The Tulip Crash
What better time than spring to talk about the tulip bulb? However, let’s look less at its beauty and more at its influence as an economic influence. The tulip may be one of the world’s most recognizable flowers but it is also at the center of one of the world’s most notorious financial crashes – The Tulip Crash of 1637.
The tulip bulb originated in Turkey. In 1593, Dutch traders imported the first bulbs to Holland. They were unique, beautiful, exotic and therefore, expensive. The growing conditions in Holland caused the bulbs to be susceptible to a mosaic virus that caused color striations in the petals known as ‘flames’. These flames created attractive markings that actually added to the tulip’s mystique and value. They became highly prized and thus even more expensive.
The flowers mysterious beauty, coupled with limited supplies lead to a tulip buying frenzy. And, of course, as with all financial frenzies people looked for more and more ways to profit. This led to speculation in tulip markets where buyers could invest in future contracts for the delivery of the bulbs. Not unlike the stock markets of today, bulbs were traded at market exchanges and as the frenzy increased buyers started trading on margins or future profits. This practice was especially risky and an overconfident atmosphere prevailed. Traders believed there would always be a market for tulips, especially to foreigners. Seeing no end to their wealth potential, traders cashed in all sorts of assets including their homes, cattle, and savings to invest in tulip bulbs. This period is seen by some as the beginning of the futures and commodities trading practices of today.
As demand grew tulip growers worked to increase their supply. Prices soared to more than 20 times the cost of bulbs and some individual bulbs could sell for as much as 10 times the yearly income of a skilled craftsperson. As prices skyrocketed investors began to cash in their wealth. This slowed down the soaring prices and eventually fear started to enter the market as more and more traders cashed in their investments. The crash ushered in one of the world’s most devastating recessions that lasted for many years. The Dutch government decided to bail out investors by paying them 10% of their investment. The bail out added to the loss of confidence and contributed to a deeper plunge in the market. Does any of this sound familiar?
To be clear, there is limited economic data from the 1630s and some researchers are skeptical of the actually scope of the bubble. Nevertheless, the effects of this over inflated little bulb understandably left the Dutch very cautious of speculation for many years.