According to Mike Dash, author of Tulipomania, The Story of the World’s Most Coveted Flower, “ In around 1624, the Amsterdam man who owned the only dozen specimens [of a spectacular midnight blue tulip topped with a band of pure white, and accented with crimson flares] was offered 3,000 guilders for one bulb”, a sum he equates with the annual income of a wealthy merchant. Apparently the bulb’s owner turned the offer down.
Although the Dutch were not the first to fall for tulips, it was in Holland that this commodity boom and bust took on extraordinary proportions.
In the early 17th century, with lucrative trade via the Dutch East India Company, and resources no longer eaten up by the costly Thirty Years’ War, Dutch merchants began to show off their considerable wealth by building huge estates; one of the visible signs of that wealth was to surround their estates by flower gardens.
”It is impossible to comprehend the tulip mania without understanding just how different tulips were from every other flower known to horticulturists in the 17th century,” says Dash. ”The colors they exhibited were more intense and more concentrated than those of ordinary plants.”
Whilst already popular and selling for a high price due to their novelty, after a short time, the tulips became susceptible to a virus called mosaic. It didn’t kill the tulip population but created distinct and unique flame-like patterns in vivid colours on the petals.
At this time, traditional bulb buyers were joined in the tulip trade by speculators, who began dealing in tulip bulbs, and speculating on the alterations and uniqueness of the virus’ effects. As buyers started to stockpile what they thought would be rare and valuable bulbs, supply became more limited, and demand grew out of control.
Prices were rising so fast and high that even those with quite moderate incomes were mortgaging or trading anything they could liquidate to get their hands on more tulip bulbs, including their land, their homes and their life savings.
“Tulpenwoede” (tulip madness) resulted in big increases in tulip prices. At the beginning of 1637, some tulip contracts reached a level about 20 times the level of three months earlier. A particularly rare tulip, Semper Augustus, was priced at around 1,000 guilders in the 1620s. But just before the crash, it was valued at 5,500 guilders per bulb—roughly the cost of a luxurious house in Amsterdam. Then without warning prices collapsed in February 1637. At bulb auctions, suddenly people who had paid ridiculously high prices for their bulbs didn’t find anyone foolish or reckless enough to offer even more, and people began to panic, and started trying to sell their bulbs, even at a loss.
Bulb dealers began refusing to honour contracts and people woke up to the fact that they had traded their homes for a flower! A dramatic market crash and panic followed. The government attempted to step in and halt the crash, but the market continued to fall uncontrollably, rendering their efforts useless.
Although some have claimed that the brief period of tulip madness (1634-1637) was an irrational bubble, some economists have pointed to other, far more rational factors. Firstly, an outbreak of bubonic plague in Amsterdam led many to believe each day could be their last, and so they began to take risks they would not normally have taken. And because gambling was illegal, contracts were unenforceable. If traders misjudged the market, they could just run off without paying.
The Economist October 2013
Another theory is that the tulip market bubble was a response to the anticipated government conversion of futures contracts into options contracts. This change was thought up by government officials, who were also keen to make a quick profit from the tulip trade, although the planned change was cancelled when the market crashed.
Whatever the reason, within days, the panic had spread across the country. Despite the efforts of traders to prop up demand, the market for tulips evaporated. Flowers that had commanded 5,000 guilders a few weeks before now fetched one-hundredth that amount, and the depression that followed had wide ranging effects, even on those who had thought they had escaped the effects of the bubble bursting by selling in time.
Maria Cox, MMTA
References
Bloomberg Businessweek: When the Tulip Bubble Burst, TULIPOMANIA, The Story of the World’s Most Coveted Flower By Mike Dash, Crown Publishers
The Economist: Was tulipmania irrational? Oct 4th 2013, 14:47 by C.W. & A.J.K.D., London
Market Crashes: The Tulip and Bulb Craze By Andrew Beattie, Investopedia
