TPO 6 Lecture 1 Economics
Listen to part of a lecture in an economics class.
Now when I mention the terms “boom and bust”, what is that going to mind?
The dotcom crash of the ‘90s.
Ok. The boom in the late 1990s when all those new Internet companies sprung
up and then sold for huge amounts of money. Then the bust around
2000…2001 when many of those same Internet companies went out of
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 the 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.
Tulips? You mean like the flower?
Exactly. For instance, do you have any idea where tulips are from? Originally I
Well, the Netherlands, right?
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 bulb 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
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
priced tulips were white with purple stricks, or red with yellow stricks on the
paddles, even a dark purple tulip that was very much priced. What happened
then was a craze for these specialized tulips. We called that craze “tulip
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 commodity. Sure the first specimens were just played
right in tulips, but they could be bred into some extraordinary variations, like
that dark purple tulip. And finally, you have an unregulated market place, no
government constrains, where price 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
multi-colored tulips became so valuable, well, according to records, one tulip
bulb was worth 24 tons of wheat, or thousand pounds of cheese. One
particular tulip bulb was sold and exchanged for a small sheep. In other words,
tulips were literally worth their weight in gold.
As demand grew, people began selling promissory notes guaranteeing the
future delivery of priced tulip bulbs. The buyers of these pieces of paper would
resell the notes and mark 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’d find 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.