Tuesday, June 10, 2008
A tulip bulb, known as "the Viceroy", displayed in a 1637 Dutch catalog: a small bulb cost 3,000 guilders, a large bulb 4,200. A skilled craftsman at the time earned about 150 guilders a year.
Tulip mania (alternatively tulipomania; Dutch names include tulpenmanie, tulpomanie, tulpenwoede, tulpengekte, bollengekte) was a period in the history of the Netherlands during which demand for tulip bulbs reached such a peak that enormous prices were charged for a single bulb. The peak of tulip mania, which occurred in 1636–37, is generally considered the first significant speculative bubble. Because of this, the term tulip mania is also used metaphorically to refer to any large economic bubble.
The event is remembered in part because of its extended discussion in the book Extraordinary Popular Delusions and the Madness of Crowds, written by popular British journalist Charles Mackay in 1843, more than two centuries after the event. According to Mackay, at one point a speculator paid as much as 12 acres of land for a single bulb. Though Mackay's book is regarded as a classic piece of popular journalism and is still read today, modern scholars believe the bubble was not as significant as Mackay suggested, or even that no economically meaningful bubble occurred. Mackay's account also omitted some significant factors, such as the epidemic of bubonic plague from which the Netherlands suffered during 1636-37, and severe setbacks in the Thirty Years War.
Pamphlet from the Dutch tulipomania, printed in 1637
The tulip, introduced to Europe in the middle of the 16th century from the Ottoman Empire, experienced a strong growth in popularity in the United Provinces (now the Netherlands). Tulip cultivation in the United Provinces is thought to have started in 1593, when Charles de L'Ecluse first bred tulips able to tolerate the harsher conditions of the Low Countries from bulbs sent to him from Turkey by Ogier de Busbecq.
The flower rapidly became a coveted luxury item and a status symbol. Special breeds were given exotic names or named after Dutch naval admirals. The Dutch, who developed many of the techniques of modern finance, created a market for durable tulip bulbs. The most spectacular and highly sought-after tulip bulbs would grow flowers with vivid colors, lines, and flames on the petals as a result of being infected with a tulip-specific virus known as the "Tulip Breaking potyvirus", a type of mosaic virus.
Tulips, which grow from bulbs, propagate 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 and years. Tulips bloom in April and May for only about a week, and the secondary buds appear shortly thereafter. From June to September bulbs can be uprooted and moved about, and thus actual purchases (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).
As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus. By 1634, spurred in part by demand from the French, speculators began to enter the market. In 1636 the Dutch created formal futures market where contracts to buy bulbs at the end of the season were bought and sold. Throughout 1636 the price of rare bulbs climbed ever higher. In November of 1636 the prices of common bulbs, without the valuable mosaic virus, also began to rise in value. Abruptly in February of 1637, however, the market collapsed and trading in tulips ground to a standstill.
Mackay's Madness of Crowds
Anonymous 17th-century watercolor of the Semper Augustus, the most famous bulb, which sold for a record price.
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. The thesis of Mackay's work was that crowds of people often behave irrationally, and Tulip Mania was, along with the South Sea Bubble and Mississippi Company Bubble, one of his prime examples. Mackay's 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 with an anti-speculative agenda.
Mackay's vivid book was extremely popular among generations of economists and stock-market participants. Thus Mackay's 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.
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.
Goods exchanged for a single root of the Viceroy
Two lasts of wheat 448ƒ
Four lasts of rye 558ƒ
Four fat oxen 480ƒ
Eight fat swine 240ƒ
Twelve fat sheep 120ƒ
Two hogsheads of wine 70ƒ
Four tuns of beer 32ƒ
Two tons of butter 192ƒ
1,000 lbs. of cheese 120ƒ
A complete bed 100ƒ
A suit of clothes 80ƒ
A silver drinking cup 60ƒ
By 1636, tulips were traded on the stock 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 a single bulb of the Semper Augustus that was purchased in exchange for 12 acres of land, or a single bulb of the Viceroy which was purchased for a basket of goods (shown at right) worth 2,500 florins.
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.]
The increasing mania caused several amusing 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, to turn them around and sell them for a profit. But such a scheme could not last forever unless ultimately someone was willing to pay such high prices to actually take possession of the bulbs. In February 1637 tulip traders could no longer get inflated prices for their bulbs, and they tried to sell. As this realization set in, the demand for tulips began to collapse, and prices began to plummet. The bubble 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.
Panicked, the 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 with a 10 percent fee. Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. Ultimately, individuals were 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 in law.
According to Mackay, lesser versions of Tulip Mania also occurred in other parts of Europe, although matters never reached the state they had in the Netherlands. The aftermath of the tulip price deflation led to a widespread economic chill throughout the Netherlands for "many years".
Mackay's account was long accepted, but recent analysis of Tulip Mania suggests that his story was inaccurate and incomplete. Anne Goldgar, in her scholarly analysis Tulipmania, argues that the phenomenon was limited to "a fairly small group" and that most accounts of the period "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism". She argues that tulips were treated more like art, for which high-status people paid exorbitant prices in the pursuit of beauty. She also notes that deals for tulips were made far in advance of when the tulips were dug out of the ground and paid for and that when the tulip market crashed, buyers simply didn't pay for their trades.
Mike Dash, author of the modern popular history "Tulipomania," states
The history of the tulip mania itself, however, remains remarkably obscure, and even now [as of 1999] it has never been the subject of an exhaustive scholarly inquiry. …My general feeling, after reviewing the available material, is that even after sounding the necessary notes of caution about the reliability of the popular accounts, historians and particularly economists remain guilty of exaggerating the real importance and extent of the tulip mania.
A 2007 paper appearing in the journal Public Choice, by UCLA's Earl A. Thompson, "The Tulipmania: Fact or Artifact?" provides an alternate explanation for Dutch tulip mania: that it was not caused by irrational speculation, but rather by a Dutch parliamentary decree (originally sponsored by Dutch investors made skittish by the Thirty Years' War then in progress) that made the purchase of tulip-bulb "futures contracts" a nearly risk-free proposition:
"…both the famous popular discussion of Mackay and the famous academic discussion of Posthumus, 1929, point out a highly peculiar part of this episode. In particular, they tell us that, on February 24, 1637, the self-regulating guild of Dutch florists, in a decision that was later ratified by the Dutch Parliament, announced that all futures contracts written after November 30, 1636 and before the re-opening of the cash market in the early Spring, were to be interpreted as option contracts. They did this by simply relieving the futures buyers of the obligation to buy the future tulips, forcing them merely to compensate the sellers with a small fixed percentage of the contract price."
Given data about the specific payoffs present in the futures and option contracts, the authors determine that tulip bulb prices in fact 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'."