Market Mania - The Tulip-Bulb Boom

This is an interesting incident which occurred in Holland in 1634-1637. It shows how booms and manias can flare up. It is a useful lesson for one and all.

• In 1593 the Dutch were introduced to Tulips for the first time. These tulips were imported from Turkey were in great demand and traded at fancy prices.
• In due course these tulips were affected by a non-fatal virus known as mosaic, which did not harm the tulips per se but altered them, causing shades of colour to appear on the petals. These colour patterns came in wide varieties and increased the rarity of the original flower.
• So the prices of tulips began to rise depending upon how the markets valued the virus alterations Speculation increased in the tulip market as it started attracting new traders eager to make quick money.
• The true bulb buyers started to stock up bulbs for the growing season thereby depleting the supply further. This increased the demand supply gap. Soon, prices were rising thick and fast encouraging people to trade their cash, gold, land and anything else they could liquidate to buy more tulip bulbs.
• The Dutch held on to their bulbs with a view to selling them to the innocent and uninformed foreigners, thereby reaping enormous profits. Meanwhile the originally overpriced tulips enjoyed a twenty-fold increase in value in one month!
• Since tulips bulbs enjoyed extensive over pricing some smart people decided to sell and lock in into the profits.
• A domino effect of progressively lower prices took people by surprise as everyone tried to sell. As price began to slide people panicked and rushed to sell regardless of the losses.
• When prices fell the participants refused to honour contracts. It suddenly dwelled upon speculators that they traded their homes for a piece of greenery. Chaos and Confusion enveloped the land. Amidst all this the government attempted to halt the crash by offering to honour contracts at 10% of the face value. The market plunged even lower making such restitution impossible.
• No one emerged unscathed from the crash. Even the people who had locked in their profit by getting out early suffered under the following depression. The effects of the tulip craze left the Dutch very hesitant about speculative investments for quite some time.
• At the peak of the market, a person could exchange a single tulip for an entire stretch of land and, at the bottom, that tulip was the price of a few tomatoes.