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Windmill in a field of tulips

A 17th Century Financial Lesson All Too Relevant Today

Economic Bubbles Have a History of Repeating Themselves.

There is an interesting movie that was released a few years ago called Tulip Fever.

If you haven’t seen it, you might want to.

It’s set in 17th-century Holland against the backdrop of tulip mania — a historic event widely examined in books, articles and academic studies for the financial lessons it teaches.

Here’s the background: Holland began importing tulips from the Ottoman Empire (present-day Turkey) in the late 1500s. By the early 1600s, tulips had become wildly popular for their bright colors and diverse features. But with supply limited and the demand huge, prices rose.

Prices climbed so high that people mortgaged their villas and sold their fields and cattle to buy tulip bulbs — even though the tulips themselves had no intrinsic value.

At the height of the craze, a single bulb commanded the equivalent of 10 times a 17th-century skilled craftsman’s annual earnings. One was said to have been sold at auction for the equivalent of $75,000 today.

Finally, the bubble burst in February 1636 and prices plunged, causing economic havoc that lasted for decades.

Other bubbles have occurred since. Sir Isaac Newton lost his life savings in the South Sea Bubble of 1720 , when the stock of the South Sea Company became worthless. And we all know the story of the Wall Street Crash of 1929. There have been many others as well, including the tech bubble that burst in 2001 and the housing bubble of 2007 that played a key role in the 2008 credit crisis.

In the film, the central characters invested heavily in the tulip market. I won’t spoil what happens to them, but I encourage you to watch the film with an eye to the embedded financial lesson.

Originally published in Inside Personal Finance

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