Tulipmania: the craze for the Netherlands’ favourite flower
In the mid-17th century, the Netherlands experienced something that has commonly, although perhaps incorrectly, been referred to as the one of the world’s first and worst economic bubbles: tulipmania.
Tulipomanie or tulpenwoede (tulip frenzy) in Dutch applies to a period of intense, and often ridiculous, speculation on futures for tulip bulbs.
At its peak in February 1637, there were tulip bulbs selling for the price of a luxury furnished house in Amsterdam.
Introduction of tulips to the Netherlands
It is generally held that the tulip was introduced to Europe by the Holy Roman Empire’s ambassador to the Sultan of Turkey, who sent the first tulip bulbs and seed to Vienna in 1554, from where they were soon distributed though the empire and into the Netherlands.
The cultivation of tulips in the Netherlands is thought to have started around 1593, when Flemish botanist Carolus Clusius established a horticultural academy at the University of Leiden and showed that tulips could easily be grown in the Low Countries’ harsher climate.
Popularity of tulips
The attraction of the tulip lay in its colour: no other flower in Europe at that time had such intense and saturated colours. It made tulips a status symbol in the newly independent Netherlands as the country embarked on its Golden Age.
Then, Amsterdam was the centre of the East India trade run by the V.O.C. (Dutch East India Company), a business so lucrative that one voyage could yield profits of around 400 per cent.
For these V.O.C. merchant princes, the tulip became a coveted luxury item, especially the rarer ones, such as the stripy Rosen (white with red or pink), Violetten (white with purple or lilac) and Bizarres (yellow or white with red, brown or purple).
Demand for rare bulbs
The problem with the increased demand for tulips is that they cannot be produced quickly. Normally it takes between seven to 12 years to grow a flowering bulb from a seed, which then produces seeds and two or three bud clones, called offsets.
These offsets can become flowering bulbs after a year or two, which means that the availability of single-coloured bulbs is reasonable predictable: asexual reproduction, as it is called, results in an increase in bulbs at a maximum annual rate of from 100 per cent to 150 per cent.
Multi-coloured bulbs, on the other hand, can only be reproduced from offsets, as the original bulb has to be infected with a virus to cause the bulb to streak. This virus also weakens the bulbs, causing 10-20 per cent reduction in propagation rates and sometimes the loss of the plant, so cultivating the most popular tulips takes longer and is less predictable.
Dutch tulip market
Tulips only bloom for a week or so in April and May, after which the dormant bulbs can be uprooted and sold from June to September, when they need to be planted again. In 17th-century tulip trading in the Netherlands, this was when the actual purchases were made, in what was called the spot market.
For the rest of the year, tulip traders would sign contracts to buy tulips at the end of the season, introducing the world’s first known example of a futures contract. In 1636 this was formalised into a type of futures market, held in taverns where buyers were required to pay a small fee for "wine money" per trade.
All contracts were with the individual parties and not with the Exchange, leaving some Dutch to describe it as windhandel (wind trade), as nothing was actually exchanged.
As variegated tulips became more popular, professional growers paid higher and higher prices for bulbs with the virus. By 1636, the tulip was the fourth leading export product of the Netherlands after gin, herring and cheese.
The contract price of rare bulbs continued to rise throughout 1636, but by November, the price for normal bulbs had also increased, reflecting the huge demand. In 1634, speculators entered the market, attributed to a growing demand in France.
Prices reached their peak in the winter of 1636-37, when some bulbs were said to have changed hands 10 times in a day. At its zenith, a rare Violetten Admirael van Enkhuizen sold for 5.200 guilders, at a time when a skilled labourer would earn 150 guilders a year.
Collapse of the tulip market
The collapse seems to have begun in Haarlem, when buyers did not appear for a routine bulb auction. This may not have been the first mark of a decline in interest in bulbs, but rather because there was an outbreak of the bubonic plague in Haarlem at that time, causing people to stay home.
Whatever the reason, within days panic had spread and the market for tulips evaporated. Three months later, bulb prices were more than 20 times lower than the February high.
Why was there a tulip bubble?
The first question really is "Was there a bubble?" A number of economists and historians have cast doubt on this, pointing to other price spikes and drops for rare flowers, including hyacinths in the 18th and 19th centuries.
Historians have found that the trade was conducted almost exclusively by wealthy merchants and skilled craftsmen, meaning any economic fallout was very limited. This is also because although prices rose, money had not exchanged hands, meaning unless sellers had bought on credit in expectation of a profit, the collapse in prices did not cause anyone to lose actual cash.
Another historian suggests the outbreak of the plague caused people to be less risk-averse, thinking they might die any day and so gambling on tulip contracts, because actual gambling was illegal, or run off without paying.
Lastly, the government was proposing changes to the way contracts were written, considering allowing people to void contracts for only 3,5 per cent of the agreed price. Thus, the argument goes, speculation increased as the risk decreased, until the government changed its mind and halted these contracts, causing prices to crash.
Tulips in the Netherlands today
Tulips are still associated with the Netherlands, and the cultivated forms of the tulip are often called "Dutch tulips." In addition to the tulip industry and tulip festivals held here in April and May, the Netherlands has the world's largest permanent display of tulips at Keukenhof, open during flowering season.
Tulips and tulip bulbs remain a popular gift here, available to buy even at Schiphol Airport as a last-minute gift. While the single-colour breeds are still the most common, the multi-coloured ones are still available, although now they are the result from breeding selection for genetic mutation rather than virus.
Despite their early ups and down, the popularity of tulips in the Netherlands remains undiminished.
Sources: Wikipedia, Garber (1989) in Journal of Political Economy, Thompson (2006) in Public Choice, The Economist, Businessweek
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