Tulipomania / Tulip Mania
Tulipomania, commonly known as Tulip Mania, arose from the sale of tulips from the Netherlands. The mid-16th century saw the introduction of the tulip from the Ottoman Empire into the Netherlands. They were first grown in cooler temperatures and quickly became a rather durable good. As time progressed, the production of tulips became more prolific. The 1600s saw a diversity in the type of tulip that was being produced. The solid colors were grown more quickly, but the multi-colored tulips were actually created from an inherent virus. Production of these took a much longer time. The demand for them was great. Their appearance was unique.
Tulips were then thought to be a status symbol, as are many tulipomania goods. They are notably scarcer and also more costly. The Dutch created the concept of the futures market when they began marketing seasonal bulbs at the end of a season. This was done by contract for the next season. The tulip ultimately became more popular and growers paid greater and greater prices, especially for the virus-infected bulbs.
When the market for tulips crashed in 1637, contract prices and the futures market collapsed along with it – and the sale of inflated tulips became a thing of the past. Some believe that many goods being marketed today respond in the same fashion as they did in the era of the tulip.
Charles Mackay wrote a book entitled, Extraordinary Popular Delusions and the Madness of Crowds. He viewed delusion and a form of contagious madness as motivators for the active participation in the futures market. He believed that speculators create speculative bubbles within the economy that are not long enduring and are damaging to the markets in general. More modern economists say that his theory is full of holes and discard his thinking as being irrelevant.
The basis for this conclusion is that only a few people suffered in the tulip's market and that only the wealthy got involved in the venture. Mackay saw the selling of property and land to buy into the future of the tulip market as an act of real madness. 1637 may have proved him right.
Some people became rich but most failed to produce returns on their extraordinarily foolish investment. The deflation of the price of tulips resulted in an economic period devoid of much activity. The deflation was discouraging to those who held bulbs and/or contracts for bulbs. The court justices were declaring the dabbling in futures of anything as an act of gambling. Therefore, the courts would now honor these contracts. The "tulip bubble" had burst beyond merely the tulip market itself.
There are other views. Some modern economists say that there really was no tulip bubble at all. In any event, what Mackay didn't understand was that it was GOVERNMENT and regulations that had affected the market and caused the crash. Before a Parliamentary decree to allow these tulip contracts to be deemed as null and void with a mere 3% downpayment, the contracts had been fully enforceable. This decree changed the nature of the future contracts into option contracts.
Tulipomania and its bursting, such as it was, seems to have thrown the Dutch citizenry into dismay. Today, the arguments for and against "bursting bubbles" continue, but the economic and social impact of such unrealistic moments tends to go on for a very long time. The argument about the cause and effect of speculative bubbles has as well.
Markets, despite Mackay, are essentially rational within a free-market context. They rise and fall without dramatics. The truly great manias are always found to be manmade and contain a good deal more purposeful influence than meets the eye, whether you are living through the period in question or reading about it in history books.