In the 19th century, Charles Mackay wrote one of the most memorable books on speculation of all time, Extraordinary Popular Delusions and the Madness of Crowds.

This book talked about a number of different manic episodes in financial bubbles. From the South Seas Bubble to the Mississippi scheme and other spectacular episodes in hysteria. Mackay's account of one of these bubbles, an early 17th century boom and bust in tulip bulbs is so famous that Mackay is credited with introducing a new word into the English language: Tulipomania.

The story goes that early in the 17th century, merchants brought the Tulip to Holland from its native Turkey. This flower soon became incredibly fashionable and the wealthy were willing to spend huge amounts of money buying rare varieties of tulips that were affected by a mosaic virus that caused a beautiful feathered pattern in the petals. Tulips became a prestige symbol, and merchants created a market for tulip bulbs that exhibited all the classic signs of what we now call a speculative bubble: a massive run up in prices, shockingly rapid falls in price, massive ruin and despair being the end result.

"Tulipomania" is so famous that this word is now a synonym for all speculative bubbles. Just recently during the tech boom a lot of people were talking about tulips, and various web sites sprung up with variations on the theme, names like e-tulips.com.

Ironically, historians now dispute the story as told by Mackay, and the episode that gave its name to all super bubbles may not have even been all that big a deal.

Mackay plagiarised another author who cited a variety of sources, tracking all of these back it was found that the ultimate source of info on the tulip bubble was a bunch of anonymously written anti-speculation pamphlets written in 1637. These pamphlets, produced long after the event by groups with a political agenda to push, greatly exaggerated what actually happened.

There was indeed a bull market on tulip bulbs, but it was nowhere near as severe as the Mackay account claims. Apparently wealthy families did buy them as collector's items, and no well to do family would be without its tulip collection. High prices were paid for these initially, and the prices did drop off.

The only tulips that attracted high prices were the virus affected ones, seed propagated tulips do not carry the virus and hence the special varieties can only be propagated by cloning. New varieties were introduced by horticulturalists and the really spectacular ones did attract very high prices from collectors, however as these were propagated natural supply and demand dynamics did cause prices to fall on virus affected clones.

Based on some dealer records that have survived to this day, historians have calculated that the average depreciation of tulip bulbs was around 28.5% a year. This doesn't exactly make them a great investment, but that is roughly the same rate at which a new sports car depreciates today, so tulips should be seen more as a costly status symbol than a national industry.

Of course there were some speculators, professional tulip dealers traded tulips on borrowed money, and it is inevitable that a few of these would have suffered heavy losses, but there is no evidence that any of the great noble families of Europe lost their entire fortunes on tulips.

There were smaller markets among the peasants in the taverns, where cheap seed propagated varieties were traded. The prices here were extremely volatile, as one might expect, but professional dealers took no interest in the common virus-free varieties and really this was just the old Dutch equivalent of PubTAB or pokies, an amusement for impoverished punters. No doubt a few of these people were ruined, but the same thing happens today to the stupid and careless at race tracks all over the world.

The common account is that the tulip bubble lead to a great depression, but Dutch archives show that the economy was very robust, indeed some call what followed a Golden age. No doubt lots of people lost money on Tulips, but only a few of the really aggressive traders were ruined, for most people it was just an expensive fashion statement. (See Peter M. Garber, The Journal of Economic Perspectives 4 (Spring 1990), pp35-54)