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I write this blog for two reasons. Firstly, it’s a fun story and secondly, an easy way to explain what a financial bubble is. Strange as it may sound, this story is true. That is the story when tulips were the cause of the financial bubble in the Netherlands.

Netherlands and tulips

The Netherlands is well known for its tulips. Experiencing the flowering of tulips in Amsterdam is amazing. But in the story of when the price of tulip bulbs went straight up, we go far back in time.

In 1636-37 the price of some types of tulip bulbs rose sharply. At most, the price was equivalent to 6 average annual salaries for a skilled worker. The reason why tulip bulbs became so expensive is two simple things. First, the Dutch middle class got better living conditions, which meant that they could afford to buy flowers. Secondly, it was pure speculation. Professional traders entered the tulip market. These manage to convince the middle class that some tulips are so rare that the price will only increase. The middle class took out a loan to buy these tulip bulbs. As a result, the price skyrocketed in a relatively short time. But the middle class had used borrowed money to invest in onions in the good belief that this was a safe investment. When everyone who had borrowed money had to repay them, they sold the tulip bulb and the price dropped quickly. The result was a disaster for those who had taken out loans in the hope of making money. Thus, we got what is considered the very first financial bubble. The incident is often referred to as the tulip crash.

The price exceeded the object’s value

A financial bubble is when the price of an object constantly rises and no longer reflects the value of the object. We can laugh today, because it is clear here that the price the tulips were bought for was far above the value. Below you see an example of what was paid for a tulip bulb.

• 2 loads wheat (according to wikipedia, a load equivalent to 1800 kilos)
• 4 loads rye
• 4 fat bulls
• 8 fat pigs
• 12 thick sheep
• 2 ox heads with wine (according to wikipedia an ox head corresponds to 2 barrels)
• 4 tonnes of beer (according to wikipedia, one tonne corresponds to 954 liters)
• 2 tons of butter
• 1000 pounds of cheese (according to wikipedia, 1 pound is equivalent to 0.5 kg)
• 1 completely bed
• 1 set of clothing
• 1 drinking cup of silver

All this is estimated to cost 2500 Gylden which corresponded to the price of 1 tulip bulb.

The tulips that were sold at these staggering prices do not exist today, but similar tulip species will still exist.

Sources:

Investopedia

History network