Tulipmania – an overview

The Tulips were introduced in Holland in the mid-sixteenth century when they were imported
from the Ottoman Empire1. They quickly became an exotic and a status enriching product.
The most valuable tulips were the ones infected with a virus which gave the tulips a flame
like pattern. These were sold for high prices, whereas common bulbs were sold against much
lower prices2. The prices of the rare tulips were high because the supply of the rare tulips was
limited. During the 1620’s all the bulbs of one of the rarest kind of tulip, the Semper
Augustus, were in the hand of a single owner who then sold one as the price rose from a 1000
guilders to 3000 guilders in 16253.

The enlargement of the Dutch economy and the foundation of the Amsterdam Stock exchange
lead to a climate where speculation became normal. Future contracts were written for popular
products such as pepper and coffee. A future is, simply stated, an agreement where two
persons agree upon a price of a commodity and in return one gets a paper which gives one the
right to buy a specific commodity on a specific date for a specific price. So, at this point, no
money transfer has taken place, only an agreement has been signed. So, when future contracts
were introduced in the tulip market it only meant that there was another commodity for which
you could buy future contracts and you could speculate. The only difference was that coffee
and pepper needed to be imported from a faraway place while tulips grew in your backyard.
Less risk means more chance on a profit.

In 1636, the tulip was the fourth leading export of Holland (following gin, cheese and
herring)4. By October 1636, the prices in the bubbles started to rise, the bulbs were planted
and were thus invisible until they flourished in springtime. A factor that also needs to be
considered is that a bubonic plague afflicted Holland in 1635-1636, Amsterdam lost around
20% of its population, the ever presence of death around them might have inclined them into
greater risk taking.

1 Anne Goldgar, Tulipmania : Money, Honor, and Knowledge in the Dutch Golden Age. (2007). 23
2
Peter M. Garber "Tulipmania." Journal of Political Economy 97, no. 3 (1989) 535-60. aldaar 537
3
A.Maurits van der Veen 2012. “The Dutch Tulip Mania: The Social Foundations of a Financial Bubble. Department of Government
College of William (2012) 4
4
Timothy Knight. Wiley Trading Ser. : Panic, Prosperity, and Progress : Five Centuries of History and the Markets (2014), 3
Table 2 is taken from the paper ‘Tulipmania’ by Peter Garber. 5 This table shows the prices of
the bulbs from the beginning of January until 5 February when the bubble busted as there
were only sellers of the bulbs left on the markets and no buyers anymore.6 The Semper
Augustus was one of the rarest bulbs in the market as it had flame like pattern on its leaves
which was considered as very beautiful which is why it was that much more expensive.
In 1637, the bubble reached its peak when hundreds of people gathered in taverns and pubs to
buy bulbs they didn’t want for prices they couldn’t afford and sell bulbs they couldn’t deliver.
7
The table shows that the prices soared in one month time. When looking at this table it is
important to put these prices into a perspective, a skilled laborer for example earned around
300 guilders in a year.8 During the period of one month, the Admirael de Man’s price went up
with 1061%, the price of the Gheele Croonen went up with 4900%, the price of Witte
Croonen increased with almost 2500%, The Gheele ende Roote van Leyden’s price rose with
680% and the Switsers’s price went up with 3000%. The price of the Semper Augustus went
up with ‘only’ 300% but this is probably because they weren’t many sold as they were quite
rare. The price on January 2, 1637 is the therefore the price from 1625 as a sell of this bulb

5
Garber, "Tulipmania." ,552
6
Knight. Panic, Prosperrity and Progress, ,5
7
Jan de Vries, , and Ad van der Woude. The first modern economy: success, failure, and perseverance of the Dutch economy, 1500-1815,
Cambridge: Cambridge University Press, (2010), 89
8
Nieuwkerk, Kroeze, Bubbels: spraakmakende financiële crises uit de geschiedenis ,22
was not regular. Still, a skilled craftsman had to work more than twenty years while saving
everything he earns, to buy one bulb.

In February 1637, the bubble busted when, during a regular bulb auction in Haarlem, there
were no buyers present, only sellers. The outcome of this auction spread like wildfire through
Holland and within a few days the future contracts were as much worth as the paper they were
written on.

Graph 19 Tulip Price index

Graph 1 gives a clear visual presentation of the tulip price index, first it’s rise from November
1636 to its crash in February 1637. A measurement implemented by the Dutch florist that
increased magnitude of the decent was that they changed the fundament of the future
contracts. They changed the future contracts to options, so instead of the obligation to buy
bulbs you now could decide if you wanted the bulb or not.10 For example: let’s say a bulb is
worth 500 guilders in the beginning of November. If the buyer and the seller agree on a future
contract than the buyer is required to buy the bulb for 500 guilders on a specific date. If the
buyer and the seller agree on an options contract, then that gives the buyer the right to buy the
bulb on a given date for 500 guilders in exchange for a small fee, but if the bulb is worth only

9
Knight, Panic, Prosperrity and Progress, 5
10
Knight ,Panic, Prosperrity and Progress, 6
50 guilders at that time, he decides not to exercise his right and he only pays the small fee for
it instead of losing 450 guilders as what would have happened if the contract was a futures
contract.
After the prices declined the traders were looking desperately to the government in the hope
that they would do something, the government however, saw these contract as nothing more
than gambling debts and thus told the traders that they were not recognized by the Dutch legal
system.11

Economic implications

To paint a complete picture of this bubble and its impact on society it is important to sketch
the market conditions and the economic situation of Holland when the bubble happened.

First, it is important to know that Amsterdam was, in this time, overflowing with capital and
credit as the golden age was well on its way12. Merchants and wealthy craftsman were thus
searching for a way to spend and invest their money and as the tulip was a status enriching
symbol, numerous gardens were created. The biggest investment however was made in real
estate as the Dutch population nearly doubled in the century after 1580. Amsterdam had to
accommodate around 400.000 new inhabitants. The wage level grew as well as the overall
productivity was captured in the wages, which was the highest in Europe around the 1650’s.13

This image is only strengthened by the following two tables

11
Knight. Panic, Prosperrity and Progress, P.6
12
Vries, Van der Woude. The first modern economy, 89
13
Prak, The Dutch Republic in the Seventeenth Century , 673
Table 114

Table 2. 15

These welfare ratios are based on the real wage indices and show that there has been an
increase throughout the seventeenth century in Amsterdam in welfare ratios. It looks as there

14
Robert Allen, 2001. “The Great Divergence in European Wages and Prices from the Middle Ages to the First World War.”. Explorations
in Economic History 38, 411– 44 (2001) , aldaar 429
15
Allen, The Great Divergence in European Wages , 429
has been no tulip mania at all. So, it is safe to assume that Holland was prosperous, doing
economically well and thus the wages were rising because of the growing economy and
investments, which created more work.
Another interesting conformation of the economic prosperity is to compare the share prices of
the VOC with those of tulip bulbs. If, like Mr. Gaber says it was all the result of an economic
boom of the Dutch economy then it can be explained why it had almost no influence on the
Dutch’s economic growth as it was organic. According to C.P. Kindleberger in his paper
‘Manias, Panics and Crashes’, the shares of the VOC increased from 229 in 1630 to 500 in
1650 which shows that trade was increasing as well.16 It does not however, explain the tenfold
increases in the prices of the tulips, but it does show that the Dutch economy was in the lift.
This statement further confirmed by table 3. In this table, there is a clear increase in revenues
even after the Tulipmania had happened.

It shows that this Tulipmania had no influence on the trading levels of Holland and the effects
of the Tulipmania have been confined in its own market.
Table 3.17

The last factor that needs to be considered to grasp the economic climate is the social
networks in which these bulbs were traded, which also gives an explanation on the question
why it didn’t affect the Dutch economy. As mentioned before, these trades were made in
taverns and during social gatherings. Markets were localized as the traders in these tulips
were mostly familiar with the florists and with the tulips themselves. The bubble could only
happen as the actors in this market were often connected via either religion or marriage.
Because of this, the actors in the market put more weight on each other’s transactions as they

16 Charles Kindleberger, Robert O’Keefe. “Manias, Panics and Crashes.” (2001), 116
17 Vries, Van der Woude. The first modern economy, 393
knew each other. Aggregated across the entire market, incorrect valuations can catapult the
market into a bubble, as it did in this case.18

In the end the tulip mania was a logical consequence for the Dutch republic. Because of the
huge inflow of capital in the republic, Amsterdam was overflowing with capital. Tulips were
a status enriching symbol which could be afforded by the rich elite. It was only when the not
so rich started to enter the market the prices went up. The crash did not affect the Dutch
economy as the trades were mostly conducted within social networks which confines the
impact of the declining prices. Furthermore, the Dutch economy was growing so rapidly that
nothing could slow it down, not even a small crisis as this one. It is even argued that the
Dutch tulip mania was an advertisement for Dutch tulips as it set Holland on the map as the
land of the tulips.19

The South Sea Bubble

After the glorious revolution of 1688, the government debts were gradually restructured
during the next 25 years. A new financial system, where joint stock corporation’s shares,
foreign bills of exchange and securely serviced long term debt were easily transferable,
helped to aid the financial needs of the British government. The origins of the South Sea
Bubble lie in the efforts of the British government to restructure the immense debt
accumulated by the British government during the Spanish succession wars (1702-1713). The
debt rose from 16.4 million pounds to 53.7 million pounds20.

The South Sea company was proposed to the British government in 1710 as an effective way
to finance the national debt. The people were encouraged to convert their long term in debt
shares into shares in a promising state backed company. Because these companies locks in
promising monopolies such as a monopoly on trade in North and South America this future
looked very promising. The people forgot here that Spain also had a monopoly on the same
territory. To further guarantee the promising future of the company the British parliament also
backed the company by stating that it will jump in if the company would encounter financial

18
Veen, The Dutch Tulip Mania, 31
19
Prak, The Dutch Republic in the Seventeenth Century , 89
20
Dickson, The Financial Revolution, pp. 91-2. Cf. Earl F. Hamilton, "Origin and Growth of the National Debt
in Western Europe," American Economic Review, 37(May 1947), pp. 118-30.

problems21.

Eventually, like previous bubbles, the madness came to London. The share price of the South
Sea Company rises from 128 pounds to almost a 1000 pounds per share in the summer of
1720. On March 21st, 1720, the South Sea Company got the permission of the British
government to convert more of the national debt into shares of the South Sea Company22. As
the shares were worth more than the par value of the debt, everybody wanted to convert thus
driving up the price as is visually explained in figure 2. However, there was no fundamental
value justifying this boom, the underlying debt to the government stayed constant, so this
Bubble was bound to burst. 23

Figure 2.24

One after the other company saw the light of day in these speculative summer as everybody
wanted to profit from the booming market. In the spring of 1720, around 190 new companies
were founded, to make a comparison, in 1700 there were around 200 companies trading on

21
Nieuwkerk & Kroeze,(2007) Bubbels. (P.39)
22
Neal, L. (2002.) The rise of financial capitalism (P 90- 100)
23
Neal, L. (2002). The rise of financial capitalism (P 101)
24
Garber, P. M. (2000). Famous first bubbles: the fundamentals of early manias. Cambridge, MA:
Massachusetts Institute of Technology. (P119)
the stock market. Although this is twenty years later, 190 companies in a period of three
months it is still a lot. This wildfire of new companies worried the British government as it
was concerned that attention for the South Sea Company was about to fade and less people
would then convert their government bonds into stocks of the company. That is why the
government enforced the Bubble Act on August 18th, 1720, to make sure that fake companies,
only in for a quick profit, were stopped25. This however set the decline of the stock of the
South Sea Company in motion as people were getting suspicious about the stock, when the
news broke that the company’s board of directors preferred investing in real estate instead of
in their own company the price of the stock crashed. One of the most famous losers of this
Bubble was Sir Isaac Newton, who spoke the famous words: ‘I can calculate the motions of
heavenly bodies, but not the madness of people’.26

So, to summarize, this crash happened because of unrealistic expectations, information

asymmetries and shortcomings in the regulation department of the government. Like I said in
the first sentence of this paper, when there is a market and there is asymmetric information,
speculation will happen. Here this meant that the Government of Great Britain saw a quick fix
for its rising government debt and eventually choose to burden society with its problem via
the South Sea Company. Government regulators were not paying attention until it was too late
and only then they put a stop to it via a new regulation law. This law however did not prevent
that the economy turned bearish.

25
Garber, P. M. (2000). (P116)
26
Nieuwkerk & Kroeze,(2007) Bubbels. (P.43)