Tulip Mania: The First Economic Bubble!

                  Pritish Gupta

           The Dutch Golden Age, spanning the 17th century witnessed something unprecedented. During the 1630’s, a tulip frenzy enveloped the Dutch society. At that time tulips were a new commodity when they were first introduced in Netherlands. The Dutch were heard singing paeans about tulips and with a blink of an eye, they became a status symbol. Different varieties of tulips ventured, but the rarer the tulip bulb, the better & more unusual the price. It may sound bizarre but the Dutch were so ensorcelled by the tulips that the prices reached new highs. Tulips were sold for over 4000 florins, the currency of the Netherlands at the time. The average price of a single flower exceeded the annual income of a skilled worker and cost more than some houses at the time. Given the distinctive nature of how tulips actually grow, people started purchasing not the actual bulb but a contract promising it in the future. Speculations went rife, contracts changed hands & it resulted in a full blown crisis. No deliveries were ever made to fulfil the contracts.

             Historical evidence suggests that tulips made their way to Europe during the 1500s and gradually forayed into Netherlands. The tulips became so fashionable among the well-off that it gained the same status as other valuable artefacts. Tulips gained popularity & the prices started soaring. At the same time, plague struck Netherlands in the 1630s and a fear spread among the people that they were actually going to die, so they started investing all their money in something as unusual as a tulip. The prices of tulip peaked around February 1636. Though by that time the Dutch came out of the delusion & started wondering about the tulips being overpriced. It came to light that tulips were actually easy to grow and cultivate. The tulips that were about to enter the market in the winter were still underground, unknown about their future. The archives state that the sales were only the contracts, just on paper.

           It was February 3, 1936, a dewy morning in Haarlem, a Dutch city. Not a single bulb was sold at an auction that very day. The prices crashed and the tulip bubble ruptured. People went bankrupt and it is said some committed suicide by drowning in the canals of Haarlem. The government did intervened but the Dutch economy was left in ruins. Tulip mania also affected the Dutch society socially. The Dutch were now seen as people who believed a lot in speculations rather than hard work. Outsiders considered the tulip bubble as a frenzy to which the Dutch kowtowed. Was it really a frenzy & did the Dutch acted irrationally?

          Many stories surfaced after the crisis as to what led the tulip bubble to deflate. Anne Goldgar’s book ‘Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age’ gives us another side of the story. It discounts the fact that Tulip mania was irrational or just a frenzy. Tulips were considered a new luxurious product when Netherlands was experiencing rapid growth. The merchant class could afford luxuries and they did so. Tulips found a place alongside valuable paintings and rare products of the time. The text provides reasons as to why the prices skyrocketed. Tulips were rare & difficult to cultivate and it wasn’t illogical to pay a high price for something valuable given the status of tulips at that time. Goldgar states that it was not a hysteria, Tulip trade was an organized one with companies in various Dutch towns involved in trading. The prices crashed not because people were guileless but because of apprehensions about the oversupply of tulips with high prices not sticking for too long. The fact that the bulbs were still planted & there won’t be any transactions until the tulips actually bloomed, was another reason for the downturn.

            Not much economic data is available to corroborate the different narratives or myths surrounding the unusual tale of tulips. In the 21st century, Bitcoin is referred to as Tulip mania 2.0. Nobel Prize winning economist Robert Shiller predicted that “Bitcoin’s Tulip maina will totally collapse”. Whether or not Bitcoin is the tulip of this century, only future holds the answer but certainly the irrational demand around bitcoin does fuel the debate.

Pritish Gupta is a final year Masters student at Jindal School of International Affairs.

 

References:

  1. Lützh, Mette, and Sarah Green Carmichael. “The Real Story of the Dutch Tulip Bubble Is Even More Fascinating than the Myth You’ve Heard”, Barron’s. May 12, 2019. Accessed August 23, 2019. https://www.barrons.com/articles/the-real-story-of-the-dutch-tulip-bubble-is-even-more-fascinating-than-the-myth-youve-heard-51557666037.
  2. Kaila-Hale-Stern. “Adam Ruins Everything Explains How the Dutch Lost It Over Tulips”. The Mary Sue. Accessed August 23, 2019. https://www.themarysue.com/adam-ruins-everything-tulipmania/

Image Source – Forexlive

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