BY: Arunima Sodhani
In the present day, investment bubbles are a widely understood phenomenon and markets and investors are equipped with the financial cognizance of spotting a bubble and avoiding it. But little know is the origin of investment bubbles, and the story behind it is quite surprising. The first investment bubble was one in the trade of tulips in Western Europe.
Tulips were first grown in Western Europe in the middle of the sixteenth century and were popularised in Germany, Holland, England in the early 1600s. The wealthy in Holland were very fascinated by the flowers and they paid high prices for the bulbs to be imported, and any wealthy Dutch who did not own a tulip collection was assumed to have bad taste. By the 1630s the mania trickled down to the lower levels of Dutch society and even middle class traders started to give up their life savings to own a few bulbs of tulips. The trade wasnt even profitable, only the prestige of owning the flower drove hundreds of people to buy tulips at exorbitant prices. After a while tulips started to be sold by weight instead of by number due to the insatiable demand, and people would not only pay high prices, but would also give up their cattle, furniture, silverware, carriages and any other valuable. A time came when people would be willing to go to the lengths of selling their houses and land at pathetically low prices to be able to buy tulips; the flowers had become a better investment than real estate. The mania was so widespread that tulips started trading on the Amsterdam Stock Exchange like any other commodity, but the speculation was much higher. Stockbrokers and market agents made huge profits by inducing price fluctuations wherever possible and gaining money through arbitrage. It was speculated that the demand for tulips would never end as the wealthy from all over the world would call on Holland for tulips, and people were hence extremely bullish on the flowers. This drove up the price of not only tulips, but also other commodities in the market due to high levels of money demand.
But after a few years of such bullish tulip trades it was realized that this could not go on forever; the demand will end one day. People were now only buying tulips to sell them for profit; no one wanted them in their garden. This is when the bubble which had been forming all this while burst. People were no longer optimistic on tulips and they stopped purchasing them, trying to get rid of their own collection. There were hundreds of sellers in the market but hardly any buyers; the contracts entered into for the trade of tulips were defaulted by buyers. People lost huge amounts of money and many went bankrupt. The matter started getting out of hand when the repercussions of breaching contracts were to be faced by the defaulters, and the local courts refused to intervene in the issue.
The case was finally taken up by the Provincial Council at Hague which suggested that the flowers be sold at auction, and the difference in the price be paid by the defaulters. This more or less ended the tulip frenzy, but the Dutch are still infamous for their affinity to tulips. To this day a black tulip is more expensive in the Netherlands than teak. Guess old habits die hard.