Tulipmania 1637

Warning: Many popular storytellers of bubbles and manias refer back to historical books like Mackay's Extraordinary Popoular Delusions and the Madness of Crowds. These historical sources can hardly be referred to as in any way scientific. They are primarily (religious) moral tales and warnings against perceived errors of human nature. It has been established that many of the claims made and stories told are simply false, not supported by evidence or at least exaggerated.

One thing to note from the start is that the available price data are not at all continuous. We know only a few prices from 1637 and earlier, and we know a few prices for trades many years later, in 1642/3, 1707, 1722, 1739 (Garber, 2000). Almost nothing is known about prices of the trades in more common bulbs in local taverns during November 1636-February 1637. The so-called peak in February 1637 is derived from only one source of price data that happens to be available for that date (an estate auction), although even these data are suspect because they cannot be confirmed by any official document. Garber (2000, p.134) explains that many of the prices he attributes to 5 February (and 2 January) are actually of unknown date. Also note that most reported bulb prices are not corrected for the weight of the bulb. Doing so sometimes dramatically changes the picture, and the weight of the tulip bulb is an important element in its fundamental value (see below on bulb propagation; also, see below on a construction of the time series of tulip prices).

[Note: Weight measurement used at the time was 1 pound = 2 mark = 16 ons = 320 engels = 10240 asen. One aas equals approx. 0.048 grams, but this varied a little depending on the exact pound weight used in the various cities, 404-494 grams. Examples are Amsterdamse pond (494.0904 grams), Haagse pond (469.728 grams), Nijmeegse pond (476.56 grams), Troois/Troys pond (492.1677 grams). Garber's use of of different pound weight in asen for Amsterdam and Haarlem is (technically) incorrect.]

Another thing to note is that much of the literature, internet websites and popular descriptions in the press, keeps repeating the same old stories, most of them following Mackay (1841 [1852]), who himself simply copied from earlier writers. We have heard how bulbs changed hands hundreds of times in a single day, and how some bulbs, sold and resold for thousands of guilders, never even existed. Tulipmania is portrayed as an example of the gullibility of crowds and the dangers of financial speculation. The Dutch economy is said to have become neglected and to have suffered as a result of the Tulipmania. But it generally wasn’t like that at all. As Peter Garber (2000) and Anne Goldgar (2007) reveal in their books, not one of these most amazing stories is true, or at least in evidence. Making use of extensive archival research, Goldgar lays waste to many of these legends, revealing that while the 1630s perhaps did see a speculative bubble in tulip prices, neither the height of the bubble nor its bursting were anywhere near as dramatic as we are led to believe. Garber (2000, p.83) notes: "The wonderful tales from the tulipmania are catnip irresistible to those with a taste for crying bubble, even when the stories are obviously untrue. So perfect are they for didactic use that financial moralizers will always find a ready market for them in a world filled with investors ever fearful of a financial Armageddon."

Almost all information in the literature about Tulipmania can be traced to a few propaganda pamphflets and contemporary pieces of comedy and ridicule, and, unfortunately, subsequent exaggerations of this material. Even the arguably most reliable source, the so-called discussion between Waermondt ende Gaergoedt, is essentially a moral tale with religious foundations, that essentially aims to criticize the trading profession (for not producing tangible goods) and the use of credit and forward contracts (rather than tangible cash and barter transactions).

Fundamentals: Tulip prices explained

Explaining the tulip price puzzle requires that we separate the story into 3 very different components:

1. HIGH PRICES PAID FOR SOME "RARE" TULIP BULBS

2. PRICE PATTERNS (up and down) FOR "RARE" BULBS (e.g. Semper Augustus, 1623-1739)

3. PRICE PATTERNS FOR MORE "COMMON" BULBS (i.e. pound goods, November 1636-February 1637)

High tulip bulb prices for some "rare" tulip bulbs

Rare tulip bulbs as a luxury good

From real world experience today, we know that high prices are paid for all kinds of luxury good items, such as race horses, prize bulls, paintings of old masters, sports cars, private planes, etc. Is this a question of speculation, risky investment (shaky fundamentals), foolish and wasteful behavior, or simply a matter of taste and preferences of wealthy buyers (high demand, low supply)? It is not appropriate for an economist to comment on the utility value attributed to luxury goods by wealthy individuals. Some billionaire might easily pay 50-100 million US$ for the luxury of using a private Boeing 747, rather than paying the 50 US$ for an economy class commercial airline ticket. Equally, it is not for economists to wonder why someone might be willing to pay several million US$ for the pleasure of owning a Rembrandt painting, rather than paying 10 US$ for a reasonable photo reproduction. In economics, high prices for highly valued luxury goods are not normally referred to as irrational bubbles, and neither should we refer as such to the high prices in the trade of luxury tulip bulbs in the early 17th century.

As documented by Goldgar (2007), tulip collection and growing, gardening in general, together with the collection of art, natural artifacts and exotica, was a longstanding and important part of the social life of wealthy members of Dutch society, but also an element of commercial networking for entrepreneurs. Some wealthy merchants, rich craftsmen and members of the ruling elite spent substantial amounts of money on collecting special and rare tulips. And they could easily afford it.

[Note: Details on income and wealth are sketchy. Goldgar (2007) reports details of a 1631 tax assessment in Amsterdam for a property tax, which identifies several hundred people (of a population of approx. 125,000) with property valued at 20,000 guilders and more: 584 20,000-50,000, 231 50,000-100,000, 91 100,000-500,000.]

The "luxury good" explanation of rare tulip prices is of course based on the presumption that rare tulips were scarce and highly valued; on there being only limited quantities of a very much desired good or product. Can we apply this to our tulip story? Garber (1990) pointed us to some basic facts on past tulip growing and trading that were missing from most previous discussions. At the time, unknown to the trade, tulips were subject to a mosaic virus, whose effect ("breaking" or "feathering") was to produce remarkable colored patterns on the tulip flower (see Royal Horticultural Society, or this web article). Bulb propagation is time consuming and difficult. Therefore, specific tulip types remained unique for a substantial period of time. Today this tulip mosaic virus no longer exists in normal tulips, because tulip growers systematically treat their crops against such viruses. However, some special tulips have survived to the present day, and agriculture institutes sometimes experiment with the virus (see for example.)

Rare, feathered tulips continued to be luxury articles for a many years. Examples exist of high value tulip transactions after the supposed market "crash" of February 1637. Illustrated tulip books, indicators of their value, continued to be produced as late as 1674 (Krelage, 1942, p.101).

Price patterns for "rare" tulip bulbs

Product life cycles

It is quite normal that high prices are paid for all kinds of newly produced luxury goods (stereo, video, wide-angle tv, etc.). These goods are known to subsequently become available at very much lower prices. This is accepted as normal and as simply reflecting a normal product life cycle. Are people who initially buy new luxury goods at the higher prices irrational? Is the decline of some goods prices over time proof of a previous price bubble? That is not the way we look at product life cycles, and neither is it a correct view of the trade in highly valued tulips.

Rare tulip bulbs as an investment project

Tulips can propagate either through seeds or through outgrowths or offsets ("baby bulbs") on the mature mother bulb. Seed propagation may take five to eight years of growth before plants are of flowering size. More importantly, the valued mosaic pattern cannot be reproduced through seed propagation. The mosaic virus can only be reproduced, and frequently only imperfectly, by cultivating the offsets from the original bulb. The size of the original bulb determines the number of possible outgrowths and therefore the value of future sales of the additional baby bulbs. Offsets require two or three years to grow on the parent bulb, before being divided, and need another one to three years of growth before they are ready to flower themselves. Note that every normal bulb could "break" at some unknown time and with unknown patterns. Tulips could also change from one season to another, with the valued color patterns fading and disappearing and the tulip losing its value.

As a result of the propagation process, a virus-infected tulip bulb represented a de facto patent or monopoly on the value of future tulips of the same type. Consequently, considering it an investment project, a net present value calculation must be applied to the pricing of rare tulip bulbs. (Chris Sims has a nice example of such a calculation which he uses to teach his students.) Even today some newly developed flower bulbs are traded at very high prices. For example, recently a small quantity of prototype lily bulbs was sold for one million Dutch guilders (€ 454.000).

We may conclude that, for the most part, the price increase of certain rare and high-value bulbs reflects their emerging status as a highly valued luxury good and the associated high present value of future offspring in an investment project. The evidence shows that over long horizons prices declined in line with the normal successful propagation of these bulbs. There existed a normal annual depreciation in bulb prices once the bulbs were successfully propagated.

High prices and price pattern for "common" tulip bulbs

Separate from the special market for rare and high-value tulip bulbs, during the winter of 1636-37 a commercial market developed for the more common lower-value tulip bulbs. We know very little of this market except from the references in Waermondt ende Gaergoedt. But we assume it existed as described. This trading apparently centered around local taverns in several cities - a relatively normal phenomenon at that time - and between rich middle-class people, newly established tulip trading companies or partnerships, and tulip growers and traders referred to as "florists". The traditional professional tulip growers and their wealthy clients were probably not taking an active part in this tavern trade. Prices of bulbs rose substantially between November 1636 and January 1637, and probably fell in early-February 1637.

Most of the information we have about trades in 1636-1637 is from a number of individual tulip contracts, usually from documents that were part of arbitration through notaries and the courts. Little is known about the trading in taverns. Despite his comments that most of the popular stories are exaggerations, Dash (1999, ch.11) is happy to emphasize the daily life of smoke-filled taverns and the presence of tabacco, beer and wine intoxicated (i.e. drunk) tavern regulars, based on some ordinary traveler accounts. This is simply one of the many distorted images perpetuated in the popular literature. First, the daily experience with beer and wine at that time was much different from today's, given that low alcoholic beer and wine generally substituted for the low-quality, even dangerous drinking water. Second, the street, a room in the tavern, or the church would have been the only public places available for regular trading sessions. Tavern trading sessions have no direct link to drunken tavern regulars. Instead, this type of trading matches the humble origins of many of today's major stock exchanges, including the London Stock Exchange and the New York Stock Exchange. Third, we have no information about the relative importance of the tavern trading sessions compared to the private contracts; no details about the type of contracts, prices or trading volume. It is entirely possible that the so-called tavern trade actually never existed, at least not in any substantial volume, and that taverns only served as a regular meeting place where commercial tulip traders could exchange the latest information.

The nature of tulip trade contracts

Besides a brief description of the normal pricing mechanisms used at the time (i.e. bid-ask price intermediation and a more general auction mechanism (from Waermondt ende Gaergoedt, 1637)), not much is known about the particulars of the tulip contracts being traded in the taverns, if any.

The literature offers several suggestions and interpretations.

1. Futures contracts. Garber (2000) and Gelderblom and Jonker (2003) argue that the tavern trade was a futures market. Garber (2000, p.45): "Neither party intended a delivery on the settlement date; only a payment of the difference between the contract and settlement price was expected. So, as a bet on the price of the bulbs on the settlement date, this market was not different in function from currently operating futures markets." Gelderblom and Jonker (2003, citing Posthumus (1926, 1927) as their source) write: "Trade centered on what the Germans call Differenzgeschäfte, the settlement of payments by cancelling out mutual claims". However, no documentary evidence is available to support the use of futures contracts. It is very likely that the concept of futures trading is simply a misinterpretation of casual comments made in the literature about "traders not actually being interested in taking delivery or actually owning the tulip bulbs" and/or a presumed transfer of common trade practices from the Amsterdam Exchange commodities market to the tulip trade.

[Note: Gelderblom and Jonker (2003,p.12) define their concept of a future as the transfer to a third party of a forward contract.]

2. Forward contracts. Because planted bulbs can only be lifted and moved after the flowering season, one common assumption has been that contracts traded between mid-September (planting) and May-June (lifting) were for future delivery of the bulbs. This is consistent with information from notarial contracts and less formal sales contracts about delivery and agreed payment schedules (payment on delivery, installments, deferred payment). It is also consistent with the Amsterdam Accord of florists signed 24 February 1637, which details that buyers from florists would be given the option to complete their existing contracts (and take delivery against payment) or dissolve the contracts for a 10 percent fee. Dash (1999, p.174 citing Waermondt ende Gaergoedt) and Goldgar (2007, p.228 from available contracts) seem to suggest that at least some trades consisted of a complicated chain of bilateral forward contracts linking several sellers and buyers. There was no central clearing mechanism, but sometimes new buyers agreed to assume the debt of the present seller to the previous seller. A representative quote has a trader facing a creditor saying "When my buyer pays me, I will pay you".

[Note: Goldgar (2007, p.228) notes that the longest chain of contracts that can be found in the available documents consists of five persons.]

[Note: See below on immediate delivery: A more essential reason for future delivery of bulbs must have been that buyers insisted on inspecting the tulip when flowering, usually in the presence of witnesses, and only accepting its delivery afterwards. Validating the quality of a tulip bulb itself, i.e. whether it was actually a high-value rare tulip, was impossible.]

3. Option contracts. Dash (1999, p.165, based on Munting, 1696) reports one example of an explicit option contract used for a tulip trade dated around December 1636. More generally, an edict from 1610 (repeated many times in later years, for example 1630 and 1636) outlawed "windhandel" in shares or 'actien': referring to all short sale contracts involving a seller not actually owning the underlying shares. [Note: This edict did not intend to proscribe all forward trading but only naked short selling, and more particularly, naked short selling the shares of the VOC and WIC. In practice, settlement of share trades (i.e. ownership transfer) had to be accomplished within a period of one month. From June 1613 the VOC opened a separate register ('time account') for forward transactions but it appears to have been rarely used (van Dillen, 1927, p.514; Petram, 2008).] At the time, authorities did not prosecute people participating in proscribed contracts, but simply refused legal enforcement of such contracts. If market participants at the time understood this nature of the contracts, it is perhaps more accurate to consider them option contracts and interpret the contract prices as option exercise prices, rather then spot prices or forward prices (Thompson, 2006). This view is consistent with the proposed solution to contract disputes after February 1637 (that is ex post), and the more general trade practice of paying a penalty ('rouwkoop') in order to dissolve a contract. However, the documentary evidence does not show many examples of option contracts, but instead shows many cases of prosecutions in court of buyers who defaulted on their contracts, which suggests the options view was not generally accepted by market participants.

4. Spot contracts. First, tulip bulbs need not be planted in a fixed garden bed. Tulips also grow in pots and people who could afford the tulips usually also had the financial means to have vases made for them especially. Tulips in pots would be available for immediately sale and delivery. Second, lifting tulips or transporting them is possible, but not recommended because there is always a risk of damaging the bulb. The idea of immediate delivery, even in the period between September and May-June, is consistent with the list of the so-called Winckel estate auction of 5 February 1637. This list explicitly lists a set of bulbs sold and to be delivered within 8 days following their lifting, as well as another set of bulbs sold while planted (apparently for immediate delivery, assuming they would not be left at their planting site).

[Note: The Amsterdam Exchange, which originated in street curb trading sessions at the end of the 15th century and finally moved into its own building "de Beurs" in 1611, was already using forward ('voorcopen', 'vaste tijdkoop'), options ('optiecopen', 'premiecontract') and futures ('Differenzgeschaeft', a German word used by an early historian), based on practices borrowed from the Antwerp Exchange. These contracts were mostly used for trading in shares, but also grain, the sale of spices, wine, beer, haring, and other commodities. (van Dillen, 1927)]

Knowing the type of contract being traded in the commercial market of winter 1636-1637 is important. A speculative futures or options market for bulbs could have developed very rapidly, partly because, apart from a down payment, there was no further margin requirement, no marking-to-market, and therefore little capital investment required. On the other hand, the sums of money involved in cash settlement of futures contracts would, in principle, bear little relationship to the spot or forward price of the tulips, and certainly not the rare high-value tulips that were not and would not be part of the tavern trade anyway.

On the other hand, the notion of a widely spread speculative tulip trade with many low income, low wealth participants (the 'tavern regulars') may still simply be an exaggeration and misinterpretation of what actually happened. Research by Goldgar (2007) identified a group of merely a few hundred people involved in the commercial tulip trade (most of them in Haarlem, the centre of the tulip trade, and several dozen people in each of a few other cities). Most of these people were professionals from the tulip grower community as well as middle-class merchants and entrepreneurs who considered the tulip trade a possible business opportunity and who were willing to invest and risk the capital they owned.

Financial panic and price collapse

According to conventional wisdom, the so-called speculative market in common tulip bulbs appears to have collapsed in February 1637. The reason and precise timing is unknown. Most discussions mention (i) a failed auction on 3 February, (ii) the meeting of florists in Utrecht on 7 February to elect representatives to a meeting in Amsterdam to discuss the problems of the tulip trade, and (iii) the observation that prices after 5 February were much lower. Perhaps, following a 3 February court session on a dispute involving several parties in a complicated chain of buy-sell contracts (Goldgar, 2007, p. ), tulip traders finally realized that the tulip trade was too complicated to be viable as a normal market. Many disputes between buyers and sellers had already shown how difficult it could be to establish the quality of bulbs that were delivered to the buyer. Furthermore, trading on credit and on forward contracts depends crucially on the creditworthiness of the buyer. These facts simply do not allow the trade to expand beyond a small group of well-known and interconnected buyers and sellers. When trust in the correct settlement of contracts fades, the market collapses. Finally, the commercial traders may have started to realize that the final consumer demand for their relatively common tulip bulbs might not be forthcoming, because the wealthy elite was mostly interested in a few rare, high value tulips.

In the end, many (how many?) buyers of tulip bulbs defaulted or were expected to default on their contracts, refusing to pay the high prices they had agreed to previously. At the end of February 1637, market professionals (i.e. a conference of florists meeting in Amsterdam on 23 February) attempted to resolve contract disputes by suggesting that all contracts after 30 November 1636 be converted into option contracts, with buyers being offered the option to dissolve their contracts for a fee of 10 percent of the original contract price (Amsterdam Accord signed 24 February 1637). Still, with courts refusing to enforce speculative contracts, disputes continued until resolved a year later by an arbitrage committee on order of the Haarlem city council (28 May 1638). In this arrangement, largely followed by other cities, sellers received a compensation of 3 1/2 percent of the original contract price.

Economic relevance of the tulip bubble

Garber (1990) argues that "Since serious traders ignored this market and participants in this market had almost no wealth, it can have been little more than a mid-winter diversion among tavern regulars mimicking more serious traders". Garber also argues that the "mania" story that continues to be repeated today, can be traced to contemporary pamphlets sponsored by the ruling elite, eager to channel trade through their own markets. To achieve this, they attempted to discredit the unregulated trade. Some of the pamphlets used in historical research are simply equivalents of today's fun and laughter by standup comedians: obviously, stories not to be taken literally and with a mere grain of truth at the core.

Although one might argue that Garber goes too far in ridiculing the tavern trade (historically, tavern trading appears to have been a serious business and not a game played by a random selection of drunken tavern regulars), his tracing of the history of the silly stories that continue to be told today in support of the mania view of the tulip trade suggests that most of these stories are probably false and misleading (this view is reinforced by the careful examination of the historical evidence by Goldgar, 2007). In particular, any connection or comparison to the high values of rare tulip bulbs is simply wrong and misleading. Anyway, the bubble in common bulb prices of January-February 1637 appears to have been of little real economic relevance.

Rational gambling on tulips in economic theory

Most economic activities are 'risky', whether it is a financial investment, business investment or even buying a consumer product. We don't normally call that gambling, betting or speculating, nor would we like to discourage these essential economic activities. One more appropriate definition of gambling is: taking part in an activity with uncertain outcome, but which is known to have a negative expected monetary value. However, even this type of gambling can be rational from an economic perspective. A "rational gambling" theory suggests that uncertain projects with negative expected monetary values, such as a lottery, can in fact be priced positively when one positive outcome is sufficiently extreme to be on an entirely different utility curve (effectively creating a quasi-convex utility function).

From 1635-1637 a bubonic plague epidemic ravaged the Netherlands, killing 10-30 percent of the population in cities such as Amsterdam, Leiden, Haarlem. One may argue that some people regarded tulip speculation as many do today's million-dollar lottery: that is, an opportunity to become rich instantly and gain the opportunity to escape the drudgery of daily live, and, in this case more importantly, death from the bubonic plague. Trading in common bulbs may have represented such a rational gamble in a live-or-die lottery. Of course, this kind of lottery is made possible only by a specific market system that excludes the need for large capital investment: for example, a futures market with no margin requirement, no marking to market.

Conclusion

Essentially, the unexplained part of tulipomania, if any, is confined to a short period of price rises in January-February 1637. Any unexplained part of tulipmania is confined to a rise and fall in common tulip bulbs traded in a newly developing commercial tulip bulb market, not directly related to the other more private market for rare and high-value tulip bulbs. There is no evidence that the crisis in tulip trading had much aggregate economic consequence. There is no evidence that the tulip trade was simply a betting market involving large numbers of common people without assets or income.

Tulipmania is a moral tale, largely disconnected from serious economic analysis. Hardly worth the overrated status in economic and financial literature.

1. The time series show, not surprisingly, that prices were on a gradual upward trend from end-1634 (index 29) to August 1636 (index 47).

2. Prices between November 1636 and February 1637 are extremely variable and/or volatile. The average is around index 70 (median 65), but prices are as high as 180 (29Jan) and as low as 7 (31Dec). These high and low prices do not identify the pre and post bubble crash period. The variability is perhaps not so surprising, because the observations represent individual contracts and to some extent unique tulip bulbs. This is not a highly liquid and highly centralized market that can be compared to our modern securities exchanges.

3. The prices of the 5 February 1637 Winckel estate auction are somewhat of blip, although perhaps a more reliable observation due to the larger number of prices for various tulips.

4. I do not find the strong hump shaped pattern that is so evident in the graph produced by Thompson (2006). This graph starts to appear on various websites, perhaps because of its strong bubble connotation, but its features are a result of the data selection process (see below).

5. Tulip prices appear to decline over various days between end-January and 6 February, but price levels are still well within the range of prices for November 1636 - February 1637. The market may have collapsed, or at least been suspended, in the second half of February but the price data do not really show it: there are no further price data. Thompson (2006) perhaps exaggerates the price collapse, by including in his time series a price/index of 11 for 1 May 1637 which is based merely on an unsubstantiated and most likely exaggerated claim - as is so common in this literature - of a price that might have been obtained at another date. Another such price claim in the literature would put the index at 1.

[Note: One unresolved problem with price measures used in the literature is that some bulbs are sold for fixed prices with a recorded weight obviously measured at the time of planting. However, during the growth season a bulb would normally gain weight; sometimes up to five times. Other bulbs are sold by a weight of 1000 asen or one pound (10240 asen) and this is obviously a weight to be measured at delivery. This practice distorts the price comparison.]

Recent literature

• Garber, P.M., "Tulipmania,"Journal of Political Economy, vol.,97 (3) June 1989
• Garber, P.M., "Who put the mania in the Tulipmania," in E.N. White (ed.) Crashes and Panics: The Lessons from History. Business One Irwin, 1990.
• Garber, P.M., Famous First Bubbles: The Fundamentals of Early Manias. MIT Press, 2000.
• Dash, M., TulipoMania. Crown Publishers, 1999.
• Goldgar, A., Tulipmania. University of Chicago Press, 2007.
• Thompson, E.A., "The tulipmania: Fact or artifact?"Public Choice, vol.130 (1-2) 2006
• Gelderblom and Jonker (2003)

Internet

Warning: Many of the websites, weblogs, etc. continue to repeate the popular Mackay version of the bubble stories. It has been clearly demonstrated that Mackay is simply an unreliable source with an over-emphasis on silly stories and with no real attempt to understand or analyze the true events. Any site quoting Mackay as a main source is simply of no value at all.

• The Tulipomania. Html version of Chapter 3 of MacKay (1841) http://www.econlib.org/library/Mackay/macEx3.html (2nd ed. 1852)