What better time than now to talk about one of the most studied financial crashes that occurred in 1637 in Holland - The Tulip Crash. To bring this piece of valuable history to your attention, I will give you a brief synopsis of the events of that time. I must add however, that due to limited documentation from the time, the extent of this crash is disputed by some.
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 very attractive markings added to the tulip’s mystique; they became highly prized and even more expensive.
This mysterious beauty, coupled with limited supplies, started a tulip buying frenzy, and that led to speculation in tulip markets. Buyers could invest in future contracts for the delivery of the bulbs. Bulbs were traded at market exchanges or early stock markets. As the frenzy increased, buyers started trading on margins, or future profits, which was especially risky. An overconfident atmosphere prevailed as traders believed there would always be a market for tulips, especially to foreigners. Traders, seeing no end to their wealth potential, 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 the supply, as investors started to cash in their wealth. This slowed down the soaring prices, which had been as much as 20 times the cost. Fear started to enter the market as more and more traders cashed in their investments. The crash happened in 3 months, ushering 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. Sound familiar?
The effect of this over inflated little bulb understandably left the Dutch very cautious of speculation for many years.
