Tulipmania!

Tulipmania (or its Dutch equivalent tulpenmanie or tulpomanie and several other terms) was the term for the speculative stock market scandal created by the astronomical prices commanded by tulip bulbs in Holland in the early 1600s, just a few decades after the first tulip bulb arrived there.

At the peak of tulipmania in February 1637, tulip contracts sold for more than 20 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble. The term tulipmania has often been used metaphorically to refer to any large economic bubble.

As a cautionary tale, here's a brief re-telling of the original story, circa 1637.  In 17th century Holland, fortunes were doubled overnight as speculators bargained on promise without hard collateral.  Poor men became rich and rich men became filthy rich--all without doing a day's work.  In the wildly speculative marketplace of the late 1630s, even the ultimate threat of government crackdowns couldn't halt the spiraling prices of the hottest commodity in the Dutch Golden Age--tulip bulbs.

Semper Augustus owed its brilliant stripes to a tulip virus.

In a more human sense, tulipmania recalls a time and tale of coveting beauty and then status that soon became a roller-coaster ride of greed, corruption and hysterical actions.  Documents from the time show collateral bartered (or lost) in the frenzy of trading that included whatever people had on hand: houses and meadows, furnishings, dowries, farm animals, paintings, barrels of beer, cheese--even marriage bedsteads!

The tulip had been introduced to Europe in the mid-16th century from the Ottoman Empire and became very popular in the United Provinces (now the Netherlands). Originally a wild flower tamed by the Turks, cultivated tulips came to Holland by way of Carolus Clusius (French: Charles de l'Écluse), director of the Royal Medicinal Garden in Vienna, who successfully raised the first European tulips during the 16th century.

In 1593, Clusius became director of the botanical garden at the University of Leyden [now Leiden], bringing his tulip bulbs with him. There, he planted his collection of tulip bulbs sent to him from Turkey by the ambassador of the Holy Roman Emperor (Ferdinand I) to the Sultan.  These bulbs were able to tolerate the harsher conditions of the Low Countries and it was shortly thereafter they began to grow in popularity. Both thrived in the Dutch climate and an industry was born.

The recent loss of the Southern Netherlands to Spain--particularly the large trading centers of Antwerp and Bruges--as a result of the war caused the rich Calvinist merchants of these cities to flee to the north. Many migrated to Amsterdam, which was at the time a tiny port but which was quickly transformed into one of the most important ports in the world in the 17th century. The exodus can be described as 'creating a new Antwerp.' 

By the early 1600s, which coincided with the first interest in the idea of gardening for decoration rather than solely for food production, the flower rapidly became a coveted luxury item and a status symbol. It also corresponded with a lull in the Thirty Years' War. Several other factors also contributed to the flowering of trade, industry, the arts and the sciences during this period.

Some have pointed out that tulips were useless. The flower had no scent, no medicinal purpose, tastes disgusting (as many Dutch discovered during the "Hungerwinter" of 1944-45) and was apparently no aphrodisiac. Most varieties bloom only a week or two a year.  But the new Dutch gardeners and collectors appreciated plants for their beauty, not their utility. These merchants and craftsmen grew tulips much as they collected paintings.

Indeed, many tulip traders were also art collectors, dealers or painters. They sometimes traded art for bulbs, though paintings never approached the prices paid for flowers. The best analogy for tulipmania may therefore not be the dot-com boom but today’s art market, in which a work by a young artist can cost as much as a London flat. Buyers of tulips chased beauty and status as much as profit.

The development and profusion of more tulip varieties quickly followed. They were classified in groups: colored tulips of red, yellow, or white were known as Couleren, but it was the multi-colored Rosen (red or pink on white background), Violetten (purple or lilac on white background),and, to a lesser extent, the Bizarden (red, brown or purple on yellow background) that were the most popular. These spectacular and highly sought-after tulip bulbs would grow flowers with vivid colors, lines, and flames on the petals, as a result, it is now understood, of being infected with a tulip-specific virus known as the "Tulip breaking virus," a type of mosaic virus.

Examples of Bizarden bulbs

Growers named their new varieties with exalted titles. Many early forms were prefixed Admirael, "admiral," often combined with the growers' names: "Admirael van der Eijck" was perhaps the most highly regarded of about 50 so named. Generael, "general," was another prefix which found its way into the names of around 30 varieties. Later came varieties with even more superlative names, derived from Alexander the Great or Scipio, or even "Admiral of Admirals" and "General of Generals." However, naming could be haphazard and varieties were highly variable in quality.  Most of these varieties have now died out, though similar "broken" tulips continue in the trade.

Admirael van der Eijck

Tulips grow from bulbs and can be propagated through both seeds and buds. Seeds from a tulip will form a flowering bulb after 7-12 years. When a bulb grows into the flower, the original bulb will disappear, but a clone bulb forms in its place, as do several buds. Properly cultivated, these buds will become bulbs of their own. The mosaic virus spreads only through buds, not seeds, and so cultivating the most appealing varieties takes years. Propagation is greatly slowed down by the virus. 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. As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus.

By 1634, in part as a 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.

This trade was centered in Haarlem during the height of a bubonic plague epidemic, which may have contributed to a culture of fatalistic risk taking. 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.

In the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841, the Scottish journalist Charles Mackay proposed that crowds of people often behave irrationally and tulipmania was one of his primary examples. His account was largely sourced to a 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.  Recent studies of the book have led to its being discounted by many modern economists.

The lack of consistently recorded price data from the 1630s makes the extent of the tulipmania difficult to estimate. The bulk of available data came from anti-speculative pamphlets by "Gaergoedt and Warmondt" (GW) written just after the bubble. Economist Peter Garber collected data on the sales of 161 bulbs of 39 varieties between 1633 and 1637, with 53 being recorded by GW. Ninety-eight sales were recorded for the last date of the bubble, 5 Feb. 1637, at wildly varying prices.

According to Mackay, the growing popularity of tulips in the early 1600s 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.

These Dutch florins were minted between 1601-1603.

By 1636, tulips were traded on the exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of society; Mackay recounted people selling or trading their other possessions in order to speculate in the tulip market, such as an offer of an acre of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy which was purchased for a basket of goods (shown below) worth 2,500 florins. A single Viceroy tulip bulb would sell for 2500 florins, a value roughly equivalent to $1,250 in current American dollars, while a rarer Semper Augustus bulb could easily go for twice that.

Goods allegedly exchanged for a single bulb of the Viceroy

Two lasts of wheat            448Æ’
Four lasts of rye              558Æ
Four fat oxen                  480Æ’
Eight fat swine                240Æ’
Twelve fat sheep             120Æ’
Two hogsheads of wine    70Æ’
Four tuns of beer              32Æ’
Two tons of butter            192Æ’
1,000 lb. of cheese            120Æ’
A complete bed                 100Æ’
A suit of clothes                 80Æ’
A silver drinking cup           60Æ’
   Total                           2500Æ’

 
"Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips." [Mackay]

The increasing mania contributed several amusing, but unlikely, anecdotes that Mackay recounted, such as a sailor who mistook the valuable tulip bulb of a merchant for an onion and grabbed it to eat. The merchant and his family chased the sailor to find him "eating a breakfast whose cost might have regaled a whole ship's crew for a twelvemonth." The sailor was jailed for eating the bulb.

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 had burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid. Mackay claims the Dutch devolved into distressed accusations and recriminations against others in the trade.

The panicked tulip speculators sought help from the government of the Netherlands, which responded by declaring that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10-percent fee. Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. The mania finally ended, Mackay says, with individuals stuck with the bulbs they held at the end of the crash.  No court would enforce payment of a contract, since judges regarded the debts as contracted through gambling, and thus not enforceable by law. Before this parliamentary decree, the purchaser of a tulip contract--known in modern finance as a futures contract--was legally obliged to buy the bulbs.

In her 2007 scholarly analysis Tulipmania, Anne Goldgar argues 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 states 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."

Stilleven met bloemen (Still Life with Blooms) by Hans Bollongier

Other economists believe that these elements cannot completely explain the dramatic rise and fall in prices.  Garber's theory has also been challenged for failing to explain a similar dramatic rise and fall in prices for regular tulip bulb contracts. Some economists also point to other factors associated with speculative bubbles, such as a loosening of monetary policy (an increase in the supply of money), as demonstrated by factors such as a surge in deposits at the Bank of Amsterdam during the tulipmania period.

Goldgar argues that although tulipmania 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. A whole network of values was thrown into doubt." In the 17th century, it was unimaginable to most people that 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 volatility of the tulip market is also a major plot event in Gregory Maguire's novel, Confessions of an Ugly Stepsister.  But more recently, tulipmania could be applied to the phenomena of the Cabbage Patch dolls, Beanie Babies frenzy, the Tickle Me Elmo panic or even the X-Box 360 craze.

Tulipmania once again became a popular reference as journalists have compared it to the sub-prime mortgage crisis. It was even used in a recent movie, "Wall Street: Money Never Sleeps", where a once-disgraced financier uses the illustration of tulipmania in a presentation, and there is even an Internet game called "Tulipmania 1637."

Sources:

Dash, Mike, Tulipomania: The Story of the World's Most Coveted Flower and the Extraordinary Passions It Aroused (London: Gollancz) 1999.

Garber, Peter M., "Tulipmania", Journal of Political Economy 97 (3): 59-60. (1989).

Goldgar, Anne, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age (Chicago: University of Chicago Press) 2007.

Phillips, S., "Tulip breaking potyvirus", in Brunt, A.A., Crabtree, K., Dallwitz, M.J., Gibbs, A.J., Watson, L. and Zurcher, E.J. (eds.) (1996 onwards). Plant Viruses Online: Descriptions and Lists from the VIDE Database. Version: 20 Aug. 1996. Retrieved on 15 Aug. 2008.

Thompson, Earl, "The tulipmania: Fact or artifact?" pdf. (Public Choice 130 (1-2): 2007) 99-114. Retrieved on 15 Aug. 2008.