Guide to market crashes

The major market crashes in history

Today we offer to guide you through the major market crashes. It is essential to understand the history of finances well, both to understand it and to see that these crashes are just an endlessly repetitive sequence of bullish and bearish cycles. Nevertheless, at the same time as our technologies develop, combined with the globalisation phenomenon, the frequency of market crashes is accelerating as well as their impact on the world economy.

Crashes were first on a country level, then they impacted a group of countries, and then an entire continent. Nowadays they affect the whole world, almost simultaneously.

Our guide to market crashes is structured chronologically:

Summary of major market crashes

The 1673 tulip crash

The tulip market crisis which affected Europe and particularly the Netherlands in the years around 1637 is termed Tulipomania. It is a major crisis because it was the first speculative bubble in history. See our article on Tulipomania for more information.

The Law bankruptcy in 1720

This crisis was partly due to John Law’s arrival in French financial management, under the reign of the regent Philippe d'Orléans. John Law, a Scottish financier, set up a revolutionary financial system, by introducing paper currency in exchange for precious metals. It was this process which led the Royal Bank to ruin and also ruined many families. After reaching the top, due to his model, he was forced to flee in order to escape a premature death.

This crisis is a good example of the trust factor in the markets.

The Vienna Stock Exchange crash in 1873

This crash was caused by the liberalization of the banking system in the 1870s.
German unification (between Prussia and the Austrian-Hungarian Empire) in 1871, created a favourable climate for the economy. In addition, France had lost the Franco-Prussian War of 1870 and was obliged to pay 5 billion francs to the Germans. New liquidity was thus injected into the German economy.

The further development of competition then led to a decline in profits for many banks, which gradually created investor doubt. The Bank of Budapest was the first to default in repayments. Other banks then met the same problem: the confidence crisis spread. The whole of Europe was gradually affected by this banking crisis.

The General Union crash in 1882

The French bank, General Union, went bankrupt in 1882. At this time the bank was relatively young, it was created in 1875, in the Lyon region. This bank went bankrupt because of bad management. Its bankruptcy pulled a lot of other market players down with it, such as Lyon regional stockbrokers. The crisis then expanded to the Paris Stock Exchange. This is a little known crisis, but it pulled numerous sectors down with it during the crisis, such as the mining sector and even the metal industry.

The 1929 crash

The 1929 crash, firstly appeared as Black Thursday, it remains the biggest crash in financial market history. The 2008 crash may seem more impressive, but the one in 1929 had even stronger repercussions at an economic level and resulted in a worldwide crisis.

Black Monday 1987

The October 1987 crash was initially caused by the fight against inflation politics of the FRS. The announcement that it would increase its interest rate added to the announcement of bad figures in the American trade balance created panic in the American markets. This was the first crisis that the computerised markets (see HFT) had to endure. As with any first time, things did not go well and the downward trend was strongly accentuated by the computerised trading systems. The FRS then had to intervene to reassure the markets through its chairman Alan Greenspan. Overall, the Dow Jones lost over 22% of its value during this crisis.

The 1998 Asian crash

This crisis hit many emerging countries in Asia, and also countries such as Brazil and Russia. The crisis began in Thailand in 1997, due to foreign investors’ loss of confidence. They were concerned that the country’s short-term debt was increasing too rapidly. This crisis gradually affected all countries in Southeast Asia. The loss of confidence also affected their currencies, which caused insolvency in the banks. The entire economy of these countries was then affected.

The Russian Crash in 1998

The Russian crash of 1998 was part of the continuity of the 1997 Asian crash. It was, above all, a rouble monetary crisis. In fact, the currency lost about 60 % of its value in a little under two weeks, with a fall of 17 % in just one day on 27th August, 1998. Russia then developed an economic crisis, which was particularly pronounced in 1998, with very high inflation at 84%. This crisis almost pulled other world markets into the red, but the FRS intervened, in particular to save "Long Term Capital Management", an American Hedge Fund.

It should be noted that: Following its creation in 1993, the VIX had its first real peak during this Russian crisis.

The Internet bubble crash in 2000

The Internet bubble is the name given to a speculative bubble which affected the state-of-the-art technology sector, including telecommunications and computer technology. Securities became famous as a good example of this crash, thanks to the Internet bubble. For example, Alcatel had reached €94 on 1st September, 2000, to finish at a price of €12.65 in September 2001. This new economy was reflected by the emergence of "Golden Boys". The fervent price increase enabled many traders to become limitlessly rich.

This crisis initially started with the fall of the NASDAQ, after it reached a record 5,048.62 points on 10th March, 2000. It then lost 27% during April 2000, and finally lost almost 40% in the year 2000. Of course, it took all other markets down with it when it fell.

The 2008 crash: Subprime crisis

The subprime crisis firstly started with the bankruptcy of the Lehman Brothers bank. This took all the financial markets down with it. See this article on the subprime crisis for a detailed presentation of this crisis. You can also consult another article on the links between the FRS and the subprime crisis.

Flash Crash of 2010

This was one.  of the most impressive flash crashes in modern history when some securities lost 99% of their value in a few minutes.

The 2010 crash: The Greek crisis

The Greek crisis followed in the wake of the subprime crisis, which itself dragged many countries into recession when this financial crisis transformed into an economic crisis. The global context partially explains this crisis, but you have to add that it was also due to the country’s financial mismanagement, during the preceding years. In fact, in 2010 the country had public debt amounting to 120% of its GDP, which was very high at that time compared to its European neighbours.

Goldman Sachs also had certain responsibility for this crisis, since it was this investment bank which developed the financing of the Greek entry into the Euro zone. The Greek crisis was in fact the trigger point for the whole of the sovereign debt crisis in Europe.

The 2011 crash: The sovereign debt crisis

The debt crisis was a continuity of the Greek crisis. Basically, this crisis was due to public deficits, uncontrolled for a very long time, and which at that time far exceeded the 3% requirements of The Maastricht Treaty. Furthermore, these public deficits were also due to the States rescuing European banks. European countries, including France, found themselves in difficulty, particularly due to speculation on their debt and degradation of their securities by agencies such as Moody's.

The difficulties encountered by the Euro zone highlights the Euro zone’s failures. The Euro zone’s lack of stability homogeneity, criteria for Mundell’s Optimum Currency Area, in theory was shown to be a problem.