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Tulip mania - The First Economic bubble

Posted by Vinoth Kumar.K on Wednesday, January 5, 2011

                 Yesterday night, I was watching the movie Wall Street: Money never sleeps and I came across a term Tulip mania. I was curious about that word because the world famous character Gordon Gekko was saying something about that, as usual I didn’t understand much just like my engineering classes. So for a change instead of facebook, I googled Tulip mania and I came across lot of interesting information.

                 Whenever we come across the word depression or speculative bubble in economics, most of us will be able to recollect the 2008 recession and the great depression of 1929, but there are lots of economic bubbles and Tulip mania is said to be the first economic bubble of the world.

                Tulip mania was a period (1630’s) in the Dutch during which the contract prices for bulbs of the recently introduced tulip reached extraordinary high level prices and then suddenly collapsed. The Tulip was a wild flower, growing in Central Asia. It was first cultivated by the Turks as early as 1000 AD; the flower was introduced in Western Europe and the Netherlands in the 17th century by Carolus Clusius, a famous biologist from Vienna. Tulips started to gain popularity in Dutch soon it become a coveted luxury item and a status symbol of the country

                Tulips grow from bulbs, and can be propagated through both seeds and buds. Seeds from a tulip will form a flowering bulb after 7–12 years. When a bulb grows into the flower, the original bulb will disappear, but a clone bulb forms in its place, as do several buds. Properly cultivated, these buds will become bulbs of their own. The mosaic virus spreads only through buds, not seeds, and so cultivating the most appealing varieties takes years. Propagation is greatly slowed down by the virus. Tulips bloom in April and May for only about a week, and the secondary buds appear shortly thereafter. Bulbs can be uprooted and moved about from June to September, and thus actual purchases occurred during these months.

               The rest of the year, the traders are just signing the contracts to purchase the tulips at the end of the season. These contracts are signed without the initial margin ( In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of his counterparty) paid. As the popularity of the flowers started to grow, more and more people started making contracts to get these flowers. The demand started to increase like anything, the prices started to shoot up. By 1635, a sale of 40 bulbs for 100,000 florins (Dutch currency) was recorded. By way of comparison, a ton of butter cost around 100 florins; a skilled laborer might earn 150 florins a year. (According to the International Institute of Social History, one florin had the purchasing power of €10.28 in 2002). By 1636, tulips were traded on the exchanges of numerous Dutch towns and cities. This encouraged the people to do trading on Tulips to make more profits within a fortnight, same phenomena behind the Great Depression, 1929. The people are ready to pledge anything they have to buy one bulb of tulip, such as an offer of 12 acres (49,000 m2) of land for one of two existing Semper Augustus bulbs.

                   People suddenly become rich and the news made the other people to go and buy the bulbs at higher and higher prices with an intention to re-sell them with a huge profit. Dutch people thought that the entire Europe will come to buy these bulbs, but when no buyers were willing to buy the bulbs at such a high price, the demand started to fall and the prices plummeted to the bottom, bankrupting the traders. At last, the Netherland traders approached the government to help them; the government announced a scheme, just like a US bailout, that buyers can get void their contracts by just paying 10 percent of the amount. But these attempts remained unsuccessful and the people loss their money.

                   But some critics say that Tulip mania cannot be considered as a economic bubble, because as a result of the Thirty Years' War (1618–1648) in Europe, the market prices were responding rationally to a rise in demand. In general, Tulip mania is widely accepted as the first economic or speculative bubble in the world’s economy.

Tags: tulip mania  economic bubble  speculative bubble  1636-37 

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