What Was the Dutch Tulip Bulb Market Bubble?
The Dutch tulip bulb market bubble, also known as "tulipmania," was one of the most famous market bubbles and crashes of all time. It occurred in Holland during the early to mid-1600s when speculation drove the value of tulip bulbs to extremes. At the market's peak, the rarest tulip bulbs traded for as much as six times the average person's annual salary.
Today, the story of tulipmania serves as a parable for the pitfalls that excessive greed and speculation in investing can lead to.
- The Dutch Tulip Bulb Market Bubble was one of the most famous asset bubbles and crashes of all time.
- 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.
- Tulips were introduced to Holland in 1593, with the bubble occurring primarily from 1634 to 1637.
- Recent scholarship has questioned the extent of the tulipmania, suggesting it may have been exaggerated as a parable of greed and excess.
History of the Dutch Tulip Bulb Market’s Bubble
Tulips first appeared in Europe in the 16th century, arriving via the spice trading routes that lent a sense of exoticism to these imported flowers that 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: According to The Library of Economics and Liberty, "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 also demanded tulips. Initially, it was a status item that was purchased for the sole reason that it was expensive.
But at the same time, tulips were known to be notoriously fragile, and would die without careful cultivation. In the early 1600s, professional cultivators of tulips began to refine techniques to grow and produce the flowers locally in Holland, establishing a flourishing business sector, that has persisted to this day.
According to Smithsonian Magazine, the Dutch learned that tulips could grow from seeds or buds that grew on the mother bulb. A bulb that grew from seed would take seven to 12 years before flowering, but a bulb itself could flower the very next year. So-called broken bulbs were a type of tulip with a striped, multicolored pattern rather than a single solid color that evolved from a mosaic virus strain. This variation was a catalyst for growing demand for rare, “broken bulb” tulips, which ultimately led to the high market price.
In 1634, tulipmania swept through Holland. The Library of Economics and Liberty writes, "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."
A single bulb could be worth as much as 4,000 or even 5,500 florins. Because 1630s florins were gold coins of uncertain weight and quality, it is hard to make an accurate estimation of today's value in dollars, but Scottish journalist Charles Mackay, in his famous 1841 book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, does give us some points of reference: Among other things, 4 tuns of beer cost 32 florins. That's around 1,008 gallons of beer, or 65 kegs of beer. A keg of Coors Light costs around $120, and so 4 tuns of beer ≈ $7,800 and 1 florin ≈ $244. That means that the best of tulips cost upwards of $1 million in today's money (but with many bulbs trading in the $50,000 - $150,000 range). 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, Haarlem, and other towns.
It was at that time that professional traders ("stock jobbers") got in on the action, and everybody appeared to be making money simply by possessing some of these rare bulbs. 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 the runup began, confidence was dashed. By the end of the year 1637, prices began to fall and never recovered.
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 to drop, holders were forced to sell their bulbs at any price and to declare bankruptcy in the process.
The Bubble Bursts
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. While it was not a devastating occurrence for the nation's economy, it did undermine social expectations. The event destroyed relationships built on trust and people's willingness and ability to pay.
According to Smithsonian, Dutch Calvinists painted an exaggerated scene of economic ruin because they worried that the tulip-driven consumerism boom would lead to societal decay. They insisted that such great wealth was ungodly and the belief remains to this day.
Real-World Examples of Extreme Buying
The obsession with tulips 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. Mackay 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."
Tulipmania 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 holding an irrationally priced asset.
- Prices collapse due to a massive sell-off, and an overwhelming majority go bankrupt.
Dutch speculators at the time spent incredible amounts of money on bulbs that 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. At the height of the bubble, tulips sold for approximately 10,000 guilders. In the 1630s a price of 10,000 guilders equated roughly to the value of a mansion on the Amsterdam Grand Canal.
Did the Dutch Tulipmania Really Exist?
In the year 1841, the author Mackay published his classic analysis. Among other phenomena, Mackay (who never lived in or visited Holland) documents asset-price bubbles—the Mississippi Scheme, the South Sea Bubble, as well as the tulipmania of the 1600s. It is through Mackay's short chapter on the subject that the event became popularized as the paradigm for an asset bubble.
Because of the timing of tulip cultivation, there was always a few years of lag between demand pressures and supply. Under normal conditions, this wasn't an issue, as future consumption was contracted for a year or more in advance. But when the 1630s rise in prices occurred so rapidly and after bulbs already were 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 the demand. Indeed, actual sales of new tulip bulbs remained at ordinary levels throughout the period.
Economist Earl Thompson, who has studied tulipmania, concluded that the "mania" was a rational response to demands arising from 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 oversupply in the market, further depressing prices.
The historian Anne Goldgar at King's College London has also written about tulipmania, 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 tulipmania was considerable."
In fact, Goldgar 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.
What Is Tulipmania?
Tulipmania is the story of a major commodity bubble, which took place in the 17th century as Dutch investors began to madly purchase tulips, pushing their prices to unprecedented highs.
What Does Tulipmania Have to Do With Market Bubbles?
Tulipmania reflects the general cycle of a bubble, from the irrational biases and group mentalities that push up prices of an asset to an unsustainable level, to the eventual collapse of those inflated prices. The example of tulipmania is now used as a parable for other speculative assets, such as cryptocurrencies or dot-com stocks.
How Did Tulipmania Affect the Dutch Economy?
While tulipmania and its ultimate crash didn’t damage the Dutch economy as Mackay wrote, there still was some collateral damage. From court records, historian Anne Goldgar found evidence of reputations lost and relationships broken when buyers who promised to pay 100 or 1,000 guilders for a tulip refused to pay up. The author said those defaults caused a certain level of “cultural shock” in an economy based on trade and extensive credit relationships.
How Does Tulipmania Relate to Bitcoin?
The bitcoin market is frequently compared with tulipmania, in that both prompted highly speculative prices for a product with little clear utility. Bitcoin prices tend to crash after significant gains, exhibiting many signs of a classic bubble.