The Dutch Tulip Mania of the 1630s

The term ‘Tulpenwoerde’ (translated to English as tulip madness) refers to the speculative economic bubble in tulip bulbs that developed in Holland during the 1630s, shaking up the Dutch population in February 1637 after the crash of the future markets related to this flower.

However, there is a dynamic hidden behind the said price fluctuations in tulips, which has traditionally been considered as a mania since the nineteenth century by authors like MacKay. Albeit, during the last decades of the twentieth century these theories have been revised in order to explain ‘Tulpenwoerde’ from a rational point of view attending to market fundamentals. 

By the seventeenth century, Holland had a sound economy with a developing financial infrastructure and a flourishing middle stratum. This was largely due to the economic and commercial prosperity at the time, allowing for consumer habits that reflected increased economic expenditure. Thus, these circumstances crystallised in the desire for tulips, as they were seen as a symbol of social prestige, and the conformation of futures market based on them.

However, not all the types of tulips were equally valued, so the rarer the variety of the tulip was, the higher the price estimation. According to this fact, the most highly regarded bulbs were the so-called ‘breaks’, a kind of tulip with singular coloured bulbs owing to a genetic mutation caused by a mosaic virus. However, this virus didn’t always produce the same patterns on the flowers so the only way to assure a specific pattern was to plant the buds of the mother bulb that already had the market-valued colour. Moreover, the cultivation of these rare tulips was not only limited by the search for a specific sample but also by the virus itself because it debilitated the bulb, limiting the reproduction of these treasured flowers, whilst emphasising the given fetish for them.

In that way, the commercial appreciation of this type of bulb resulted in a focus on the breed of tulip by the horticulturists in order to try to get as much profit as possible. Resultantly, the amount of the breaking bulbs increased. However, once a particular variety became more common, its value decreased at the same time the new tulip varieties substituted the older ones, strengthening the speculation on this market. In addition, the amount of these broken tulips were unpredictable, so it also created space for what has been considered by some experts as gambling, especially after the end of 1634, when speculators started to participate in these markets developing a futures market that were formally set up in 1636. Thereafter, contracts for future deliveries of rare bulbs began to be signed in autumn and winter, expecting the deliveries to be completed by the following spring. Due to this heightened demand, both the horticultural and florist markets received increased attention from speculators, surmounting in an informal market, seen as a parallel economic bubble.  

However, the overstated rise of the bulb tulip prices fell dramatically in February 1637 causing the breakdown of the futures market based on this trade.

Traditionally, the blossoming of the tulip market and its later collapse had been seen as an example of irrational trading. However, after the thorough studies of the last decades it has been proved that a logical explanation does exist.

In that way, dismissing the theories that were built up, including Mackay’s research, which came back in the 1950s focusing on the lunacy of this commercial dynamic, the last researches tried to justify it from an economic and financial point of view, regarding the market fundamentals. Peter M. Garber was one of the most renowned researchers in this field, and although some of his statements have been revised, his studies initiated a new tendency advocating a different approach to tulip mania.

 Following this new line of thought, Earl Thompson in his article, ‘The tulip mania: Fact or artifact?’, focuses on the economic measures taken by the government officials in Holland. Thus, Thompson explains that due to the stressed decrease in the tulip market during November 1936, right after a spectacular price rise the previous month, the government officials try to rearrange this situation. Consequentially, they proposed a contract conversion that provided to original contracts a new provision that released purchasers of the flowers if the future spot prices didn’t reach the contract prices as long as they paid the planters a nominal percentage fee. Therefore, once these negotiations were leaked the prices rose rapidly due to the common expectation that the deals signed during that month would be an optional exercise with the right to reject the contract if the spot prices were lower than expected.

However, on February 24^th, 1637, after another market breakdown, the planters announced that only the contracts written after November 30^th were susceptible to conversion postponing the termination date almost a month and forcing all the November buyers to assume the futures contracts payments. This new proposal opened up a lengthy discussion in a situation of chaos due to the lack of bankruptcy protective measures, or a more developed financial security system, that ended up with the general suspension of the contracts in April 1637. Thus, sellers were allowed to sell bulbs at spot prices while buyers were obliged to pay the difference between these market prices and the prices that were set by Dutch authorities. At the same time tulip cases where banned in courts transferring them to local settlements in an economic environment where neither creditors nor debtors could take refuge in any legal protection or status to solve their claims.

In that way, the stronger critics to the Dutch tulip mania are actually focussed on the shortage of a legal, and economic structure that could handle the development of this future market. Additionally, the lack of trading rules that standardised the tulip market, banning any type of trading outside the mainstream, and the creation of a general legal enforcement linked to these contracts would have also helped prevent this chaotic economic situation.

References:

-C.V. y A.J.K.D., “Was tulipmania irrational?”, The Economist [en línea] 4 de octubre de 2013 [fecha de consulta: 8 de diciembre de 2013]. Disponible en: http://www.economist.com/blogs/freeexchange/2013/10/economic-history

-Day, C. (2004). “Is There a Tulip in Your Future?: Ruminations on Tulip Mania and the Innovative Dutch Futures Markets”. Journal des Economistes et des Etudes Humaines, 14(2), pp. 151-170. Disponible en red en:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=946140

-French, D., “The Dutch monetary environment during Tulipmania”, The Quaterly Journal of Australian Economics, Vol. 9, No. 1 (Spring 2009), pp. 3-14. Disponible en red en: http://mises.org/document/2954/

-Garber, P. M. ‘Tulipmania’. Journal of Political Economy, Vol. 97, No. 3 (Jun., 1989), pp. 535-560. [Fecha de consulta: 8 de diciembre de 2013]. Disponible en: http://www.jstor.org/stable/1830454

- Narron, J. y Skeie, D. “Crisis Chronicles: Tulip Mania, 1633-37”, Liberty Street Economics, [en línea], 6 de septiembre de 2013, [fecha de consulta: 8 de diciembre de 2013]. Disponible en: http://libertystreeteconomics.newyorkfed.org/2013/09/crisis-chronicles-tulip-mania-1633-37.html

-Thompson, E. A., “Tulipmania: Fact or artifact?”, Public Choice, Vol. 130, No. 1/2 (Jan., 2007), pp. 99-114. Disponible en red en:

http://www.econ.ucla.edu/thompson/Document97.pdf