Boom and Bust and Boom and Bust

Tulip Mania

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 The tulip was introduced into the Netherlands from the Ottoman Empire at the end of the sixteenth century. The multi-coloured varieties of the tulip, resulting from a virus, became much-coveted luxury items and a status symbol for the wealthy. People purchased bulbs at increasingly high prices hoping to resell at an even higher price. By early 1637, the price of a tulip bulb peaked at more than twenty times the annual wage of a skilled artisan.

 In February 1637, buyers of the over-valued bulbs could no longer be found thus precipitating a sudden crash in prices until the bulbs were worth only a fraction of their original worth, perhaps no more than the price of an onion. This phenomenon is known as a “speculative bubble”. The “dot com bubble” of 2001 saw similar behaviour among investors paying high prices for companies that were no more than a collection of ideas and buzzwords. Today, the comparable mania for modern art with the rich and famous vying to outdo each other to buy “great” works of art will inevitably leave many art owners ruing their folly.

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In the last thirty years, however, a number of economists have cast doubts on whether “tulip mania” was really a “speculative bubble”, suggesting that the effects were much exaggerated and that the price rises resulted from short supply and increased demand. There is no doubt that the tulipmania left the Dutch very reluctant to make speculative investments. Indeed, short selling, selling borrowed shares in the hope of buying them back at a profit if the price falls, often cited as one of the causes of the latest Stock Market crash, was subsequently banned in the Netherlands. In the following decades, the “tulipmania”  was seen as a morality tale by many writers bemoaning the loss of the meaning of real “value” and decrying the evil of gambling.

The South Sea Bubble