The tulipomania

As we are all aware, there was a recent financial crisis, and it took many people by surprise, wiping out a large part of their savings, sometimes all of it. Is such event extraordinary or simply ordinary?

As a matter of fact, the expression tulipomania or tulip mania is the official term used by economists to depict such financial bubbles. The term comes from events that took place in 1637 in Holland, so it does not sound like there is anything new in this type of crisis, is there? The problem is that most people are not specialists of the history of financial crisis, and even if they were, it is always much easier to rationalize about them once they are over than in the middle of it.

This first “recorded” economic bubble that took place in Holland in the beginning of the seventeenth Century is extremely interesting and colorful as it is based on flowers.¬† Initially brought from Turkey, these tulip flowers of beautiful colors caught the interest of the Dutch high society by their beauties, and the bulbs used to produce them became more and more valuable.

Then there was a typical buble, where initially there is real demand for real assets from well informed buyers, but the supply is limited, then more and more buyers come in as the product becomes more and more trendy, speculators join the fray to make a quick profit, pushing prices higher and higher. When the people with the less means start to be aware of this item and discuss it, it is a signal that the bubble is near its climax.

So at one point, like a house of cards losing its frail equilibrium, the entire structure collapses. People  who paid on margin are bankrupted and forced to liquidate immediately, creating tremendous pressure on prices. Wealthy buyers stay on the sideline as they are waiting for better prices. And we know the rest.

The funny thing is that the chain of events just described above happened many times in the past and will continue to occur in the future. Because this phenomenon is unavoidable due to the way information spreads within the population, fashions develop by a mimicking trait common to all human beings, prices are based on relative value more than on fundamental values and irrationality, greed and fear are the emotions driving markets.

Humans are humans and the tulip manias bubbles are a direct consequence of our human nature.

As of today, Holland is the main producer of tulips in the world. They have an exchange for tulips where the bulbs are traded like stocks, they have the largest fields of tulips under cultivation and the largest exhibition of tulips. Holland is often associated with tulips.

Economic historians do not all agree on the facts surrounding the tulip crisis, and in particular its gravity, widespread aspect and the economic effect that it may have had at the time. This is a moot debate. If Holland is still today so much involved with tulips, it shows without doubt that this product has had a profound influence.

And even if this crisis was limited to only a small part of the population, it clearly illustrates the human behavior characteristic of all bubles.