Tulipmania: First Speculative Bubble Burst Where Tulips Could Buy You A House
The narrative of Tulipmania is the tale of a big commodities bubble that occurred in the 17th century. It began when Dutch investors began to feverishly purchase tulips, which drove their values to all-time highs. Tulipmania is the account of a significant commodity bubble.
During the peak of the Tulip Mania, the average price of a single flower was higher than the yearly salary of a competent worker. It was even higher than the purchase price of certain houses.
Today, speculative investments like dot-com stocks and cryptocurrencies are sometimes compared to the tulip craze that occurred in the Netherlands in the 19th century.
The illogical biases and collective mentalities that drive the values of an asset to an unsustainable level are reflected in the overall cycle of a bubble, which culminates in the ultimate collapse of those inflated prices. This cycle may be seen in the history of tulip mania.
According to one school of historical thought, the true size of the tulip bubble was minimal, but subsequent narratives have grossly inflated its significance.
The Flamboyant Flower - After the arrival of Tulips in Western Europe in the late 1500s, they became a luxury item and status symbol for wealthy Dutch merchants. The flowers were fragile, and it took 7-12 years for cultivators to grow a bulb from a seed.
Hack-a-Tulip - After the cultivation techniques were refined, the flower could be grown faster from a bulb, causing the demand to increase as more people collected & speculated about tulip bulbs.
Flower Power - Houses were mortgaged and people sold valuable objects to invest in tulip bulbs. By 1636, even stock exchanges were established to trade in bulbs, pushing the average price of a single flower where it exceeded the annual income of a skilled worker & cost more than some houses at the time.
Bulb Bubble - The best Tulips cost about $750,000 in today's valuation with many bulbs trading in the $50,000 - $150,000 range. At its peak, tulips sold for approx. 10,000 guilders (pre-euro currency) which, in the 1630s was roughly equal to the value of a mansion on the Amsterdam Grand Canal.
The great upswing began in 1634 and ended in spectacular fashion in February 1637. Although it caused a temporary economic downturn, the tulip craze was more of a novel social and economic phenomenon than a serious event. The Dutch Republic, one of the world's top economic and financial powers in the 17th century and the country with the greatest per capita income in the world from around 1600 to around 1720, was not much impacted by this.
When asset prices begin to significantly depart from their fundamental values, the phrase "tulip mania" is sometimes used metaphorically to refer to the entire economic bubble.
Tulipmania (also known as the Dutch tulip bulb market bubble) is a model for the general cycle of a financial bubble:
Investors lose track of rational expectations.
Psychological biases lead to a massive upswing in the price of an asset or sector.
A positive-feedback cycle continues to inflate prices.
Investors realize that they are holding an irrationally priced asset.
Prices collapse due to a massive sell-off, and an overwhelming majority go bankrupt.
Did Tulipmania Really Exist?
Historians have debated the authenticity of Tulip Mania, with some believing that the event may have been exaggerated or even invented by the public. Anne Goldgar, a historian at King's College London, discovered that "there weren't that many individuals participating and the financial implications were relatively minimal." Had there truly been a tulip-based economic collapse, there would have been considerably bigger ripple effects on the wider economy. Instead, Goldgar "couldn't discover anyone that went bankrupt."
An alternate argument is that the magnitude of the bubble was inflated by Dutch Colonists, who objected to the profiting of the Amsterdam stock market and considered the tulip bubble as a warning against capitalistic excess.
In The End
There was a precipitous drop in prices beginning in February 1637. People first bought bulbs on credit with the intention of repaying the loan when they resold the bulbs for a profit, which led to the precipitous fall in demand. As prices fell, however, holders were compelled to unload their bulbs at any cost or face bankruptcy. The price of tulip bulbs stabilised in 1638.
In the midst of the excitement, no one stopped to consider that they were gambling everything on an inert piece of vegetation. As a result of dealers' refusal to fulfil commitments, prices dropped and consumers were stuck with bouquets of unsellable flowers. Speculators and market participants lost everything overnight, despite the fact that the Dutch economy did not crash.