Tulips have long-endured as one of the most important cultural symbols of the Netherlands, arguably occupying the same rank as windmills and wooden clogs in this regard. Thousands flock to Amsterdam and to the Keukenhof in nearby Lisse, one of the world’s largest flower gardens, to view these tulips when they bloom in Spring. In fact, the official website of the Dutch Tourism Board has a section about tulips on its front page, showing that in the modern day, tulips have remained one of the Netherlands’ most important pieces of cultural self-identification. The story of how tulips took root in the Dutch cultural imagination, however, is one which historians and others have looked upon with equal parts interest and puzzlement. This article explores the wave of financial speculation that gripped the Netherlands in the early seventeenth century, which has since come to be known as the Tulip Mania.
What is a Speculative Bubble?
The idea of a speculative bubble refers to a period in which the price of a certain asset increases rapidly, as a result of ‘irrational speculative activity,’ rather than due to changes in the intrinsic value of the asset. While this highly complex socio-economic phenomenon cannot be easily explained, for the purposes of this article, speculative bubbles are most easily understood as when a commodity becomes extremely over-valued, and then sees a rapid decrease in value when the bubble eventually ‘bursts.’
Tulips and the Dutch Golden Age
But how does this phenomenon relate to the Early Modern Dutch Republic? The 1630s was firmly in the middle of the century-long period known as the Dutch Golden Age, a time of incredible economic, scientific, and cultural success which propelled the Netherlands to being one of Europe’s most prosperous nations. It was in the same time period that tulips had begun to be imported into Central and Western Europe through the Ottoman Empire. In the Netherlands in particular they became a hugely influential status symbol as a result of their intense colouration and perceived beauty, factors that have helped the tulip remain a highly popular flower today. As a result of this, the Dutch tulip market developed rapidly, with tulip traders using concepts such as ‘forward contracts’, a method of agreeing to a future transaction, to quickly drive up the value of the market as a whole.
The Expanding Bubble
Demand for tulips continued to increase, which brought with it increasing numbers of tulip speculators into the market. Speculators were investors who bought assets with the intention of selling them on after a short period of time in order to benefit from volatility in the price of their chosen asset. What developed in the Netherlands at this time was an ever-growing system of promises between speculators, who traded an ever-growing number of forward contracts between each other. Thus, the agreed price of tulips increased hugely without any flowers actually being traded hands. Put more simply, speculators promised to buy tulips at a specified price, and then arranged to sell them to other speculators at a higher price, who then went on to promise even more speculators at even higher prices. What emerged was something of a snowball effect, where the asset itself, the tulip bulb, became enveloped within the ballooning network of contracts that surrounded it. At the peak of the mania, single tulip bulbs were worth 10,000 guilders, which was around the same value as a mansion on Amsterdam’s Grand Canal.
Bursting the Bubble
Of course, just like a snowball cannot continue growing forever, a bubble must at some point burst. For the Tulip Mania, this occurred in February 1637, when, although our records of the exact events are not fully reliable, it appears as though the price of tulip forward contracts collapsed almost entirely. This was likely as a result of speculators’ sudden unwillingness to continue to increase the price of contracts, a problem which in turn brought down the complex existing networks of agreed-upon contracts.
One of the important factors of speculative bubbles is that it is difficult to identify one until it has already burst. In other words, it is very hard to recognise that rapidly increasing price of an asset is a signifier of irrational economic activity rather than simply a reflection of increasing demand, and so therefore a bubble tends not to reveal itself until after the damage has been done. It is in this context that it becomes easier to understand why the price of tulips became so high in during the peak of the Tulip Mania.
The Legacy of Tulip Mania
Much of what we know today about the Tulip Mania comes to us from Charles Mackay’s highly influential 1841 work Extraordinary Popular Delusions and the Madness of Crowds, which uses the Tulip Mania as a key example for his theory that large crowds of people can sometimes act in highly irrational ways. While detailed analysis is unfortunately outside the scope of this article, it is important to note that there exists modern historiographical arguments which suggest that Mackay’s account of the mania has exaggerated many of its details.
Nevertheless, the Tulip Mania has continued to capture the fascination of historians and economists alike. For me, the legacy of the Tulip Mania remains a cautionary tale against the dangers of ‘irrational speculative activity’, and I furthermore believe that the wild speculation at the heart of the mania has been mirrored in recent years by the unpredictable and volatile cryptocurrency market. Many prominent investors, such as Warren Buffett, have suggested that the crypto market as a whole represents a speculative bubble. Looking more specifically, NFTs as a cryptographic asset have been compared directly to tulips by William Bernstein, in that both assets went through a process of extreme speculation, followed by large-scale collapse in value. The rise and fall of the NFT market is a testament to the cyclical nature of speculative bubbles; simply substitute NFTs for tulips and perhaps we have the retold the same story.
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