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This chapter explains what financial crashes are and why, how, and when they occur. More specifically, it examines the mechanisms underlying crashes; whether we can forecast crashes; whether we could control or at least have some influence on crashes; whether crashes indicate a fundamental instability in the world financial structure; and what could be changed to modify or suppress these instabilities. The chapter considers the stock market crash of October 1987 and the main explanations for its occurrence, as well as other financial crashes in history, including the tulip mania, the South Sea bubble, and the great crash of October 1929. It also discusses extreme events in complex systems and concludes with an analysis of a new set of computational methods that can be used in the prediction of large-scale financial crashes.

This chapter examines historical examples of international crises and contagion in chronological sequence, asking in each case (a) what is the evidence for contagion, judged by the standards set by analysts of the crises of the 1990s; and (b) what were the consequences of the crisis for the evolution of financial and monetary systems? The crises considered are the tulip mania of 1637, the Mississippi and South Sea bubbles of 1719–20, the Latin American debt crisis of 1825, the international crisis of 1873, the Barings crisis of 1890, the stock market crises of 1893, the panic of 1907, the Wall Street crashes of 1929 and 1987, and the Asian crises of 1997. A commentary is also included at the end of the chapter.

The financial crisis known as the ‘Dutch tulip mania’ led to tulip bulbs being traded for very large sums of money throughout the 1620s and 1630s. This chapter documents the crisis along with the London and Paris bubbles that exploded during the same century. The financial mechanism itself was absolved, while moralists, at most, would single out dishonest traders as responsible for the crisis. The blame was laid at the door of deceitful mediators and criminal florists, collectively engaged in setting up an oligopoly of sort manipulating most exchanges. The dishonest operators, it was suggested, would force prices up by buying all that was on offer, thus creating an artificial demand, and selling afterwards on a falsely created rising market. The victims of such practices ignored not only the value of tulips but also the moral stature of those trading them. Simultaneously, the work of Beccaria and Bentham is discussed, particularly their efforts to explain the harm caused by the financial world and to connect luxury, usury, and crime.