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Lecture 1 - Boom and Bust

Narrator: Listen to part of a lecture in an Economics class.

Professor: Now when I mention the terms “boom and bust”, what does that bring to mind?

Student: The dot-com crash of the ‘90s.

Professor: Ok. The boom in the late 1990s when all those new Internet companies sprang up and were then sold for huge amounts of money. Then the bust around 2000…2001 when many of those same Internet companies went out of business. Of course, booms aren’t always followed by busts. We’ve certainly seen times when local economies expanded rapidly for a while and then went back to a normal pace of growth.

But, there’s a type of rapid expansion, what might be called a hysterical or irrational boom that pretty much always leads to a bust. See, people often create and intensify a boom when they get carried away by some new industry that seems like it will make them lots of money fast. You’d think that by the 90s, people would have learned from the past. If they did, well, look at tulips.

Student: Tulips? You mean like the flower?

Professor: Exactly. For instance, do you have any idea where tulips are from?

Originally I mean.

Student: Well, the Netherlands, right?

Professor: That’s what most people think, but no. They are not native to the Netherlands, or even Europe. Tulips actually hail from an area that Chinese call the Celestial Mountains in Central Asia, a very remote mountainous region. It was Turkish nomads who first discovered tulips and spread them slowly westward.

Now, around the 16th century, Europeans were traveling to Istanbul and Turkey as merchants and diplomats. And the Turks often gave the Europeans tulip bulbs as gifts which they would carry home with them. For the Europeans, tulips were totally unheard of, Er…a great novelty. The first bulbs to show up in the Netherlands, the merchant who received them roasted and ate them! He thought they were kind of onion.

It turns out that the Netherlands was an ideal country for growing tulips. It had the right kind of sandy soil for one thing, but also, it was a wealthy nation with a growing economy, willing to spend lots of money on new exotic things. Plus, the Dutch had a history of gardening. Wealthy people would compete, spending enormous amounts of money to buy the rarest flowers for their gardens.

Soon tulips were beginning to show up in different colors as growers tried to breed them specifically for colors which would make them even more valuable. But they were never completely sure what they would get. Some of the most prized tulips were white with purple streaks, or red with yellow streaks on the petals, even a dark purple tulip that was very much prized.

What happened then was a craze for these specialized tulips. We called that craze “tulip mania”. So, here we’ve got all the conditions for an irrational boom: a prospering economy, so more people had more disposable income – money to spend on luxuries, but they weren’t experienced at investing their new wealth.

Then along comes a thrilling new commodity. Sure the first specimens were just plain old red tulips, but they could be bred into some extraordinary variations, like the dark purple tulip. And finally, you have an unregulated market place, no government constraints, where prices could explode. And explode they did, starting in the 1630s.

There was always much more demand for tulips than supply. Tulips didn’t bloom frequently like roses. Tulips bloomed once in the early spring. And that was it for the year. Eventually, specially-bred multicolored tulips became so valuable. Well, according to records, one tulip bulb was worth 24 tons of wheat, or a thousand pounds of cheese. One particular tulip bulb was sold and exchanged for a small ship. In other words, tulips were literally worth their weight in gold.

As demand grew, people began selling promissory notes guaranteeing the future delivery of prized tulip bulbs. The buyers of these pieces of paper would resell the notes at marked up prices. These promissory notes kept changing hands from buyer to buyer until the tulip was ready for delivery.

But it was all pure speculation because as I said, there was no way to know if the bulb was really going to produce the variety, the color that was promised. But that didn’t matter to the owner of the note. The owner only cared about having that piece of paper so it could be traded later at a profit. And people were borrowing, mortgaging their homes in many cases to obtain those bits of paper because they were sure they found an easy way to make money.

So now, you’ve got all the ingredients for a huge bust. And bust it did, when one cold February morning in 1637, a group of bulb traders got together and discovered that suddenly there were no bidders. Nobody wanted to buy. Panic spread like wild fire and the tulip market collapsed totally.