Buy a House with a Tulip? The Tale of the First Market Crash

The tale of tulip mania is often held up as the first-ever market bubble and crash, coming well before many others — the South Sea Bubble of 1720, the Wall Street Crash of 1929, the Dot-com Bubble of the late 1990s and the 2008 financial crisis.

As many of us here in Canada wait eagerly for those first tender stems to push up through the soil and announce the true arrival of spring, let's uncover a little about the tulip craze of 17th century Holland.

Tulips Enter the Marketplace

Picture this: Amsterdam in the dawning Dutch Golden Age. The newly independent economy is booming as Dutch merchants import spices, sugarcane other goods from India and Southeast Asia and sell them at a profit. Meanwhile, the tulip is tiptoeing its way from the high plains of Central Asia to Turkey, then Vienna, and onto the southern Netherlands, where a Flemish botanist decides to plant a collection of the exotic new bulb and finds that it tolerates the harsher local growing conditions surprisingly well. Although he plans to keep this little discovery for himself, legend holds that thieves raid his garden one night, bringing the new flower to the already bustling Dutch marketplace.

With its large blossom and deeply saturated colour, the tulip soon became a sought-after luxury item and status symbol. The flower traded and sold in the Dutch marketplace according to colour and type, with the rarest and most visually arresting variety (see Tulip Trivia) commanding the highest price.

Roots of the Futures Market

According to at least one account, by 1634, speculators began to enter the tulip market, further inflating prices and feeding the growing frenzy for the showy flower and its bulb. In addition to buying and selling actual tulips during the season, the Dutch also created a system that allowed trading at the end of one season in anticipation of the next, creating what many call the world's first futures market.

Exact data from the 1600s is scarce, so much of tulip mania's modern narrative comes from the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay. Mackay writes: "Many individuals grew suddenly rich…Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them…Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips."

Although some later economists fault Mackay's account as exaggerated, he is not the only one to report that during the tulip craze, a single bulb could be traded for livestock, food, large parcels of land and even entire homes. Some reports put the cost of a single bulb as high as 5,000 Dutch guilders, or the price of a house, and others cite more than 300 guilders, or about the annual wage of a master craftsman at the time.

From Bloom to Bust

Regardless of the exact cost, those inflated prices weren't to last. In February 1637, the speculative tulip bubble abruptly burst and prices sank, and bulbs were suddenly no more valuable than a humble onion. Some say speculators just couldn't afford to purchase even the cheapest bulbs anymore.

Market bubbles are peculiar. In hindsight, it seems ridiculous to think of trading an entire house for a flower bulb. And yet, history shows, it's simply human nature to get caught up in hot trends.

Will you be one of the many Canadians heading to your local garden centre as spring starts to bloom? Think of your garden-store haul in 17th century terms — how many houses will you pile in your cart?