17th century: Tulip mania

ScreenShot001Tulip mania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and suddenly collapsed.

  • At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (or economic bubble),[3] although some researchers have noted that the Kipper- und Wipperzeit episode in 1619–22, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble.[4] The term “tulip mania” is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).[5]

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market.[25] The contract price of rare bulbs continued to rise throughout 1636, but by November, the price of common, “unbroken” bulbs also began to increase, so that soon any tulip bulb could soon fetch hundreds of guilders. That year the Dutch created a type of formal futures marketswhere contracts to buy bulbs at the end of the season were bought and sold. Traders met in “colleges” at taverns and buyers were required to pay a 2.5% “wine money” fee, up to a maximum of three guilders per trade.

  • Neither party paid an initial margin nor a mark-to-market margin, and all contracts were with the individual counter-parties rather than with the Exchange. The Dutch derogatorily described tulip contract trading as windhandel (literally “wind trade”), because no bulbs were actually changing hands. The entire business was accomplished on the margins of Dutch economic life, not in the Exchange itself
  • By 1636 the tulip bulb became the fourth leading export product of the Netherlands—after gin, herring and cheese. The price of tulips skyrocketed because of speculation in tulip futures among people who never saw the bulbs. Many men made and lost fortunes overnight.
  • Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfill any of these contracts because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt.
    • The collapse began in Haarlem, when, for the first time, buyers apparently refused to show up at a routine bulb auction. Only sellers existed, as there were no buyers, at all. While this may have been the result of the fact that Haarlem was then at the height of an outbreak of bubonic plague, within days panic had spread across the country.
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