Whitney Drenth
Globally, people consider the tradition of growing tulips just as deeply ingrained into Dutch culture as wooden shoes and windmills. While these brightly-colored, spring-blooming perennials are now commonplace in most gardens, these flowers were once only found in a narrow band in Central Asia. Tulips were first introduced to Western Europe when Conrad Gesner, a Swiss physician, delivered them from Constantinople in 1559 (Mackay 89). Due to their exotic nature, tulips became much sought after by the wealthy for their private admiration (Hirschey 12).
In the 1600s, Holland was experiencing a “golden age”. Several Dutch firms combined to create the Dutch East India Company, founded in 1621. The Dutch East India Company opened trade with the New World and western Africa. This company made the Netherlands into a major sea power; its dealings accounted for over half of Europe’s total shipping trade (Hirschey 11). The Dutch West India Company colonized New Netherland (present-day New York, New Jersey, Connecticut, and Delaware) and bought Manhattan Island from the Native Americans. Here they established New Amsterdam, later renamed New York City. The expansion of trade and widespread international influence made the Netherlands into a major commercial hub. The Dutch people had the highest standard of living in the world (Hirschey 12).
By 1634, the desire to own tulips spread to the middle and lower classes. Rather than owning the flowers for their beauty, these people were much more interested in accumulating the bulbs for resale and trading. With extra cash in their pockets, it is no wonder that Dutch citizens were so open to gamble on profit speculation when tulip prices began to rise. This triggered a speculative frenzy now known as “tulipmania”, where tulip bulb prices increased so drastically that they were treated as a form of currency. The historian Charles Mackay cites that tulip bulbs cost anywhere between 1,260 and 5,500 florins (94). Mark Hirschey, whose article appeared in the Financial Analysts Journal, expands on the price index put forward in Mackay’s work by converting it to the U.S. dollar equivalent in 1998. This shows that a single tulip bulb would cost between $17,430 and $76,085 (Hirschey 12).
The events of this tale have become legendary. Similar accounts are told time and time again within the media. In his book Famous First Bubbles: The Fundamentals of Early Manias, Peter Garber quotes the Sept. 26, 1976 Wall Street Journal article, which argues that “the ongoing frenzy in the gold market may be only an illusion of crowds, a modern repetition of the tulip-bulb craze” (qtd. in Garber). Garber also quotes the Financial Times, which claims that during the global financial crisis of October 1998 people acted just “like the seventeenth century tulip speculators” (qtd. in Garber). In a more recent article from Business Insider, the CEO of JPMorgan, Jamie Dimon, declares that the modern cryptocurrency, bitcoin, is “worse than tulip bulbs” (Oyedele par. 1). It is almost guaranteed that the story of “tulipmania” will be invoked whenever financial speculation is in question. Nonetheless, modern economic writers’ reliance on “tulipmania” as a rhetorical device to validate their argument about abnormal crowd behavior is misplaced. “Tulipmania” has become so synonymous with financial instability within literature that authors rarely conduct adequate academic research on the event itself.
The passage of time has made some of the common sources of “tulipmania” unreliable. The modern tale of “tulipmania” as it is told within the media has been largely taken from Charles Mackay’s book Extraordinary Popular Delusions and the Madness of Crowds, which was originally published in 1841. Mackay’s account of “tulipmania” is brief; it is only nine pages long. Mackay asserts that tulip trading obsessed the Dutch so much that every other industry in the country was neglected. He describes how those unaware of the tulip bubble sometimes found themselves in awkward dilemmas caused by their lack of knowledge (Mackay 90-92). Despite how widely accepted Mackay’s account is within popular literature, modern researchers have now concluded that his description of the tulip bubble’s far-reaching and devastating effects may have been greatly exaggerated (Goldgar 5).
It is unfair to judge an old text with modern standards of recording academic information, as those standards did not exist when the text was written. Regardless, readers should take into account the text’s age when using Mackay’s book as a source. Mackay did not use citations of any kind within his book. In her book Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, Anne Goldgar evaluated the possible sources Mackay may have used for researching and writing. She concluded that Mackay’s main source was Johann Beckmann. Beckmann was a financial speculation author with suspicious sources of his own. He relied on the works of Abraham Munting, a botanical writer whose father supposedly lost money in the tulip trade. However, Munting himself was no eyewitness. By the time Munting wrote his work in the 1670s, the Dutch were cognizant of how the expansion of trade, both with the trading of the Dutch East India Company and tulip trading, changed their culture, priorities, and society. In those days, “tulipmania” was viewed as a social and cultural crisis that demonstrated the Dutch citizens’ new propensity for greed rather than a financial crisis. In response, propagandists published pamphlet literature in order to paint “tulipmania” as a ridiculous oversight. These works reveal the Dutch citizen’s deep anxieties about the changes their society underwent due to the “golden age” and their desire to stop a similar event from happening in the future. Unfortunately, it is from these works that we get the modern picture of “tulipmania.” Munting cited Adriaen Roman’s Dialogue Between True-Mouth and Greedy-Goods, as if it were fact (Goldgar 5-6), which perhaps set off the downward spiral of inaccurate tulip bubble research.
These sources lead to the comedic anecdotal evidence Mackay provides in his book. Mackay uses stories of people unaware of the tulip trading, who in result found themselves in awkward dilemmas as a result of their ignorance, to show the “madness of crowds.” One such tale was a sailor who mistakenly ate a tulip bulb because he thought it was an onion. The entire town responded by hunting him down to punish him with imprisonment. These stories show the Dutch’s effort to make “tulipmaina” seem as ridiculous as possible (Mackay 92). They play into an exaggerated narrative that makes it seem like collective crowd madness is the only explanation as to why anyone would willingly pay a large sum of money for a single tulip bulb. During the years after the tulip bubble crash, there was a conscious effort made to erase the signs of market fundamentals that would have pointed to a reasonable explanation of “tulipmania” in an attempt to preserve the Dutch citizen’s perceived cultural values (Goldgar 5-6). Arguments built on anecdotes should be rejected as they cannot be used to establish cause and effect relationships for the events they describe. Anecdotes are usually stories of only a few people; they do not give proper representation of the entire population. Understanding the potential for fallacy when reading about this time, and understanding how these falsehoods were created intentionally, will help modern investors recognize that “tulipmania” is not as far removed from modern economics as they may think.
Even within more modern research done on “tulipmania,” there have been several instances of research articles based on incorrect theories. Much of the research done on “tulipmania” during the 1900s was backed by the Efficient Market Theory. This theory was a popularly accepted explanation of financial markets and reached its peak in the 1970s. Unfortunately, this theory does nothing to negate the idea of crowd madness. The Efficient Market Theory states that “the price of a holding accurately reflects all public knowledge”. In this hypothesis, economic bubbles are conveniently lumped under the term “anomalies” despite the prevalence of market volatility throughout history (Mohacsy and Lefer 456-457).
An example of the Efficient Market Theory in popular media can be seen in the Financial Times, which claimed that, like the tulip speculators, people rely on “continuous orderly markets” (qtd. in Garber 11). However, a look at markets throughout history proves that markets are hardly orderly. In addition to “tulipmania”, the Mississippi Bubble (a large-scale money printing operation in 1719-1720) and the South Sea Bubble (a debt-for equity swap in 1720) are some of the earliest examples of financial manipulations and economic instability found in history (Garber 13). More recently, the dot-com bubble in the 1990s, the American housing bubble in the early 2000s, and the current cryptocurrency bubble continue to prove how prevalent these kinds of crises are in economics. These examples point more towards continuously unorderly markets, rather than what the Efficient Market Theory suggests. In their article, Mohacsy and Lefer claim “market efficiency cannot quantify instinct and emotion, nor the sentiments that inspire behavior among crowds, that is, large groups of investors” (455-457). In other words, the volatility seen within markets proves that the Efficient Market Theory is false.
When describing “tulipmania”, as well as similar events where asset prices were at odds with economic expectations, it is common to hear the word “bubble”. A bubble in economics describes the phenomena of asset price movements that do not follow fundamentals. Garber claims that the term bubble displays researchers’ inability to explain why the asset’s price deviates from its intrinsic value. The term bubble lacks a strong operational definition. Palgrave’s Dictionary of Political Economy says that a bubble is any unsound market speculation (Garber 7). By these definitions, society has no knowledge that a bubble is occurring until it has “burst”. The word is an empty explanation that does not truly expend an effort into understanding the event it describes. Garber argues that more measurable economic explanations based on fundamentals should be exhausted before settling for such vague terms (8).
In response, modern academic finance has evolved to include behavioral finance when evaluating causes for financial instability. Behavioral finance differs from the Efficient Market Theory because it uses social sciences like psychology and sociology to examine the reasons for people’s choices with money. “Money and Sentiment: A Psychodynamic Approach to Behavioral Finance” makes the point that while “most investors regard themselves as investing rationally, few do” (Mohacsy and Lefer 455). People fall victim to the “Greater Fool Theory”, where they think there will be a “greater fool” that will pay more for their stock or possession than they did. This leads markets to reflect both people’s optimism and pessimism. Investors are described as reacting collectively, making the market a conglomeration of human sentiment (Mahascy and Lefer 456-458). Collective crowd optimism raises the prices people are willing to pay and collective crowd pessimism lowers them. Behavioral finance relies on the usage of feedback models based on the reactions of crowds within markets. One such model, the price-to-price feedback theory, is thought to be one of the oldest theories about behavioral finance. However, rather than appearing in scholarly journals, this theory is more often expressed in newspapers and magazines. The price-to-price feedback theory is also defined in Mackay’s account of “tulipmania”. Investors were described as following the crowd, herding like cattle to follow a leader without scouting the grass themselves. When they saw others leaving the market, they let their fears consume them and they left it as well (Shiller 91). Mackay credits the cause of the rise and drop in tulip prices to this phenomenon; “it was seen that somebody must lose fearfully in the end. As this conviction spread, prices fell, and never rose again” (Mackay 95).
While the shift from the Efficient Market Theory to behavior finance is effective when explaining modern events, the use of behavioral finance should be limited to such applications. Years after an event, psychological state of mind cannot be considered a measurable concept (Garber 4). With historical distance it is clear the tulip prices in 1630s Holland were severely inflated. It is easy to read into situations and make assumptions as to how and why an event happened the way it did. Mackay himself did not witness the tulip bubble, and while he may have made assumptions from what his limited sources reported, he really had no data to support his claim. This is not to say that behavioral finance should not be used in modern research as long as there is available and reliable evidence. The early bubbles, however, should be explained by the available data and supported by market fundamentals.
It is evident that writers’ reliance on Mackay’s propaganda-based work and articles based on the Efficient Market Theory results in an inaccurate picture of the tulip craze. That is not to say that gaining a clear understanding of the 17th century tulip speculation is a lost cause. There are researchers who, straying away from the well-worn path of repeated propaganda, plagiarism, and inaccurate research, have presented new models for understanding the causes and effects of the tulip trade bubble. These models are more suited to explain “tulipmania” because they consider market volatility and are more measurable given the distance of time.
According to McClure and Thomas’ article, “Explaining the Timing of Tulipmania’s Boom and Bust: Historical Context, Sequestered Capital and Market Signals”, the answer to “tulipmania” comes from an understanding of tulips themselves. It was the flower’s extraordinary colors and variations that caused demand for them in the beginning. However, even when the wealthy first started purchasing tulips to grow their exotic collection, the trading was done in bulbs. The Dutch traded neither the flowers nor the seeds, even though they are obviously related to tulip bulbs. While during the fall and winter of 1636, a single tulip bulb could be traded for an Amsterdam townhouse, only for the prices to subsequently plunged in February 1637, the prices for tulip flowers and tulip seeds remained unchanged throughout the entire tulip bubble. McClure and Thomas believe that this point is crucial. The reason tulip bulbs were traded, rather than flowers and seeds, is that bulbs are an economically viable investment good. The continuously rising tulip bulb prices were not the only reason buyers assumed they would make a profit. Tulip speculators knew that buying tulip bulbs would generate future income because every bulb, if planted in the fall, would “produce two to three offset bulbs” that were accessible and sellable when they were “harvested the following summer” (McClure and Thomas 124). These offset bulbs would then grow their own underground offshoots when they were planted the following year. One could hardly expect a bouquet of tulips to reproduce into sellable and profitable goods, and while tulip seeds can be used to produce bulbs, they are much more delicate and take much longer to get returns on the investment. They are hardly good substitutes when considered both economically and horticulturally. (McClure and Thomas 125).
McClure and Thomas claim that it was this very act of the bulbs reproducing that led to the tulip market down fall. While people may wish for money to grow on trees, it is not rational for it to do so. This is especially true when it grows underground where no one can see it. McClure and Thomas apply the idea of sequestered capital “-capital whose quantities, usages and future yields are hidden from market participants-” to “tulipmania”. This hypothesis is well supported by weather and planting records from this time period. These records show that there is a correlation between the planting of the bulbs and tulip prices soaring the winter of 1636 and 1637. Planting the bulbs sequestered them from the traders as they were unable to see how many offsets were being produced. In result, throughout the fall and winter the tulip prices soared. Traders had no way of knowing how many tulip bulbs there would be in the spring, so pricing reflected this lack of knowledge. To aid in the tulip trading, being that all the tulips were under ground, market participants began buying and selling promissory contracts (promises of future delivery). These promissory contracts are thought to have shifted hands several times throughout the winter months. When the tulip sprouts finally emerged in February of 1637, revealing them to the traders again, it was seen that there were more sprouts than the traders had expected. McClure and Thomas assert that the tulip bulb burst because it was seen that the supply for tulips surpassed the demand, and the prices subsequently plummeted (McClure and Thomas 130-132).
Earl Thompson researched another explanation of “tulipmania”. In his article, he takes an in-depth look into the conversion of promissory contracts into option contracts at the end of “tulipmania.” An option contract gave the buyer the ability to back out of their agreement to pay the sum of money promised by paying a fee. For this reason, Thompson is adamant that “tulipmania” should not be considered a bubble at all, as the actual prices paid by tulip customers between November 30, 1636 and February 24, 1637 were around 3.5% of the amount agreed upon in their winter promissory contracts (Thompson 101). He assumes that the market participants would have been involved in the Dutch legislature’s decision and would have known while making their promissory contracts in the fall and winter that they would have the option to back out in the spring if the prices of tulips did not in fact rise enough for them to make a profit (Thompson 104). McClure and Thomas point out that Thompson bases his entire evidentiary case only on three transactions. In all three of these transactions, the promissory contracts were originally made with the knowledge that they could be discounted into options contracts (McClure and Thomas 135), therefore Thompson assumes that “all promissory contracts should be converted into options contracts” (Thompson 102). McClure and Thomas emphasize that there were too few transactions studied to give sufficient support of Thompson’s claim. They also point out the existence of several deals that directly contradict Thompson’s assumption. These deals show that the majority of contracts were made just as promissory contracts and were then converted into options contracts only after the February court decision. Buyers had no way of knowing that this would occur (McClure and Thomas 135).
Modern writers rely far too much on “tulipmania” as a rhetorical device for their financial arguments. “Tulipmania” may always be shrouded in the kind of mystery that only the distance of time can provide. So much has been written about this event, and so much of what has been written is wrong, that the actual progression of this event may have been so sullied by inaccurate interpretations that it is unlikely researchers will ever discover the truth. However, stories of “tulipmania” will continue to circulate. While the Dutch are no longer willing to pay a fortune for a single bulb, their love for tulips is still very present. The Keukenhof Gardens in Lisse, South Holland, Netherlands, is home to the largest tulip garden in the world, demonstrating how deeply ingrained the tradition of growing tulips is to Dutch culture (“Tulpomania.” par. 1). Tulips still garner much attention from Dutch descendants even outside of the Netherlands. Holland, Michigan’s Tulip Time sees more than 500,000 visitors per year and has a $43 million economic impact on the area (Bondie par. 1). The importance of tulips to the Dutch, both in the past and present, does not condone the distorted version of “tulipmania” that still circulates in modern media. Bubbles like “tulipmania” should not be portrayed as if they were spawned by abnormal crowd behavior. Rather, writers should use more economic-based, modern approaches based on available and trustworthy data to analyze and explain “tulipmania.” With historical distance it is easy to look back on tulip prices in 1630s Holland and realize they were severely inflated. However, it is less easy for people, investors or otherwise, to realize the same about their own investing and spending. This new understanding of “tulipmania” will serve as a warning to not be tempted by immediate rewards.
Works Cited
Bondie, Cassandra. “Report: Tulip Time Pulls in $48M Annually for Area.” Holland Sentinel, 19 Oct. 2018, https://www.hollandsentinel.com/news/20181019/report-tulip-time-pulls-in-48m-annually-for-area.
Garber, Peter. Famous First Bubbles: The Fundamentals of Early Manias. The MIT Press, 2000.
Goldgar, Anne. Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age. The University of Chicago Press, 2007.
Hirschey, Mark. “How Much is a Tulip Worth?” Financial Analysts Journal, vol. 54, no. 4, Jul./Aug. 1998, pp. 11-17. ProQuest, https://proxy.lssu.edu/login?url=https://search.proquest.com/docview/219175910?accountid=27857.
Mackay, Charles. “The Tulipomania.” Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. L.C. Page & Company, 2nd ed., 1967, pp. 89-97.
McClure, James, and David Thomas. “Explaining the Timing of Tulipmania’s Boom and Bust: Historical Context, Sequestered Capital, and Market Signals.” Financial History Review, vol. 24, no. 2, Aug. 2017, pp. 121-141. ProQuest, doi: 10.1017/S0968565017000154.
Mohacsy, Ildiko, and Heidi Lefer. “Money and Sentiment: A Psychodynamic Approach to Behavioral Finance.” Journal of The American Academy of Psychoanalysis and Dynamic Psychiatry, vol. 35, no. 3, Aug. 2007, pp. 455-475. ProQuest, https://proxy.lssu.edu/login?url=https://search.proquest.com/docview/198179437?accountid=27857.
Oyedele, Akin. “Jamie Dimon: Bitcoin is a Fraud That’s Worse Than Tulip Bulbs.’” Business Insider, 12 Sept. 2017, https://www.businessinsider.com/bitcoin-price-worse-than-tulip-bulbs-2017-9?utm_source=yahoo&utm_medium=referral.
Shiller, Robert. “From Efficient Markets Theory to Behavioral Finance.” The Journal of Economic Perspectives, vol. 17, no. 1, Winter 2003, pp. 83-104. ProQuest, https://proxy.lssu.edu/login?url=https://search-proquest-com.proxy.lssu.edu/docview/212069631?accountid=27857.
“Tulpomania.” Keukenhof Holland, https://keukenhof.nl/en/discover-the-park/tulpomania, 5 Nov. 2018.
Thompson, Earl. “The Tulipmania: Fact or Artifact?” Public Choice, vol. 130, no. 1-2, Jan 2007, pp. 99-114. ProQuest, doi:10.1007/s11127-006-9074-4.