Often considered the first financial bubble, Tulip Mania saw the rapid rise and fall in the price of tulip bulbs in the Netherlands during the 17th century. This is a popular story that you definitely may have heard before. The story revolves around tulip bulbs. Flower seeds. They were brought into Holland around the end of the 16th century, and the wealthiest citizens quickly took a fancy to them. There were no other flowers quite like these, and they quickly became a status symbol. They were new, supply was limited, rich people liked them, and they were vibrantly colored. What more could you want? All of this excitement caused them to rise in price.
According to Charles Mackay’s book Extraordinary Popular Delusions and the Madness of the Crowds, at the peak, a skilled laborer may have had to work for 10 years to be able to afford a single tulip bulb. There were reports of people selling their homes just to buy a single flower. The meteoric rise in price caused more and more people to enter the market, and that caused even more demand. In order to make them more accessible, contracts were created that allowed people to leverage a large amount of debt to assist in their tulip bulb purchase. This only fed more into the mania. There was more and more demand, as well as more and more cash chasing a limited supply. It seemed like the price would go up forever.
What happened next?
You guessed it.
The meteoric rise was met with an even swifter fall, and before people even knew what was happening, these exciting new bulbs were suddenly worth very little. Those tulip futures contracts left people in debt with little to show for it. It seems silly that a flower could cause that much commotion. Silly as it may be, the pattern that it followed is reminiscent of many other speculative bubbles that would follow. This would be the first massive bubble that history remembers, but it would certainly not be the last.
Speculative bubbles and market crashes cause a lot of fear for investors. Many avoid investing altogether because of bad memories of crashes. In order to better understand crashes and how they happen, this compilation features information about some of the largest speculative bubbles in history. Additionally, at the end are some key takeaways. These short articles are designed to only highlight the major points, and if any of them seem interesting, there are a lot of great sources online that go into far more detail about each of these bubbles. If we understand why bubbles and crashes occur, we can take steps to avoid them and diminish some of the fear we have when investing!