Anyone who has been following the stock market for more than a few years knows the fear and heartache that comes with a correction. Market corrections (the pesky moment when people realize something is overvalued and refuse to pay the current rate) have always been a reality of the free market. Corrections are fairly common and happen throughout the market with regularity. However, every once in a while, their dreaded big brother comes to town; the dreaded market crash. These are colossal corrections that rear their head when a market bubble (the astronomic increase in the value of a market entity beyond the intrinsic worth of said entity) bursts.
Recent history saw the effects of the Dot-Com Bubble and the Housing Crisis of 2008. Many experts are questioning whether the stock market is in another bubble today. If they’re right then now is the perfect time to learn about history’s first recorded Market Bubble. This is the story of the Dutch Tulip Mania and how we can avoid the crash that followed.
A Quick Overview of Tulip Mania
At the height of Tulip Mania investors and collectors alike were willing to spend just amount any price for a single bulb. The value of one tulip at the peak of the bubble surpassed that of homes of the day. In fact, these little flowers had enough buying power to purchase not one, not two, but four or five homes. It was an unbelievable rise in value that consequently created generational wealth for a few lucky individuals. On the flip side of this metaphorical coin, though, others squandered generations of wealth.
At this point you might be asking yourself, “Why would anyone ever pay so much for a single flower?” Well have you ever seen someone buy, I don’t know, Pokemon Cards, or Game Stop Stock, or NFT’s, or Bitcoin? Yeah, it’s just like that. Okay, this is a little different, some of those things actually have an intrinsic value worth an investment. Tulips on the other hand, they have almost no value.
How Did it Happen?
A few things set the stage for the Tulip boom of the 15th century. Probably the most influential factor was the economic state of the Dutch Republic in that day. The country was in the middle of its golden age that would birth modern economics, the world’s first stock market, and the worlds first free market economy. It was a unique era and it would position them as the world economic leader for nearly three centuries. The strong economy meant one thing, more money was moving through the country than ever before. The wealthy and even the lower class individuals had more money to spend on non-necessary purchases.
There was so much money moving around the country that a popular trend picked up in the years prior to the tulip craze of purchasing lavish status symbols. Now status symbols had been a fact of life for millennia, but this was the first widespread case of people outside of royalty having the ability to display their wealth to the world. One of the popular status symbols of that day were, you may see where this is going, flowers. The Dutch upper class would spend thousands lining their properties with flowers. We’re not just talking about a flower bed by the windows. They literally covered entire acres in blossoms. This was the second leading factor to Tulip Mania.
It’s All About the Tulip Though
The last major factor was the tulip itself. Tulips were special because they were not native to the Netherlands. These flowers were imported all the way from China for the first time in 1554. Immediately, the Dutch were enamored by the bulb of this flower. It was like nothing they had ever seen before in color, shape, or size.
There were quite a few problems with tulips, though. Importing was risky because the trip from China to the Netherlands was lengthy by sea and most of the plants could not survive the trip. Smart botanists tried to plant the flowers locally. Which would become the better strategy, but also prevented its own set of challenges. Tulips don’t bloom every year. A farmer could only expect yields every couple of years at that time.
The climate in the Netherlands was also vastly different than that of China. Tulips struggled to thrive due to the chilled temperatures. Lastly, the soils in the Netherlands carried bacteria that these flowers were not previously exposed to and sparked a highly contagious Tulip disease that caused the plants to bloom with brightly colored streaks from the bottom to the top of the petals. Although, many of the plants couldn’t survive the effects of the disease some could, and those survivors were beautiful.
Photo by Sheelah Brennan on Unsplash
The Tulip was ready to become a highly desirable and rare commodity. People in the Netherlands also had an influx of discretionary income where a common status symbol was flowers. You can see where this is heading. In November of 1636, only 70 years after the first arrival of the Tulip in the Dutch Republic, something remarkable began.
Tulips to the Moon!
By the time the price of Tulips skyrocketed they had already been a lavish item on the shopping list of many of the local elites. Yet, something strange happened in 1636. The force of supply and demand began to sharply drive the value of these bulbs upwards. Seeing the opportunity many who had the flowers on hand began rushing to sell what they had to capitalize on the increased value. Those who did not already have Tulips suddenly became aware of the opportunity and rushed to purchase as many flowers as possible.
Since Tulips were a finite resource they quickly became unavailable altogether. Savvy investors began selling tulip futures (essentially a contract that says you own an item that does not yet exist, but as soon as it does it’s all yours). So at the height of Tulip Mania people were not even investing in actual tulips, rather I Owe You’s of tulips, it was a wild time.
For months the price kept moving up and up and up. No one had ever seen anything like this. Assuming that they could purchase a tulip today and sell it tomorrow for a higher price people were selling all they had to buy one single flower. Everyone who did this had their life changed forever. The question was just did it change for better or worse. It was all a question of timing. After all, one remarkable sale of 40 Tulips was valued at 100,000 Dutch Florins. Adjusted for inflation, that sale was worth $6,000,000 USD.
Tulips to the Dirt!
Almost as fast as it rose the Tulip market came crashing down. In a single day, in February 1637, prices sharply dropped after sellers at an auction could not find a buyer. News spread quickly and suddenly investors started selling off their Tulips for fractions of their purchase price. Fear of losing everything drove these investors to bail out and swallow the loss they had already acquired. Over the course of the next couple weeks the price dropped down below the original value and the Dutch lost its interest in planting or seeing the flowers ever again.
Conclusion
At first glance, it’s shocking that someone would buy one flower for $150,000. People have, on the other hand, been doing this ever since. Bubbles inflate because people see the potential of rapid increase in wealth and bet the farm on that potential. For some investors this pays off, for most the risk nearly destroys them financially. If there’s one thing we can learn from Tulip Mania it’s be weary of anything that is being bought or sold for numbers vastly higher than it was worth yesterday. If the price does not match its intrinsic value, it is probably in a bubble and all bubbles pop. The question is just when.
For more info on the unbelievable Tulip Mania we recommend the documentary The Tulip Bubble on Curiosity Stream. Get access to thousands of documentaries for only $12 a year with our special link: Sign up today!
Disclaimer. Things I Learned Last Night is not a group of financial advisors and we are not releasing this information as financial advice. We do not take responsibility for your investment decisions. This content is intended for educational and informational purposes only. Be safe and smart out there!
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