The First Market Bubble: Tulip Mania of the 17th Century

#tulips #financialmarkets #marketbubble #Netherlands #Holland #money #flowers #investments

Long before the Dot-Com Bubble of the closing years of the 20th century, the world experienced another period of wild economic speculation. It took place in Europe in the 17th century. The commodity whose prices rose to astronomical and unsustainable prices wasn’t internet stock, real estate, oil, or gold; it was the common tulip.

Ogier de Busbecq, the ambassador of the Holy Roman Emperor to Turkey, is credited with introducing the tulip to Europe in 1554. Within forty years tulip popularity grew to the point where they could be found throughout Central Europe. The flower’s heartiness permitted it to thrive in the colder climates of the United Provinces (now the Netherlands). With a little help and publicity from Dutch botanist Carolus Clusius, the Low Countries soon boasted impressive crops of the colorful flower.

Read about the war the Netherlands fought over a kettle of spilled soup.

The tulip was an exotic item. Unlike any other flower in Europe, its shape and vibrant colors made it a status symbol for anyone who wanted to flaunt his or her wealth.

Tulip growers learned to cultivate new and more-desirable colors. Each new color or pattern of colors captivated collectors. Soon, tulip growers were marketing their brand of tulip bulbs under names that were more coveted than vintage wines or thoroughbred horses.

Tulips can be grown from seeds or bulbs. When the tulip grows from a seed, it can take seven to twelve years before it begins to produce flowers. When grown from a bulb, however, the flower can appear much more quickly. With the tulip in bloom only for about a week during the months of April and May, tulip collectors spent most of the year trying to accumulate the perfect bulbs in anticipation of the next year’s exhibition of colors. Thus was born a commodity market as tulip traders signed futures contracts to buy or sell bulbs at the end of the growing season.

By 1634, the market for tulips had become international. Traders from as far away as France increased the demand for tulips well beyond their availability. By 1636, the top trading items in the Dutch economy were gin, herring, cheese, and tulips, in that order.

The year 1636 saw the tulip price escalate wildly. Speculators traded futures contracts without ever seeing the bulbs the contracts agreed to buy. In retrospect, the prices seem impossible to believe. In one case, an entire townhouse was offered in exchange for ten bulbs of the Semper Augustus variety of the flower. What is even more remarkable is that the offer was refused, because the bulbs were regarded as more valuable than the offered real estate.

To put the prices in context, a skilled laborer at that time might expect to earn between 150 and 350 florins per year. One florin at in 1635 had the purchasing power of $13 in today’s economy. The price of a ton of butter that year was 100 florins. That same year, 40 tulip bulbs sold for 100,000 florins — enough to buy 1,000 tons of butter or to pay a skilled worker 286-667 years of salary!

The price of tulips grew off of speculation. In other words, the contracts that were traded did not actually provide tulip bulbs to anyone; they merely conveyed the right to buy or sell a certain number of bulbs for a stated amount. This would all work out well if they ultimately found customers willing to pay such prices for the bulbs. If they couldn’t, the prices would be proven to be unsustainable, and the market would collapse.

That’s exactly what happened. During the last month of the bubble — February 1637 — prices skyrocketed by 1,100%. That month a single bulb of Semper Augustus went for 10,000 florins. Only then did speculators begin to realize how difficult it would be to find anyone wealthy enough — or committed enough — to purchase the bulbs at anything close to market prices. In the span of one week, prices fell off by 25%. Within three months, prices had returned to what they were before the bubble began to form.

Countless fortunes were wiped out overnight. The government stepped in to help, allowing speculators to void their contracts by paying 10% of the contract’s value. By this point, the price of tulips had fallen so low, that many were unable to pay even the 10% amount.

In the years to come, many investors would make and lose fortunes in market bubbles. One cannot help but wonder if modern speculators wish they could trade places with their counterparts of 4 centuries ago. At least they had some pretty flowers to look at, instead of sheets of worthless paper entitled “Stock Certificate.”

Read about the war that was declared, but both countries forgot to fight.

Read more fun facts about economics.

Read about the town that danced for an entire month.

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