Tulip Mania and the Stock Market

Tulip Mania and the Stock MarketIs a tulip bulb worth $76,000? It is if people are willing to pay that much for it and that’s exactly what happened in Holland in the 1630’s. If it sounds unbelievable, you may have never heard of Tulip Mania. The story began in 1559 when Conrad Guestner brought the first tulip bulbs from Constantinople to Holland and Germany, and people fell in love with them. Tulip bulbs quickly became a status symbol for the wealthy as they were beautiful and hard to get.

After some time, a few tulip bulbs contracted a non-harmful plant virus called mosaic. The effects of the mosaic virus were tulip petals with beautiful “flames” of color. This unique effect further increased the value of the already rare and highly coveted tulip bulb.

Early buyers were people who truly prized the flowers, but the rapidly rising price quickly attracted speculators looking to profit. They created trading activity, and eventually, tulip bulbs were placed onto the local market exchanges. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs. They were trying to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb. Prices in today’s dollars ranged from $17,000 all the way to $76,000 for a single bulb.

Tulip notaries and clerks were appointed to record transactions, and public laws and regulations were developed to control the tulip craze. It was at this point that a few informed speculators started liquidating their tulips bulbs and contracts. In addition, more tulip bulbs were being added to the supply as people harvested new tulip bulbs.

Suddenly, tulip bulbs weren’t quite as rare as before. The tulip market began a slight down trend, but shortly after started to plummet. Confidence was soon destroyed, and panic seized the market. Within six weeks, tulip prices crashed by 90%. People that traded in farms and live savings for a tulip bulb were left holding a worthless plant seed. Defaults on contracts and liens on owners were widespread.

The Dutch government avoided intervening, advising tulip speculators and owners to form a council to attempt to stabilize prices and mend public confidence. These plans failed miserably and tulip prices plummeted even lower.

Eventually, assembled deputies in Amsterdam declared null and void all contracts that were made at the height of the mania. The supreme judges of Amsterdam declared all tulip speculation to be gambling, and refused to honor any contracts. Payments were not enforced and this further fueled the market crash.

The amount the market declined from peak to bottom is difficult to calculate, but, we know that at the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion. Imagine having bought a tulip for $76,000, only to discover six weeks later that it was now worth less than one dollar.

The financial devastation that followed the tulip bulb crash lasted for decades, crippling Dutch commerce. As usual, the only people who prospered from the insanity were the smart ones who liquidated at the top.

In market manias, investors act irrationally. It still happens today (dot com mania anyone?). Excessive greed causes people to feel financially invincible and make decisions that cause financial devastation. This process occurs regardless of if the market is a commodity market or a paper market like stocks. The only way to survive is to not fall into the trap of a market mania.