The Tulip Speculation Bubble

The tulip had a long but unsurprising past before it arrived in Europe just after the middle of the sixteenth century. The flower originally grew in the wild in Central Asia but the Turks were cultivating it for its beauty by the year 1,000. In 1554, a European ambassador in Istanbul first saw the tulip and sent some seeds to a friend in Holland for his garden. By the beginning of the next century, everybody wanted the flowers. This was natural. Their flowers were brighter than any other and came in red, purple and pink. (The rose was either light pink or white until the nineteenth century.)

In the early decades of the seventeenth century, tulips became more and more popular in Holland, especially if they had yellow or white stripes on them. In fact, the most expensive flowers had the most stripes on them. Three hundred years later, scientists realised that the patterns were, in fact, signs of virus in the tulip.

Under normal circumstances, tulip bulbs take at least seven years – and maybe as long as twelve – to grow from seeds and last only a few years. New bulbs can also be produced from shoots from the original bulb, but there are never more than two or three of these. They also take up to three years to flower. So, growing tulips is neither quick nor easy. However, the bulbs producing the striped flowers were especially difficult to grow, because the virus affected the bulb, not the seeds. So, to be sure of getting the prized stripes on the flower, cultivators could only use shoots. But there were very few of these from the diseased bulbs, as the virus weakened them. This made them even rarer.

Very soon, the wonderful striped tulip flowers in a garden became a status symbol, showing the owner's wealth. This pushed prices higher and higher until a single bulb could be sold for more money than a house in the Dutch capital. From 1634, more and more people wanted to buy tulips and even sold their furniture to get the money to do so. Bulbs that were still growing in the ground were sold before they produced flowers.

Sometimes, ownership of an underground bulb changed ten or more times in a day. And each time, the price was higher. It was not only striped bulbs, but also the more usual flowers, that sold for top prices. Tulip traders became hugely rich although no bulb actually changed hands.

From late 1636 to early 1637, people began to call the interest in the flowers 'Tulipomania', suggesting mental illness. The business began to be called "wind trade" in Dutch, as buyers were not trading anything, just a flower that people might see in the future. In other words, they were trading in wind.

In his book on the subject in 1841, the British journalist, Charles Mackay told many wild stories from the time, including one about a workman who saw a tulip bulb and grabbed it. The owner ran after him in the street but the thief ate it before he was caught, thinking it was an onion. Mackay reports that he was sent to prison for six months, but it is unlikely that the event took place because tulip bulbs taste nothing like onions and are, in fact, poisonous.

The Dutch government became more and more worried about 'Tulipomania' but could do nothing to stop the business, because it was private buying and selling. However, in February 1637, for the first time, tulip buyers in a Dutch town called Harlem did not go to market. We now believe that this was because there was plague in the town and people did not want to be in close contact with others because they were afraid of catching the disease.

However, news of the first unsuccessful sale of bulbs went from one Dutch town to another and people started to worry about the huge amounts of money they had spent on tulips.

Within a couple of weeks, they were worth only a tenth or even less of the money people had paid for them. Buyers refused to pay and Dutch judges said that the contracts they had signed were worthless because these were gambles – not business agreements.

'Tulipomania' was the first of many speculative bubbles and the term is now often applied to any market when prices are far higher than the real value of the product. Although Mackay's book did a lot to make the tulip crisis well-known, many economists now think that it is not a very accurate description of what happened in seventeenth century Netherlands. However, there have been many other financial disasters which have happened since 1637 and have caused the same excitement and panic. It does not matter, perhaps, that the story is not a historical and factual one. The sudden rush for great riches and, sometimes, the disastrous results are there on the pages of history books for everyone to read.

It is only strange that a simple and wonderful flower was the cause of the financial speculation which made some people hugely rich and destroyed many others.

And all this was because of diseased tulip bulbs that were still in the ground.