The Tulip-Mania Saga:
(Disclaimer: Today, its long, but interesting!)
The Dutch tulip bulb market bubble, also known as 'tulipmania' was one of the most famous market bubbles and crashes of all time. It occurred in Holland during the early to mid-1600s when speculation drove the value of tulip bulbs to extremes.
How did it happen?
Tulips first appeared in Europe in the 16th century, arriving via the spice trading routes that lent a sense of exoticism to these imported flowers that looked like no other flower native to the continent. It is no surprise then that tulips became a luxury item destined for the gardens of the affluent: which according to The Library of Economics and Liberty, "it was deemed a proof of bad taste in any man of fortune to be without a collection of [tulips]."
Following the affluent, the merchant middle classes of Dutch society (which did not exist in such a developed form elsewhere in Europe at the time) sought to emulate their wealthier neighbours and, too, demanded tulips. Initially, it was a status item that was purchased for the very reason that it was expensive.
But at the same time, tulips were known to be notoriously fragile, and would readily die without careful cultivation. In the early 1600s, professional cultivators of tulips began to refine techniques to grow and produce the flowers locally, establishing a flourishing business sector, that has persisted to this day.
According to Smithsonian Magazine, the Dutch learned that tulips could grow from seeds or buds that grew on the mother bulb. A bulb that grew from seed would take seven to 12 years before flowering, but a bulb itself could flower the very next year. So-called "broken bulbs" were a type of tulip with a striped, multicoloured pattern rather than a single solid colour that evolved from a mosaic virus strain. This variation was a catalyst causing a growing demand for rare, “broken bulb” tulips which is what ultimately led to the high market price.2
In 1634, tulipmania swept through Holland. The Library of Economics and Liberty writes, "The rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade."3
A single bulb could be worth as much as 4,000 or even 5,500 florins—since the 1630s florins were gold coins of uncertain weight and quality it is hard to make an accurate estimation of today's value in dollars, but Mackay does give us some points of reference: among other things, 4 tuns of beer cost 32 florins. That's around 1,008 gallons of beer, or 65 kegs of beer. A keg of Coors Light costs around $90, and so 4 tuns of beer ≈ $4,850 and 1 florin ≈ $150.4 That means that the best of tulips cost upwards of $750,000 in today's money (but with many bulbs trading in the $50,000 - $150,000 range). By 1636, the demand for the tulip trade was so large that regular marts for their sale were established on the Stock Exchange of Amsterdam, in Rotterdam, Haarlem, and other towns.
At that time, professional traders ("stock jobbers") got in on the action, and everybody appeared to be making money simply by possessing some of these rare bulbs. Indeed, it seemed at the time that the price could only go up; that "the passion for tulips would last forever." People began buying tulips with leverage, using margined derivatives contracts to buy more than they could afford. But as quickly as it began, confidence was dashed. By the end of the year 1637, prices began to fall and never looked back.
A large part of this rapid decline was driven by the fact that people had purchased bulbs on credit, hoping to repay their loans when they sold their bulbs for a profit. But once prices started their decline, holders were forced to liquidate—to sell their bulbs at any price and to declare bankruptcy in the process. Smithsonian Magazine indeed notes that "[h]undreds who, a few months previously had begun to doubt that there was such a thing as poverty in the land suddenly found themselves the possessors of a few bulbs, which nobody would buy," even at prices one-fourth of what they paid. By 1638, tulip bulb prices had returned to from whence they came.
Fun Fact: During the Tulip Mania, the most expensive tulip cost as much as a villa on the most fashionable Amsterdam canal. Also, At the height of the market, the rarest tulip bulbs traded for as much as six times the average person's annual salary.
Bubbles and manias are timeless. As an investor, you should stay disciplined and stick to your investment principles.
Cheers!
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