Tulip mania in 17th century Europe

Human beings seem to have a penchant for throwing their money away by speculating on something that looks to be a “dead cert” to make them a fortune but turns out to be precisely the opposite. The world’s current economic ills (as of 2013) can be traced to speculation over house prices in the United States, just as the Wall Street Crash of 1929 was based on the mistaken belief that share prices would continue to rise for ever. Such “bubbles”, which burst with disastrous consequences, can be traced back to the early 17^th century, where the object that excited the mania was the humble tulip bulb.

Tulips were unknown in Europe before the 16^th century, when merchants and travellers began to bring bulbs back from central Asia. In the Netherlands, tulips became sought after not only for their attractiveness as Spring flowers but also because of their rarity. Having these exotic plants growing outside one’s house was clearly a status symbol that indicated not only good taste but considerable wealth. Anything that is rare and desirable is always going to be expensive, in any age.

It was soon discovered that the tulip was capable of being cross bred to produce a variety of colours, shapes and other characteristics. As early as the 1590s work was being done at the University of Leiden (by the botanist Charles l’Ecluse) to develop new varieties that would lead eventually to a major Dutch industry that continues to the present day. The most exotic varieties became even more highly prized than “ordinary” tulips and wealthy people became desperate to acquire tulips that their neighbours did not possess, even though individual tulips come into flower for a only a couple of weeks at most.

The next stage was for people to start investing money in advance so that they would be the first to own tulip varieties that had not yet been developed. Contracts were signed for the purchase of next year’s bulbs while they were still in the ground and not yet harvested. This was therefore the first example of a “futures” market that has been a staple ingredient of financial trading ever since.

Nothing could stop the growth of speculation in the tulip market, especially when money started coming in from foreign investors, and prices inevitably started to rise steeply. Before long the money changing hands as people gambled on the future value of tulip bulbs that did not yet exist was out of all proportion to what the bulbs were really worth.

As the bubble expanded in the early 1630s, more and more people, most of whom had absolutely no interest in owning tulips, put increasing sums of money into the market, buying and selling futures contracts in the expectation of always making a profit. Even people with relatively modest means sold possessions in order to have money to invest in tulips.

It paid the people who actually owned the tulip bulbs not to sell them, because they knew that they would be able to charge a much higher price for them at some future date. At the height of the market, in 1636, one bulb was traded for the equivalent of $35,000 dollars, a sum that the average Dutch worker would take more than 16 years to earn.

The bubble had to burst, and it did so in February 1637 when the price of tulips collapsed as nobody could afford to buy them. Some people who saw the end coming, and traded in their investments at the right time, made huge fortunes, but for most investors it was a disaster as they lost virtually all their money. Those people who had foolishly put more into tulip futures than they could afford to lose were the biggest losers and many became destitute as a result.

It would be encouraging to be able to say that this experience taught people across Europe and the world a salutary lesson in why one should never invest money in schemes that are not founded on real and substantial assets. However, human greed and the chance of making a quick buck for relatively little effort are factors that are guaranteed to lead people astray. Whether it is the South Sea Bubble and the Mississippi Land Bubble of the 1720s, or the dot-com bubble of the 1990s, people with more money than sense will always, it seems, find innovative ways of losing it. Unfortunately, as the more recent Subprime Mortgage Bubble has shown, the consequences of such disasters do not just affect those people who make the mistakes.

© John Welford