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When a tulip was worth more than a house

tulip, tulip bulbs, financial bubble, financial crack, tulip bubble

tulip, tulip bulbs, financial bubble, financial crack, tulip bubbleBetween 1636 and 1637, the first great financial crack in history took place in Holland, which curiously had a flower, the tulip, as the protagonist. How much would have paid a Dutch saver for a tulip in 1636? Approximately 5,500 florins of the time, equivalent to the price of a luxury apartment in the centre of Amsterdam. 

Let us look back over the crucial moments of one of the most absurd speculative bubbles that ever happened in the history of finance. 

Tulip bulbs were imported to Europe from Turkey in 1500 and Holland was the country that immediately expressed the greatest appreciation for this kind of flower. Early in the 1600s, tulips cultivated in the Netherlands were affected by a non-fatal virus that altered the colour of petals by generating a wide variety and increasing the rareness of specimens.

Prices began to reflect the degree of petal colour alteration and the possession of a tulip became a status symbol of Dutch economic wealth. More and more people started to require tulips and florists had to face a first problem: the demand for tulip bulbs was considerably higher than the supply and all this resulted in further price growth.

The financial industry adopted the first moves by introducing tulip bulbs in negotiations on the Stock Exchange. Soon, it was invented the possibility of booking bulbs by setting an advance price to honour at the expiration of the contract. It was the birth of derivative contracts called “futures”.

In 1635 was recorded a sale of 40 tulip bulbs for 100 thousand florins, i.e. about 2500 florins per bulb. A record price was paid for the most famous bulb, the Semper Augustus, sold for 6,000 florins. To get an idea of the order of magnitude, in the same year, the average salary of a Dutch was equal to 240 florins per year.

It's a bit like if at present-day a tulip bulb was paid from $ 300,000 to $ 750,000, just like the purchase price of an apartment in the city.

Dutch savers considered the tulip as a solid investment for their future. Everyone started selling their lands and using the savings of a lifetime to buy more and more bulbs. Incredible but true, the whole economy has gone crazy for a flower.

It was only the prelude to the outbreak of what was the first documented speculative bubble in history. In a few months between 1636 and 1637, the price of a bulb increased by about 200 times, but at the beginning of February, something changed: some investors decided to take profit by selling their tulips and shortly after a bulb auction went deserted.

This event generated the first concerns that quickly became panic, triggering a rush to unprecedented sales. The tulip bulbs, which until a few months ago valued like a home, were now traded at the same price of the onion bulbs.

For those who had to honour the futures, it was practically impossible to pay on expiration because the price agreed earlier was much higher than the current value of the bulb. The government attempted to curb the panic by offering to honour the contracts at 10% of nominal value, but the fall in the price of tulips did not stop.

Nobody remained unscathed by the collapse, and even those who had obtained profits in the past suffered the effects of a galloping depression in the years to come.

In every historical era, bubbles reproduce the irrational behaviour of the players on the market and are mainly characterized by a strong and sudden interest in a new investment object, a euphoria on the purchase dictated by a speculative component, a clear difference between price and economic fundamentals.

These elements contradict traditional economic theory based on the rationality of individuals and the ability of the market to reflect, at any given time, the value of the exchanged assets.

 
Seasonalgo, seasonal trading, spread trading, commodity market
 
 
 

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