The Dutch Tulip Bubble

A tulip displayed in a 1637 Dutch catalog.

A tulip displayed in a 1637 Dutch catalog.

Money is a strange thing. Basically, we all agree that this “thing”, whether it’s a piece of paper or a giant stone disk, is what we will trade for other things. The value is fueled more by perception of value, rather than any value intrinsic to the object. The stone disks, or rei, mentioned above are a perfect example; the limestone that comprised the disks was unknown to the Yap, and when they found it they became enamored with it and ascribed to it great value, even though they didn’t necessarily use it for anything practical.

While it’s easy to mock the Yap as “primitive” for using stone currency, it’s no different than our own reliance on paper money or gold. Stone disks aren’t even the weirdest instance of money madness from history. After all, limestone could at least conceivably be used to build something. Flowers, on the other hand, are most often used for little more than ornamentation. The tulip was an especially coveted flower in 17th century Holland, where one of the strangest financial disasters in history took place.

 

A wondrous flower sparks a frenzy

Tulips didn’t reach Europe until 1559, when the first bulbs bloomed in Bavaria. No one in Europe had seen anything like it; the bulbs bloomed in brilliant colors. It took years for a bulb to produce flowers. A bulb might also produce two or three offshoots, or miniature bulbs that grew off the main bulb. The nature of tulip biology actually helped encourage the frenzy that would follow. The Dutch became enamored of the colorful flowers after they were introduced in 1593. Their novelty made them fetch a good price on the market, but their value sky rocketed when the flowers contracted a mosaic virus that made them produce a variety of bright “flames” of color on their petals (of course, no one knew what viruses were at the time; they just knew their flowers were suddenly a lot more exotic.) These new strains of tulip began to sell at a premium.

A cottage industry of bulb traders evolved as prices for the rarest strains of tulips soared. Eventually, even lower grade flowers–sold by the pound–began to sell for as much as twenty times their original price. The rarest bulbs could sell for a small fortune. People began to put up their estates, their homes, and their animals as collateral to purchase more bulbs. More often than not, the bulbs themselves were not actually traded; rather, a note giving the buyer the right to the bulb when it would be lifted the following summer would be exchanged. It was a speculative market; essentially, buyers were putting down money on the commodity, betting that the price would rise in the future, at which point they would sell and make their money.

 

Admiral_Verijck_(van_der_Eijck)The market collapses/Lessons learned?

The problem with a speculative market is that it works…until it doesn’t. The tulip bubble burst by 1637, when the inevitable panic set in. Someone refused to pay up, or some twitchy investors went ahead and sold to lock in their profits. Whatever the cause was, the tulip’s inflated value began to rapidly drop. Bulbs that could buy an estate months before were suddenly worth as much as an onion. Government commissions were established in the wake of the collapse to try and solve the mess (without it breaking into violence.) Buyers were forced to pay a small percentage of the original value of the bulbs, meaning that they were out that money and the sellers were out the expected value of their bulbs. Everyone lost.

Luckily, though, despite the tulip bubble being a devastating blow for the people involved, the Dutch Stock Exchange never got involved in the madness. Had they done so, the results would have been far worse, effecting large segments of the Dutch economy. As it stood, a relatively small number of people were harmed by the tulip bubble.

While the tulip bubble is often studied in economics, it’s hard to say if anyone has actually learned a lesson from it. The strange thing about humans is that we are afflicted with a special kind of insanity; the belief that we know better, that what happened to those people won’t happen to us. So, while the speculative bubble of the 17th century is strange, bubbles themselves aren’t all that uncommon. A huge one popped in 2008, plunging the world into economic turmoil that still plagues it to this day. The speculating during that collapse was on derivatives, especially so-called mortgage backed securities. At least tulips were tangible. Even today, many economics experts couldn’t even tell you what a mortgage backed security even is. And we would call the Dutch (or the Yap, for that matter) stupid!

 

Sources:

Beattie, Andrew. “Market Crashes: The Tulip and Bulb Craze.” Investopedia.com. Investopedia. August 3, 2014. http://www.investopedia.com/features/crashes/crashes2.asp

Frankel, Mark. “When the Tulip Bubble Burst.” BusinessWeek.com. April 24, 2000. Business Week. August 3, 2014. http://www.businessweek.com/2000/00_17/b3678084.htm

“Tulipmania.” uchicago.edu. August 8 2014 http://penelope.uchicago.edu/~grout/encyclopaedia_romana/aconite/tulipomania.html