Dutch Tulip Bulb Market Bubble
Tulip Mania or Tulip Craze, was the name given to the speculative craze surrounding the sale of tulip bulbs and involved the use of futures contracts in 17th-century Holland.
Dutch Tulpen Windhandel, often called Tulip Mania or Tulip Craze, was the name given to the speculative craze surrounding the sale of tulip bulbs in 17th-century Holland.
The beautifully shaped, vividly colored tulips were introduced to Europe by Turkish immigrants around 1550 when they immediately became well-liked despite being expensive.
The demand for rare tulip species in diverse hues quickly surpassed the supply, causing the price of individual bulbs to rise to unjustifiable heights across northern Europe.
By roughly 1610, when a single bulb of a new variety was accepted as dowry for a bride, a successful brewery in France was exchanged for one bulb of the variety Tulipe Brasserie.
Between 1633 and 1637, the fury in Holland reached its height. Before 1633, only seasoned growers and professionals were allowed to trade tulips in Holland.
However, as prices climbed steadily, more middle-class and working-class families began to speculate on the tulip market. Mortgages on homes, estates, and companies were obtained to buy bulbs for later resale at higher prices.
Sales and resales were made repeatedly without the bulbs ever leaving the ground, and pricey varieties of bulbs could bring in hundreds of dollars each.
Worries about whether prices would keep rising at the beginning of 1637 sparked the crisis. The tulip market crashed almost quickly, wiping out fortunes and putting many ordinary Dutch families in dire straits.
- Dutch Tulpen Windhandel, also known as Tulip Mania or Tulip Craze, was a speculative frenzy surrounding the sale of tulip bulbs in 17th-century Holland.
- The first tulips arrived in Europe in the 16th century via the spice trade routes, which gave these imported flowers, which looked unlike any other native flower on the continent, a sense of exoticism.
- Tulipmania swept through Holland in 1634. "The Dutch craze 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," the Library of Economics and Liberty states.
- The bubble burst by the end of 1637. The market collapsed after buyers said they could not afford the exorbitant price they had previously agreed upon for bulbs. It did not drastically affect the country's economy but weakened social norms.
- The public's preoccupation with tulips has caught their attention for many years and has been the topic of countless works, including Deborah Moggach's novel Tulip Fever.
History of the Dutch Tulip Bulb Market Bubble
The first tulips arrived in Europe in the 16th century via the spice trade routes, which gave these imported flowers, which looked unlike any other native flower on the continent, a sense of exoticism.
Therefore, it is not surprising that tulips evolved into a luxury good reserved for the gardens of the wealthy. A lack of a collection of [tulips] was considered a sign of poor taste in any man of fortune, according to The Library of Economics and Liberty.
Tulips were known to be notoriously delicate, and without careful cultivation, they would perish. This led to the emergence of professional tulip growers who perfected methods to cultivate and produce the flowers locally in Holland in the early 1600s, creating a thriving industry that has endured to this day.
According to Smithsonian Magazine, the Dutch discovered that tulips could sprout from seeds or buds that formed on the mother bulb.
A bulb itself may flower next year. However, a bulb grown from seed would take seven to twelve years. The tulip variety is known as "broken bulbs" and developed from a mosaic virus strain and featured a striped, multicolored design rather than a single solid color.
This variance increased demand for uncommon, "broken bulb" tulips, which drove the market price.
Tulips Sweep Holland
Tulipmania swept through Holland in 1634. "The Dutch craze 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," the Library of Economics and Liberty states.
The price of a single bulb could reach 4,000 or even 5,500 florins. It is challenging to calculate today's 1630s florins' value in dollars because they were gold coins of questionable weight and quality.
That said, Scottish journalist Charles Mackay does provide some points of comparison in his renowned 1841 book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds: Four tuns of beer cost 32 florins, among other things.
That is around 65 kegs or 1,008 gallons of beer. So four tuns of beer would cost $7,800, or $244, and one florin would cost almost $120 for a keg of Coors Light.
The best tulips would therefore cost upwards of $1 million in today's currency (but many bulbs would trade for between $50,000 and $150,000). By 1636, traditional markets for selling tulips had been established on the Amsterdam Stock Exchange and in Rotterdam, Haarlem, and other cities.
Professional traders (stock jobbers) joined the market at that point, and it seemed everyone was profiting just by owning a few of these unusual bulbs. But, at the time, the belief was that the cost would continue to rise and that "the passion for tulips would last forever."
The fact that customers had bought bulbs on credit to repay their loans when they sold them for a profit was a significant factor in this decline's rapidity. As a result, holders were compelled to sell their bulbs at any price as prices began to fall, which led to their insolvency.
The Bubble Bursts
There was a bustling futures market for tulip bulbs, and tulip traders could be seen operating at thousands of Dutch inns. The winter of 1636–1637 saw the height of the tulip mania, with some bulbs changing hands ten times each day.
The peak occurred early that winter during an auction for seven orphans whose only possession was a collection of 70 exquisite tulips left by their late father.
The most expensive bulb ever sold was a rare Violetten Admiral van Enkhuizen on the verge of splitting in two. In total, the flowers generated close to 53,000 guilders.
The bubble burst by the end of 1637. The market collapsed after buyers said they could not afford the exorbitant price they had previously agreed upon for bulbs. It did not drastically affect the country's economy but weakened social norms.
The incident destroyed relationships based on mutual trust and people's willingness and ability to pay.
Smithsonian Magazine claims that Dutch Calvinists depicted an exaggerated vision of economic collapse because they were concerned that the tulip-driven consumer boom would result in social deterioration.
People used leveraged futures contracts to purchase more tulips than they could afford. But confidence was destroyed just as fast as the buildup started. Prices started to decline by the end of 1637 and never fully recovered.
Did the Dutch Tulipmania Exist?
Mackay's influential work, Extraordinary Popular Delusions and the Madness of Crowds was published in 1841.
The Mississippi Scheme, the South Sea Bubble, and the tulipmania of the 1600s are just a few of the notable asset-price bubbles that Mackay (who never lived in or even traveled to Holland) describes.
The event gained notoriety as the archetype for an asset bubble, thanks to Mackay's brief chapter on it.
The timing of tulip planting resulted in a few-year gap between supply and demand pressures. However, this was not a problem under normal circumstances because future usage was prearranged for a year or more in advance.
Growers would have needed more time to raise production in reaction to price because the 1630s price hike happened so quickly after bulbs had already been planted for the year.
According to economist Earl Thompson, because of this kind of production lag and growers' legal agreements to sell their tulips later, which the Dutch government strictly enforced, prices increased because suppliers could not meet all the demand.
Throughout the period, real sales of new tulip bulbs stayed normal.
By 1638, tulip production had increased to keep up with the earlier demand, which had already decreased, leading to a market overstock and further reducing prices.
Thompson agrees with Anne Goldgar, a King's College, London historian who has written extensively about tulipmania and questions its "bubbles."
According to Goldgar, Tulipmania may not have been an economic or speculative bubble, but it still caused the Dutch people significant suffering for other reasons.
"The shock of tulipmania was considerable, even though the financial crisis affected very few," she says.
Goldgar continues by claiming that the "tulip bubble" was not a craze (even though some people paid exorbitant rates for a small number of extremely rare bulbs and suffered significant financial losses).
The tale has become part of popular culture as a warning against greed and the perils of price inflation.
Real-World Examples of Extreme Buying
The public's preoccupation with tulips has caught their attention for many years and has been the topic of countless works, including Deborah Moggach's novel Tulip Fever.
The tulip frenzy allegedly swept through all tiers of Dutch society in the 1630s. The poorest chimney sweeps to the wealthiest merchants "jumped into the tulip fray, buying bulbs at high prices and selling them for even more," according to Mackay.
The tulipmania phenomenon can model a financial bubble's general cycle:
- Traders lose sight of reasonable expectations.
- Psychological biases cause a sharp increase in the price of a particular asset or industry.
- Prices keep rising as a result of a positive feedback cycle.
- Investors are aware that the asset they are holding is becoming overpriced.
- Prices plummet due to a big sell-off, and the vast majority file for bankruptcy.
Baseball cards, non-fungible tokens (NFTs), Beanie Babies, and shipping stocks exhibit comparable price cycles.
Dutch investors at the time spent enormous sums of money on bulbs that only bloomed for a week; numerous businesses were established for the sole purpose of trading tulips. But in the late 1630s, commerce took off.
The guilder, used before the euro, was the currency of the Netherlands in the 1600s. Tulips cost roughly 10,000 guilders during the height of the bubble. In the 1630s, a home on the Amsterdam Grand Canal was worth approximately 10,000 guilders.
The South Sea Bubble
More complex circumstances than those that caused tulipmania contributed to the South Sea Bubble of 1720. The British government granted the South Sea Company a monopoly on all trade with the Spanish provinces of South America when it was founded in 1711.
Investors bought shares of the South Sea Company in anticipation of a similar success to the East India Company, which gave England a thriving trade with India.
As the company's directors circulated false stories of unfathomable riches in the South Seas, the value of the company's shares surged more than eightfold in 1720, from £125 in January to £950 in July, before plummeting in the following months and igniting a serious economic crisis.
By the summer of 1720, shares in the South Sea Company were overvalued, and other businesses also experienced a spike in share prices.
This was partially caused by inexperienced investors entering the market and losing control. Additionally, money was imported from France. Under the direction of a Scottish economist by the name of John Law, the French economy underwent a significant number of reforms.
Japan's Real Estate and Stock Market Bubble
Asset bubbles can occasionally result from the too-stimulative monetary policy of today. The Japanese economic bubble in the 1980s is a good illustration.
In the 80s, Japan's overall economy expanded at an impressive rate of 3.89 percent, based on GDP. In comparison, the US advanced by 3.07 percent. That said, Japan's economy struggled during the 1990s.
The early 80s 50% increase in the Yen value caused the Japanese recession in 1986, which was combated by the government's announcement of a monetary and fiscal stimulation program.
Due to rampant speculation's success due to these measures, the value of Japanese stocks and urban real estate tripled between 1985 and 1989.
At the height of the California real estate boom in 1989, the Imperial Palace grounds in Tokyo were worth more than the entire state's real estate.
The bubble burst in 1991, setting the stage for the "Lost Decade" of deflationary pricing and poor economic growth that followed in Japan.
Researched and authored by Karnic Boudoughian
Reviewed and Edited by Basil Khalidi | LinkedIn
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