Dutch Tulip Bulb Market Bubble Definition

Accelerated Depreciation

What was the bubble in the Dutch tulip bulb market?

The bubble in the Dutch tulip bulb market, also known as ‘tulipmania’, has been one of the most famous market bubbles and crashes of all time. This happened in Holland from the early to mid-1600s, when speculation took the value of tulip bulbs to an extreme. At the height of the market, the rarest tulip bulbs traded up to six times the person’s average annual salary.

Today, Tulipmania serves as a parable for the traps that can be caused by excessive greed and speculation.

History of the Dutch tulip bulb market bubble

Tulips arrived in Western Europe in the late 1500s and, being an import from their native Turkey, they dominated the same exoticism as spices and oriental rugs. It was unlike any other flower native to the continent. It is therefore not surprising that tulips have become a luxury item intended for the gardens of the wealthy: “it was considered as evidence of bad taste in every man of fortune to find himself without a collection of [tulips]. “Following the wealthy, the middle classes of Dutch society (which did not exist in a form as developed elsewhere in Europe at the time) sought to imitate their wealthy neighbors and also demanded tulips. Originally, it was an item of status that was bought for the very reason that it was expensive. But at the same time, tulips were known to be notoriously fragile, “they can barely be transplanted, or even kept in place. life “without careful cultivation. In the early 1600s, professional tulip growers began to refine local cultivation and flower production techniques, creating a thriving commercial sector that continues to this day.

According to Smithsonian.com, the Dutch have learned that tulips can grow from seeds or buds that grow on the mother bulb. A bulb that sprouted from seeds would take seven to 12 years before flowering, but a bulb itself could flower the following year. “Broken bulbs” were a type of tulip with a striped multicolored pattern rather than a single solid color from a strain of mosaic virus. This variation was a catalyst causing an increasing demand for rare broken bulb tulips, which ultimately led to the high market price.

In 1634, Tulipmania swept Holland. “The rage among the Dutch to own [tulip bulbs] was so large that the ordinary industry of the country was neglected, and the population, even in its lowest lie, launched out in the trade of tulips. “A single bulb could be worth up to 4,000 or even 5,500 guilders – as the guilders of 1630 were gold coins of uncertain weight and quality, it is difficult to make a precise estimate of today’s value in dollars, but Mackay gives us some points of reference: among others, 4 tuns of beer costs 32 guilders. That’s about 1,008 gallons of beer – or 65 tons of beer. A barrel of Coors Light costs around $ 90, and therefore 4 bottles of beer ≈ $ 4,850 and 1 florin ≈ $ 150. This means that the best tulip cost more than $ 750,000 in cash today (but with many bulbs trading between $ 50,000 and $ 150,000). In 1636 the demand for the tulip trade was so great that regular markets for their sale were established at the Amsterdam Stock Exchange, Rotterdam, Harlaem and other cities.

At that time, professional traders (“stock jobbers”) got into action, and everyone seemed to be making money just by owning some of these rare bulbs. Indeed, it seemed at the time that the price could only go up; that “the passion for tulips would last forever.” People started buying tulips with leverage – using margin derivative contracts to buy more than they could afford. But as soon as it started, confidence was shattered. At the end of 1637, prices began to fall and never looked back. Much of this rapid decline was caused by the fact that people bought light bulbs on credit, hoping to repay their loans when they sold their light bulbs at a profit. But once prices started to fall, holders were forced to liquidate – sell their bulbs at any cost and declare bankruptcy. “Hundreds of people who, a few months earlier, had begun to doubt the existence of poverty in the country suddenly found themselves owners of a few light bulbs, which nobody would buy”, even at the cost of a quarter of this they paid for. In 1638, the prices of tulip bulbs returned from where they came from.

Key points to remember

  • The Dutch tulip bulb market bubble was one of the most famous asset and crash bubbles of all time.
  • At the top of the bubble, the tulips sold for around 10,000 guilders, the value of a mansion on the Grand Canal in Amsterdam.
  • Tulips were introduced to Holland in 1593, the bubble mainly occurring from 1634 to 1637.
  • Recent studies have questioned the extent of tulipmania, suggesting that it may have been exaggerated as a parable of greed and excess.

The Bubble Bursts

By the end of 1637, the bubble had burst. Buyers announced that they could not afford the previously agreed high price for the bulbs and the market collapsed. While it was not a devastating event for the country’s economy, it has undermined social expectations. The event destroyed relationships based on people’s trust and willingness and ability to pay.

According to Smithsonian.com, Dutch Calvinists painted a scene of exaggerated economic ruin because they feared that the consumerism boom brought about by tulips would lead to the decay of society. They insisted that such great wealth was ungodly and the belief remains to this day.

Real examples of extreme buying

The obsession with tulips – called “Tulipmania” – has captured the imagination of the public for generations and has been the subject of several books including a novel entitled Tulip fever by Deborah Moggach. According to popular legend, the tulip craze took hold of all levels of Dutch society in the 1630s. A Scottish journalist Charles Mackay, in his famous 1841 book Memories of extraordinary popular delusions and the madness of crowds, 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.”

Dutch speculators have spent incredible amounts on these bulbs, but have only produced flowers for a week – many companies have formed for the sole purpose of selling tulips. However, trade reached its peak in the late 1630s.

In the 1600s, the Dutch currency was the guilder, which preceded the use of the euro. According to Focus-Economics.com, at the height of the bubble, tulips sold for around 10,000 guilders. In the 1630s, a price of 10,000 guilders was roughly equivalent to the value of a mansion on the Grand Canal in Amsterdam.

Did the Dutch Tuliplmania really exist?

In 1841, author Charles Mackay published his classic analysis, Extraordinary popular delusions and crowd madness. Among other phenomena, Mackay (who has never lived or visited Holland) documents asset price bubbles – the Mississippi regime, the bubble of the South Sea and tulipmania of the 1600s. It is through the Mackay’s short chapter on the subject that it was popularized as an asset bubble paradigm.

Mackay argues that the sought-after bulbs, of particular rarity and beauty, sold for six figures in today’s dollars – but there is actually little evidence that the craze was as widespread as it that has been reported. Political economist Peter Garber published an academic article on Tulipmania in the 1980s. First, he notes that tulips are not alone in their meteoric rise: “a small quantity of … lily bulbs was recently sold for 1 million guilders ($ 480,000 at 1987 exchange rates)”, demonstrating that even in the modern world, flowers can command extremely high prices. In addition, due to the timing of growing tulips, there has always been a gap of years between demand and supply pressures. Under normal conditions, this was not a problem since future consumption was contracted for a year or more in advance. Because the price hike in 1630 occurred so quickly and after the bulbs had already been planted for the year, producers would not have had the opportunity to increase production in response to prices.

Earl Thompson, an economist, has in fact determined that due to this type of production delay and the fact that producers have entered into legal contracts to sell their tulips at a later date (similar to futures), which have When rigorously enforced by the Dutch government, prices rose for the simple fact that suppliers could not meet all of the demand. Indeed, actual sales of new tulip bulbs remained at ordinary levels throughout the period. Thus, Thompson concluded that the “craze” was a rational response to the demands anchored in contractual obligations. Using data on the specific earnings present in the contracts, Thompson argued that “the prices of tulip bulb contracts closely reflected what a rational economic model would dictate … The prices of tulip contracts before, during and after the “tulipmania” seem to provide a remarkable illustration of “market efficiency.” Indeed, in 1638, the production of tulips had increased to match earlier demand – which had already declined, creating excess supply on the market, further depressing prices.

Historian Anne Goldgar has also written about the tulip mania, and agrees with Thompson, casting doubt on its “boiling”. Goldgar argues that although the tulip craze did not constitute an economic or speculative bubble, it was nonetheless traumatic for the Dutch for other reasons. “Even though the financial crisis has affected very few people, the shock of Tulipmania has been considerable.” In fact, she goes on to say that the “Tulip Bubble” was not a fad at all (although a few people paid very high prices for a few very rare bulbs, and a few people also lost a lot of money) . Instead, the story has been incorporated into public discourse as a moral lesson, that greed is bad and that the pursuit of prices can be dangerous. It has become a fable on morality and the markets, invoked to remind that what goes up must go down. Furthermore, the Church clung to this tale as a warning against the sins of greed and greed – it became not only a cultural parable, but also a religion apologue.

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