'Tulip Mania' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Tulip Mania refers to the very first recorded massive financial bubble in the world. In what today sounds like a crazy fascination, the Dutch people became obsessed with the unusual flowers in the 1600s. Over a period of several years, practically everyone got in on the craze of purchasing these flowers’ bulbs for every increasingly higher prices. They reached a price level not seen before or since in world history as a result. At one point during the mania, the average cost for one tulip flower was greater than the yearly wages of a skilled laborer at 4,000 florins (Netherlands currency in that day and age).
Dutch Tulip Mania is a classic, textbook example of the various stages in the bubble cycle. In these bubbles, investors get so caught up in the experience that they become irrational with their expectations as the bubble inflates. These psychological and mental biases towards the asset in question cause a stratospheric rise in the price of the sector or asset. Continuously positive feedback allows for the prices to keep rising. One day, investors wake up to realize that all they are holding is a tulip, for which they sold their houses to purchase.
Prices then start falling and plunge (in only a week in this specific case) as the sell off gets crazy. Investors are proverbially trampling over each other in a mad and desperate dash for the exits. Many buyers who participated in the mania bubble then go bankrupt, losing everything. In some cases, like with this first bubble, families are ruined for literally generations. As ridiculous as this at first may sound, the dot com bubble was practically the same type of crazed fascination as the Tulip Mania.
Tulip Mania was also called the Tulip Craze and the Dutch Tulpenwindhandel. This seventeenth century speculative craze gripped all of Holland at the time. It centered around the buying and selling of tulip bulbs. These unusual flowers became introduced from Ottoman Imperial Turkey to Europe as the Sultan gave a gift of Tulip bulbs to Vienna just after 1550. The intensely beautiful colored flowers soon evolved into a highly desirable and very expensive item. It took no time for the demand on a wide variety of these delicately colored flowers to massively outpace the available supply.
As a result of this early interaction of supply and demand principles, the price levels for single tulip bulbs of rarer variants started to soar to ridiculous heights throughout Northern Europe. In the year 1610, only one bulb of a newer variety of Tulips would be cheerfully accepted in token as a bridal dowry. As an example of the value individuals and business people were attaching to them, a flourishing French beer brewery was traded for a single Tulipe Brasserie bulb. Yet this was still only the early stages of the Tulip Mania.
The Tulip Mania soared to its biggest heights in Holland from the years 1633 to 1637. Up to the year 1633, the tulip trade had been generally limited to only professional experts and agriculturalists. Yet the continuously increasing prices led a major number of regular poor and middle class working families to engage in speculation on the tulip market. People of all income levels mortgaged their industries, businesses, estates, and houses against Tulip bulbs which they purchased with the intent of selling them again at even loftier prices.
In many cases during those five years, there would be sales and re-sales of the bulbs countless times before the bulbs ever even came out of the ground. Because tulip bulbs only appear from June through September, the enterprising Dutch invented an early version of the derivatives market to continue the trade year round. This was much like the current day futures and options on futures contracts. The Dutch traders would sign their contracts for future Tulip bulbs in front of a notary. The tulip contract market finally grew into a critical component of the booming bubble into which the Dutch Tulip trade evolved.
In early 1637, a trader failed to appear to complete his tulip bulb transaction at the price of a house. Doubts immediately arose regarding the sustainability of the then-current prices and ongoing future increases. Literally within a week and nearly overnight, the entire pricing model of Tulips crashed. Entire fortunes were burned to ashes in days. Many regular Dutch families lived the rest of their lives in financial ruin and even poverty as a result of this most serious Tulip Mania and first major market bubble.