Dutch Tulip Mania: The First Modern Financial Bubble & Market Crash

Though rational economists doubt the impact and prevalence of so-called financial “bubbles,” they seem to be an all-to-common occurrence. Indeed, most Americans are intimately familiar with the recent “housing bubble” crash and overall market mayhem of 2008. But how could anyone have predicted such catastrophic outcomes? The simple truth is that most investors make decidedly irrational decisions when placing bets on the market. It seems that most pay no specific attention to the actual worth of whatever securities are at stake. Moreover, financial bubbles have been impacting developed nations for centuries.

Perhaps the most comically applicable market crash occurred in Holland at the turn of the 17^th Century. Beginning in 1593, tulips were brought in from Turkey and introduced to the Dutch. As a novelty item, tulips were purchased in order to demonstrate one’s higher station in life, much like the fancy cars and shiny rims of contemporary American culture. An outbreak of the non-fatal mosaic virus superficially altered the appearance of the tulips, producing “flamed” designs upon the petals. Accordingly, tulips of varying rarity were traded much like the securities of today, with more aesthetically pleasing varieties holding higher “value.” Most everyone began dealing in tulips, essentially speculating on the tulip market, which, like the recent housing bubble, was believed to have no growth limit.

Tulip bulb buyers began to stockpile for the upcoming growing season, thus increasing the scarcity of the product and public demand. Prices began to soar to such extremes that individuals were trading their entire estates and personal savings; effectively liquidating the entirety of their assets for this precious security. In a period of one month, tulip prices increased twenty-fold! Obviously, like the modern financial markets, asking prices in no way accurately reflected the actual worth of tulip bulbs.

One fateful day, one of the rarest tulip bulbs failed to sell. Consequently, hoarders panicked, selling their supply and flooding the market. Like any irrevocable financial collapse, tulip buyers continued to sell regardless of losses, though very few were buying. Dealers refused to honor contracts and the masses soon realized that they had traded their entire net worth for a piece of greenery. After the government attempted to step in and offer 10% of the face value of any contract, the markets plunged even lower. Even those who refused to buy into the tulip craze suffered as a financial depression swept across the country. In fact, it took nearly an entire generation for the Dutch economy to recover.

This particular financial crisis is comical only because it occurred so far in the past. However, it sheds light on the type of behavior still exhibited by investors in global financial markets. There is nothing rational about how these systems operate, nor is there any logic present in many fo the decisions made by speculators and investors. Very seldom do prices accurately depict actual value. Is our arbitrarily created U.S. Dollar any more "real" or valuable than a tulip bulb? Unfortunately, such processes can and do repeat themselves quite often. You cannot correct human nature.