Sunday, March 16, 2008

A Little Tulip Trivia

1636, the Netherlands. The tulip craze struck the Dutch and the price of tulips soared to astronomical prices. Before long, just about everyone was trying to "get in on the action" by buying tulips in the expectation of profiting from the quickly rising prices. Although this market was short lived, it remains a great example of how the market can sometimes behave in irrational ways.

In 1636, the Netherlands was experiencing a period of relative prosperity after having just overcome a depression. This prosperity encouraged spending and one of the things that people started spending money on was tulip bulbs. After years of doing without, people wanted to beautify their homes and property with flowers that grew well in their area. As more and more people had more and more money to spend, the demand for tulip bulbs outgrew the supply. Before long, the price for an average tulip bulb was growing by as much as 100% per week.

At this point, the craze began feeding on itself. The quickly rising prices encouraged many people from all walks of life to try their hand at speculation. Since these people had a good expectation that the price of tulips would be significantly higher a week or two after they bought some bulbs, they stood to make a significant profit. Many did make enormous profits off of this craze which encouraged others to try their hand it at. Before long, people were quitting their jobs to become tulip "day traders." They made money not by buying tulips at wholesale prices from a supplier and reselling them to customers at retail prices, but by buying a supply of tulips and waiting for the price to rise before reselling. By January of 1637, some rare tulip bulbs were fetching prices equivalent to over $100,000 in today's dollars.

Sounds like real estate prices in some parts of the country today! And to think I only paid a couple of bucks for the beautiful tulips posted here...