Netherlands: Tulip Mania
Historians think the tulip was first brought to the Netherlands from Turkey in 1593. The Dutch fell in love with this new flower, but the colorful tulip was scarce. When something is ‘scarce’ it means there isn’t enough available. During Tulip Mania, lots of people wanted tulips. This is called ‘Demand.’ But, there weren’t many tulips around, so the ‘Supply’ was low.
When Demand is higher than Supply, people are willing to pay more and the price goes up. So, what if you had a scarce tulip in the Netherlands in 1636? Let’s investigate.
Imagine you start to grow a tulip bulb. One day, your friend Jenny comes to visit and says, “I’ll pay you $100 for that flower. I don’t want it now but when it blooms next year, it’s mine. Here’s $100 and a Contract for you to sign. It says that the holder of the Contract owns this tulip.”
But Jenny does not really want your flower. So, why did Jenny buy it? Because, she thinks she can sell the Contract to Zoe for $200. Wait…how could Jenny sell the tulip if you are still growing it?
Remember the Contract? You signed the Contract promising to give your tulip to whoever shows up at your door in 12 months. Jenny didn’t sell the flower itself, she sold the Contract!
For $200, Zoe now owns that Contract. She has two choices. She can keep the Contract and collect your tulip, or she can sell the Contract.
Zoe decides to sell the Contract. She finds a buyer, and this buyer finds another buyer who finds another buyer, then another. Each time the Contract goes from one buyer to the next, it sells for a higher price. There is such a high demand for tulips that everyone expects the price will keep going up.
In the year since you first sold your tulip to Jenny it went from $100 to $250,000. Then one day, disaster! The tulip is no longer worth $250,000, but far less. The problem, you see, is the ‘Demand’ has suddenly disappeared. There are no buyers at such high prices. So, what happens now?
David is the last person who bought the contract. He paid $250,000 thinking he could sell it for even more money. But, the price has dropped a lot and David has just lost most of his money. OUCH!
In all this buying and selling, Jenny, Zoe, and David are called ‘speculators.’ They are betting on the future price. Speculators plan to make a profit from the increase in price. Sometimes it works out, like it did for Jenny and Zoe, but sometimes it doesn’t. The story did not end well for David.
And, yes, Tulip Mania really happened!