Think our current subprime mess is the craziest financial scandal of all times? Perhaps Enron or Long Term Capital is your pick for this dubious distinction? How about Barings being bankrupted by an out-of-control trader? All of these are no doubt deserving a place in financial history's hall of shame, but for sheer unbridled stupidity the tulip bulb bubble is the hands down winner.

During the years 1634 - 1637 the Dutch indulged themselves in a period of collective silliness that is still almost impossible to believe. They began trading tulip bulbs and futures on tulip bulbs. Prices skyrocketed by many thousands of percent. Like the .com bubble, trading in tulip bulbs was not limited to professional traders. Instead, the average man on the street bought and sold tulip bulbs in an attempt to "get rich quick". Some people did get rich, but when the game collapsed many were ruined.

The tulip is not even native to the Netherlands. It seems to have originally come from the the region where China, Tibet, Russia and Afghanistan all meet. After the long Winter in this part of the world the blooming of the first Tulips was a sure sign of Spring and the Turks who lived in this area prized the tulip for this reason. As the Turks moved west they brought the tulip with them.

The Tulip craze started almost accidently. A shipment of cloth from the Ottoman Empire arrived in the Netherlands in the late 1560s. Included in the cargo were some tuliip bulbs, possibly a gift from the Ottoman merchant who handled the transactions of a Dutch trader in Istanbul (Dash, p. 36). In any event, the Dutch trader had no idea what they were, so, thinking they were some sort of onion, he ate a few. The remainder he planted. In the Spring some unusual flowers appeared insted of more Turkish "onions". Local botanists were fascinated since they had never seen such flowers before.

By 1600 Tulips were in demand to be planted in gardens. But tulips do not spread rapidly and the supply of bulbs could not keep up with demand. A further problem was that tulips only bloom briefly each year, so they must be sold as bulbs. If a dealer was told that he was buying a certain type of tulip he would not know if the seller was honest until the next Spring, a situation which was just begging to be exploited by the less than honest.

As tulips became more popular books were published with paintings of particuarly beautiful types of flowers. These flower albums increased the demand for tulips. By 1633 people began paying somewhat ridiculous prices for tulips. One wealthy Dutchman sold his country estate for three rare tulip bulbs (Dash, Pp. 106-7). By the fall of 1635 tulips were being traded via promissory notes which listed the date that the bulb would be removed from the soil and be transfered to its new owner. In other words, futures trading on tulip bulbs had begun. At the time, futures were a novel concept. They seem to have first been traded in Amsterdam less than thirty years before on products like timber and spices (Dash, p. 115). A florist with a capital of 50 guilders could buy futures with only 10% down. When the bulbs were delivered, he could sell the bulbs at a profit (assuming they continued to rise in price) and use part of the proceeds from the sale to pay the balance due on the futures transaction.

Before long futures were being sold short by traders who did not have bulbs and a classic short squeeze ensued. The short sellers desperately bought back their futures at huge losses, or went to the cash market to buy the bulbs to cover their position. Prices climbed to dizzying heights. At an auction in 1636 one buyer paid more than 21,000 guilders for a small number of bulbs. This was enough money to buy two houses in downtown Amsterdam (Dash, p. 152).

Like all great crashes, the collapse of the tulip market came when the buyers no longer had enough money to buy with. On February 1, 1637 the morning trading began with a seller offering the "reasonable" price of 1,250 guilders for his bulbs. He was greeted with silence. He lowered his price to 1,100 guilders. No dice. He then offered at 1,000 guilders. Nothing doing. Now the longs got squeezed as prices collapsed. The selling became more desperate. By the summer of 1637, a bulb that had been going for 5,000 guilders was trading at 50 guilders. Florists were unable to honor trades they had made and the great tulip craze came to its inevitable end.


Sources:Dash, Mike. "Tulipomania", New York: Three Rivers Press, 1999.