Did TulipMania create the first futures contracts?

In the 17th century, when Holland had the highest per capita income in the world while the Dutch Republic's economic and financial system were at the time the most advanced and sophisticated ever seen in history. However, their sophistication in financial matters led to TulipMania, that ruined many financially.

To hear what happened let’s drop in and listen to two Dutchmen in a bar discussing TulipMania.

Arnoud Bakker I’ve always wanted to know why did TulipMania happen in 1637?

Jan Steen. Well, they say it was all because fashionable ladies of Paris liked to wear tulips. They wanted to wear were tulips with mosaic patterns. These had to be grown from specific bulbs that had a rare virus.

Arnoud Bakker I bet the only place with this rare virus was here in Holland.

Jan Steen. Yes, and as a result, for a few years prices went silly. What made it worse was that people didn’t pay the full price for them, they bought them on what we now call, future contracts. This meant that they never owned them, they paid 2.5% of the purchase price, agreeing to pay the rest when they sold them, hoping for a profit. This is what we now call a futures contract. This drove the price of bulbs up from a few florins in 1634 to 2,000 florins in 1637.

Arnoud Bakker That’s unbelievable, 2,000 florins just for a bulb!

Jan Steen. Oh, it was mad. Especially as nobody was growing any bulbs, and nobody was actually paying for them! The prices just kept going up.

Arnoud Bakker I suppose it had to end, what happened?

Jan Steen. Oh, of course it did, that was when someone sold a bulb for 6,390 florins!

Arnoud Bakker Wow, what happened?

Jan Steen. Well, as one was sold for 6,390 florins, everyone else tried to take their profits. Then people started to panic, suddenly everybody realised that tulip bulbs were just innocent little bulbs, and they were in fact worthless!

Arnoud Bakker Oh my god, I suppose all those people lost a lot of money.

Jan Steen. Yes, they did, think about it this way, in those days you could buy a mansion on the Buitenhof for just over 3,000 florins. The result, countless people lost their life savings as they all owed so much money on their futures contracts. Their liabilities were frightening.

There were so many lessons to learn from this first modern day economic crisis, but there is one message for us, it is about the dangers of buying something you only pay for at a later date.

Isn’t History Fascinating?

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