The rise of Bitcoin and other shiny cryptocurrencies, the dot-com boom that was also the doom of many Internet-based companies – these are the more recent examples that come to mind when you hear the words “economic bubble.”
There’s certainly a trend – fancy new technology tends to attract investors. But technology hasn’t always been around, and sometimes it was just fancy new… stuff. Which brings us to our topic, a legendary bubble that is still talked about centuries later. The OG bubble, if you will. I present to you the earliest known speculative bubble in history – the Tulip Mania.
Tulip bulb bubbles
Let’s take a trip to 17th century Holland, when the country was one of the world’s leading economic powers. Following its newfound independence, international trade was blooming. These were exciting times. New money, new goods and new ideas were flowing in, and people developed a fascination for the luxurious and the exotic. Merchants obliged by bringing in such goods from far and wide. And so when tulips were introduced to the Dutch, it was love at first sight.
But surely mere tulips couldn’t be the object of such fascination? On one hand, the tulip’s intense bright colours were unlike those of previously known flowers. But what really captured traders’ attention was a variety of tulip bulbs called ‘broken bulbs’ – rare multicoloured and striped tulips that were the result of some infection. Everyone wanted to flaunt their wealth and status with these beautiful rarities, but well, they were rare. Supply couldn’t meet demand, and prices started soaring all throughout northern Europe in the early 1600s, when a single tulip bulb could cost more than a house.
Tulip bulb bubbles burst
The frenzy peaked in Holland in the 1630s. During the months of June to September, tulips were off-season and bulbs could be uprooted and moved about, so spot purchases occurred during these months. During the rest of the year, traders signed contracts to buy at the end of the season, essentially creating forward contracts. Thus the Dutch created a market for tulip bulbs where contracts changed hands. The tulip trade, which was earlier restricted to professionals, became accessible to ordinary citizens who wanted to speculate on the rising prices. People mortgaged homes and other property and made or lost fortunes overnight. The chaos continued until one day, tulip contract prices dropped abruptly and the trade came close to a halt. The collapse might have had something to do with an outbreak of plague, or perhaps simply the prices had gone too high and no one wanted to risk being unable to resell.
Truths and Takeaways
If you think the story sounds too fantastical to be true, you might be right. While the tulip mania is not a completely made-up story, some historians argue that the extent of the bubble and its impact on the Dutch economy is being overstated in popular culture. We do have historical records of the prices, and it’s definitely true that they soared beyond the price of a house and later dropped like a stone. But the rest of the story, such as why it happened and how commoners involved in speculation, does not have enough historical evidence in either direction.
Still, the tulip mania remains a common metaphor used to refer to potential economic bubbles where there seems to be no clear value to the asset being traded. Whether the story is true or not, the message can be taken to heart – don’t invest in trending stocks just because everyone else is doing it. You might find yourself on the wrong side of a bubble.