2024-01-14 07:42:05
The first stock market crash in history was caused by… a tulip. This flower, prized for its rarity, once led to the ruin of many investors.
Who would have thought that simple tulips might be the cause of a speculative bubble? However, it is this variety of flowers that gave rise to the first stock market crash in history.
At the end of the 16th century, the tulip was introduced to Europe. Through its beauty, and especially its rarity, it quickly became a symbol of prestige among the wealthy classes. So much so that many investors are starting to bet on it. A simple tulip bulb then fetches crazy sums, the equivalent of hundreds of thousands of euros today. A look back at this instructive stock market story.
First futures markets
As early as 1635, the first futures markets took over the tulip market in Holland. In this new financial system, sellers and buyers rush to set the price of assets for future transactions. From June to September, while the bulbs emerge from the ground, the actual transactions take place. But once summer is over, it’s time to look forward. The market turns into a ballet of futures contracts, precursors of today’s “futures”.
In this futures market, an individual can buy a tulip bulb in December, before it even begins to grow. He then undertakes to sell it in June when the tulips are in bloom, subject to sufficient production.
But that’s not all. This system is coupled with the introduction of bill notes. Concretely, these documents detail the price and specifications of the bulbs. The notes, exchanged like property titles, make it possible to sell bulbs still in the ground.
Deferred transactions mean rising prices, and therefore new investors in sight. These notes pass from hand to hand: they change ownership up to 10 times in the same day! All the ingredients are there for a speculative bubble. This is the beginning of a “windhandel”, or trade in wind, as described by contemporaries.
A bulb might be worth… two houses
But the tide is starting to turn. In 1636, a bill changed the situation and modified market prices. Contracts no longer include an obligation to purchase but are only options. As a result, speculators flock to the market en masse. Even so-called “normal” tulips can be bought at indecent prices.
The speculative bubble bursts. At the top of the speculative bubble, a bulb of the highly prized variety Always August sold for up to 10,000 guilders, the equivalent at that time of two houses in Amsterdam. It is therefore common for the richest to invest their money in tulips rather than in paintings by renowned painters.
According to historians, the Black Death was the cause of the crash. During an auction, anticipated as another success, the usual bidders desert the place, unable to honor their contracts. This is the end of speculative madness.
Without organization and regulation, the market has generated transactions without guarantees. Result? The massive cancellation of contracts has plunged several unlucky individuals into bankruptcy. This has not, however, turned the Dutch away from the tulip: the Netherlands is today the leading producer of this flower in the world, with two billion units leaving the Batavian fields each year.
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