3 February 1637: The Tulip Crisis Outbreak – Finance for All

The first speculative bubble in history burst in Holland… in February 1637! The problem: intense speculation about tulips. The story of this episode, during which tulip bulbs were exchanged for the same price as a house in Amsterdam.

The tulip: a luxury product and an expanding market

It all started when the tulip appeared in Europe at the end of the 16th century.E century. The colorful flower then adopts wealthier classes. At the beginning of the 17th centuryE century in the Netherlands in large numbers varieties tulips they are created by gardeners. In fact, they use flowers infected with potyvirus, a disease affecting tulips that changes their color, to obtain new species. However, this disease complicates the cultivation of plants, and as a result, some varieties are very difficult to grow.

Until 1634 tulip market it is similar to the art market. Environment reserved for the richest where the customer places an order with the gardener to grow the desired variety. The order is placed from autumn, when the bulbs are planted, and payment is made in the summer, when the flower emerges from the ground, and the customer is sure that what he is buying corresponds to what he ordered. However, the rarest tulips are the ones that attract the most. Demand for certain species is exploding. We are then witnessing the beginnings of the creation of a speculative bubble.

The emergence of a speculative bubble: the credit and futures market

OF 1635several financial innovation accelerate the development of a speculative bubble. The most important innovation is the introduction banknotes. These specify the properties of the bulb and its price. This allows buyers to sell a bulb that is still in the ground by no longer exchanging the bulb itself, but a banknote, a piece of paper serving as a title.

The tulip market then becomes a forward marketthat is, a market where settlement of buy or sell transactions is deferred over time. This development in the futures market, coupled with a credit boom that generates leverage, causes prices to soar, which in turn attracts new entrants to the market.

The number of transactions also increases and it is not unusual to see a note change hands several times before the tulip blooms. Contemporaries also spoke “windhandel”, wind trade.

Bursting the bubble

THE Resources providing tulip price developments at this time are rare. The market is not regulated and therefore there is no official price. In this matter we have to deal with the records of occasional transactions found by historians. Thus, it is not possible to accurately track all price movements during this speculative bubble.

However, it seems that in January 1637, at the height of the bubble, a tulip can be worth up to 15 years of an artisan’s salary. The bulb of the Semper Augustus variety – the most sought after at the time – would even be replaced 10,000 guilders, the equivalent of two houses in the city.

THE fallit means the bursting of the bubble, it takes place on 3 February 1637. Why this particular day? According to the most likely hypothesis, the crash was caused by the total absence of buyers that day at the usual auction in a Haarlem tavern. According to historians, buyers did not show up for the sale because of the bubonic plague. However, this was enough to completely turn the market around: enough a few hours for word of the absence of buyers to spread throughout the city and several days for the information to reach the whole of the United Provinces. Tulip bulbs become unsaleable, or 95% to 99% off.

The market is not organized or regulated, transactions were made without guarantees. On 23 February 1637, a national meeting of gardeners decided that sales concluded after November 1636 would be canceled in exchange for a small percentage of the transaction amount. In reality, most contracts were simply terminated, bankrupt the unfortunate individuals who invested in spot exchange contracts at the worst time.

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