Tulipomania refers to a speculative bubble that took place in the 17th century Dutch Republic (today’s the Netherlands) that collapsed in February 1637. This was caused by the frenzied fury of Dutch investors buying tulip bulbs and pushing the prices higher and higher until, suddenly, the buying stopped.

While many people lost fortunes, it had no noticeable effect on the overall economy of the prosperous and economically powerful Dutch Republic. [Mackay’s 1831 book indicates that a depression ensued but there doesn’t appear to be contemporaneous verification of this.] During Tulipomania, tulip prices were pushed to unimaginable high levels. Some bulbs were trading at prices more than 10 times the annual income of a skilled worker or an amount equivalent to the value of 12 acres of land. Tulips and tulip bulb futures contracts were traded on the Dutch stock exchanges making it easy for them to be purchased by almost anyone that could open an account and was looking to cash in from the “free money” from the rapidly rising prices. Credibility was added to the mania since Amsterdam merchants were among the most active and best in the world with worldwide trading activities at that time.

In 1636 the tulip bulb was the fourth leading export of the Netherlands. Speculation in tulip bulb futures pushed the prices to sky-high amounts. While there was never intrinsic value other than the beauty of the tulip flowers, prices kept being pushed up and up. Abruptly in February 1637, buyers of the futures disappeared, causing an immediate plummeting of the values. It was as if everyone got out of bed the morning of the crash and simply decided not to buy any more tulip bulb contracts. In the aftermath, the Dutch courts refused to adjudicate the defaulted contracts considering them a gambling endeavor in which debts were not enforceable in courts.

The bubble burst when the simple rule of the marketplace took effect: A price is only valid if a buyer is willing to pay it. When the buyers vanish, so does the value.

Some of this is fact and some details are legends or myths. No matter; this did occur and at this point the details do not really matter. The basic rule of caveat emptor was validated; let the buyer beware. To avoid getting caught up in a present-day bubble waiting to burst, understand how you can make or lose from the investment and, in particular, what has to occur for gains to materialize. If you want to read further, check the two sources I used: https://en.wikipedia.org/wiki/Tulip_mania and the 1831 book Extraordinary Popular Delusions and the Madness of Crowds, written by Scottish journalistCharles Mackay.

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