The infamous tulip mania is generally described as the first recorded speculative bubble and nowadays is often used as a descriptor of any bubble that has resulted in prices of an asset rising far beyond any calculation of intrinsic value.
The Dutch were introduced to the tulip flower sometime in 1593 when it was brought over from Turkey to Holland. Since this new flower was a novelty it already had some built-in demand, however, over time the species contracted a virus which altered its colour, often described as ‘flames’. A combination of factors led to the tulip to sell at a premium over other flowers and became a status symbol among the wealthy. Market factors began to take over and enterprising persons began to store/inventory tulip bulbs for sale with the intention to sell at high prices. And thus, the seeds for a boom were planted.
As the supply of tulips decreased due to increasing demand, scarcity took over. Prices began to trade higher and higher that people began selling whatever assets they already had in order to purchase more tulips. At one point tulips enjoyed a twenty fold increase in price in one month. At its peak, the rarest tulip bulbs traded for as much as six times the average person’s annual salary. By 1963, tulip bulbs were traded on market exchanges where everyday citizens could buy/sell allowing for further speculation by the masses.
Eventually, the market dynamics that caused the rapid and unwarranted price increases eventually led to the tulip crash as people tried to liquidate as quickly as they could on a rapidly falling ‘asset’ which induced panic selling.
In the end, even if a prudent speculator had sold at the highs or a citizen managed to avoid any of the mania, many citizens faced financial ruin after the collapse, severely damaging the local economy.
Caveat: the tulip mania and bubble was popularized in the book, “Extraordinary Popular Delusions and the Madness of Crowds”, by Charles Mackay published in 1841. However, more recent research conducted in the 1980’s says speculation was limited to merchants and craftsman and the fallout of the crash had very limited economic impact on the larger economy.
Nevertheless, the tulip bulb mania metaphor persists to this day. Still, there is no dispute that tulip prices rose and fell dramatically during this time period. The lessons learned whether imagined or real, are still valid.