How did a tulip once cost more than a luxury townhouse?

Introducing 'Tulipmania’, the world’s first market bubble?

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London’s famous RHS Chelsea Flower Show has kicked-off for 2023. Whilst this means it’s flower-mania in London for the next week, it’s interesting to reflect on another time of flower madness:  ‘Tulipmania’, the first market bubble.

In this article, we’ll explore the ‘Tulipmania’ case study to draw similarities to modern day market bubbles, and how it demonstrates that, sometimes, it’s better to save than to follow trends.

Tulips take Holland

This story goes all the way back to the 1630s, when the Netherlands economy was booming. Tulips were seen as a luxury item as they were imported and looked like no other native flower. This enticed people to purchase tulips as a statement of wealth and encouraged farmers to learn to grow the flower locally. Instead of saving their guilders (the Dutch currency at the time) people moved their money into purchasing tulip bulbs as they thought this would give them a greater return.

1634 was when ‘Tulipmania’ hit. Everyone, from the wealthy to the poor, scrambled to own tulip bulbs of which many were estimated to cost the modern equivalent of £40,000 - £120,000 each. Some bulbs even cost more than a luxury canal townhouse in Amsterdam! Professional traders also began owning the items to make money on the expectation that the price of the bulbs would continue to go up. Eventually tulip prices got so high, people began buying bulbs on credit and they were even added to the Amsterdam Stock Exchange in 1636.

Know your onions:

An entertaining story from this tulip era comes from a sailor who is said to have mistaken a tulip bulb for an onion and turned it into relish. Had the bulb been sold, the money could have paid for the whole ship's crew to be fed.

The bloom bursts 

The tulip market bubble burst by late 1637. Buyers could no longer pay the high price previously agreed for bulbs, so prices fell drastically, and many people declared bankruptcy. Modern economists describe ‘Tulipmania’ as a classic example of a market bubble and crash. By the end of ‘Tulipmania’, those that decided to keep hold of their guilders could have ended up better off than those who got involved in the trend. 

What is a ‘market bubble’?

A market bubble can occur when people start buying items because they think they can sell them for more money later on, not because they really need them or think they are worth that much. The belief that the prices will keep rising, plus the rush to buy these items, causes a ‘positive-feedback cycle’ that continues to inflate the price. Eventually, the item is worth a lot more than it should be and once people realise that the price has gone too high, they stop buying. This is when the ‘bubble’ bursts. Prices of the item drop suddenly and like in the case of ‘Tulipmania’, people who own these items can financially suffer.

So what?

Some economists have been skeptical about whether ‘Tulipmania’ was a market bubble or if the dizzying prices actually reflected supply and demand. Whether it’s truthful, or a cautionary tale of FOMO, it’s still useful to reflect on how excitement and speculation can change the price of items away from the market value.

The bottom line: maybe stick to saving?

Although buying trendy items can seem exciting at the time, sometimes it pays to keep your money in a savings account as, unlike tulips, your money is less likely to wither away.

Whether you like the flexibility to add and dip into your savings, or prefer to lock your money away with a fixed rate, Marcus by Goldman Sachs savings accounts are designed to help you save the way you want to.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.

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