Tulipmania

Tulipmania refers to a historical period that began sometime in the 1620s or early 1630s and was characterized by an inflationary market in tulip bulbs including active trading in tulip bulb futures contracts. Tulip mania first began in the Netherlands in response to high demand for tulips; first introduced to the Dutch from Africa in the 1590s, these lovely flowers soon became one of the most popular ornamental plants and were sought out for home gardens throughout much of Europe. The popularity of tulips and the demand for tulip bulbs coincided with the onset of the Dutch Golden Age and the consequent rise of Dutch influence on world culture and finance.

Tulip markets


Initially high prices for tulip bulbs were restricted to exceptionally rare varieties and were not considered typical. However, with the advent of more and more new species of tulips, investors began to regard tulip bulbs as a form of tradable currency and to sell futures contracts on tulip bulbs at ever increasing prices. Single tulip bulbs sometimes sold for ten times the average annual income of a typical Dutch citizen, making them one of the most valuable commodities in the world. Tulips were soon priced out of the reach of the common people and speculation on the tulip bulb market reached epic proportions, spurred in part by the devastation caused by the bubonic plague and the increased wealth of a smaller population that resulted.

Tulipmania 1637


The height of tulipmania came during 1636 and the early months of 1637, when demand for tulip bulbs reached a fever pitch. Short selling of tulip bulbs became commonplace; investors assumed that they would be able to purchase the bulbs needed before the contracts came due.

Tulipmania crash


In February 1637, the market in tulip bulbs crashed catastrophically and fortunes were lost virtually overnight. Due in part to the vast sums of money that were involved, the tulip bubble burst ruined some investors outright and crippled others financially. Just before the tulipmania crash, prices had reached all-time highs not only for rare varieties of bulbs but for common bulbs as well; the extreme risks and rewards of Tulipmania 1637 gave way to the utter collapse of the market.

Lessons learned


Tulipmania is widely regarded as the first bubble market; the resulting tulipmania bubble burst had serious repercussions not only for the Dutch Golden Age, but for the entire European financial market. While historians disagree on the severity of the effects of the tulipmania crash, the moral of the story is undisputed; the rapid overvaluation of assets due to short-term speculation is likely to create the potential for equally rapid devaluation of those assets and severe financial losses for speculators.
Tim Ord
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