Bryan Yach, CFP®: 0:01

Amsterdam. Winter. 1637. Outside, the canals are dark, and there's a thin fog drifting over the murky water. Inside, a crowded tavern. The rooms warmer. They're not necessarily more comfortable. Wet coats hang near the door. The smell of pipe smoke. Beer. Jenever. The ancestor of gin. Billows through the air. Men in dark wool doublets and broad collars crowd around wooden tables, drinking beer, arguing over scraps of paper, and sitting between them is a tulip bulb. Not a flower, a bulb. Something that has the potential to be beautiful, but for now is simply a brown, dry, uninteresting bulb. The sort of thing that looks more like a small onion or oversized garlic clove than something worth a fortune. But in the Dutch Golden Age, the 17th century, this unassuming bulb could have been a life savings. The beer keeps flowing, the numbers keep rising. Every new buyer comes with a higher price. Price of one bulb becomes worth more than 15 years' wages for a skilled craftsman. That's half a career in the form of a tulip bulb. [Music]

Lucille: 1:16

You're listening to Money's The Matter, a podcast about understanding money through the lenses of history, stories, and human psychology. Here's Bryan.

Bryan Yach, CFP®: 1:25

There's even a legend, probably apocryphal, about a sailor who mistook a rare tulip bowl for an onion and ate it for breakfast. He had just eaten something valuable enough to feed an entire ship's crew for a year. Whether that actually happened is doubtful, but the fact that people have repeated the story for hundreds of years tells you something about how absurd tulip prices seemed, even to later generations. And then suddenly, the buyer stopped showing up. Panic set in. The sellers nervously showed up, only to find an empty room. So how did this happen? How does something that looks like an oversized garlic clove become worth 15 years of someone's labor? The easy answer is greed. Or stupidity. A bunch of people lost their minds, paid ridiculous prices for flowers, and eventually reality caught up with them. It's a good story. It's also a little too convenient. Because if people buying tulips weren't fools, they lived in one of the wealthiest, most commercially sophisticated societies on Earth. They understood trade. They understood contracts. They understood money. And for a while, buying tulips worked. Prices went up. People made money. Which leads us to a much more interesting question. At what point does the price of something stop becoming what it's worth? Start becoming what you think the next person will pay for it. To understand why anyone cared this much about a flower, you have to understand the Netherlands in the 1600s. The Dutch Golden Age. Dutch ships were moving goods around the world. Amsterdam had become one of the great commercial centers of Europe. Merchants were getting rich trading spices, textiles, timber, grain, and just about everything else you could fit inside a ship. Along with that new wealth came a taste for things that were rare, exotic, beautiful. The tulip fit perfectly. Tulips themselves were relatively new to Western Europe. They'd arrived from the Ottoman Empire in the late 1500s and quickly became objects of fascination among wealthy Europeans. In the Dutch Republic, that fascination found pretty fertile ground if there was a lot of money moving through the system. Some of these flowers were unusual. The most prized had brilliant streaks, contrasting colors running through their petals. The Dutch didn't know it at the time, but those patterns were caused by a virus. It made the flowers more beautiful, unpredictable, difficult to reproduce. So before there was ever a bubble, there was a perfectly reasonable reason for certain tulips to be expensive. They were scarce. They were fashionable. Owning the right set of tulips said something about you. Somewhere along the line, it wasn't about the flower anymore. It wasn't even about the scarcity. They began buying because tulip prices were going up, and that distinction is important. During the winter, many bulbs were still underground. So traders increasingly bought and sold contracts, giving them the right to receive bulbs later. The Dutch had a name for this type of trading. Windhandle. Vintandel. Windtrade. In taverns, groups of traders known as "colleges" gathered around tables and exchanged promises for flowers that, in many cases, nobody in the room could actually see. These were futures contracts. These were derivatives. This is not unlike our futures, options, swap contracts that we see today. And as prices rose, every successful sale seemed to prove that the last buyer was right. It validated the last buyer. Imagine someone you know buying a contract for $500 and selling it immediately afterwards for $700. You might think $700's insane, but the next buyer sells it for $900. Suddenly the person who looked reckless is a genius. And you're the one sitting there wondering what you missed. You're missing out. That's the seductive part of the bubble. Rising prices don't just make people richer, they make the story behind those prices feel more believable. Eventually people stop thinking about the utility of the good and start thinking about how can I sell it for more than I just bought it for. That's speculation. But the prices of today still have to answer to tomorrow. In the first days of February 1637, the market began to seize up. One contemporary account describes a sale in Harlem where sellers offered bulbs and buyers simply weren't willing to pay their prices. There was no dramatic announcement. Nobody said, "Okay, here's the bubble popping. No king walks in the room and bans tulips. No ships sink carrying the world's tulip supply." This is simply a realization spreading from trader to trader and it spreads fast because panics spread fast. Once that happens, the logic works just as powerfully in reverse, exponentially. If you bought because you believe someone would pay more, you need to sell before everyone else reaches the same conclusion. Contracts begin unraveling. Buyers refuse to honor prices that they agreed on days earlier. Sellers want their money. Authorities are pulled into disputes over which agreements should actually be enforced. The strange thing about the collapse isn't that something suddenly happened to tulips. Nothing happened to tulips. The tulips didn't care about any of this. What collapsed was confidence in the price. The tulips were simply a bystander. And this is where we get the story of tulip mania. The story's gotten a little mangled over the last 400 years. People might change the story a little bit to fit their current worldview. But the whole Dutch economy didn't collapse after this. There isn't good evidence that every farmer, chimney sweep, servant, and Holland gamble away their life savings. And historians haven't found the trail of mass bankruptcies that later versions would lead us to expect. The real market appears to have been much smaller than the legend. But tulip mania matters in the context of history. What makes it more interesting is you don't need an entire country to lose its mind for speculative behavior to emerge. You just need a group of people, a compelling story, something where the value is difficult to pin down, and enough recent success to make skepticism feel foolish. Tulips aren't stocks. Stocks aren't houses. Houses aren't cryptocurrencies. But human beings have the same brains that we had then. We haven't evolved much since then. We watch what other people are doing. We hate missing out. And when prices rise long enough, we have an ability to invent reasons why they deserve to and why they should continue. We create those narratives in our head because it's what we want. It's what we want to see happen. Which brings us back to our tavern. The smoke, the beer, scraps of paper, Univer. And sitting quietly in the middle of it all, a little brown tulip bulb. Months later, someone could take that bulb, put it in the ground, give it water, give it sunlight. Eventually, a beautiful flower appears. The bulb hadn't become more useful when it's price soared. It didn't become less beautiful when the market collapsed. In fact, the tulip had no idea any of this was happening. But despite that, it also created one of the greatest economic lessons in the history of mankind. And one of the first recorded market bubbles. It starts with the hype, hits the peak, falls down with a panic. Humans have such an amazing ability to imagine a future that hasn't been promised yet. For a brief moment, people looked at the little brown bulb, didn't see a flower, they saw wealth, they saw opportunity, they saw status, they saw a better future. And they looked at themselves 10, 15 years down the line and imagined what that could mean. Most importantly, they saw someone standing behind them who might be willing to pay more until one day they turned around. And nobody was there.