The “Tulip Mania” Economic Bubble: Source of a Myth?

One often-cited historical example of an economic bubble is the “Tulip Mania” phenomenon of the 1600s, famous especially for the problems it created in Holland. The story goes that in the 16th century, tulips were introduced to Europe from Turkey andover time  become the object of a speculative bubble that collapsed in 1637, ruining many people in the process.

The Wikipedia entry on Tulip mania says that “the modern discussion of tulip mania began with the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay.”

The Wikipedia article calls McKay’s account “popular but flawed” and says that “since the 1980s economists have debunked many aspects of his account.” McKay’s account traces back to a 1797 book by Johann Beckmann, A History of Inventions, Discoveries, and Origins.

The article says that both Beckmann and McKay’s accounts are “primarily sourced to three anonymous pamphlets published in 1637 with an anti-speculative agenda.”

The chapter on “Tulipomania” from McKay’s Extraordinary Popular Delusions and the Madness of Crowds can be found at this link on the online text archive Project Gutenberg.

Speaking of the tulip bubble, McKay writes that:

In 1634, the rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade. As the mania increased, prices augmented, until, in the year 1635, many persons were known to invest a fortune of 100,000 florins [guilders] in the purchase of forty roots.

In modern terms, it’s a little hard to judge the extent of the bubble described here, but McKay does present a list of items and their values in florins that were supposedly exchanged for just one root of the rare Viceroy tulip species:

Two lasts of wheat — 448
Four lasts of rye — 558
Four fat oxen — 480
Eight fat swine — 240
Twelve fat sheep — 120
Two hogsheads of wine — 70
Four tuns of beer — 32
Two tuns of butter — 192
One thousand lbs. of cheese — 120
A complete bed — 100
A suit of clothes — 80
A silver drinking-cup — 60

Total: 2500 florins

Rampant speculation on the value of rare tulip species resulted in the establishment of formal markets for their sale, says McKay:

The tulip-jobbers speculated in the rise and fall of the tulip stocks, and made large profits by buying when prices fell, and selling out when they rose. Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.

Speculation also took hold among the laity:

Nobles, citizens, farmers, mechanics, sea-men, footmen, maid-servants, even chimney-sweeps and old clothes-women, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart. Foreigners became smitten with the same frenzy, and money poured into Holland from all directions.

When the bubble finally collapsed in 1637, McKay writes, “prices fell, and never rose again. Confidence was destroyed, and a universal panic seized upon the dealers.”

In the light of recent revelations about the perverse compensation system in today’s financial services industry (see “Should banking execs get paid a lot?”), it’s interesting to note what McKay says about the way in which some speculators managed to walk away unscathed while many suffered ruin:

Hundreds who, a few months previously, had begun to doubt that there was such a thing as poverty in the land, suddenly found themselves the possessors of a few bulbs, which nobody would buy, even though they offered them at one quarter of the sums they had paid for them. The cry of distress resounded every where, and each man accused his neighbour. The few who had contrived to enrich themselves hid their wealth from the knowledge of their fellow-citizens, and invested it in the English or other funds. [Italics ours.] Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.

As mentioned above, modern scholarship has revealed some deficiencies in the received version of the Tulip Mania case study. We will plan on taking a closer look at those criticisms in future posts.

AB — 2 April 2009