TulipmaniaThe Crazy Tale of Tulipmania: Trading’s First Market Bubble. Photo: Rodion Kutsaev (Unsplash)

The Crazy Tale of Tulipmania: Trading’s First Market Bubble

Nobles, citizens, farmers, mechanics, sea-men, footmen, maid-servants, even chimney-sweeps and old clothes-women, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers.Charles Mackay

Tulip Fever, the recently-released film of Deborah Moggach’s 2000 novel of the same name, is unlikely to generate the hype or the revenues it was once expected to for a number of reasons. Not only did the critics hate it, but it was also made by the Weinstein Company.

Its crash from high-value cultural property to stale dud echoes the real-life story of “tulpenmanie” that it tells. In the mid-1630s, the Netherlands saw intense trading and rapid price increases for tulip bulbs. “This curious episode…testifies to man’s greed and the fickleness of fate,” says Moggach in her novel.

Tulip breeds with elaborate names like Admiral Von der Eyk or Semper Augustus changed hands for large sums. Scottish journalist Charles Mackay reported that a single Viceroy bulb was sold for a value equivalent to that of “two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tuns of butter, one thousand lbs. of cheese, a complete bed, a suit of clothes, [and] a silver drinking-cup”.

Meanwhile, the sum that could have been fetched by another bulb, he says, could have “sumptuously feasted the Prince of Orange and the whole court of the Stadtholder”.

Tulips became the fourth most important Dutch export, after gin, herrings and cheese. Prices for other goods rose as profits flooded into the country. The market for tulips became more complex as traders, now including people from a range of backgrounds as well as growers and florists, dealt in tulip derivatives as well as the bulbs themselves.

A number of factors could have caused the tulip bubble. The flowers’ novelty and fragility made them particularly attractive assets. Recently imported from Turkey, the tulip was not yet a familiar national symbol in the Netherlands, but an exotic curiosity.

The plague afflicting the Netherlands at the time may have sharpened people’s appetite for pleasure and profits. It also gave healthy workers more disposable income as demand increased for their services.

In addition, the plant’s lifecycle encouraged speculative trading as bulbs could only be physically exchanged for a portion of the year.

The bubble ended, however, with a crash in February 1637. The Dutch government tried to intervene to protect tulip investors, but soon the bulbs that had once been so highly valued were worth only small proportions of their peak prices.

Tulip Price Index

Tulip Price Index, 1636-37. Photo: Wikimedia

This, according to many commentators, had a severe economic and social effect on the economy. “Thousands of people are made destitute,” writes Moggach. “They throw themselves into the canals; they deliver themselves up to the mercy of the charitable institutions; in churches throughout the land they bitterly repent their folly.”

Events may not have been as dramatic as this fictional account suggests, however. Historian Anne Goldgar suggests tulipmania is a “famous but misunderstood event”.

Speaking to a reporter, she said that “there weren’t that many people involved and the economic repercussions were pretty minor”. Elsewhere she argues that the story of Tulipmania has been misrepresented, particularly by Mackay.

Whatever the truth might be, what is certain is that the story of Tulipmania has become a resonant trading morality tale. Arguments it has been used to advance include that excess capitalism is bad, and that activities in the “real” economy shouldn’t be neglected for the sake of trading.

Tulipmania certainly teaches a useful trading lesson about the difference between actual worth and price. Traders neglected the inherent value of the beauty of a tulip flower to focus on the market’s assessment of the potential of bulbs, sometimes even ones that had not finished growing.

Some trading commentators point out that paying more for an asset than what you think its actual worth to be can be rational if you think the price will go still higher. However, most traders would say it’s wise to distinguish reality and hype, whether looking at assets themselves or stories told about them.

Many things have changed in the trading world since the days of Tulipmania. But as the dotcom boom, derivatives trading before the financial crisis, and recent trading in cryptocurrencies show, some traders still have their heads turned by the latest attractive and unusual opportunities in the market.

The outlines of the tale have become legendary, to be invoked almost ritually whenever either the Netherlands or financial speculation is in question.Anne Goldgar

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