Tulip Mania: An Old Presage of Modern Economic Bubbles

Tulip Mania Modern Economic Bubble
Tulip Mania

The term “tulip mania” refers to the period during the Dutch Golden Age when the Netherlands saw an incredible rise in the popularity and sale of tulips. Tulips were first introduced to Europe when they were brought from the Ottoman Empire in 1554. They were initially brought to Vienna but made their way to the Netherlands soon thereafter. The increase in popularity of the tulip in the Netherlands is generally thought to have occurred around 1593; this increase coincides with the establishment of the “hortus academicus” by the Flemish botanist Carolus Clusius at the University of Leiden.

The high popularity of the tulip was due to its beauty and rarity. Tulips take a substantial amount of time to produce – daughter offsets usually take 1-3 years to become flowing bulbs – and so even at the height of its popularity the tulip was in short supply. These factors, coupled with the spectacular economic development of the Netherlands during this era, combined to transform the tulip into a status symbol which was highly coveted throughout Dutch society.

By the early 1600s tulips were a thriving commodity. Tulips became extremely expensive during this time. A number of varieties of the flower were developed and certain varieties commanded far higher prices than others. One variety, the Viceroy, was allegedly traded for goods equaling roughly 2500 florins in 1636; a skilled craftsman typically earned 300 florins per year.

Since tulips only bloom during a short window every year (in the Northern Hemisphere), futures contracts were made by tulip traders so that tulips could be bought in advance. By 1636, a formal futures market was created in which contracts to buy bulbs could be bought and sold. By that time, tulips had come to play a massive part in the Dutch economy: by 1636 the tulip became the fourth leading export of the Netherlands.

Fascinatingly, in February of 1637, the tulip bulb market crashed in the Netherlands. Tulip prices plummeted and trading abruptly ceased. A number of theories have been advanced but so far an explanation for the collapse of the tulip market which is universally satisfactory has yet to be uncovered. For various reasons, the demand for tulips fell sharply in 1637 and as a consequence many individuals lost considerable sums of money on tulip contracts. Many modern economists point to tulip mania as one early example of an economic bubble; others contend that the phenomenon should not be considered an economic bubble by modern standards. However it is classified, tulip mania remains an exceptionally interesting example of market volatility and price fluctuation.

Image credit: liz west

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