.

The balloon was punctured in late August 1987. The United States announced a whopping trade deficit. This came as no surprise to those who had been watching the numbers closely and who also knew that the government was running an enormous deficit as well. Investors started to sell off their shares.

The selling reached a frenzy on 19 October 1987. On that Monday, hundreds of billions of dollars was wiped off the value of shares. The Dow Jones Industrial Average suffered a percentage loss that was almost double that of the 1929 Crash. The carnage in Canada was not quite as bad, but it was enough to send brokers and their customers rushing to the pubs for a stiff drink or three.

While the total losses were large, they were spread over a far greater number of people than the Crash of 1929. This goes some way to explaining why the Crash of 1987 was not followed by a depression. Others say that international agreements and cooperation worked to head off a major economic collapse.

MARGINAL DEALS

One of the reasons the Stock Market Crash of 1929 was so devastating is because people were buying "on margin." This means that instead of buying your stocks with the money you have, you could purchase them with a little bit of cash down and the rest on credit. Not a bad deal, especially when the security used to back up the loan is your ownership of the stock. Let's say you want 100 shares of Black Pearl stock. The cost for 100 shares is, say, $15,000. You put down 10%, borrow the rest from the stockbroker and make monthly payments. Jones down the street is doing the same thing, as is Chiang, Abdullah, and Macpherson. All this buying of stock pushes up the price. Now, 100 shares of Black Pearl are worth $30,000. You can pay off what you owe on the stock by its increase in value.

So, how can you lose on this? Easy. What goes up usually comes down again. Your investment could turn out to be worth less, but the stockbrokers still want the money they loaned you. During the 1920s, people were buying shares with as little as 10% down. As a result of the 1929 Crash, margin accounts are nowhere near as easy to get as they were and the maximum margin allowed is 50%. Government regulators have put in rules that help protect investors from themselves.

COMPUTER TRADING

A lot of analysts have blamed computer trading for the Crash of 1987. Also known as 'program trading," this involves the automatic buying and selling of shares. Pre-set formulas, determine when a stock becomes a "buy," and when it becomes a "sell."

When the right conditions are met an order to buy or sell is sent by the computer to a broker who then does as instructed. In October 1987, stock prices started to decline sharply and this triggered a lot of programs to issue sell orders. This, in turn, helped push the value of shares lower. More computers began to execute trades to sell their stock, and prices began rapidly to roll downhill.