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| Monkeys dealing in tulips. When the bubble bursts, at the far right, one urinates on the now worthless flowers. Jan Brueghel the Younger, 'Satire on Tulip Mania', c1640, CC BY-SA. |
What was this Tulip Mania ?
Tulip mania was a period when tulips were recently introduced and bought in large quantities by many people. This caused tulip prices to shoot up. They were sold at prices higher than skilled workers’ income. After reaching a peak, tulip prices crashed, leaving tulip holders bankrupt. Some argue that it was the first major economic bubble.
The History of Tulip Mania ?
Tulips first arrived in Western Europe in the late 1500’s, and, being an
import from their native Turkey, commanded the same exoticism that
spices and oriental rugs did. It looked like no other flower native to
the Continent. It is no surprise then that tulips became a luxury item
destined for the gardens of the affluent: “it was deemed a proof of bad
taste in any man of fortune to be without a collection of [tulips].
Following the affluent, the merchant middle classes of Dutch society
(which did not exist in such developed form elsewhere in Europe at the
time) sought to emulate their wealthier neighbors and, too, demanded
tulips. Initially, it was a status item that was purchased for the very
reason that it was expensive. In the early 1600’s, professional
cultivators of tulips began to refine techniques to grow and produce the
flowers locally, establishing a flourishing business sector, that has
persisted to this day.
“The rage among the Dutch to possess
[tulip bulbs] was so great that the ordinary industry of the country was
neglected, and the population, even to its lowest dregs, embarked in
the tulip trade.” ( Memoirs of Extraordinary Popular Delusions and the Madness of Crowds– Mackay, 1841)
In 1634, tulipmania swept through Holland and by 1636, the demand for the tulip trade was so large that regular marts for their sale were established on the Stock Exchange of Amsterdam, in Rotterdam, Harlaem, and other towns. At the height of the bubble, tulips sold for approximately 10,000 guilders, equal to the value of a mansion on the Amsterdam Grand Canal.
Indeed, it seemed at the time that the price could only go up; that
“the passion for tulips would last forever.” People began buying tulips
with leverage – using margined derivatives contracts to buy more than
they could afford. But as quickly as it began, confidence was dashed. By
the end of the year 1637, prices began to fall and never looked back. A
large part of this rapid decline was driven by the fact that people had
purchased bulbs on credit, hoping to repay their loans when they sold
their bulbs for a profit. But once prices started their decline, holders
were forced to liquidate – to sell their bulbs at any price and to
declare bankruptcy in the process.
By the end of 1637, the bubble had
burst. Buyers announced they could not pay the high price previously
agreed upon for bulbs and the market fell apart.
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| Poster of Tulip Mania |
Introduction of Tulipmania?
Tulipmania is the story of the first major financial bubble, which took place in the 17th century. Investors began to madly purchase tulips, pushing their prices to unprecedented highs. The average price of a single flower exceeded the annual income of a skilled worker and cost more than some houses at the time. Tulips sold for over 4000 florins, the currency of the Netherlands at the time. As prices drastically collapsed over the course of a week, many tulip holders instantly went bankrupt.
Key Takeaways
- Tulip mania, a period in the 17th century when prices of tulips in the Netherlands reached astronomical highs, is considered the first financial bubble.
- After tulips became so expensive that the cost of a single bulb exceeded that of an average home, the price collapsed, and many investors went bankrupt.
- Tulip mania reflects the general cycle of a bubble, from the irrational biases and group mentalities that push prices of an asset to an unsustainable level, to the eventual collapse of those inflated prices.
Understanding Tulipmania
Tulipmania (also known as tulip mania) is a model for the general cycle of a financial bubble: investors lose track of rational expectations, psychological biases lead to a massive upswing in the price of an asset or sector, a positive-feedback cycle continues to inflate prices, investors realize that they are merely holding a tulip that they sold their houses for, prices collapse due to a massive sell-off and many go bankrupt.
A similar cycle was witnessed during the dotcom bubble of the early 2000s and housing bubble that preceded the global financial crisis of 2008. Some argue that the current age of cryptocurrency and its high prices might be a similar bubble.
Real World Examples of Extreme Buying
The obsession with tulips—referred to as "Tulipmania"—has captured the public's imagination for generations and has been the subject of several books including a novel called Tulip Fever by Deborah Moggach. According to popular legend, the tulip craze took hold of all levels of Dutch society in the 1630s. A Scottish journalist Charles Mackay, in his famous 1841 book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, wrote that "the wealthiest merchants to the poorest chimney sweeps jumped into the tulip fray, buying bulbs at high prices and selling them for even more."
Dutch speculators spent incredible amounts of money on these bulbs, but they only produced flowers for a week—many companies formed with the sole purpose of trading tulips. However, the trade reached its fever pitch in the late 1630s.
In the 1600s the Dutch currency was the guilder, which preceded the use of the euro. According to Focus-Economics.com, at the height of the bubble, tulips sold for approximately 10,000 guilders. In the 1630s a price of 10,000 guilders equated roughly the value of a mansion on the Amsterdam Grand Canal.
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| Gordon Gekko talks tulips. Wall Street: Money Never Sleeps / scottab140 |
Did the Dutch Tuliplmania Really Exist?
In the year 1841, the author Charles Mackay published his classic analysis, Extraordinary Popular Delusions and the Madness of Crowds. Among other phenomena, Mackay (who never lived in or visited Holland) documents asset price bubbles - the Mississippi Scheme, the South Sea Bubble, and the tulipmania of the 1600s. It is through Mackay's short chapter on the subject that it became popularized as the paradigm for an asset bubble.
Mackay makes the point that sought-after bulbs, of particular rarity and beauty did sell for six figures in today's dollars - but there is actually little evidence that the mania was as widespread as has been reported. The political economist Peter Garber in the 1980's published an academic article on the Tulipmania. First, he notes that tulips are not alone in their meteoric rise: "a small quantity of ... lily bulbs recently was sold for 1 million guilders ($480,000 at 1987 exchange rates)", demonstrating that even in the modern world, flowers can command extremely high prices. Additionally, because of the timing in tulip cultivation, there was always a few years of lag between demand pressures and supply. Under normal conditions, this wasn't an issue since future consumption was contracted for a year or more in advance. Because the 1630's rise in prices occurred so rapidly and after bulbs were already planted for the year, growers would not have had an opportunity to increase production in response to price.
Earl Thompson, an economist, has actually determined that because of this sort of production lag and the fact that growers entered into legal contracts to sell their tulips at a later date (similar to futures contracts), which were rigorously enforced by the Dutch government, prices rose for the simple fact that suppliers couldn't satisfy all of the demand . Indeed, actual sales of new tulip bulbs remained at ordinary levels throughout the period. Thus, Thompson concluded that the "mania" was a rational response to demands embedded in contractual obligations. Using data about the specific payoffs present in the contracts, Thompson argued that "tulip bulb contract 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." Indeed, by 1638, tulip production had risen to match the earlier demand - which had by then already waned, creating an over-supply in the market, further depressing prices.
The historian Anne Goldgar has also written on the Tulip mania, and agrees with Thompson, casting doubt on its "bubbleness." Goldgar argues 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." In fact, she goes on to argue that the "Tulip Bubble" was not at all a mania (although a few people did pay very high prices for a few very rare bulbs, and a few people did lose a lot of money as well). Instead, the story has been incorporated into the public discourse as a moral lesson, that greed is bad and chasing prices can be dangerous. It has become a fable about morality and markets, invoked as a reminder that what goes up must go down. Moreover, the Church latched on to this tale as a warning against the sins of greed and avarice - it became not only a cultural parable, but also a religious apology.
Why have these myths persisted? We can blame a few authors and the fact they were bestsellers. In 1637, after the crash, the Dutch tradition of satirical songs kicked in, and pamphlets were sold making fun of traders. These were picked up by writers later in the 17th century, and then by a late 18th-century German writer of a history of inventions, which had huge success and was translated into English. This book was in turn plundered by Charles Mackay, whose Extraordinary Popular Delusions and the Madness of Crowds of 1841 has had huge and undeserved success. Much of what Mackay says about tulip mania comes straight from the satirical songs of 1637 – and it is repeated endlessly on financial websites, in blogs, on Twitter, and in popular finance books like A Random Walk down Wall Street. But what we are hearing are the fears of 17th-century people about a 17th-century situation.
It was not actually the case that newcomers to the market caused the crash, or that foolishness and greed overtook those who traded in tulips. But this, and the possible social and cultural changes stemming from massive shifts in the distribution of wealth, were fears then and are fears now. Tulip mania gets brought up again and again, as a warning to investors not to be stupid, or to stay away from what some might call a good thing. But tulip mania was a historical event in a historical context, and whatever it is, Bitcoin is not tulip mania 2.0.
- https://ecotalker.wordpress.com/2019/08/23/term-of-the-week-tulip-mania/
- https://www.investopedia.com/terms/t/tulipmania.asp
- https://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp
- https://getpocket.com/explore/item/tulip-mania-the-classic-story-of-a-dutch-financial-bubble-is-mostly-wrong?utm_source=pocket-newtab-intl-en
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