That Time Tulips Crashed the Economy
Between the months of October and December in 2017, the price of a single Bitcoin went from around $4,000 US dollars to a little over $19,000. That’s an increase of nearly 500 percent in under 3 months.
This has led some people to call it an economic bubble.
But this bubble isn’t the first and it won’t be the last. We’ve had housing bubbles, dot com bubbles, even scrubbing bubbles.
But almost 400 years ago we had what has been called the first economic bubble. And it didn’t involve anything as intangible as digital money. Nope. The first bubble was for tulips. Yes, the flower. People went crazy for them.
Just why people were so crazy for tulips is a little unclear but I’m gonna try and find out anyway.
Right now, the price of tulips is holding steady. It’s January here in Illinois and it doesn’t seem like a great time to be buying tulips. Demand for these flowers or any outdoor flowers of any kind will be pretty light until spring, I imagine.
But almost 400 years ago, at the exact same time of year, the demand for tulips skyrocketed.
Their price surged 200 percent over the course of the winter. Some tulip varieties went for more than five times that of an average house. But in less than three months, the tulip craze was over. The bottom fell out of the market and the price of these flowers went back to normal — that is, less than a percent of what they worth at the height of their value.
This whole situation has been called tulip mania and has been cited as the first economic bubble.
An economic bubble is a financial phenomenon where the market price of a good or service exceeds its intrinsic value.
We’ve seen several of these throughout the years. The dot-com boom of the 90s. The housing boom in the 2000s that led to the Great Recession. Even the Great Depression was precipitated by excessive speculation in the stock market.
But the first recorded boom happened in the Netherlands during the Dutch Golden Age.
There’s some debate about its true nature but I’ll get to that in a bit.
What is certain is that people of the time really liked tulips.
In the 17th century, the Dutch East India Company held a monopoly over trade with the far east, giving the Netherlands access to goods no one else in Europe had access to — like exotic spices, luxury textiles, and — yes — tulips.
There was no other flower on the European continent quite like the tulip. While any tulips were remarkable and highly prized, the ones with petals displaying rare or unique colorations and color patterns were the most sought after. These were the kind of tulips that had a going rate of more than a house.
The most expensive tulip on record commanded enough money to feed and clothe the average Dutch family for half a lifetime.
Tulips are nice and all — they’re very pretty flowers — but are are they really worth an entire Dutch family? Had the whole country gone nuts?
First of all, in the years leading up to tulip mania, the Dutch parliament changed the laws governing tulip contracts. They ruled that anyone who signed a contract to buy some tulips, was under no obligation to actually purchase them. This meant speculators could purchase tulip contracts with little risk. So more and more investors purchased these obligation-free contracts.
This drove the price of tulips.
So if you signed a contract to buy a tulip for a dollar but the market price for a tulip jumped to two dollars, you could sell your tulip for a tidy profit. Or you could cut out the tulip entirely and just sell the contract. This whole enterprise snowballed — more contracts written for ever more expensive tulips — until you start to get tulips worth more than a house.
That is, until late February, when the Dutch authorities pulled the plug. They halted the sale of these contracts — with hardly anyone buying a single tulip.
And so the market crashed.
But that isn’t the whole story.
Another factor might’ve been the appearance of the Bubonic Plague.
Just a few decades before the tulip craze, the plague had broken out in Amsterdam, decimating the population. Ever since, the specter of the Black Death haunted the Netherlands. This could’ve encouraged a fatalistic view toward financial investment. If there was a good chance you would catch the plague and die at any moment, why worry about making a return on your investment? Why not drop a ton of money on some tulips?
And that’s just what people did.
Apparently nothing sparks the desire for financial investment quite like the imminent prospect of death.
And when the plague did break out in the Netherlands in the winter of 1637, it made it so people were too sick or too scared of getting sick to deliver on their tulip contracts.
And the market crashed.
But after all that, the tulip craze might not’ve been as crazy as we thought.
In fact, it might not’ve been a bubble at all.
Recent research has shown that the tulip trade wasn’t as widespread as initially reported. There’s little evidence that the subsequent crash had much of an effect on the economy. Money and tulips may not even have changed hands on a very large scale, meaning that the economic fallout would’ve been very limited — if not entirely nonexistent.
So the very story of the first economic bubble might’ve been just as exaggerated as the price of the tulips.
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