A tulip bulb, known as "the Viceroy", displayed in a 1637 Dutch catalog: a small bulb cost 3,000 florins, a large bulb 4,200. A skilled craftsman at the time earned about 150 florins a year.

Tulip mania (alternatively tulipomania; Dutch names include tulpenmanie, tulpomanie, tulpenwoede, tulpengekte, bollengekte) was a period in the history of the Netherlands during which demand for bulbs of the recently-introduced and fashionable tulip reached such levels that enormous prices were charged for a single bulb. The peak of Tulip Mania, which occurred in 1636–37, is generally considered the first significant speculative bubble.^[1] Because of this, the term "tulip mania" is also used metaphorically to refer to any large economic bubble.^[2]

The event was popularized by its extended discussion in the book Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay in 1843, more than two centuries after the event. According to Mackay, at one point a speculator paid as much as 12 acres of land for a single bulb.^[3] Mackay claims that many such investors were ruined by the fall in prices, and the Dutch economy fell into depression. Although Mackay's book is regarded as a classic piece of popular journalism and is still read today, modern scholars believe that the bubble was not as significant as Mackay suggested, or even that no economically meaningful bubble occurred.

Research of the Mania is difficult because of the limited data from the 1630s—much of which comes from biased, anti-speculative sources. Economists have, however, found some rational explanations for what happened. Other flowers such as the hyacinth have also seen prices soar upon the flower's introduction, only to fall dramatically over time. There is little evidence of significant economic distress after Tulip Mania. The high prices may also have been driven by expectations of a decree from parliament that contracts could be voided for a small cost. There was little risk to investors if prices did not reach high levels, because they could get out of contracts for a small cost. Thus high prices may have resulted from a rational assessment of risk and reward, and not from speculative mania.

History

Pamphlet from the Dutch tulipomania, printed in 1637

A flecked tulip, with a flame-like pattern on the petals, would have fetched a high price.

The tulip was introduced to Europe in the middle of the 16th century from the Ottoman Empire, and became very popular in the United Provinces (now the Netherlands).^[4] Tulip cultivation in the United Provinces is generally thought to have started in 1593 when the Flemish botanist Charles de l'Écluse first bred tulip bulbs—sent to him from Turkey by Ogier de Busbecq—able to tolerate the harsher conditions of the Low Countries.^[5] Although it is not firmly established that this is when tulips were first introduced, it was shortly thereafter that they began to grow in popularity.^[6]

The flower rapidly became a coveted luxury item and a status symbol, and a profusion of varieties followed. Growers were free to name their creations as they wished, and did so with exalted and lofty titles. Many early forms were prefixed Admirael "admiral", often combined with the growers' names-Admirael van der Eijck is perhaps the most highly regarded of about fifty so named. Generael "general" was another prefix which found its way into the names of around thirty varieties. Later came varieties with even more superlative names, derived from Alexander the Great or Scipio, or even "Admiral of Admirals" and "General of Generals". However, naming could be haphazard and varieties highly variable in quality.^[7] The Dutch, who developed many of the techniques of modern finance, created a market for durable tulip bulbs.^[8] The most spectacular and highly sought-after tulip bulbs would grow flowers with vivid colors, lines, and flames on the petals as a result of being infected with a tulip-specific virus known as the "Tulip Breaking potyvirus", a type of mosaic virus.^[9][10]

Tulips grow from bulbs, and propagate through both seeds and buds. Seeds from a tulip will form a flowering bulb after 7–12 years. When a bulb grows into the flower, the original bulb will disappear, but a clone bulb forms in its place, as do several buds. Properly cultivated, these buds will become bulbs of their own. The mosaic virus spreads only through buds, not seeds, and so cultivating the most appealing varieties takes years. Tulips bloom in April and May for only about a week, and the secondary buds appear shortly thereafter. From June to September, bulbs can be uprooted and moved about, and thus actual purchases (in the spot market) occurred during these months. During the rest of the year, traders signed contracts before a notary to purchase tulips at the end of the season (effectively futures contracts).^[11]

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus. By 1634, in part as a result of demand from the French, speculators began to enter the market.^[12] In 1636, the Dutch created formal futures markets where contracts to buy bulbs at the end of the season were bought and sold. Throughout 1636, the price of rare bulbs climbed ever higher. That November, the price of common bulbs without the valuable mosaic virus also began to rise in value. The Dutch derogatorily described the tulip trading aa a windhandel (literally "wind trade"), because no actually bulbs were changing hands.^[13] However in February 1637, the price collapsed abruptly and the trade of tulips came to a standstill.^[14]

Mackay's Madness of Crowds

Anonymous 17th-century watercolor of the Semper Augustus, the most famous bulb, which sold for a record price.

The modern discussion of tulip mania began with the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay. The thesis of Mackay's work was that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company Bubble, one of his primary examples. Mackay's account was largely sourced to a 1797 work by Johann Beckmann titled A History of Inventions, Discoveries, and Origins. In fact, Beckmann's account, and thus Mackay's by association, was primarily sourced to three anonymous pamphlets published in 1637 with an anti-speculative agenda.^[15]

Mackay's vivid book was extremely popular among generations of economists and stock-market participants. His popular but flawed description of tulip mania as a speculative bubble remains prominent, even though since the 1980s economists have debunked many aspects of his account.^[16]

According to Mackay, the growing popularity of tulips in the early 1600s caught the attention of the entire nation: "the population, even to its lowest dregs, embarked in the tulip trade".^[3] By 1635, a sale of 40 bulbs for 100,000 florins (also known as Dutch guilders) was recorded. By way of comparison, a ton of butter cost around 100 florins, a skilled laborer might earn 150 florins a year, and "eight fat swine" cost 240 florins.^[3] According to data from the International Institute of Social History, one florin had the purchasing power of €10.28 in 2002.^[17]

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; Mackay recounted people selling or trading their other possessions in order to speculate in the tulip market, such as a single bulb of the Semper Augustus that was purchased in exchange for 12 acres of land, or a single bulb of the Viceroy which was purchased for a basket of goods (shown at right) worth 2,500 florins.^[18]

Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.^[3]

The increasing mania contributed several amusing anecdotes that Mackay recounted, such as a sailor who mistook the valuable tulip bulb of a merchant for an onion and grabbed it to eat. The merchant and his family chased the sailor to find him "eating a breakfast whose cost might have regaled a whole ship's crew for a twelvemonth". The sailor was jailed for eating the bulb.^[3]

People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. But such a scheme could not last forever unless ultimately someone was willing to pay such high prices to actually take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips began to collapse, and prices began to plummet. The bubble burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid.^[3]

The panicked tulip speculators sought help from the government of the Netherlands, which responded by declaring that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10-percent fee. 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.^[3]

According to Mackay, lesser tulip manias also occurred in other parts of Europe, although matters never reached the state they had in the Netherlands. The aftermath of the tulip price deflation led to a widespread economic chill throughout the Netherlands for "many years".^[3]

Modern views

Mackay's account of inexplicable mania was long accepted, but recent analysis of the tulip mania suggests his story was incomplete and inaccurate. In her scholarly analysis Tulipmania, Anne Goldgar argues that the phenomenon was limited to "a fairly small group" and that most accounts from the period "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism".^[19]

Mike Dash, author of the modern popular history Tulipomania, states

The history of the tulip mania itself, however, remains remarkably obscure, and even now [as of 1999] it has never been the subject of an exhaustive scholarly inquiry. …My general feeling, after reviewing the available material, is that even after sounding the necessary notes of caution about the reliability of the popular accounts, historians and particularly economists remain guilty of exaggerating the real importance and extent of the tulip mania.^[20]

A standardized price index for tulip bulb contracts, created by Thompson 2007, p. 101. Thompson had no data between February 9 and May 1, thus the shape of the decline is unknown.^[21]

There is no dispute that prices for tulip bulb contracts rose and then fell in 1636–37, but even a dramatic rise and fall in prices does not necessarily mean that an economic bubble or speculative bubble developed and then burst. For tulip mania to have qualified as an economic bubble, the price of tulips would have become unhinged from the intrinsic value of bulbs. Modern economists have offered several explanations why the rise and fall in prices did not constitute a bubble.^[22]

Rational explanations

Economists have put forward several possible reasons for an increase in price. The increases of the 1630s corresponded with a calm period in the Thirty Years' War, leading to rising demand.^[23] Data on sales largely disappeared after the February collapse in prices, but a few other data points of bulb prices after tulip mania show that bulbs continued to lose value for decades after. Economist Peter Garber compared this data to hyacinth prices at the beginning of the 19th century, when the hyacinth replaced the tulip as the fashionable flower, and found a similar pattern. When hyacinths were introduced florists strove to grow beautiful flowers, but as people became more accustomed to hyacinths the prices began to fall. The most expensive bulbs fell to 1–2 percent of their peak value within 30 years.^[24] Garber also notes that, "a small quantity of prototype lily bulbs recently was sold for 1 million guilders ($480,000 at 1987 exchange rates", demonstrating that even today flowers can command extremely high prices.^[25]

While Mackay's account held that a wide array of society was involved in trading tulip bulbs, Goldgar's study of archived contracts found that even at its peak the trade in tulips was conducted not by commoners, but almost exclusively by merchants and skilled craftsmen who were wealthy, but not members of the nobility.^[26] Any economic fallout from the bubble was, contrary to Mackay's assertions, very limited. Goldgar, who identified many prominent buyers and sellers in the market, found less than half a dozen who experienced financial troubles in the time period, and even of these cases it is not clear that tulips were to blame.^[27]

This is not altogether surprising. Although prices had risen, money had not exchanged hands between buyers and sellers. Thus profits were never realized for sellers—unless sellers had made other purchases on credit in expectation of the profits, the collapse in prices did not cause anyone to lose money.^[28] Because the rise in prices occurred after bulbs were planted for the year, growers would not have had an opportunity to increase production in response to price.^[29]

Garber's theory, however, has been challenged for failing to explain a dramatic rise and fall in prices for regular tulip bulb contracts.^[30] A 2006 article in the Quarterly Journal of Austrian Economics identified other factors associated with speculative bubbles, such as a loosening of monetary policy (an increase in the supply of money), as demonstrated by factors such as a surge in deposits at the Bank of Amsterdam during the Tulip Mania period.^[31]

Legal changes

A 2007 paper by UCLA's Earl A. Thompson, "The Tulipmania: Fact or Artifact?", provides further explanation for Dutch tulip mania: that it was caused by a Dutch parliamentary decree (originally sponsored by Dutch investors made skittish by the turmoil of the Thirty Years' War^[32]) that changed the way tulip contracts functioned:

A modern-day field of tulips in Hillegom, Netherlands—despite their colorful history, tulips have remained popular.

"…On February 24, 1637, the self-regulating guild of Dutch florists, in a decision that was later ratified by the Dutch Parliament, announced that all futures contracts written after November 30, 1636 and before the re-opening of the cash market in the early Spring, were to be interpreted as option contracts. They did this by simply relieving the futures buyers of the obligation to buy the future tulips, forcing them merely to compensate the sellers with a small fixed percentage of the contract price."^[33]

Prior to this parliamentary decree, the purchaser of a tulip contract—known in modern finance as a futures contract—was obligated to buy the bulbs. The decree changed the nature of these contracts, so that if the spot price fell the purchaser could opt to pay a penalty and forego receipt of the bulb, rather than pay the full, contracted price. This change in law meant that, in modern terminology, the futures contracts had been transformed into options contracts. This proposal began to be debated in the fall of 1636, and if it became clearer to investors that the decree was likely to be enacted, prices would be expected to rise.^[34]

This decree allowed someone who purchased a contract to void the contract with a payment of only 3 1/2 percent of the contract price (or about 1/30th the contract).^[35] Thus, investors bought increasingly expensive contracts. A speculator could sign a contract to purchase a tulip for 100 guilders. If the price rose above 100 guilders, the speculator would pocket the difference as profit. If the price remained low, the speculator could void the contract for only 3 1/2 guilders. Thus, a contract nominally for 100 guilders, would actually cost an investor no more than 3 1/2 guilders. In early February, as prices reached a peak, Dutch authorities stepped in and halted the trading of these contracts, Thompson argues, and actual sales of tulips remained at ordinary levels throughout. Thus Thompson concludes that the "mania" was a rational response to legal changes.^[36]

Given data about the specific payoffs present in the futures and option contracts, Thompson determines that tulip bulb prices hewed closely to what a rational economic model would dictate: "Tulip contract prices before, during, and after the 'tulipmania' appear to provide a remarkable illustration of 'market efficiency'."^[37]

Social mania and legacy

Goldgar argues that although tulip mania cannot be said to have constituted an economic bubble or speculative bubble, it was nonetheless traumatic to the Dutch for other reasons. "Even though the financial crisis affected very few, the shock of tulipmania was considerable. A whole network of values was thrown into doubt."^[38] In the 17th century, it was unimaginable to most people that something as common as a flower could be worth so much more money than most people earned in a year. The idea that the prices of flowers that grow only in the summer could fluctuate so wildly in the winter, threw into chaos the very understanding of "value".^[39]

Much of the backlash against tulip mania, such as the anti-speculative pamphlets which were later reported by Beckmann and Mackay, were not written by victims of any bubble, but were primarily religiously motivated. The upheaval was viewed as a perversion of the moral order—proof that "[c]oncentration on the earthly, rather than the heavenly flower could have dire consequences."^[40]

Thus a relatively minor economic event took on a life of its own as a morality tale. Nearly a century later, during the crash of the Mississippi Company and the South Sea Company in about 1720, tulip mania appeared in satires of these manias.^[41] When Johann Beckmann first described tulip mania in the 1780s, he compared it to the falling lotteries of the time.^[42] In Goldgar's view, even many modern popular works about financial markets, such as Burton Malkiel's A Random Walk Down Wall Street (1973) and John Kenneth Galbraith's A Short History of Financial Euphoria (1990; written soon after the stock market crash of 1987), used the tulip mania as a lesson in morality.^[43][44][45]

Tulip mania again became a popular referent during the dot-com bubble of 1995–2001.^[46] Most recently, journalists have compared tulip mania to the subprime mortgage crisis.^[47][48] Despite the mania's enduring popularity, Daniel Gross of Slate has said that if the recent research into tulip mania is correct, "then business writers will have to delete Tulipmania from their handy-pack of bubble analogies."^[49]

See also

• Tulip Era in the Ottoman Empire

Notes

References

• Dash, Mike (1999), Tulipomania: The Story of the World's Most Coveted Flower and the Extraordinary Passions It Aroused, London: Gollancz, ISBN 0575067233 
• French, Doug (2006), "The Dutch monetary environment during tulipomania", The Quarterly Journal of Austrian Economics 9(1): 3–14, doi:10.1007/s12113-006-1000-6, <http://www.mises.org/journals/qjae/pdf/qjae9_1_1.pdf> 
• Galbraith, J. K. (1990), A Short History of Financial Euphoria, New York: Penguin Books, ISBN 0670850284 
• Garber, Peter M. (1989), "Tulipmania", Journal of Political Economy 97(3): 535–560, doi:10.1086/261615 
• Garber, Peter M. (1990), "Famous First Bubbles", The Journal of Economic Perspectives 4(2): 35–54, <http://www.jstor.org/stable/1942889> 
• Garber, Peter M. (2000), Famous First Bubbles: The Fundamentals of Early Manias, Cambridge: MIT Press, ISBN 0262072041 
• Goldgar, Anne (2007), Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, Chicago: University of Chicago Press, ISBN 9780226301259 
• Hooper, William R. (1876), "The Tulip Mania", Harper's New Monthly Magazine 52(340) 
• Kindleberger, Charles P. (1978), Manias, Panics, and Crashes: A History of Financial Crises, Basingstoke: MacMillan, ISBN 0333257162 
• Mackay, Charles (1841), Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, <http://www.econlib.org/library/mackay/macExContents> 
• Malkiel, Burton G. (2007), A Random Walk Down Wall Street (9th ed.), W. W. Norton, ISBN 0393062457 
• Pavord, Anna (2007), The Tulip, London: Bloomsbury, ISBN 0747571902 
• Pollan, Michael (2002), The Botany of Desire, New York: Random House, ISBN 0375760393 
• Shiller, Robert J. (2005), Irrational Exuberance (2nd ed.), Princeton University Press, ISBN 0691123357 
• Thompson, Earl (2007), "The tulipmania: Fact or artifact?", Public Choice 130(1–2): 99–114, doi:10.1007/s11127-006-9074-4, <http://www.econ.ucla.edu/thompson/Document97.pdf> 

External links

Wikisource has original text related to this article:

The Tulip Mania

• Wageningen Tulip Portal, an extensive collection of historical resources, including scanned images of seventeenth century Dutch tulip books and pamphlets, from Wageningen UR Library"
• James Grout: Tulipomania, part of the Encyclopædia Romana
• Page on the Tulip Breaking potyvirus from Plant Viruses Online
• Charles McKay's Account of Tulipomania in Modern English
• The fictional book The Confessions of an Ugly Stepsister, Gregory McGuire, pub. by Regan Books/Harper Collins (1999) is set in Haarlem, Netherlands during the period time of tulip mania. For a review of the book, see http://januarymagazine.com/SFF/stepsister.