By Antanas Jablonskis & Krišjānis Krakops

When most people think about the Netherlands, they think about, among other things, the tulip. So, it may come as a surprise for many to find out that not only does the tulip not originate from there but was also responsible for the first financial bubble in history. In the years 1634-1637, the tulip market experienced a drastic increase in prices followed by a sudden crash in February 1637. Until recently, the story of “tulip mania” has been presented as a parable about human greed and market irrationality, brought up whenever there is trouble in the economy. But some have suggested that view might not be true and that our perception of this period in history is largely misconstrued, based upon later, exaggerated stories. This article explores the environment in which the bubble took place, what made the tulip ripe for such a bubble, and how these events are perceived today.

The golden age-a background for a bubble

The Dutch golden age was a period roughly spanning the 17th century, in which the Dutch Republic saw tremendous economic development and became a leading financial, trade, cultural and military power in Europe. Many will recognize the Dutch masters of painting from this era, such as Rembrandt and Vermeer, while others might remember the philosophers Descartes and Spinoza, the former of whom, though a Frenchman, sought refuge in Holland, which was far more open-minded than almost any other place in Europe at the time. These examples showcase Holland as a major center for art, science and culture, a beacon of the Enlightenment.

The successes of the Dutch which enabled the flourishing of these new ideas came from their dominance in trade and from their innovations in banking and agriculture. Interestingly, all this development came during long wars with the Spanish Empire, the Eighty Years War (1568-1648), which ultimately saw the Dutch gain independence and consolidate their power, and the Thirty Years War (1618-1648), which was a larger conflict between the major powers of Europe. Since wars are very expensive and since the Spanish had closed Lisbon (the main trading hub of spices in Europe at the time) to Dutch merchants in 1580, they had to find other sources of revenue to sustain the young republic fighting for its existence.

In 1602 the Dutch East India Company (VOC) was founded. It was the first multinational corporation as well as the first publicly traded company in the world. It benefited from extensive government support, low interest rates, and new advancements in shipbuilding, such as the fluyt, a new type of ship, large and relatively cheap to manufacture. These factors allowed the Dutch to overtake the Portuguese in the spice trade which had massive profit margins, sometimes exceeding 400%. Dutch sailors travelled as far as Indonesia, Japan (for a long time the Dutch were the only Europeans allowed to trade there), China, the Caribbean, and Novaya Zemlya, they also had a hand in founding cities like Cape Town and New York. In only a few decades, the East India Company had a monopoly over the trade of spices like nutmeg, pepper and cloves, its own army (by some estimates, exceeding 10 000 soldiers) and wealth that surpassed most states at that time. It was, in effect, another state onto itself, and continued its existence until 1799.

In addition to the spice trade, the Dutch had other advantages. Holland was well situated for trade between the Baltics and the Atlantic. Cities like Amsterdam became centers of trade for all sorts of commodities like grain, precious metals and textiles. The wealth gained from trade was used for land reclamation from the sea, thus increasing agricultural output, and building canals, which eased the transport of goods throughout the country.

Finally, the Dutch were innovators of finance, creating some of the first stock markets and the world`s first insurance company. The stability of banks and the financial system allowed for the aforementioned low interest rates. Merchants and even common people could invest in the East India trading company with low risk. Before, a merchant usually invested in a single ship or voyage. If the ship sank, the investment disappeared with it. Now anyone could invest in multiple ships, thus cutting down the risk whilst maintaining the same level of profit.

On tulips

       The tulip has its origins far from Europe, in the valleys of Tien Shan and the Pamir Mountains, which were originally inhabited by Turkish nomads. By the 16th century, the tulip had become a symbol of Turkish culture and a favored flower in the gardens of the elites, not excluding the Sultan himself. Although there is no definitive answer as to how the tulip made its way to Europe, it is widely believed that the Ottoman`s sent it as a gift to the Holy Roman Empire. The first record of the Tulip in Europe comes from the botanist Conrad Gesner, who first saw it in the garden of John Henry Herwart in Augsburg, Germany in 1559. Soon after that, another scientist, Carolus Clusius, introduced the flower to the Netherlands for the first time in 1593, by planting the flower in Leiden University`s botanical garden. Much of his study was devoted to so-called “broken tulips”, which often had a peculiar and extraordinary color in various patterns. He didn`t know it at the time, but this phenomenon was caused by the mosaic virus, which, as Clusius noted, lowered the broken tulip`s fertility.                                                                                                             The tulip is a bulbous flower that blooms in the spring. There are two ways of propagating tulips- either by planting buds formed on the mother bulb or planting seeds. While planting seeds takes seven to twelve years to produce flowers, planting buds allowed the flower to blossom next year, it also made it possible for the bud to replace the original bulb by the end of the season. After blooming in spring, the bulb can be taken out of its bed in June, provided they were replanted by September.

Rise and fall

As the word spread about the new exotic flower from the East, the tulip quickly became popular in the Netherlands and in Europe as a whole. In the beginning, the bulbs (the trade happened only with bulbs, not the flowers themselves) were bought and sold only by those interested in the flower, such as experts, botanists and the wealthy, seeking to adorn their gardens. However, with gradually increasing popularity all across Europe and with steadily increasing prices, the tulip market was no longer filled only with connoisseurs and people that were simply fascinated by the beauty of the tulips. It was recognized by many as a market with huge potential profits. With an increasing volume of trades and new buyers entering all the time, the tulip market found itself restricted by the biology of the tulip, since they could only be exchanged during the summer. Thus, the new way of trading tulips was invented – future contracts, which eventually allowed year-round trading of bulbs in 1635. This change- the buying and selling of bulbs without a material base- was the foundation of the bubble.

As the amount of short sales increased more and more, the Dutch government begin to fear the possible outcome. They had already taken action against such practice’s decades before the tulip bubble, outlawing short-selling all the way back in 1608. Still, the trade continued, and the market boomed, with a steady stream of new customers entering the fray, hoping to buy and the sell the contracts for a profit. Newcomers to the market started gathering in private societies called “colleges”, which became notorious for their outrageous sales. The prices continued to skyrocket throughout 1636, and early 1637, with some of the rarest kinds, like Semper Augustus, reaching the price of a high-end house in Amsterdam for a single bulb.

In February of 1637, an ordinary trade auction opened in Haarlem, with a rather casual price of 1250 guilders as the opening bid. For some reason no one wanted to take the bid. This caused the auctioneers to lower the price several times within the day. Panic started. The message quickly spread throughout Holland, with investors rushing to sell that which was swiftly becoming useless and worthless. It had finally happened. The bubble had burst. The tulip market came crashing down, leaving behind its legend.

Was it really a mania?

In modern days, the central dispute about the tulip bubble is whether the increase and subsequent drop in prices were caused by irrationality or market “fundamentals”- factors which typically determine the price of a particular commodity. Secondly, there is disagreement as to the extent to which the crash affected the Dutch economy as a whole.

The story of the tulip bubble was popularized by the English poet and writer Charles Mackay in his book “Extraordinary Popular Delusions and the Madness of Crowds”, published in 1841. The book presents the story as we know it today- of a frenzy for tulips, of workers selling all their possessions for a single bulb, of people drowning themselves in canals after the crash (ironically, Mackay was himself involved in the infamous England railway bubble in the 1840s). Nowadays most agree that his take was embellished, to say the least, taken from hearsay and unreliable, moralistic figures were drawn up by the Dutch government post-crash. Nevertheless, there is some disagreement about the causes and severity of the tulip bubble.

The economist Peter M. Garber makes the case that, contrary to the popular story, the rise and fall of prices were not caused by collective madness but market fundamentals. When it comes to tulips, several factors made it ripe for instability. Because tulip bulbs could only be taken from their beds between June and September, all sales and purchases in other times of the year would have to be via futures contracts, which became more sought for as new traders entered the market, most of whom had no actual interest in the physical bulb, and as the market spread to France and England. In addition, the rarest and most expensive tulips were those infected by the mosaic virus, which often gave the tulip`s flower a beautiful color but also lowered the tulips fertility, which made the whole enterprise even riskier.

By comparing the prices of tulips post-crash and the prices of other flowers like Hyacinths, Gaber argues that the price drop is explained by an increase in supply, as varieties of bulbs become more common and are thus not out of line with what might expect with such a new commodity. It`s likely that the crash was also caused in part by the decrease in new buyers entering the market due to the lack of affordable bulbs. Others, like the historian and professor Anne Goldgar, argue that the high prices of especially the rare bulbs can be attributed to tulips role as a status symbol in 17th century Holland, as well as France. The same people who bought rare bulbs for incredible prices might just as well buy a painting, or rare silks, or shells, or any other luxury product. They had money to spend and money to lose. There is, however, one aspect on the bubble which cannot be explained by such factors, and that is the price increase of the common bulbs during the final weeks of the bubble. Gaber states:” the increase and collapse of the relative price of common bulbs is the remarkable feature of this phase of the speculation.”    A possible culprit for this part of the bubble may the outbreak of plague, which ravaged Holland and Europe during those years, giving the people a more fatalistic outlook on life and making them more prone to risky actions and investments.

There is also some dispute as to the extent of the damage the bubble did to the Dutch economy. Gaber points out the relative absence of the tulip bubble among later economic histories. In fact, the Dutch golden age went on despite the bubble for another 70 years or so. While the story has sometimes been evoked as an example for the necessity of state oversight, the Dutch government frowned upon “trading in the wind”- that is, trading without either the bulb or cash actually exchanging hands. They did not penalize merchants for engaging in such activities, but they would not enforce any futures contracts. In practice, this meant that the vast majority of people didn`t lose any money when the crash did occur, since the contract had no legal weight. Goldgar claims to have found no instances of anyone drowning themselves, and no cases of bankruptcy. The last statement is disputed by the scholar Douglas French. According to his research, the amount of bankruptcies in Amsterdam doubled between 1635-1637. He also found that litigations around the tulip bubble increased dramatically, suggesting a large amount of upheaval after the crash.

Summary and conclusions

The story of tulip mania has often been attributed to irrationality and used for comparison both to other bubbles in history and for market processes which some deem to be bubbles (like cryptocurrencies). Upon closer inspection, we see that the rise and fall of tulip prices between 1634 and 1637 can mostly be explained by market forces, not unlike those of other similar commodities. Whilst there is plenty of room for discussion and caveats, one can state confidently that the tulip bubble was far from a simple matter of market frenzy. So perhaps, in addition to the lessons about bubbles, we can also learn not to simplify history for our convenience.

Without an understanding of the nuances that make up an event such as this, there exists a serious risk of failing to recognize the real causes of crashes. A narrative that is less clear-cut, but which falls much closer to reality will always serve us better than a reduction to the simple, well known story filled with buzzwords.

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