The great market crash: when a tulip bulb could buy an estate
Jun 02, 2016 12:05PM ● Published by Neighbors Magazines
by John Masus
In the late 16th century, tulips were introduced to Holland from Turkey. The beauty of the tulip was much sought after and a thriving market developed. After a time around 1634 a virus showed up in this already beautiful flower. It was not fatal to the plant but what it did do was alter the color scheme causing “flames” of color to appear on the petals in a gorgeous and unique way. The color schemes were varied so that each flower was different in its own way. Since the tulips were already selling at a premium, this made them even more valuable.
Prices began to rise and speculators wanted to get in on this thing. Whatever this “thing” was. Inventories were going up leading to scarcity and increased demand. People wanted in on this action. They began borrowing, or spending their life savings, selling their land for cash to buy the tulip bulbs. People would liquidate anything to buy more bulbs. The sky was the limit.
The Dutch market thought that the bulbs could be sold to foreigners for enormous profits. Needless to say, the speculation prices were not a true reflection of the flowers’ worth. So the only thing that could happen, happened.
Prices began to fall and fall and fall. In fact, this whole episode could be considered one of the earliest market crashes recorded with a resultant government bailout. You read that correctly. The Dutch government stepped in with a price floor that would honor contracts at 10% of their value, but nothing helped. Prices continued to fall until the crash was complete.
Nobody knows for certain, but from start to finish 1634 to 1637, peak to bottom, it was said that at its peak you could trade a single bulb for an entire estate and at its bottom you could trade a single bulb for a tomato.*
That was almost 400 years ago and to this day, if you visit Holland, you can still see the tulip market in downtown Amsterdam. Just don’t pay anything more than the normal price for the tulips.
So what’s this historical story have to do with today’s markets? Different things and different thinking affect the markets just as they did 400 years ago. Remember the tech bubble of the late 90s that drove the NASDAQ up to 4,600 points? It seemed like anyone could invest and make money. It clouded judgments. I had a potential client (true story) tell me that in the previous year he had made more money investing in the market than he did in salary. He wondered if he should quit and do investing full time. I said I didn’t think that was a good idea. He disagreed but he didn’t quit his job. When the tech bubble burst around the turn of the century, it took the NASDAQ 14 years to come back.
The housing bubble that burst in 2007 through 2009 is another example. Cheap money drove housing prices through the roof so to speak. Buying too much house with too much debt didn’t work out very well. We are still paying for that one in terms of lost investments, homes, bankruptcies, etc.
We’ve learned some lessons and systems have been put in place to help, but strong emotions, whether positive or negative are not the best reactions. I thought the above referenced story was interesting because it happened in another time and place and yet it still rings true today. Humans are still human. In that respect, nothing has changed and history is still fun. It’s nice to know where we’ve been.
If you really want to be happy, nobody can stop you.