Tulip Mania

How much would you pay for this tulip bulb?

You plant them in the ground, and a tulip grows up. They’re not seeds, though!

Instead, there’s a little baby tulip plant in there—the whole thing, including a flower bud, leaves and roots. The super-thick leaves are called scales, and that’s where the food is stored. There’s a thin outer covering called a tunic that protects everything inside.

Tulip bulbs remind me more of eggs than of seeds. When they grow up from the ground, all that stored energy comes through in vibrant, bright colors. Maybe it’s no wonder why they became sought-after luxury items at the start of the 17th century.

Back over to my original question, about how much you’d pay for that tulip bulb: one typical way to think about this would be to ask what a tulip flower was worth to you, and then to multiply that number by whatever percentage chance you think the bulb will actually grow into a tulip.

With good care, a bulb was very, very likely to become a tulip, since it was already most of the way there. However, there was also a small chance that the ensuing tulip would produce bulbs, meaning you could then sell those bulbs to someone else who wanted tulips if you already had enough of them.

You might expect as much as a day’s skilled labor in exchange for a tulip bulb, especially seeing as how they had only recently been imported from the Ottoman Empire to the Netherlands, and given that small chance of producing a few extra bulbs to sell, but essentially, it’s fair to say that the value was perceived to the aesthetic pleasure they produced in the eye of the beholder.

If you were rich and Dutch, you could impress other rich people by having tulips, so they became sought-after. Someone noticed that you could sell those extra bulbs for quite a bit of money, even more than you might expect, and demand started to drive this price up even more.

Not all tulips were equal, either! Some of them produced intricate color patterns due to a virus in the bulb. This was a feature, not a bug, and these bulbs were much more expensive, even right from the beginning.

At the same time, there was an enormous amount of money (Dutch gilders) in the Netherlands due to the success of the Dutch East India Company, a sort of extranational pirate organization that had incredible success in trading with far-off nations by using gunboat diplomacy.

All this money wanted somewhere to go, and speculation on markets was relatively new and exciting. Buying and selling futures contracts—a contract that guarantees a buyer the right to buy at a specific price in the future, or the seller to sell at a specific price—have been around at least since the time of Hammurabi, but here they were liquid and accessible to a wide market for the first time.

If a tulip bulb cost 1000 guilders and you only had 100 guilders to speculate, you might still be able to buy a contract with the right to buy a tulip bulb in a year for 1000 guilders. If, in a year, the price drops to 500, you don’t have to buy. If it goes up to 1500, you can exercise your contract, then sell for a profit of 500 (from your initial investment of 100).

Does this sound good to you? It sounded good to an awful lot of Dutch traders. Many more speculators got involved and drove the price up even further, hoping to get rich from those futures contracts when the price rises next year.

Eventually, single tulip bulbs sold for more than the price of an expensive house. Another way to put it is that most Dutch people would not make enough money in their entire lifetimes to pay for a single bulb, at least the most expensive ones.

Tulips, folks. These bulbs produced tulips, not solid gold.

This was a financial bubble, and it was the first really big one ever recorded. Fortunes were made and lost overnight, and people’s lives were ruined… and before you start imagining that only the very rich suffered, remember those futures contracts?

If you know much about the 2008 Global Financial Crisis, you know that terrible things can happen when an asset price drops rapidly. Although subprime borrowing and bundling everything into derivatives contracts started the ball rolling, once the underlying houses backing those assets lost value, so did all those loans, and all those loans-on-loans.

When this happened in February of 1637, the tulip bubble burst quickly. Those who tried to get out quickly and cut their losses might have gotten away without financial ruin, but many, many more were hurt by the downward price spiral the panic-selling started.

Today, “tulip mania” is often used as a cautionary phrase for the likes of cryptocurrency or generative AI as perceived bubbles form. Panics and manias have happened many times since the 17th century, and there’s no reason to think we’ll ever completely escape the orbit of the lure of easy financial gain. This time isn’t really different.

If you want to read more about very old financial bubbles, here’s the story of how Isaac Newton fell into the same sort of trap:

Do you have a favorite financial bubble to study, think, or write about?