Historical Oddities: The Tulip Bubble

The Netherlands is famous for its tulip fields, but back in the 1600s the tulip flower was only a recent introduction into European gardens from the Ottoman Empire. This was during the golden age of Dutch trade dominance, and the tulip became a wealthy status symbol. Many merchants engaged in trade with the East Indies would buy up large estates with fields of tulips. The demand for the flower grew and prompted one an extreme rise in prices in 1636 and 1637, before crashing again. This tulip mania as it was known is now considered by economists to be one of the first documented speculative market bubbles.

Tulip mania swept the Dutch mercantile class during this short time. The price increased nearly 400% in mere months between November of 1636 and 1637, after a period of steady price increase during the 1630s. Tulip bulbs took years to grow, and rare varieties became especially coveted. The most valuable tulips were those affected with the mosaic virus. The virus caused the tulip to display stripes of white or yellow instead of the usual solid color. The striping made the bulbs appear even more extravagant and as the number of varieties of the flowers grew, they became even rarer. As professional growers and merchants sought to get their hands on rarer bulbs, speculators began to enter the market. The bubble finally burst in 1637 as the price of tulips crashed in only a month. The trade in tulips plummeted, but tulip fields remained a cultural icon of the Netherlands. Meanwhile, tulip mania had often been referenced in the discussion of economic bubbles, starting as early as the 1700s when the British South Sea Company went bankrupt.

Such a drastic rise and fall in prices for something such as a tulip may seem irrational, and for a time the bubble was considered a result of social mania. However, there may be a rational explanation for the tulip bubble over such a short period of time. In 1636, most of the action on the tulip market was in buying what were effectively futures contracts on the tulips. In late 1636, the florists’ guild and the Dutch parliament started debating a decree to change the way the tulip market would function. The decree would remove the obligation for the futures contracts owners to purchase the tulips, and instead they could opt out and pay a penalty of a small percentage of the original contract. This essentially turned futures contracts on tulips into options contracts. The decree was to apply to all contracts on tulips made after November 1636, but the law was not passed until February 1637. So during that time, purchasers could buy contracts on tulip bulbs at vastly inflated prices knowing the obligation would be gone once the law was passed. This made market demand and the displayed tulip price skyrocket. Once the law was passed, the price crashed as the market returned to normal price levels. The support for this explanation is that actual sales of tulip bulbs remained at ordinary price levels during this time. Unfortunately, the scarcity of historical records on tulip sales and prices in the Netherlands during these years muddles any economic examination of tulip mania so a full explanation of the cause may be uncertain.

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