Tulips And Bubbles



The “dot com” bubble of the late 1990’s and early 2000’s and more recently, the collapse of the real estate bubble, serve as reminders of the volatility in various financial markets.  Although financial bubbles can be exciting the eventual collapse can also be very painful.  

The first recorded financial bubble took place in what is today the Netherlands in the 1630’s.   The Tulip had been growing in popularity for several years and eventually a craze developed as the flower became recognized as a luxury and a status symbol.  Since some of the more popular varieties could take several years to develop, and since the bulbs had to remain in the ground during certain parts of the year, transactions were often conducted by signing contracts where sellers and buyers would agree to a transaction that would be effected at some point in the future.  This effectively created a type of futures market.

As the popularity and prices for certain varieties grew, speculators began to enter the market buying the bulbs or contracts on the bulbs not for their future beauty, but in the expectation that someone else would be willing to pay more.  And for a while there was always someone who was willing to pay more.  It seems that the mere fact that tulip prices were rising so quickly became the main motivation for people to rush into tulips.  By some accounts, single bulbs were selling for more than the value of a very nice home at the time.  One rare variety, the Semper Augustus, reportedly sold for as much as 5,500 florins.  To get an idea of the value at the time, consider that a skilled laborer might earn 150 to 300 florins in a year.  One thousand pounds of cheese could be had for 120 florins, and four oxen for 240 florins.

According to Charles Mackay, who in 1841 published a book called Extraordinary Popular Delusions and the Madness of Crowds, people from all walks of life participated in the speculation.  In his publication he claimed that:

Many individuals grew suddenly rich.  A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip marts, like flies around a honey-pot…Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.

As the prices of tulips continued to soar, buyers became either unwilling or unable to pay the increasing prices for the flowers and the demand dropped.  As speculators became unable to sell at the inflated prices sellers began to panic and the tulip bubble burst. 

Some modern scholars have challenged certain aspects of Mackay’s account of the tulip bubble and the “widespread economic chill” that according to him affected the Netherlands for many years afterward.  However, while each bubble and following bust was a result of different economic developments, there are a number of similarities in the many financial bubbles that have taken place in the more than 370 years since the tulip market collapsed.  Perhaps the most notable is that they are driven by the emotions of fear and greed.

Kimber Heaton is a Certified Financial Planner (CFP) and the principle of HEATON FINANCIAL, a Registered Investment Advisor, and can be reached at info@heatonfinancial.com or 435-272-4362.

Reference:  Wikipedia -Tulip mania