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One of the most beautiful things about arriving at home after a few days away is opening the balconies (especially today when it hasn't rained and it's been a fantastic day) and contemplating the plants and flowers that she loves so much. Among them, the tulips that she brought from her last trip to Amsterdam stand out and are beautifully yellow and beautiful. Precisely, tulips have been her daily reading, because on a day like today in 1637, the Tulip Mania collapses within the Dutch Republic.
Tulip mania, in Dutch tulpenmanie, was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The major acceleration started in 1634 and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative bubble or asset bubble in history.
In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis. It had no critical influence on the prosperity of the Dutch Republic, which was one of the world's leading economic and financial powers in the 17th century, with the highest per capita income in the world from about 1600 to about 1720.
The term tulip mania is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.
Forward markets appeared in the Dutch Republic during the 17th century. Among the most notable was one centred on the tulip market. At the peak of tulip mania, in February 1637, certain tulip bulbs sold for more than 10 times the annual income of a skilled artisan. Research is difficult because of the limited economic data from the 1630s, much of which comes from biased and speculative sources.
The 1637 event gained attention in 1841 with the publication of the book Extraordinary Popular Delusions and the Madness of Crowds, written by Scottish journalist Charles Mackay, who wrote that at one point 5 hectares of land were offered for a Semper Augustus bulb. Mackay claimed that many investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock. Although Mackay's book is often referenced, his account is contested.
The introduction of the tulip to Europe is often attributed to Ogier de Busbecq, the ambassador of Charles V, Holy Roman Emperor, to Sultan Suleiman the Magnificent, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire. Tulip bulbs, along with other new plant life like potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century. These bulbs were soon distributed from Vienna to Augsburg, Antwerp, and Amsterdam.
Their popularity and cultivation in the United Provinces (now the Netherlands) started in earnest around 1593 after the Southern Netherlandish botanist Carolus Clusius had taken up a post at the University of Leiden and established the hortus academicus. He planted his collection of tulip bulbs and found that they were able to tolerate the harsher conditions of the Low Countries. Shortly thereafter, the tulip grew in popularity.
The tulip was different from other flowers known to Europe at that time, because of its intense saturated petal colour. The appearance of the nonpareil tulip as a status symbol coincides with the rise of newly independent Holland's trade fortunes. No longer the Spanish Netherlands, its economic resources could now be channelled into commerce and Holland embarked on its Golden Age. Amsterdam merchants were at the centre of the lucrative East Indies trade, where one voyage could yield profits of 400%.
As a result, tulips rapidly became a coveted luxury item, and a profusion of varieties followed. They were classified in groups: the single-hued tulips of red, yellow, or white were known as Couleren; the multicolored Rosen (white streaks on a red or pink background); Violetten (white streaks on a purple or lilac background); and the rarest of all, the Bizarden ('Bizarres') (yellow or white streaks on a red, brown, or purple background). The multicolour effects of intricate lines and flame-like streaks on the petals were vivid and spectacular, making the bulbs that produced these even more exotic-looking plants highly sought after. It is now known that this effect is due to the bulbs being infected with a type of tulip-specific mosaic virus, known as the tulip breaking virus, so called because it breaks the one petal colour into two or more. Less conspicuously, the virus also progressively impairs the tulip's production of daughter bulbs. The historian Philipp Blom theorised in his book, Nature's mutiny, that the mania might also have been driven by the effects of the Little Ice Age, which left most other flowers dry and shrivelled by the temperature, while the tulip was the one which sustained itself.
Growers named their new varieties with exalted titles. Many early forms were prefixed Admirael ('admiral'), often combined with the growers' names: Admirael van der Eijck was perhaps the most highly regarded of about fifty so named. Generael ('general') was another prefix used for around thirty varieties. Later varieties were given even more extravagant names, derived from Alexander the Great or Scipio, or even Admiral of Admirals and General of Generals. Naming could be haphazard and varieties highly variable in quality. Most of these varieties have now died out.
The tulips bloomed in April and May for about one week. During the plant's dormant phase from June to September, bulbs can be uprooted and moved about, so actual purchases (in the spot market) occurred during these months. During the rest of the year, florists, or tulip traders, signed forward contracts before a notary to buy tulips at the end of the season. Thus the Dutch, who developed many of the techniques of modern finance, created a market for tulip bulbs, which were durable goods. Short selling was banned by an edict of 1610, which was reiterated or strengthened in 1621 and 1630, and again in 1636. Short sellers were not prosecuted under these edicts, but forward contracts were deemed unenforceable, so traders could repudiate deals if faced with a loss.
As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. The contract price of rare bulbs continued to rise throughout 1636. By November, the price of common, unbroken bulbs also began to increase, so that soon any tulip bulb could fetch hundreds of guilders. Forward contracts were used to buy bulbs at the end of the season.
Traders met in college at taverns and buyers were required to pay a 2.5% wine money fee, up to a maximum of three guilders per trade. Neither party paid an initial margin, nor a mark-to-market margin, and all contracts were with the individual counter-parties rather than with the Exchange. The Dutch described tulip contract trading as windhandel (literally wind trade), because no bulbs were actually changing hands. The entire business was accomplished on the margins of Dutch economic life, not in the Exchange itself.
Tulip mania reached its peak during the winter of 1636-37, when some contracts were changing hands five times. No deliveries were ever made to fulfill these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. The collapse seems to have occurred by the end of the first week of February 1637, which caused a number of disputes over the extant contracts. On February 7, tulip growers scrambled in Utrecht to elect representatives for a national assembly in Amsterdam. Their situation had become uncertain as the buyers no longer had any interest in honoring the contracts, and there was no legal basis for enforcing them.
By the end of February, the representatives gathered in Amsterdam for deliberations. They decided on a compromise where all contracts entered before December 1636 would be binding, but later contracts could be cancelled by paying a fee amounting to 10% of the price. The matter was brought before the Court of Holland, which declined to rule one way or the other and referred the question back to the city councils. The legislature of Holland decided to cancel all contracts to allow fresh deals to be struck during the summer. In Haarlem the issue dragged on, since the government left it to the parties to solve their issues by arbitration or other means. In May the city ruled that buyers could cancel any extant contracts at a fee of 3.5% of the price. The Dutch court system remained busy with a number of tulip disputes throughout 1639. In the end, most contracts were simply never honored.
More information: Investopedia
What we do know is that speculative episodes
never come gently to an end.
The wise, though for most the improbable,
course is to assume the worst.
John Kenneth Galbraith
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