Josseph de la Vega was in 1688 the first person to give an account of irrational behaviour in financial markets and to explain the role of the stock exchange. The story centres on the tulip mania and the workings of the Amsterdam Stock Exchange (which had been founded in 1602). In the preface to his book, de la Vega states that ‘he wanted to describe this "on the whole most honest and most useful of all businesses" and to explain on the other hand "all the tricks the rascals know how to employ".’
In 1623, a single bulb of a famous tulip variety could cost as much as a thousand Dutch florins (the average yearly income at the time was 150 florins). Tulips were also exchanged for land, valuable livestock and houses. Allegedly, a good trader could earn six thousand florins a month. By 1635, a sale of 40 bulbs for 100,000 florins was recorded. By way of comparison, a ton of butter cost around 100 florins and "eight fat swine" 240 florins. A record was the sale of the most famous bulb, the Semper Augustus, for 6,000 florins in Haarlem. By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of society, with many people selling or trading their other possessions in order to speculate in the tulip market. Some speculators made large profits as a result. Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon was dubbed windhandel, or "wind trade".
In February 1637, tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst. People began to suspect that the demand for tulips could not last. Panic developed. Some buyers were left holding contracts to purchase tulips at prices now ten times those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid. Allegedly, thousands of Dutch, including businessmen and dignitaries, were financially ruined. Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. Ultimately, individuals were stuck with the bulbs they held at the end of the crash—no court would enforce payment of a contract, since judges regarded the debts as contracted through gambling, and thus not enforceable in law. The aftermath of the tulip price deflation led to a widespread economic slowdown throughout the Netherlands for a number of years afterwards, resulting in what we would describe today as a moderate economic depression. Does this sound familiar?