In recent memory, we’ve seen
market crashes and bubble bursts revolving around different commodities: stocks,
real estate, technology, mortgages, and even the banking system, itself. The
fear and panic from a market crash is downright horrifying, shaking the very
foundation of our economy and belief in the system to serve the individual.
But has it always been that
way? We can look as far back as the Great Depression in the United States as
evidence that this phenomenon of an overinflated bubble meeting a sharp pin
prick is not new, but was the stock market crash of the 1920s and 30s the
first? Not even close.
In fact, you’ll probably be
shocked to hear that the first speculative asset to skyrocket in value and then
crash entirely was Dutch tulips. That’s not a typo – I really do mean Dutch tulips.
In the 1600s, certain market and geographic factors (and a whole lot of greed
and irrationality) saw the price of imported tulips climb so fast – even 1,000%
in one month – that some rare bulbs were worth an entire luxury home. Only
months later, that same rare tulip wasn’t worth more than a common flower,
sending the Dutch economy reeling. The Dutch tulip market crash was such a profound
historical event that they even had a name for it: “Tulpenwoede,” or tulip
madness.
The buildup.
1593 Tulips were first
introduced to the Dutch when traders from Turkey brought them across the seas
to Europe. Legend has it that a Dutch ambassador working at the court of
Suleiman the Magnificent in Constantinople, Turkey noticed the magnificent
flowers and sent some to a Botanist friend in Holland.
The rich had already been in
the practice of rampantly collecting luxury items from foreign shores at the
time, from seashells to spices to artwork.
When the Amsterdam stock
exchange opened in 1602, bolstered by the Dutch East India Company, a thriving
but informal future exchange market blossomed. Soon, flowers became a hot
commodity, and among them, tulips were the most coveted.
But what probably launched
the Tulipmania value explosion – and subsequent market crash – was a strange
twist of fate. The tulip crops were infected with a non-fatal virus known as
mosaic, which didn’t kill them, but changed their appearance, causing brilliant
“flames” of color to appear on their petal.
All of a sudden, the already
coveted flowers became rare and unique trophies for the rich. As a luxury item
only available imported from Turkey, they had been selling at high prices
before, but once the mosaic virus enlivened their appearance, the price shot up
astronomically.
Cashing in on the new tulip
craze, but by the 1630s, a few tulip brokerages had opened for business, most
of them wealthy merchants in the same tight circle or even family.
The bubble inflates.
Although the supply of new
tulips, and especially those with the beautiful mosaic defect, was limited,
people clamored to get more as the ultimate status symbol – or means to a quick
profit as prices always seemed to rise. When buyers and garden centers bought
as many as humanly possible, it further limited supply, fed demand, and
skyrocketed prices. Traders and merchants stocked inventories of tulips as fast
as they could, with no consideration for cost.
"Neighbors seemed to
talk to neighbors; colleagues with colleagues; shopkeepers, booksellers,
bakers, and doctors with their clients gives one the sense of a community
gripped, for a time, by this new fascination and enthralled by a sudden vision
of its profitability," writes Anne Goldgar
in "Tulipmania."
Soon, it seemed like
everyone was dealing in tulips bulbs, and a huge secondary market emerged where
people bet on their future price increases, buying and selling options, not
just the flowers themselves. The common perception was that the market for
these tulips had no ceiling, as they thought they could easily unload tulips to
unwitting foreigners, so people started cashing in or trading their houses,
land, life savings, or any other assets they owned to get their hands on more
bulbs.
The craze was so out of hand
that in the 1630s, a sailor was arrested and locked in a Dutch jail for eating
a tulip bulb that he had thought was an onion. It was said that the mistake of
eating the bulb was about the same cost as feeding his ship’s entire crew for a
year!
Everyone wanted in on the
tulip madness, and by 1637, values were shooting up twenty-fold every
month. And then, the bubble hit it’s
ceiling over a one month period in 1637, when the price of Switsers, a popular
tulip bulb, went up 1,100%, from 125 florins a pound to 1,500 a pound.
Quite possibly, the zenith
of Tulipmania was February 5 of 1637, when a historic auction was held in the
town of Aikmaar to raise money for orphaned children. The prized sellers at the
auction were two varietals of tulips: a Viceroy that sold for $4,203 florins
and an Admirael Van Enchuysen that sold for 5,200 forins. Just how much is
4,000 or 5,000 florins? It’s enough to buy a luxury home in Amsterdam at the
time. The value of these tulips had reached the point of abject lunacy.
The bubble bursts.
No one is exactly sure
what happened to cause the market to crash, seemingly overnight. Some think it
was traced to economic irregularities due to the Black Plague spread over
Europe. Others think that the greed just hit its zenith, when people tried to
sell their options and inventory more than keep buying. Or maybe someone just
blinked, realizing the price increases and market craze was unsustainable. But
all of a sudden, everyone wanted to sell. And the prices, which had been
soaring exponentially every month, began to soften and then fall. The same mob
mentality that drove the masses to buy and trade tulips out of greed turned to
abject panic to get out.
Prices completely
collapsed in February of 1637. Not only did people completely stop buying, but
also the huge options and futures market that revolved around the tulip trade
was exposed as a house of cards. At the blink of an eye, with no buyers and a
herd of sellers looking to dump their tulips or promises to buy inventory in
the coming season, sellers, insurers, merchants, and bulb traders went
bankrupt.
The crash.
The ensuing crash was such
an economic free fall for a good portion of the population that on April 27 of
1637, the Dutch government had to step to try to stabilize the Tulipmania
fallout. The federal States-General issued a proclamation that laid out a
process for arbitration for those who couldn’t pay their debts or were no
longer willing or able to honor their contracts. They offered a solution of
allowing people to honor contracts at only 10% of their face values, with local
magistrates arbitrating, but even that didn’t help. The panic that swept the
nation as people realized they’d cashed in their houses, businesses, life
savings, etc. in order to buy simple flowers. No amount of government
intervention would help, as people couldn’t even give away the once invaluable
tulips and contracts to buy them.
The damage to the Dutch
economy was total; even those prudent few people who weren’t involved with the
tulip trade felt the impact of the ensuing national depression. For centuries,
the aftershocks felt from Tulipmania kept the people, governments, and banks of
Holland notoriously risk-averse. And even today, when they see a tulip, they
think of something far different than just a beautiful flower.
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