The Tulip Bulb Mania - Extraordinary Popular Delusions And The Madness Of Crowds

 


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"Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. " -Charles MacKay, 1841

Have you heard about the speculative tulip bulb craze that gripped seventeenth-century Holland? The peak of the mania saw a single tulip bulb selling for the equivalent of $150,000 or it might have been $1,500,000, depending on which historian is doing the talking. This story is true, it really happened, and it could happen again.

In 1559 Conrad Gestner brought the first tulip bulbs from Constantinople to Holland and Germany, and people fell in love with them. In very short order tulip bulbs became a status symbol for the wealthy — they were very beautiful and difficult to get.

Early buyers were people who truly prized the lovely flowers, but it wasn't long before speculators got invovled and many buyers were merely in for the money. They created trading activity, and eventually tulip bulbs were placed onto the local market exchanges. By 1634, the demand to own tulips had spread from the wealthy class into the middle classes of Dutch society. Merchants and shopkeepers began to vie with one and another for single tulip bulbs.

How bad was it? It was so bad. . . it was so bad that at the height of the tulip bulb bubble in 1635, a single tulip bulb was sold for the following items:

  • four tons of wheat
  • eight tons of rye
  • one bed
  • four oxen
  • eight pigs
  • 12 sheep
  • one suit of clothes
  • two casks of wine
  • four tons of beer
  • two tons of butter
  • 1,000 pounds of cheese
  • one silver drinking cup.

    The present day value of all these items comes to nearly $40,000! For a single tulip bulb we don't even know the color of. Things became so bizarre that people were selling everything they owned – their homes, their livestock, everything – to buy single bulbs on the expectation that the bulbs would continue to grow in value.

    By 1636, tulips were established on the Amsterdam stock exchange to accomodate the speculators and gamblers who had become the primary purchasers of tulip bulbs.

    Tulip notaries and clerks were appointed to record transactions, and public laws and regulations were developed to control the craze. Late in 1636, a few tulip owners began to liquidate their holdings. At first prices began to weaken slowely, then more rapidly as confidence was destroyed. By then panic seized the market.

    Within six weeks, tulip prices crashed by 90%. Defaults on contracts and liens on owners were widespread and the Dutch government refused to interfere. Instead, it simply advised tulip holders to agree among themselves on some plan to stabilize prices and restore public confidence. Eventually assembled deputies in Amsterdam declared null and void all contracts that were made at the height of the mania, these were the ones made prior to November 1636. Tulip contracts made after November 1636 were settled if buyers paid merely 10% of the prices to which they had earlier agreed.

    Tulip prices continued to fall. Next, the provincial council in the Hague was asked to invent some measure to stabilize tulip prices and public credit. Tulip prices continued to fal. In Amsterdam, judges regarded tulip contracts as gambling activities and court rules held that gambling debts were not debts in the eyes of the law. No court in Holland would enforce payment. Tulip collectors, speculators, and gamblers who had tulips at the time of the collapse were left with ruinous losses.

    Tulip prices soon plunged past the present equivalent of a dollar each. Is it possible for you to imagine buying an investment for $76,000, only to discover six weeks later that it was worth no more than one dollar? Commerce in Holland suffered a severe shock it did not recover from for many years.

    Now I know you are thinking “What kind of fool would possibly get caught up in that?” I understand, we’re talking TULIPS here – not food, shelter, clothing, or firearms! TULIPS! What could cause people to lose such control of their senses?

    I believe the answer is greed. Instead of building the value of their portfolios carefully and with understanding, they went for the quick buck. As long as it looked like the sky was the limit, nobody wanted to accept the fact that they were buying very expensive tulip bulbs.

    Do you think people are too smart to fall for this kind of speculative risk today? Do you remember the Internet Craze of the late 90's? Otherwise how about these great investment words: Beanie Baby.

    Roger Sorensen

    America's Financial Guide can be found at =>http://www.Slave2Work.com Subscribe to Money Basics via http://www.slave2work.com/ezine.html

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