TCH: Tulip Mania

           In the 17th century, one of the first recorded speculative bubbles held Holland firmly in its grip and it involved one of the most unlikely of assets, not stocks or bonds or real estate, but tulip bulbs. Even more than the time and place, it is the asset involved that makes the tale of ‘tulip mania’ so uniquely preposterous. Though all bubbles have some common characteristics, the flower boom of the 1630s is about as peculiar as these financial follies get.

           This is so because the events were driven by the very biology of the flowers themselves as much as the economic characteristics of the society they entranced. Despite these peculiarities and all the historical uncertainties surrounding tulip mania, the episode has become the archetypical boom and bust, perhaps precisely because of how strange the events appear in hindsight. Though many bubbles look ridiculous in retrospect, none do so as much as the tulip bubble that burst almost four centuries ago.

Holland

           That such an event occurred in Holland is fitting. By the early 1600s, the Netherlands was the richest country in the world. Developed financial markets are said to have facilitated the growing prosperity of the Dutch, whose reputation for creditworthiness no doubt helped secure further riches. The autonomous cities and provinces in the country housed a sizable and growing mercantile class which competed for wealth by trafficking goods between the seas of Europe and oceans of the world. The Netherlands was uniquely well connected to the rest of the globe by trade, a fact obscured by its peripheral location in Continental Europe.

Tulips

           These connections helped bring the tulip to Holland. Of course, part of the flower’s value resulted from its relative rarity in Europe in which it was an introduced species. Tulips originally came from the mountain ranges of central Asia, just north of the Himalayas. They were said to have been introduced to Europe by Ogier de Busbecq, the Holy Roman Emperor’s ambassador to Ottoman Turkey. He sent many bulbs back to Europe in the 1550s. The flower’s eastern origin is subtly exposed in its name. The word 'tulip' is derived from the Persian word for turban, which the flower resembled. Following its introduction, botanists and horticulturists replanted the bulbs elsewhere and acclimatized the plants for the cold damp climates of Northern Europe.

           In Europe, tulips typically bloom for a week in April or May before becoming dormant during the summer months. It was then, from June to September, that bulbs could be uprooted and traded amongst cultivars and consumers. Both the former and the later were particularly impressed with tulips that exhibited combinations of colors. These flowers were unique because tulip petals are typically only of a single color; indeed, it was the brilliance of this color that made the plants so sought after. However, tulip fanciers occasionally noticed specimens with more striking designs; these were diseased flowers produced by plants infected by tulip breaking virus.

           Varieties of distinct tulips were often given extravagant names. As an example, there was the Viceroy, with purple and white stripes. There was also the Childer, which was reddish orange. Others were named after particular cultivars, famous Dutch persons, or historical figures. Perhaps the most sought after was the Semper Augustus, whose flowers bore a red and white brushstroke pattern.

           Whether diseased or not, tulips typically reproduce both by seeds and by buds that sprout from the bulb. However, because tulip breaking virus doesn’t infect the seeds of a plant, they couldn’t be relied upon to give rise to a tulip of similar pattern. Because cultivars specifically sought diseased tulips, they had to rely on the buds alone to replicate the flowers. This slowed the process of multiplying the special varieties.

Flower Markets

           Tulips proved to be popular among the wealthy and the middle classes of the Netherlands. The market for tulip bulbs was driven by this growing demand for the flowers and the limited pace with which horticulturalists were able to reproduce the plants. The market turned botanists, previously academics mostly interested in sharing specimens for experimental purposes, into entrepreneurs being paid large sums for their bulbs. Prices paid depended on the exact specimen and the weight of a particular bulb; larger bulbs developed more outgrowths and could produce more buds and thus supplied more future bulbs.

           However, there was a major limitation in the tulip market. Because the bulbs could only be uprooted and replanted in the summer months, the time period in which a trade in the physical bulbs could take place was limited to a fraction of the year. In reality, it was more limited still because buyers, wanting to protect themselves from fraud, often demanded to see the flowers given off by a particular bulb before committing to a purchase. This meant that trades usually took place immediately after the flowers bloomed and thus limited activity in the ‘spot’ market to June.

           This temporal limitation did not prevent a year-round trade in tulips though. In 1630s Holland there was an active forward market for bulbs. Outside of the summer, when the market in physical bulbs blossomed, traders made agreements to buy and sell tulip bulbs when the following summer arrived. This was convenient; a buyer could secure a bulb without expending cash immediately, payment would take place upon delivery.

           However, because payment would not actually occur until the future, this allowed speculators to make bold bets while paying little to nothing upon entering a commitment. In the futures markets of today, the risk inherent in this is solved for by revaluing contracts daily and requiring a payment be posted to make good on any interim price movements. This way, a buyer is not discovered to be unable to honor his commitment when the delivery date arrives. That said, these sensible practices did not exist four hundred years ago.

Bubble

           For reasons that aren’t entirely known, the prices for tulip bulbs took off in the mid-1630s. The rise in prices attracted speculators looking for quick riches. Many supposedly expected the wealthy everywhere would come to Amsterdam to buy bulbs, raising future demand. Whether this was based on any sound reasoning or was just a justification for gambling, who knows? What is certain was that this was a craze of previously unheard-of proportions. Many bought bulbs on credit and it is recorded in the lore of the mania that some bulbs traded ten times in a day, a claim probably more fantastical than factual. Nonetheless, so great was the craze that much satire was inspired by the events, including a painting by Jan Breughel the Younger showing the trafficking, trading, and ultimately the abandonment of the tulips.

           Before the bust though, prices rose to extravagant levels. A single sought-after bulb would easily sell for over a thousand guilders in the mid-1630s; some went for closer to five thousand guilders each. For comparison, the annual wages of a skilled worker then might have been around 250 guilders and may have been perhaps twice that much for a very educated professional such as a lawyer. Perhaps more remarkably still, note that the entire island of Manhattan was bought from a Native American tribe for sixty guilders by the Dutch a decade earlier. The rarest bulbs were so valuable that, to ease transactions, property and other assets were traded directly for bulbs, bypassing the need for liquidating property into chests of coins or bullion with which to buy tulips.

           After a phenomenal amount of enthusiasm, things began to change, once again for relatively unknown reasons. The mania reached its peak in 1635-36 and it turned in 1637 when prices began to fall. Surviving records of bulb prices are few but they suggest values may have fallen by 90% or more. Ruined speculators petitioned to have any forward agreements they made cancelled before they were forced to pay up come summer. However, the government was disinterested in intervening and the courts resolved not to get involved either, interpreting the speculation as a form of gambling beyond the law. Because gambling debts were not to be legally enforced, the courts left transaction parties to sort out disputes amongst themselves. With that, the tulip mania came to an end.

Lesson            

           The Dutch tulip boom and bust of the 17th century was exceedingly peculiar, mostly because it involved a commodity no one would regard as an investible asset class today. However, the commodity markets are actually full of such ‘peculiarities’. Consider that as of January 2020, the price of rhodium, a metal used in car exhaust systems, stands at almost fifteen times the levels it did just three years earlier; an ounce of the metal currently goes for $10,000. Surely much of the trade in rhodium is also taking place in forward or futures markets, just as was the case during the tulip boom. That said, these markets are better structured today. Regardless, despite its strangeness, the events that shook the tulip market in the 1630s have lived on in financial market lore, as it probably should.

Further Reading

1.      Garber, Peter M. Famous First Bubbles: The Fundamentals of Early Manias. MIT Press, 2000.

2.      Garber, Peter M. “Tulipmania.” Journal of Political Economy, vol. 97, no. 3, 1989, pp. 535–560.

3.      Goldgar, Anne. “Tulip Mania: The Classic Story of a Dutch Financial Bubble Is Mostly Wrong.” The Conversation, 18 May 2019.

4.      Mackay, Charles. “The Tulipomania.” Extraordinary Popular Delusions and the Madness of Crowds., pp. 89–97.

5.      Sooke, Alastair. “Culture - Tulip Mania: The Flowers That Cost More than Houses.” BBC, BBC, 3 May 2016.