Crash Future Frenzy

[Nell Barreto]

Tulipmania (Dutch: tulpenmanie) was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The major acceleration started in 1634 and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative bubble or asset bubble in history.[2] In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis. It had no critical influence on the prosperity of the Dutch Republic, which was one of the world's leading economic and financial powers in the 17th century, with the highest per capita income in the world from about 1600 to about 1720.[3][4] The term tulip mania is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.[5][6]

Forward markets appeared in the Dutch Republic during the 17th century. Among the most notable was one centred on the tulip market.[7][8] At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled artisan. Research is difficult because of the limited economic data from the 1630s, much of which come from biased and speculative sources.[9][10] Some modern economists have proposed rational explanations, rather than a speculative mania, for the rise and fall in prices. For example, other flowers, such as the hyacinth, also had high initial prices at the time of their introduction, which then fell as the plants were propagated. The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small cost, thus lowering the risk to buyers.

The 1637 event gained popular attention in 1841 with the publication of the book Extraordinary Popular Delusions and the Madness of Crowds, written by Scottish journalist Charles Mackay, who wrote that at one point 5 hectares (12 acres) of land were offered for a Semper Augustus bulb.[11] Mackay claimed that many investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock. Although Mackay's book is a classic, his account is contested. Many modern scholars believe that the mania was not as destructive as he described.[12][13][14]

The introduction of the tulip to Europe is often questionably attributed to Ogier de Busbecq, the ambassador of Charles V, Holy Roman Emperor, to Sultan Suleiman the Magnificent, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire.[15][16] Tulip bulbs, along with other new plant life like potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century.[17] These bulbs were soon distributed from Vienna to Augsburg, Antwerp, and Amsterdam.[18]

Their popularity and cultivation in the United Provinces (now the Netherlands)[19] started in earnest around 1593 after the Southern Netherlandish botanist Carolus Clusius had taken up a post at the University of Leiden and established the hortus academicus.[20] He planted his collection of tulip bulbs and found that they were able to tolerate the harsher conditions of the Low Countries.[21] Shortly thereafter, the tulip grew in popularity.[22]

The tulip was different from other flowers known to Europe at that time, because of its intense saturated petal colour. The appearance of the nonpareil tulip as a status symbol coincides with the rise of newly independent Holland's trade fortunes. No longer the Spanish Netherlands, its economic resources could now be channelled into commerce and Holland embarked on its Golden Age. Amsterdam merchants were at the centre of the lucrative East Indies trade, where one voyage could yield profits of 400%.[23]

As a result, tulips rapidly became a coveted luxury item, and a profusion of varieties followed. They were classified in groups: the single-hued tulips of red, yellow, or white were known as Couleren; the multicolored Rosen (white streaks on a red or pink background); Violetten (white streaks on a purple or lilac background); and the rarest of all, the Bizarden ('Bizarres'), (yellow or white streaks on a red, brown, or purple background).[24] The multicolour effects of intricate lines and flame-like streaks on the petals were vivid and spectacular, making the bulbs that produced these even more exotic-looking plants highly sought-after. It is now known that this effect is due to the bulbs being infected with a type of tulip-specific mosaic virus, known as the "tulip breaking virus", so called because it "breaks" the one petal colour into two or more.[25][26] Less conspicuously, the virus also progressively impairs the tulip's production of daughter bulbs.[27]

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 fifty so named. Generael ('general') was another prefix used for around thirty varieties. Later varieties were given even more extravagant names, derived from Alexander the Great or Scipio, or even "Admiral of Admirals" and "General of Generals". Naming could be haphazard and varieties highly variable in quality.[28] Most of these varieties have now died out.[29]

The tulips bloomed in April and May for about one week. During the plant's dormant phase from June to September, bulbs can be uprooted and moved about, so actual purchases (in the spot market) occurred during these months.[27] During the rest of the year, florists, or tulip traders, signed forward contracts before a notary to buy tulips at the end of the season.[27] Thus the Dutch, who developed many of the techniques of modern finance, created a market for tulip bulbs, which were durable goods.[19] Short selling was banned by an edict of 1610, which was reiterated or strengthened in 1621 and 1630, and again in 1636. Short sellers were not prosecuted under these edicts, but forward contracts were deemed unenforceable, so traders could repudiate deals if faced with a loss.[30]

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market.[32] The contract price of rare bulbs continued to rise throughout 1636. By November, the price of common, "unbroken" bulbs also began to increase, so that soon any tulip bulb could fetch hundreds of guilders. Forward contracts were used to buy bulbs at the end of the season.[33]

Traders met in "college" at taverns and buyers were required to pay a 2.5% "wine money" fee, up to a maximum of three guilders per trade. Neither party paid an initial margin, nor a mark-to-market margin, and all contracts were with the individual counter-parties rather than with the Exchange. The Dutch described tulip contract trading as windhandel (literally 'wind trade'), because no bulbs were actually changing hands. The entire business was accomplished on the margins of Dutch economic life, not in the Exchange itself.[33]

By the end of February the representatives gathered in Amsterdam for deliberations. They decided on a compromise where all contracts entered before December 1636 would be binding, but later contracts could be cancelled by paying a fee amounting to 10% of the price.[37][41] The matter was brought before the Court of Holland, which declined to rule one way or the other and referred the question back to the city councils.[42] The legislature of Holland decided to cancel all contracts to allow fresh deals to be struck during the summer.[43] In Haarlem the issue dragged on, since the government left it to the parties to solve their issues by arbitration or other means. In May the city ruled that buyers could cancel any extant contracts at a fee of 3.5% of the price.[43] The Dutch court system remained busy with a number of tulip disputes throughout 1639.[44] In the end most contracts were simply never honored.[45][46]

The lack of consistently recorded price data from the 1630s makes the extent of the tulip mania difficult to discern. The bulk of available data comes from an anonymous satire, Dialogues between Waermondt and Gaergoedt, written just after the bubble. Economist Peter M. Garber [de] collected data on the sales of 161 bulbs of 39 varieties between 1633 and 1637, with 53 being recorded in the Dialogues.[47]

98 sales were recorded for the last date of the bubble, February 5, 1637, at wildly varying prices. The sales were made using several market mechanisms: forward trading at the colleges, spot sales by growers, notarized forward sales by growers, and estate sales. "To a great extent, the available price data are a blend of apples and oranges", according to Garber.[48]

The modern discussion of tulip mania began with the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay. He proposed that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company scheme, one of his primary examples. His account was largely sourced from a 1797 work by Johann Beckmann titled A History of Inventions, Discoveries, and Origins.[50] Beckmann in turn used several available sources, but all of them drew heavily from the satirical Dialogues that were written to mock the speculators.[51] Mackay's vivid book was popular among generations of economists and stock market participants. His popular but flawed description of tulip mania as a speculative bubble remains prominent, even though since the 1980s economists have debunked many aspects of his account.[51]

By 1636, tulips were traded on the exchanges of numerous Dutch towns and cities. This encouraged trade by all members of society. Mackay recounted people selling possessions in order to speculate on the tulip market, such as an offer of 5 hectares (12 acres) of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy that, he said, was purchased in exchange for a basket of goods (shown in table) worth 2,500 florins.[49]

3a8082e126