The colour orange can be attributed to many different things: the name of a famous fruit, the skin color of a particularly rowdy world leader, and, of course, the Orange Kingdom, the Netherlands. Along with my fascination with the Netherlands and the Dutch, another thing that fascinates me is the tendency for humans to become complete lunatics. You might wonder, dear reader, how you can combine these two fascinations of mine? There is one simple answer to that question: The Tulip Mania of 1637.
The Tulip crisis is widely regarded as the first-ever recorded financial bubble. The crisis, as one might guess, involved the trade of tulip bulbs. At the time, the Netherlands had one of, if not the most, sophisticated financial markets, establishing the first ever stock-exchange and readily engaging in option and bond trading. The predisposition for trading, combined with a tradition of collecting exotic objects, made tulips the hottest item on the shelf. This development was further exacerbated by the outbreak of a new virus, causing the flowers to get a distinctive and mesmerising appearance. Accordingly, the first official exchange-market for tulips opened, and the price went completely haywire. Within the span of a couple of years, the price for a tulip was tenfold that of the salary of a skilled artisan. The prices rose so quickly that people started selling their land and their homes in order to secure just a few tulip bulbs. Seemingly reasonable people sold off their entire fortunes in order to get a mere tulip bulb, which had zero intrinsic value.
The Dutch, notwithstanding this absurd situation, were not finished. People obviously did not only want to buy tulips when they were ripe! They wanted to speculate on the price all year round. Therefore, the Dutch stock-exchange started issuing forward-contracts on tulips, allowing buyers to speculate on the rise or fall of the underlying asset, the tulip. Unfortunately, the pipe dream eventually had to come to an end, reality had to catch up to the frenzy. In 1637, the floodgates opened and the price fell approximately 99%.
This story evokes both a feeling of delight and terror within me. On one hand, it is quite a funny story how hundreds of thousands of seemingly rational people can become completely unhinged, sinking their entire life fortune into a puny tulip. On the other hand, it frightens me how humans have repeated the same mistake and spiralled down into the same madness numerous times after this. The subprime mortgage crisis of 2008, the dot-com bubble, and the Black Tuesday crash are only a few examples of that. Humanity clearly has a very short memory and we are therefore poised to make the same mistake again and again. Who knows? Maybe we are in a tulip mania right now, throwing away our hard earned money at something completely worthless. We will not know that until the bubble bursts and comes falling down on us with relentless force. Despite the major improvements in understanding the financial market, everyone is still exposed to the madness of man. This fate, albeit a cruel one, is something that everyone simply has to cope with whether or not you want to.
