About the Dutch Tulip Bulb Market Bubble

What Was the Dutch Tulip Bulb Market Bubble?

The Dutch tulip bulb market bubble occurred in Holland during the 1630s, when speculation drove tulip value to as much as six times the average person’s annual salary at the market’s peak. Historians are divided on whether the speculation was an actual bubble or merely a “mania.”

Asset prices did crash, but it apparently did not significantly damage the Dutch economy. The story now serves as a cautionary tale for the pitfalls of excessive greed and speculation in investing.

The Origins and Rise of Tulipmania in Holland

Tulips first appeared in Europe in the 16th century, arriving via the spice trading routes that lent a sense of exoticism to these imported flowers. They looked like no other flower native to the continent.

It is no surprise that tulips became a luxury item destined for the gardens of the affluent. “It was deemed a proof of bad taste in any man of fortune to be without a collection of [tulips],” according to The Library of Economics and Liberty.

The merchant middle classes of Dutch society, which didn’t exist in such a developed form elsewhere in Europe at the time, sought to emulate their wealthier neighbors. They also demanded tulips. They were initially a status item that was purchased for the sole reason that they were expensive.

But tulips were known to be notoriously fragile and would die without careful cultivation. Professional cultivators of tulips began to refine techniques to grow and produce the flowers locally in Holland in the early 1600s. They established a flourishing business sector that has persisted to this day.

According to Smithsonian Magazine, the Dutch learned that tulips could grow from seeds or buds that grew on the mother bulb. A bulb that grew from seed would take seven to 12 years before flowering, but a bulb itself could flower the very next year.

So-called broken bulbs were a type of tulip with a striped, multicolored pattern rather than a single solid color. They evolved from a mosaic virus strain. This variation was a catalyst for the growing demand for rare, “broken bulb” tulips, which ultimately led to the high market price.

The Tulip Craze Takes Over Dutch Society

Tulipmania swept through Holland in 1634. According to The Library of Economics and Liberty, the Dutch were so eager to own tulip bulbs that regular industries were ignored, and even the lower classes joined the tulip trade.

A single bulb could cost between 4,000 and 5,500 florins. It’s hard to make an accurate estimation of today’s value in dollars because 1630s florins were gold coins of uncertain weight and quality, but Scottish journalist Charles Mackay does give us some points of reference in his famous 1841 book “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.”

Four tuns of beer cost 32 florins. That’s around 1,008 gallons or 65 kegs of beer. A keg of Coors Light costs around $120, so four tuns of beer ≈ $7,800 and 1 florin ≈ $244. The best of tulips cost upward of $1 million in today’s money, with many bulbs trading in the $50,000 to $150,000 range. The demand for the tulip trade was so large by 1636 that regular markets for their sale were established on the Stock Exchange of Amsterdam in Rotterdam, Haarlem, and other towns.

It was at this time that professional traders (stock jobbers) got in on the action, and everyone appeared to be making money simply by possessing some of these rare bulbs. It seemed at the time that the price could only go up, that the passion for tulips would last forever.

People had purchased bulbs on credit, hoping to repay their loans when they sold their bulbs for a profit. But holders were forced to sell their bulbs at any price and to declare bankruptcy in the process when prices began to drop.

The Collapse of the Tulip Market

The bubble had burst by the end of 1637. Buyers declared they couldn’t pay the previously agreed high prices for bulbs, causing the market to collapse. It wasn’t a devastating occurrence for the nation’s economy, but it did undermine social expectations. The event destroyed relationships built on trust and people’s willingness and ability to pay.

Dutch Calvinists, according to Smithsonian Magazine, exaggerated the economic ruin, fearing the tulip boom would cause societal decay. They insisted that such great wealth was ungodly, and the belief remains to this day.

Lessons from Tulipmania: Recognizing Financial Bubbles

The obsession with tulips has captured the public’s imagination for generations and has been the subject of several books, including “Tulip Fever,” a novel by Deborah Moggach. The tulip craze took hold of all levels of Dutch society in the 1630s, according to popular legend. Mackay wrote that “the wealthiest merchants to the poorest chimney sweeps jumped into the tulip fray, buying bulbs at high prices and selling them for even more.”

Tulipmania is a model for the general cycle of a financial bubble:

• Investors lose track of rational expectations.
• Psychological biases lead to a massive upswing in the price of an asset or sector.
• A positive feedback cycle continues to inflate prices.
• Investors realize that they’re holding an irrationally priced asset.
• Prices collapse due to a massive sell-off, and an overwhelming majority go bankrupt.

Similar cycles have been observed in the prices of Beanie Babies, baseball cards, non-fungible tokens (NFTs), and shipping stocks.

Dutch speculators spent incredible amounts of money on bulbs at the time that only produced flowers for a week. Many companies were formed with the sole purpose of trading tulips, but the trade reached its fever pitch in the late 1630s.

The Dutch currency was the guilder in the 1600s. This preceded the use of the euro. Tulips sold for approximately 10,000 guilders at the height of the bubble, equal to the value of a mansion on the Amsterdam Grand Canal.

Debating the Reality of Tulipmania

Mackay, who had never lived in or even visited Holland, published his classic analysis, “Extraordinary Popular Delusions and the Madness of Crowds,” in 1841. The book documented several prominent asset-price bubbles: the Mississippi Scheme and the South Sea Bubble, as well as the tulipmania of the 1600s. Mackay’s short chapter on the subject prompted the popularization of the paradigm for an asset bubble.

There were always a few years of lag between demand pressures and supply because of the timing of tulip cultivation. This wasn’t an issue under normal conditions because future consumption was contracted for a year or more in advance. But growers wouldn’t have had an opportunity to increase production in response to price when the 1630s increase in prices occurred so rapidly and after bulbs already were planted for the year.

Earl Thompson, an economist, has determined that prices rose simply because suppliers couldn’t satisfy all the demand due to this sort of production lag and the fact that growers entered into legal contracts to sell their tulips at a later date, similar to futures contracts. These contracts were rigorously enforced by the Dutch government. Actual sales of new tulip bulbs remained at ordinary levels throughout the period.

Using data about the specific payoffs present in the contracts, Thompson argued that “tulip bulb contract prices 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.’” Indeed, tulip production had risen to match the earlier demand by 1638. The earlier demand had waned by then, creating an oversupply in the market and further depressing prices.

Anne Goldgar, historian at King’s College London, has also written extensively about tulipmania and agrees with Thompson, casting doubt on its “bubbleness.” Goldgar argues that tulipmania may not have constituted an economic or speculative bubble, but was nonetheless traumatic to the Dutch for other reasons. Goldgar writes that though the financial crisis affected few, the shock of tulipmania was significant.

Goldgar goes on to argue that the “tulip bubble” was not at all a mania, although a few people did pay very high prices for a few very rare bulbs and some lost a lot of money. The story has instead been incorporated into the public discourse as a moral lesson that greed is bad and chasing prices can be dangerous.

The Bottom Line

The Dutch tulip mania of the 1600s is a prime example of an asset bubble driven by irrational exuberance and group psychology. Some economists and historians question whether tulipmania was the widespread financial crisis that is referenced today in relation to other bubbles like dotcom stocks before 2001, the subprime housing market before 2008. They suggest that the idea of tulipmania has been greatly exaggerated as a parable or lesson in taming greed and excess.

The actual extent and severity of the tulip bulb bubble and crash were far smaller in reality than we have been led to believe.