tulip-mania

What Was Tulip Mania? The Dutch Tulip Bubble Explained

Tulip mania, also known as the Dutch tulip bubble, was a period during the 17th century where contract prices for tulip bulbs reached extremely high levels before crashing in 1637. Trading became increasingly more organized in these rare tulips, with companies established to grow, buy, and sell them. Cultivation techniques also improved, which caused more and more people to speculate on tulip bulb prices. 

Understanding tulip mania

Tulip mania occurred in the Netherlands between 1634 and 1637.

Tulips were a relatively new status symbol for wealthy Dutch citizens at the time, with some hard to cultivate varieties producing rare flowers that had striped or speckled petals.

Trading became increasingly more organized in these rare tulips, with companies established to grow, buy, and sell them.

Cultivation techniques also improved, which caused more and more people to speculate on tulip bulb prices. 

Though the practice attracted some regulatory oversight, stock traders pushed tulip prices to astronomical levels.

The most expensive tulips sold for around 5,000 guilders – equivalent to the price of a well-appointed house and more than twenty times the annual income of a skilled carpenter. 

Perhaps inevitably, the prices peaked and dramatically collapsed over a week during February 1637. Three months later, tulip bulbs were back to trading at normal prices.

What caused the Dutch tulip bubble?

Tulip mania is frequently cited as the classic example of a financial bubble, with many naïve and uninformed investors entering the market and then losing everything because of unsustainable price rises.

However, considering that the bubble did not cause a widespread ripple effect in the Dutch economy, an alternative theory may explain its demise.

The most accepted explanation is that with so many people cultivating rare bulbs, they simply become more abundant and less desirable.

This theory is supported by the fact that the crash occurred in February at a time when tulip bulbs begin to emerge from the Dutch soil.

Bulb traders may have witnessed this proliferation during their travels and realized certain flowers were less rare than they had imagined.

Whatever the cause of Tulip mania, the consequences for buyers and sellers alike were painful.

Many transactions were not basic exchanges of cash for bulbs but promises to pay for bulbs in the future.

Disagreement over who owed what to whom between buyers without money and sellers without bulbs was rife.

Implications for tulip mania in the 21st century

Today, tulip mania has become a catchphrase for insanity in markets where high prices are attached to items with little value or utility.

Indeed, similar price cycles have been observed in the trade of Beanie Babies, baseball cards, and non-fungible tokens (NFTs). 

The so-called South Sea Bubble, where a shipping company was formed to reduce national debt through slavery, is a more historical example of investment mania leading to a market crash.

Key takeaways:

  • Tulip mania was a period during the 17th century where contract prices for tulip bulbs reached extremely high levels before crashing in 1637.
  • The causes of tulip mania have perhaps been distorted over the centuries, with many assuming it was one of the first examples of a market bubble bursting. However, the proliferation of once rare tulip bulbs probably lead to them becoming less desirable. 
  • Tulip mania remains a popular term to describe markets where high prices are associated with low value or low utility items, including baseball cards, Beanie Babies, and NFTs.

Related Financial Bubbles

Tulip Mania

tulip-mania
Tulip mania was a period during the 17th century where contract prices for tulip bulbs reached extremely high levels before crashing in 1637. The causes of tulip mania have perhaps been distorted over the centuries, with many assuming it was one of the first examples of a market bubble bursting. However, the proliferation of once rare tulip bulbs probably lead to them becoming less desirable. Tulip mania remains a popular term to describe markets where high prices are associated with low value or low utility items, including baseball cards, Beanie Babies, and NFTs.

South Sea Bubble

south-sea-bubble
The South Sea Bubble describes the financial collapse of the South Sea Company in 1720, which was formed to supply slaves to Spanish America and reduce Britain’s national debt. Investors saw the potential for the South Sea Company to collect interest on the loan in addition to collecting profits from its gold, silver, and slave interests. Positive sentiment was also driven by the actions of the government. Lucrative trade profits never materialized, which caused the share price to become dangerously overvalued. Instead, the South Sea Company operated more like a bank and less like a shipping business. Capital invested from waves of new investors was redistributed to older investors in an early Ponzi scheme. The share price crashed in December 1720, with many South Sea Company directors impeached or imprisoned.

Mississippi Bubble

mississippi-bubble
The Mississippi bubble occurred when a fraudulent fiat banking system was unleashed in a French economy on the verge of bankruptcy. Scottish banker John Law proposed that the French transition from gold and silver-based currency to paper currency. Law theorized that he could sell shares in the Mississippi Company to pay off French national debt. When the company secured total control of European trade and tax collection, investor speculation increased to unsustainable levels. The company share price reached its peak in January 1720 as more and more speculative investors entered the fray. Law continued to issue banknotes to fund share purchases, which inevitably caused hyperinflation. Less than twelve months later, shares in the Mississippi Company declined by 1900% and Law had to flee France in disgrace.

Stock Market Crash of 1929

stock-market-crash-of-1929
The Stock Market Crash of 1929 was a major American stock market crash in October 1929 that precipitated the beginning of the Great Depression. Black Friday, Black Monday, and Black Tuesday are terms used to describe the calamitous fall of the Dow Jones Industrial Average over three days. The index would slide further in the following years and would not recapture its pre-crash value until November 1954. The Stock Market Crash of 1929 was caused by complacency during the economic prosperity of the 1920s with many new investors buying stocks on margin. Government mismanagement and company share prices that did not reflect their true value were also contributing factors.

Japanese Lost Decade

japan-lost-decade
The Japanese asset price bubble resulted in greatly inflated real estate and stock market prices between 1986 and 1991. During the late 1980s, the Japanese economy was booming as a result of exuberance in equity markets and skyrocketing real estate prices. The Nikkei stock market index reached a peak of 38,916 on December 29, 1989. The bubble burst soon after as the Bank of Japan raised bank lending rates to try to keep inflation and speculation in check. The economy lost over $2 trillion in value over the next twelve months. The Japanese asset price bubble was primarily caused by bank deregulation and expansionary monetary policy. Japanese banks who had lost their corporate clients instead lent to riskier small and medium enterprises. The 1985 Plaza Accord trade agreement also caused a sharp appreciation in the yen, which caused massive speculation that the Bank of Japan was happy to ride for years.

Dot-com Bubble

dot-com-bubble
The dot-com bubble describes a rapid rise in technology stock equity valuations during the bull market of the late 1990s. The stock market bubble was caused by rampant speculation of internet-related companies. At the height of the dot-com bubble, instances of private investors quitting their day jobs to trade on the financial market were common. Thousands of companies held profitable IPOs despite earning no profit or even revenue in some cases. The dot-com bubble began to burst after interest rates were raised five times between 1999 and 2000. Wall Street analysts, perhaps seeing the writing on the wall, advised investors to lower their exposure to dot-com stocks. The NASDAQ peaked in March 2000 and had lost 80% of its value by October 2002.

Global Financial Crisis

global-financial-crisis
The global financial crisis (GFC) refers to a period of extreme stress in global financial markets and banking systems between 2007 and 2009. The global financial crisis was precipitated by changes to legislation in the 1970s. The changes created the subprime mortgage industry and forced banks to loosen their lending criteria for lower-income borrowers. When the subprime market collapsed in 2008, one-fifth of homes in the United States had been purchased with subprime loans. Bear Stearns and Lehman Brothers collapsed because of their excessive exposure to toxic debt, while consumers were left with mortgages far exceeding the value of their homes. In the aftermath of the GFC, interest rates were reduced to near zero and there was sweeping financial reform.

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