Tulip mania or tulipomania (Also, other Dutch names include: tulpenmanie, tulpomanie, tulpenwoede, tulpengekte…) was a period in the Dutch Golden Age during which contract prices for bulbs of the then recently introduced tulip reached extraordinarily high levels and then suddenly collapsed.
At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (or economic bubble), although some researchers noted that the Kipper-und Wipperzeit episode in 1619–22, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble. The term tulip mania is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).
The event was popularized in 1841 by the book Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay. According to Mackay, at one point 12 acres (5 ha) of land were offered for a Semper Augustus (most highly prized) bulb. Mackay claims that many such investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock.
The tulip was introduced to Europe in the mid-16th century from the Ottoman Empire, and became very popular in the United Provinces (now the Netherlands). Tulip cultivation in the United Provinces is generally thought to have started in earnest around 1593 after the Flemish botanist Charles de l’Écluse had taken up a post at University of Leiden and established the hortus academicus.
There, he planted his collection of tulip bulbs— sent to him from Turkey by the Emperor’s (Ferdinand I, Holy Roman Emperor) ambassador to the Sultan, Ogier de Busbecq—which were able to tolerate the harsher conditions of the Low Countries, and it was shortly thereafter they began to grow in popularity.
Tulips grow from bulbs, and can be propagated through both seeds and buds. Tulips bloom in April and May for only about a week, and the secondary buds appear shortly thereafter. Bulbs can be uprooted and moved about from June to September, 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).
Thus the Dutch, who developed many of the techniques of modern finance, created a market for durable tulip bulbs. Short selling was banned by an edict of 1610, which was reiterated or strengthened in 1621 and 1630, and again in 1636. Short sellers were not prosecuted under these edicts, but their contracts were deemed unenforceable.
As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus(Streaked blossoms get their streaks from a harmless virus infection that causes the color to disappear in patterns, letting white or yellow show through.). By 1634, in part as result of demand from the French, speculators began to enter the market. In 1636, the Dutch created a type of formal futures markets where contracts to buy bulbs at the end of the season were bought and sold.
Traders met in “colleges” at taverns and buyers were required to pay a 2.5% “wine money” fee, up to a maximum of three florins, per trade. The contract price of rare bulbs continued to rise throughout 1636. That November, the contract price of common bulbs without the valuable mosaic virus also began to rise in value. The Dutch derogatorily described tulip contract trading as windhandel (literally “wind trade”), because no bulbs were actually changing hands. However in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt.
A standardized price index for tulip bulb contracts, created by Earl Thompson. Thompson had no price data between February 9 and May 1, thus the shape of the decline is unknown. The tulip market is known, however, to have collapsed abruptly in February.
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; he proposed that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company scheme, one of his primary examples. His account was largely sourced to 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. Mackay’s vivid book was 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 then 1980s economists have debunked many aspects of his account.
According to Mackay, the growing popularity of tulips in the early 17th century caught the attention of the entire nation; “the population, even to its lowest dregs, embarked in the tulip trade”. 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. (According to the International Institute of Social History, one florin had the purchasing power of €10.28 in 2002.)
People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. However, such a scheme could not last unless someone was ultimately willing to pay such high prices and 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 collapsed, and prices plummeted—the speculative bubble burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid.
Mackay’s account of inexplicable mania was unchallenged, and mostly unexamined, until the 1980s. However, research into tulip mania since then, especially by proponents of the efficient market hypothesis, who are more skeptical of speculative bubbles in general, suggests that his story was incomplete and inaccurate.
In her 2007 scholarly analysis Tulipmania, Anne Goldgar states 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”. Peter Garber argued that the bubble “was no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market.”
Earl A. Thompson, UCLA economics professor, argued in a 2007 paper that Garber’s explanation cannot account for the extremely swift drop in tulip bulb contract prices. The annualized rate of price decline was 99.999%, instead of the average 40% for other flowers. He provides another explanation for Dutch tulip mania. The Dutch parliament was considering a decree (originally sponsored by Dutch tulip investors who had lost money because of a German setback in the Thirty Years’ War) that changed way tulip contracts functioned:
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.
Some economists point to other factors associated with speculative bubbles, such as a growth in the supply of money, demonstrated by an increase in deposits at the Bank of Amsterdam during that period. Goldgar argued that although tulip mania may not have constituted an economic or speculative bubble, it was nonetheless traumatic to the Dutch for other reasons.
“Even though the financial crisis affected very few, the shock of tulip mania was considerable. A whole network of values was thrown into doubt.” In the 17th century, it was unimaginable to most people who 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”.
The popularity of Mackay’s tale continues to this day, with new editions of Extraordinary Popular Delusions appearing regularly, with introductions by writers such as financier Bernard Baruch (1932), financial writers Andrew Tobias (1980), and Michael Lewis (2008), and psychologist David J. Schneider (1993). 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.
When Johann Beckmann first described tulip mania in the 1780s, he compared it to the failing lotteries of the time. 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.
Also in Oliver Stone’s drama Wall Street: Money Never Sleeps from 2010, a sequel to the classical 1987 film Wall Street, the tulip mania is referenced. Gordon Gekko, played by Michael Douglas, uses a historical chart displaying the market value of tulips and compares it to the Financial crisis of 2007–2010.
Tulip-mania again became a popular reference during the dot-com bubble of 1995–2001. Most recently, journalists have compared it to the subprime mortgage crisis. Despite the mania’s enduring popularity, Daniel Gross of Slate has said of economists offering efficient market explanations for the mania, that “If they’re correct … then business writers will have to delete Tulip mania from their handy-pack of bubble analogies.”
Blog by RJ dated 5/12/2010, “5-Famous Bubbles in History and What You Can Learn From Them”, writes: “This past decade, we’ve seen three bubbles burst: Dot-com era burst in 2000, real estate crash in 2008, and the credit crisis of 2008-2009. This type of behavior is nothing new to an economy. You would be surprised at how many bubbles there have been, and what made them burst, dating back to the 17th century. RJ looks at famous bubbles in history and ends with what you can learn from them.”
Tulip Mania: In the 17th century in Holland, tulips, yes the flower, were the rage. For just one tulip, you would have to trade 4 oxen, 8 pigs, or 12 sheep. Rare tulips were going as high as 10X the annual salary of a craftsman. As you probably guessed, eventually the market for tulips crashed. Those who speculated in the tulip craze soon had nothing.
Roaring 20′s: What caused the Great Depression? Debt: For the first time in history, individuals were given access to debt. Now they could buy a house, a car, and a radio and not pay till later. Even worse, people were using credit to purchase stocks. As we found out recently, when banks make loans to people who aren’t going to pay them back, they lose money. When banks stop making loans, a bubble bursts.
Japanese Bubble Economy: It’s a little shocking how similar the bubble in Japan was to the U.S.’s recent bubble. The Japanese Government loosened restrictions on banks. Banks made loans to people who couldn’t pay them back because it looked good in the books. Eventually, banks stopped making loans. Sounding familiar? The Nikkei 225, which is similar to the Dow Jones Index in the U.S., closed at 38,957.44 on December 31, 1989. As of today the Nikkei 225 is around 10,400.
Dot-Com Bubble: During 1995-2000, if a company had been considered a tech company, its stock price went up. It didn’t matter that the majority of these companies were not making any money. We were in a “new” era. A crazy amount of money, usually from private investors, was being thrown at small start-ups. Big corporations got greedy and acquired every start-up they could.
However, the small start-ups were not making money. Big corporations tried hard to make them profitable but since they had no experience in the tech industry they couldn’t. The site geocities.com was purchased by Yahoo for $3.57 billion. Ten years later, geocities closed down: Greed at its finest.
Credit Crisis: You probably have heard enough by now. U.S. Government relaxes restrictions on lending. Banks make loans to people who are not going to pay them back. The economy goes up because now banks can make loans to almost anyone. A couple of years later, everyone starts to default on their loans. Real estate prices drop. Banks stop making loans. Plus, they now own all the real estate that’s worth next to nothing.
“Inevitably, we can expect another bubble bursting or two or three. It’s just a matter of when. You can tell a bubble is about to burst when people start to get greedy and when everyone is saying that the rules have changed. The people who survive are those who are out of debt, have an emergency fund, and work hard (and smart). These are the same people who prosper during and after each bubble.”