Term of the Week: TULIP MANIA


DETAIL FROM JAN BRUEGHEL THE YOUNGER’S SATIRE ON TULIP MANIA, 1640

What was this esctacy ?

Tulip mania was a period when tulips were recently introduced and bought in large quantities by many people. This caused tulip prices to shoot up. They were sold at prices higher than skilled workers’ income. After reaching a peak, tulip prices crashed, leaving tulip holders bankrupt. Some argue that it was the first major economic bubble.

HISTORY

Tulips first arrived in Western Europe in the late 1500’s, and, being an import from their native Turkey, commanded the same exoticism that spices and oriental rugs did. It looked like no other flower native to the Continent. It is no surprise then that tulips became a luxury item destined for the gardens of the affluent: “it was deemed a proof of bad taste in any man of fortune to be without a collection of [tulips]. Following the affluent, the merchant middle classes of Dutch society (which did not exist in such developed form elsewhere in Europe at the time) sought to emulate their wealthier neighbors and, too, demanded tulips. Initially, it was a status item that was purchased for the very reason that it was expensive. In the early 1600’s, professional cultivators of tulips began to refine techniques to grow and produce the flowers locally, establishing a flourishing business sector, that has persisted to this day.
The rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.” ( Memoirs of Extraordinary Popular Delusions and the Madness of Crowds– Mackay, 1841)

Tulip mania poster, pixels.com

In 1634, tulipmania swept through Holland and by 1636, the demand for the tulip trade was so large that regular marts for their sale were established on the Stock Exchange of Amsterdam, in Rotterdam, Harlaem, and other towns. At the height of the bubble, tulips sold for approximately 10,000 guilders, equal to the value of a mansion on the Amsterdam Grand Canal.

Indeed, it seemed at the time that the price could only go up; that “the passion for tulips would last forever.” People began buying tulips with leverage – using margined derivatives contracts to buy more than they could afford. But as quickly as it began, confidence was dashed. By the end of the year 1637, prices began to fall and never looked back. A large part of this rapid decline was driven by the fact that people had purchased bulbs on credit, hoping to repay their loans when they sold their bulbs for a profit. But once prices started their decline, holders were forced to liquidate – to sell their bulbs at any price and to declare bankruptcy in the process.
By the end of 1637, the bubble had burst. Buyers announced they could not pay the high price previously agreed upon for bulbs and the market fell apart.

Gordon Gekko talks tulips. Wall Street: Money Never Sleeps / scottab140

The Generality of it
Tulip mania is used as a metaphor to describe an economic bubble. People start investing in a particular asset in large quantities because of positive sentiments about it. This pushes the prices of that asset to very high levels. After reaching a peak, prices suffer a sharp fall due to an extensive sell off, leaving the asset holders bankrupt. These assets are then metaphorically called tulips.

What’s your favourite economic bubble? Let us know at – aapoortijournal@gmail.com

References

https://en.m.wikipedia.org/wiki/Tulip_mania

https://www.investopedia.com/terms/t/tulipmania.asp

https://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp

Memoirs of Extraordinary Popular Delusions and the Madness of Crowds– Mackay, 1841

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