The year was 1636, during the Dutch Golden Age. Demand for tulips suddenly shot through the roof. Welcome to the world’s first financial bubble, when flowers were worth more than a mansion next to Amsterdam’s Grand Canals.
Today, high-net-worth investors – those with $1 million or more invested – often diversify their holdings to include more than the usual stocks, bonds and real estate. That’s why the portfolios of the ultra-rich also have the fun stuff – Hermes handbags, Rolex watches, art, gold bars, and other appreciating collectibles. In the 1600s, tulip bulbs made the list.
Flowers had always been a status symbol in medieval Europe, as only the wealthy could afford their cultivation and maintenance. When tulips were first introduced to the continent from trade routes, they gained particular interest due to their intense color, never seen before. And so tulips became a coveted luxury item. Rare colors were grown and both the wealthy and common people wanted a slice of the pie.
As demand grew and merchants joined in the market, the price for tulip bulbs shot up and soon started trading between 4,000 to 5,500 florins. For reference, 1,000 gallons of beer back then would cost only 32 florins – imagine buying a tulip bulb that would cost you 171,875 gallons of beer! At the height of the tulip mania, some rare bulbs even sold for 10,000 florins, or the price of a mansion in the heart of Amsterdam.
Like all financial bubbles that would come after it, this one eventually popped.
As prices started reaching exorbitant levels, the number of buyers dwindled. The scary thing about the tulip mania was that people had started buying tulips on credit – yes, going into debt for flowers – confident they’d be able to pay off the debt once they sold the tulip bulbs for a profit. But with no one left to purchase their tulips, people started defaulting on their loans. Thus began the tulip market’s landslide.
While some analysts believe the story has been exaggerated over time, the tulip mania certainly happened. It’s the earliest example of how market hype and irrationality could drive valuations to insane numbers. Knowing this history, would you still invest in collectibles and the latest fads?