The tulip craze was a historical event in the Netherlands that is often held up as a prime example of the dangers of market speculation. The term tulip craze is often used to refer to a market bubble. Although there is some contention in modern thought about whether the historical tulip craze was actually as drastically influenced by speculation as was previously thought, the event still serves as a good allegorical example of the pitfalls of rampant market speculation.
A tulip craze basically occurs when there is an increase in the value of something, and a number of speculators invest heavily to take advantage of that increase — this speculation then causes a further, often more rapid, increase, which encourages further speculation. This sort of speculative increase cannot, of course, continue forever, and once the value levels out or begins to drop, a massive drop typically results. This phenomenon is also often discussed in terms of a bubble inflating and eventually popping.
The historical tulip craze occurred in the Netherlands on the early side of the 17th century. Tulips had recently become very vogue, especially among the wealthy inhabitants of the Netherlands, and as a result, rare varieties began to reach rather exorbitant values. Eventually, some tulips were sold at the rate of a single bulb for the value of a house, and lots of bulbs were exchanged for large estates. Tulips became a commodity on the Dutch stock exchanges, allowing people who weren’t cultivators or traders to try to take advantage of this boom.
As a result, many people began putting enormous amounts of wealth into speculation on the tulip market — in some cases, their entire savings or properties. This speculation reached a fevered pitch — hence the term tulip craze — around 1636, with more and more money pouring into the market, including speculation on tulip futures offered by traders who had not yet planted bulbs. In early 1637, the market was saturated, and some traders began to sell, often in large amounts. As others saw that the market was turning, they panicked and unloaded all of their tulip stock, causing an enormous downturn.
The tulip craze ruined many thousands of people financially, as tulip bulbs that had been purchased for the price of a great estate were nearly overnight devalued to the price of common onions. There were trading events similar to the great Dutch tulip craze in other parts of Europe as well, with tulips reaching exorbitant prices, subsequent speculation, and an eventual bubble burst, but none nearly as catastrophic as the Dutch tulip craze of 1636-37. In the modern age, there are many examples of economic events similar to the tulip craze. Real-estate speculation, for example, can often reach similar levels, with land speculators paying extraordinary amounts of money for properties in what are thought to be highly-desirable locations, only to eventually have the market turn and be left with greatly devalued property.
Many items of popular culture follow the same trajectory as the tulip craze, although on a smaller scale. Baseball cards, for example, went through a period in which they could fetch great sums — mostly due to speculation on the part of people who saw the potential for great profit — and ultimately crashed such that cards once worth thousands of dollars became worth little more than the paper they were printed on. Beanie babies, Elmo dolls, pogs, and innumerable other children’s toys and collectibles also serve as recent examples of modern tulip crazes.