Financial or economic bubbles are generated when the price of an asset becomes increasingly high, much higher than the actual value of it. Over recent decades, several assets have created economic bubbles. The dotcom revolution in the 1990s was one of them, as well as the soaring US real estate prices that eventually led to the 2008 global financial crisis.
But economic bubbles are much older than that. The first ever financial bubble that was recorded took place in the 1630s, in the Netherlands. At the center of this bubble was an unusual asset: the tulip bulb. Yes, the thing that people put into the ground in the hope that, a while later, a flower will emerge.
Tulips are originally from Central Asia. A diplomat sent the first tulip bulb from the Ottoman Empire to Vienna in the 1550s. Due to its exotic look, the tulip became a luxury item and a status symbol in Europe.
Carolus Clusius, a Flemish botanist founded the botanical garden at the University of Leiden in the Netherlands and began to successfully cultivate tulips.
This botanist made an interesting discovery: sometimes tulip petals changed color and began sporting multi-colored patterns. This mysterious phenomenon was called “tulip breaking”, and it created spectacular flowers. This was a rare occurrence and it made the multi-colored tulips much more valuable than the rest. Today, we know that tulip breaking is caused by a virus that infects certain tulip bulbs and they’re quite difficult to propagate. Other botanists began to cultivate tulips, and because of their popularity, prices began to rise.
17th-century Netherlands was the perfect place for the Tulip Mania to break out. Newly independent from Spain, the Netherlands quickly became a major European power. Dutch traders were very successful, spreading wealth and an increasing demand for luxuries throughout the country.
tulips are a perfect commodity for a futures market
Similarly, tulips are a perfect commodity for a futures market (when parties sign a contract to deliver specific goods or services for a set price at a specified time in the future). Since tulip bulbs can only be uprooted between June and September, all purchases outside this time frame took place as futures trades, where traders signed contracts to deliver at the end of the season. This means that as prices were soaring and deals made (sometimes even ten transactions per bulb a day), no bulbs actually changed hands.
As usual with financial bubbles, things got out of hand quite quickly. Botanists competed with each other, trying to cultivate more and more spectacular flowers. Semper Augustus was one of the most coveted cultivars during the craze.
a whole house was offered for 10 bulbs of Semper Augustus. And the offer was refused in favor of a better one
By 1637, prices were stellar. According to contemporary records, a whole house was offered for 10 bulbs of Semper Augustus. And the offer was refused in favor of a better one. Speculators rushed the market, selling all their properties and possessions to bid on tulip bulbs. During the last month of the bubble, prices skyrocketed by 1,100%.
In February 1637, the tulip bubble burst. Buyers began to stop fulfilling their contracts, and the whole artificially-generated craze came crashing down. Fortunes were lost overnight and the value of the tulip took a plunge into the ground (where it really belongs).
Some scholars argue whether the Tulip Mania was a real financial bubble, since its bust didn’t send the Netherlands into a full-blown economic crisis. Although the Dutch government had to intervene to save many investors, it’s true that the country’s economy as a whole didn’t suffer long-lasting consequences. And the tulip is still one of the things the Netherlands is best known for.
The story of the Tulip Mania may seem funny today. Who would give their whole house in exchange for a flower that blooms for a week? But bear in mind that it’s easy to be smart in retrospect. Recognizing a bubble and trying to stop it is a lot more difficult when it’s actually happening everywhere around you.