The Dutch Tulip Craze In 1637
The Dutch Tulip Craze
The Dutch Tulip Bulb Craze in 1637 demonstrated how interest in a market leads to an increase in prices and a greater number of investors. As prices rose too high too quickly, the market expanded in a challenging way before inevitably crashing.
At the beginning of the Dutch Tulip Craze, demand for the unusual, multicolored tulips increased dramatically. Dealers selling the popular tulips began hoarding whatever bulbs they could get their hands on. Demand for Dutch tulips was so high that soon tulip farmers did not have enough land, money, or bulbs to maintain an adequate supply. More land would have to be bought or developed, and more workers would be required to keep up with demand. The goal for the farmers and dealers
was to sell all of their product. However, they knew even more of the product could be sold if they could keep up the supply.
Growing interest in the tulip market resulted in a dramatic increase in the price of all tulips. People were willing to pay high prices or trade items of great value, such as furniture, houses, or even property. This caught the attention of investors. To entice people to buy the flowers, call-options were put into place where buyers paid a fee to the seller to buy tulips in the future at an agreed price. However, the call options only made things worse. Within a month’s time, bulb prices rose twenty fold, reaching unrealistic heights, and then dropped twenty fold.
Margin-buying was also expected to help the market expand and allow buyers to place a down payment. People were borrowing in hopes that the prices would stay high. But when the market fell, the margin created a problem for everyone. Often when someone would buy on margin, he/she had to pay back with interest. That was devastating to the borrower when tulips did not continue to sell at as high a price as was expected. Investors were quickly losing their equity positions, and it was impossible to keep a steady supply. This affected the whole country economically as the financial market fell apart. The Dutch government rushed in to try and solve the problem. Contracts were settled at 10 percent of the purchase price. But this did not keep people from paying great amounts for the tulips.
A craze, mania, and frenzy was created around a product that could not hold its value over time. Marketing has a huge influence on peoples’ perception of how much something is worth. An item is worth whatever people are willing to pay for it. The Dutch Tulip Craze can remind us that what is worth so much one day, can be worthless the next.
The Dutch Tulip Bulb Craze in 1637 demonstrated how interest in a market leads to an increase in prices and a greater number of investors. As prices rose too high too quickly, the market expanded in a challenging way before inevitably crashing.
At the beginning of the Dutch Tulip Craze, demand for the unusual, multicolored tulips increased dramatically. Dealers selling the popular tulips began hoarding whatever bulbs they could get their hands on. Demand for Dutch tulips was so high that soon tulip farmers did not have enough land, money, or bulbs to maintain an adequate supply. More land would have to be bought or developed, and more workers would be required to keep up with demand. The goal for the farmers and dealers
was to sell all of their product. However, they knew even more of the product could be sold if they could keep up the supply.
Growing interest in the tulip market resulted in a dramatic increase in the price of all tulips. People were willing to pay high prices or trade items of great value, such as furniture, houses, or even property. This caught the attention of investors. To entice people to buy the flowers, call-options were put into place where buyers paid a fee to the seller to buy tulips in the future at an agreed price. However, the call options only made things worse. Within a month’s time, bulb prices rose twenty fold, reaching unrealistic heights, and then dropped twenty fold.
Margin-buying was also expected to help the market expand and allow buyers to place a down payment. People were borrowing in hopes that the prices would stay high. But when the market fell, the margin created a problem for everyone. Often when someone would buy on margin, he/she had to pay back with interest. That was devastating to the borrower when tulips did not continue to sell at as high a price as was expected. Investors were quickly losing their equity positions, and it was impossible to keep a steady supply. This affected the whole country economically as the financial market fell apart. The Dutch government rushed in to try and solve the problem. Contracts were settled at 10 percent of the purchase price. But this did not keep people from paying great amounts for the tulips.
A craze, mania, and frenzy was created around a product that could not hold its value over time. Marketing has a huge influence on peoples’ perception of how much something is worth. An item is worth whatever people are willing to pay for it. The Dutch Tulip Craze can remind us that what is worth so much one day, can be worthless the next.