The Dutch Tulip Bubble that occurred during the 1600s was one of the largest market bubbles and crashes in history. It was fuelled by excessive speculation, driving the price of tulips to more than 10x the annual average salary at its peak. The eventual crash undermined social cohesion and trust; although, the recession that followed didn’t negatively impact the Dutch economy in a way that the Wall Street Crash and the Great Recession did. The Tulip Bubble serves as a reminder for investors and individuals to not excessively speculate in the market.
For much of the 1600s up to the 1800s, the Dutch economy and business framework exceeded that of the world. They had been responsible for creating the world’s first stock exchange, thereby allowing firms to receive private funding. Meanwhile, Tulips had been introduced into Europe, following imports from Turkey during the 1550s, quickly becoming a luxury product. They were seen as representative of the Dutch upper class due to their beautiful and exotic nature. with its saturated petal colour. Unsurprisingly, for much of the early 1600s, the price of tulips quickly rose to meet this growing demand. This was especially true as tulips were hard to cultivate, rendering them a rare species of flower. By 1610, a single bulb of a rare tulip was considered acceptable as dowry for a bride.
During the 1630s, the wider population were suddenly able to access the previously restricted market of tulip trading. Previously, this had been restricted to the upper classes and the aristocracy. This only increased tulip prices as the entire population, including the peasantry, began to speculate in the market. Houses and factories were mortgaged so that individuals could participate continue to speculate in the tulip market.
“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.”The Library of Economics and Liberty
People started to buy tulips with leverage, using derivatives to purchase more bulbs than they could afford. By 1636, tulips became the fourth biggest export from the Dutch economy, after cheese, gin and herrings. In the same year, tulips began trading on the Amsterdam Stock Exchange. The price of Tulips reached its peak during the winter of 1636-37. This was at a point at which contracts for tulip bulbs were allegedly changing hands up to ten times a day, with no deliveries made to fulfil said contracts. What followed was a sharp fall in tulip prices.
By 1637, the buyers of these tulip contracts announced that they would be unable to pay the previously agreed prices for bulbs. At the same time, buyers refused to show up at a routine bulb auction in Haarlem for the first time. This led to the market for tulips collapsing, as prices fell dramatically, leading to fortunes dissipating overnights and creating financial problems for many Dutch families. This could be attributed to the outbreak of the bubonic plague at the time, which had affected Haarlem particularly badly. Another cause of this rapid decline in tulip bulb prices is the fact that many had purchased said bulbs on credit. This meant that once prices began to fall, said individuals were forced to liquidate their positions at any price, thereby declaring bankruptcy as the price of tulips fell below their loans. At the same time, more tulip bulbs were added to the supply due to the increasingly lucrative returns that drove producers into the market, making them not as rare as speculators initially believed.
Whilst the collapse of tulip prices didn’t particularly affect the Dutch economy, it created a culture of suspicion towards speculative investments, lasting for decades to come. In more recent times, the tulip mania of the 1600s has been likened to the rise of Bitcoin, with many predicting Bitcoin to suffer a similar fate. The tulip bubble of the 1630s was the first of its kind – speculation on an unprecedented scale, involving the entire population. However, it was succeeded by many more bubbles from which many have resulted in economic ruin.