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Daily RC Article 160

Tulipmania: The Rise and Fall of a 17th-Century Speculative Bubble

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Tulips first arrived in Europe from the Middle East in the sixteenth century. The ‘broken’ varieties were caused by a virus which broke up the solid colours, allowing the pale under-colour to be revealed in florid striations.

By early seventeenth century, prices for broken blooms had reached ridiculous heights... In 1611 the new Bourse was completed in Amsterdam, the first recognisable modern stock exchange, and the rising price of tulips was soon being quoted. Prices became so high that innovative techniques in speculation were introduced. One could obtain the right to buy a tulip at a future date, at a predetermined price. If by that date the price of the tulip had risen higher than this price, profit was assured. This type of trading was called buying an ‘option’. What is now known as the futures market was coming into being. Exotic bulbs would frequently change owners a number of times before they had even left the ground…

‘Everything has a price’ had now progressed to the point where the price was everything. The intrinsically worthless bloom was now priceless. But a morsel of reality did remain – as was discovered by a rich merchant when a sailor visited his house and ate what he thought was an onion, but turned out to be a bulb of Semper Augustus.

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As the price of tulip bulbs rose further, more speculators were enticed, calming the trepidations and reinforcing the expectations of those preceding them. Confidence built up from its solid, ever-expanding base like a pyramid…By 1637 the market in the Netherlands appeared to be all but saturated. Yet dealers knew that by now buyers from all over Europe were flocking to the Netherlands to invest in tulips, and would continue to do so. Or would they? The pan-European Thirty Years War was at its height and the supply of money was beginning to dry up. A few cautious dealers started quietly cashing in their profits. But whispers of these deals quickly spread. Suddenly everyone wanted to sell their bulbs, a panic set in and the market crashed. The price of a tulip collapsed to the price of its functional reality. Meanwhile options were called in at previously agreed prices, and investors were bankrupted…

The Dutch tulipmania was the first great speculation bubble in financial history. Such crashes would now become a regular feature of the stock exchange markets. Despite all efforts to regulate against this instability, they would remain so and will continue to remain so. Instability lies at the heart of the system, and is integral to it. Gambling must always have winners and losers.

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Speculation can temporarily separate this conjunction. It is possible for everyone to win (bubble expands) but this means it is also possible for everyone to lose (bubble bursts). In the Palgrave Dictionary of Economics, considered the definitive Bible of the subject, tulipmania is listed as a general economic term - a situation in which some prices behave in a way that appears not to be fully explainable by economic “fundamentals”.’ So tulipmania is the economic wild card, the element of chaos, the flutter of the butterfly wing (or falling tulip petal) which later results in an economic tornado...

The article delves into the historical phenomenon of the Dutch tulipmania, a 17th-century speculative bubble that emerged due to the skyrocketing prices of tulip bulbs. Initially introduced from the Middle East, tulips with unique patterns caused by a virus fetched exorbitant prices. The tulip market escalated with speculative trading and options, but eventually crashed dramatically in 1637, leading to financial ruin for many investors. Tulipmania became a hallmark of speculative bubbles, illustrating the unpredictability and instability inherent in financial systems. It's considered a significant economic anomaly, challenging conventional explanations of market behavior.
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