Tulip mania or tulipomania (Dutch names include: tulpenmanie, tulpomanie, tulpenwoede, tulpengekte and bollengekte) was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. It is recognized as one of the first and well-known financial panics.
The popular flower became a status symbol, the rare bulbs were hard to reproduce and in great demand. A large futures market formed for the seasonal flower and the speculation escalated. At its peak, the prices rose twenty-six times in January 1637, only to fall to one-twentieth of its peak price a week later. Finally, the Court of Holland judged the tulip sales to be bets under Roman law and basically canceled all contracts. The growers of the bulbs absorbed the most of the damage and the number of bankruptcies doubled.
Throughout 17th century, precious metals from the New World, Japan and other locales have been channeled into Europe, with corresponding price increases. As kings throughout Europe debased their currencies, the Dutch provided a sound money policy with money backed one hundred per cent by specie.
The effects of free coinage combined with the stability of the Bank of Amsterdam, created the impetus that channeled the large amounts of precious metals being discovered in the Americas, and to a lesser degree in Japan, toward Amsterdam.
The Japanese silver mining industry was also expanding at the same time, and the Dutch East India Company had a virtual monopoly on trade with Japan. From 1624 to 1853 the Dutch were the only Europeans permitted to trade with Japan, managing to obtain about one-half of the total exports of the precious metals.
Under the stimulus of "free" coinage, an immense quantity of the precious metals found their way to Holland, and a rise of prices ensued, which found one form of expression in the curious mania of buying tulips at prices often exceeding that of the ground on which they were grown.
Free coinage laws created more money from the increased supply of coin and bullion, than what the market demanded. Ironically, this acute increase in the supply of money fostered an atmosphere, that was ripe for speculation and malinvestment, and led to one of the first recorded panics or speculative bubbles.
Boom and bust
Like other periods of heightened speculation, Dutch interest rates "declined sharply" in the seventeenth century and tulip bulb futures could be traded with no margin required. The tulip trading clubs were "soundly organized" and "proved very effective in smoothing transactions". The masses speculated in the tulip trade as an outgrowth of "an increasingly feverish boom in the Dutch economy as a whole, which began in 1631 and 1632 and gathered pace toward the end of the decade and meant that in many cases there was more money around than ever before."
As more novice florists became interested in tulip speculation, professional growers introduced "an unusually large number of new varieties in 1634, which had the effect of depressing prices," but provided an avenue for commoners to participate in the mania.
By 1636, a formal futures market had developed for the tulip market. Trading took place in taverns in groups, known as "colleges" where rules governed bidding and fees:
- 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 bulbs on the settlement date, this market was not different in function from currently operating futures markets.
The crash of tulip prices in 1637 left the growers of the bulbs to absorb the majority of the financial damage of the mania. The government basically canceled all contracts, as the Court of Holland judged the tulip sales to be bets under Roman law. The growers could not find new buyers or recover money owed them by buyers supposedly under contract.
- In any event, the magistrates of the Dutch towns saw niceties of equity as less pressing than the need to deintoxicate the tulip craze. Their intervention was hastened by the urgency of returning the genie speculation to the bottle from which it had escaped, and corking it tightly to ensure against any recurrence. To some extent, they could feel satisfied that the ineluctable operations of Fortuna had already punished the foolhardy by taking them from rags to riches and back again in short order. But they still felt impelled to launch a didactic campaign in tracts, sermons and prints against folly, since its special wickedness had been in leading the common people astray.
The number of bankruptcies in Amsterdam has doubled from 1635 to 1637.
- Early Speculative Bubbles and Increases in the Supply of Money
- Tulip Fever
- Tulipmania and the Econo-Cultural Breakdown
- Doug French. "The Dutch Monetary Environment During Tulipmania" (pdf), Quarterly Journal of Austrian Economics, Vol. 9 Num. 1. 2006, referenced 2011-01-08.
- Tulipmania at Wikipedia