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Tulip Mania

Tulip Mania

You have probably heard about many market bubbles. They have happened often throughout recent history. But, do you know about the first bubble? In this explanation, you will learn about the earliest and also one of the largest-scale market bubbles known to this date: the Tulip Mania.

What was the Tulip mania?

The Tulip mania is one of the most well-known speculative bubbles in history. It started in 1634 when the price of tulips ramped up many times their actual value before taking a nose-dive and culminating in a market crash in February 1637.

Considered as the first-ever recorded speculative bubble in the world, Tulip mania remains to this day a powerful lesson about excessive greed and speculation.

Tulip Mania History Painting of a tulip field StudySmarterA painting by Claude Monet depicting the Dutch tulip fields, Wikimedia Commons.

The history of Tulip mania: a great financial bubble

To understand tulip mania, we must first learn how tulips became a luxury trade item back in the seventeenth century in Europe.

Why tulips?

Tulips originated in the Tian Shan mountain ranges and didn't arrive in the Netherlands until the end of the sixteenth century. The vividly coloured petals differentiated tulips from any flower known to Europe at that time and quickly turned them into a fashionable trading item among the rich.

Carolus Clusius was the botanist that pioneered the cultivation of tulips in the Netherlands. His fascination with the tulip led him to grow a private garden with many rare tulip types and spend his later years studying the mysterious phenomenon called ‘tulip breaking’.

Tulip breaking is when a tulip petal colour changes into a multicoloured pattern. Science later found out that the breakages were caused by a virus infection.

People in Holland and the rest of Europe were obsessed with the infected tulips, much more than they admired the normal ones. This ramped up their price, and many Dutch botanists competed with one another to breed new and more beautiful tulips, known as ‘cultivars’.

Tulip Mania History Tulips infected with a virus were the most expensive StudySmarterA picture of tulips infected with the tulip breaking virus, Wikimedia Commons.

At first, the cultivars were only traded among a small group of botanical hobbyists. Soon, the trade expanded and botanists began to receive buying requests from strangers in faraway lands. This gave birth to the tulip brokerages, and the whole tulip trading scene became more popular than ever.

The Dutch golden age

One factor contributing to the popularity of tulips is The Dutch Golden Age which took place between 1588 and 1672.

During this time, art, science, and military flourished in Holland and the country was considered one of the most influential economies in the world. A group of the new-rich emerged, consisting of merchants, artisans, and tradesmen who wanted to prove their social status by owning luxury items1.

The tulip business

The mesmerizing beauty of multicoloured petals and the rise of the independently rich Dutch traders turned tulips into a fashionable trading asset.

The problem is that tulips can't be cultivated year-round. They only bloom between April and May for a few weeks and their dormant phase takes place between June and September when the bulbs can be uprooted and moved to another place.

As a result, the trading of tulips rarely happened on the scene. People would sign contracts to buy tulips during the last months of the year and collect them in the next summer. Before the actual transaction, the tulip contract could change hands many times2.

The causes of Tulip mania

So far we have examined what turned tulips a fashionable trading asset in Holland and the rest of Europe during the seventeenth century. But what actually led to the tulip mania?

The speculation period

As tulips gained in popularity and demand grew, speculators entered the market. At first, the speculation was rationable with realistic expectations of tulips' profit growth. Soon, the matter got out of hand as a lot of buyers jumped in for fear of missing out.

This boosted the trading volumes and drove the price of tulips up many times their intrinsic value. At one point, people were willing to pay 100,000 florins for 40 bulbs — around 10 times the annual salary of a skilled worker3.

Tulip Mania History 1637 Illustration of a Tulip StudySmarterIllustration of a tulip from 1637, Wikimedia Commons.

This is known in today's terms as a speculative bubble.

A speculative bubble is a rapid climb in the value of an asset, driven by an exaggerated expectation of its future growth.

The tulip contract trading was dubbed as ‘wind handle’ as people didn’t receive any bulbs at the time of the purchase. Instead, people signed contracts to buy the tulips, then resold them for a higher profit. At its peak, the tulip changed hands ten times before the actual transaction.

Suppose you sell me a tulip for 2 guilders, I sell it to my brother for 10 guilders. My brother's friend is interested and promises to buy the tulip from him for 50 guilders and so on.

Due to the exaggerated expectations of profit returns, transactions bloomed and tulips became the fourth leading traded item in the Netherlands, after gin, herrings, and cheese.

Tulip Mania History Semper Augustus: the most expensive flower during Tulip mania StudySmarterSeventeenth-century illustration of the Semper Augustus, the most expensive tulip during the Tulip mania, Wikimedia Commons.

The burst

In 1637, the bustling tulip market deflated. Buyers came to their senses and decided they no longer wanted to pay for the highly overpriced tulips. Demand fell and the market collapsed. It started in Haarlem when people refused to show up to collect the tulips, partly due to the recent outbreak of bubonic plague, then spreading to other parts of the Netherlands and Europe.

The speculative bubble burst. Many people were furious as the tulips they owned were only worth a fraction of what they had paid for them. Amid the crisis, the Court of Holland ordered to freeze all tulip agreements. Some tulip growers pressed for full payments, though they eventually gave up the effort and reduced the price to the level that buyers could actually buy. The Tulip mania finally ended, but its impact on the Dutch economy lasted for many years.4

The Tulip mania not only left the state of the Dutch economy ruined but also destroyed people's trust and relationships.

The market bubble cycle: Tulip mania

Tulip mania is a classic example of a market bubble that happens in a cycle. This is better illustrated in the figure below.

Tulip Mania Tulip bubble chart StudySmarterFigure 1. Market bubble cycle, Alanna Odagbu - StudySmarter.

Despite the fact that the Tulip mania taught us of the dangers of inflating prices to irrational levels, throughout history, we still see this kind of story repeat itself. Most recently with the dot-com bubble and cryptocurrencies.

Perhaps the greatest lesson is that human behaviours are hard to change and our best hope is to equip ourselves with the knowledge to prevent ourselves and those around us from suffering when such a crisis happens.

Tulip Mania - Key takeaways

  • The Tulip mania, also known as the Dutch tulip bulb market bubble, is the earliest market bubble recorded in history.
  • It dates back to the seventeenth century and happened most robustly between 1634 and 1637.
  • Due to the popularity of the tulip bulbs (particularly the ones infected with a virus that made them multicoloured) and the rise of new-rich Dutch, the price of tulips increased many times. At its peak, 40 tulips cost around 100,000 florins: more than a fortune.
  • In February 1637, the tulip bulb contract prices collapsed rapidly as buyers refused to show up to pay for the tulips. Declining demands followed and prices plummeted.
  • The Tulip mania happened as a result of the investors’ irrational expectations and the positive feedback cycle that kept the price inflated.
  • It remains forever a powerful lesson about excessive greed and speculation.

Sources

1. Simon Schama, The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age, 1997.

2. Anne Goldgar, Tulipmania: money, honour, and knowledge in the dutch golden age, 2007.

3. Mike Dash, The Story of the World's Most Coveted Flower & the Extraordinary Passions It Aroused, 2001.

4. Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, 1841.

Frequently Asked Questions about Tulip Mania

Tulip mania, also known as the Dutch tulip bulb market bubble, is the earliest market bubble recorded in history. It happened mostly between 1634 and 1637 when the market collapsed. 


At its peak, 40 tulips cost up to 100,000 florins, more than 10 times the average worker's annual salary at the time.  

As the popularity of tulips escalated, their price grew exponentially. Speculators entered the market in 1634 as a result of rising demands of the French. At its peak, the price of 40 tulips was 100,000 florins, and the contract trading hands changed 10 times per day. Tulips became the fourth leading trade article in Holland. 


In February 1637, tulip bulb contract prices collapsed rapidly as buyers refused to show up to pay for the tulips. Demand dropped sharply after and the price plummeted. 

As in any financial bubble, the tulip mania is the result of the investors’ irrational expectations for an asset's future price and the positive feedback cycle that kept the prices inflated. 

The tulip mania happened mostly between 1634 and 1637. 

The biggest lesson from the tulip bubble is to be aware of speculative investments as the market can burst any time when the public comes to thei senses and realize the inflated assets are not worth as much as they predicted.

Final Tulip Mania Quiz

Question

What was the Tulip mania? 

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Answer

Tulip mania, also known as the Dutch tulip bulb market bubble, is one of the most well-known market bubbles in history.

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Question

What is a market bubble? 

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Answer

A phenomenon where a financial asset is priced much higher than its intrinsic value; when people come to their senses, the demand and prices drop sharply. 

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What are examples of market bubble?

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Answer

Japan's real estate bubble

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What drove the tulip prices up so high? 

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Answer

The artistic beauty of multicoloured tulips.

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What is a simple definition of speculation?

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Answer

The anticipation of the future price of a financial asset.

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What does contract trading mean?

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Answer

The transaction happens on paper, based on people's promise to pay in the future. 

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When did the burst of the tulip bubble occur?

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Answer

February 1637

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How long was the tulip bubble?

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Answer

From 1593 to the first half of the seventeenth century.

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What can we learn from the tulip mania? 

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Answer

Irrational expectations for an asset can blow the price up to many times its intrinsic value. 

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What was the result of Tulip mania?

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Answer

The tulip mania not only left the state of the Dutch economy ruined but also destroyed people's trust and relationships. 

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Question

What is the biggest lesson of the tulip mania?

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Answer

Be aware of irrationally speculative investments

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When does a market bubble burst?

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Answer

When people refuse to buy the overpriced asset, either because they realize it's not worth as it's charge or because they can't afford it. 

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What is the relation between Dutch Golden Age and Tulip mania?

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Answer

The rise of a new group of wealthy middle-class merchants, artisans, tradesmen who were ready to spend extravagant money on luxury items cause speculators to push the price of tulips the unprecedented heights. 

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Question

In what century did the Dutch tulip mania take place?

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Answer

In the seventeenth century. 

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Question

What are the 5 stages in a market bubble cycle?

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Answer

  1. Investors set irrational expectations for an asset.
  2. Psychological biases push the price of an asset to unprecedented heights.
  3. Prices continue to inflate due to a positive feedback cycle.
  4. People realise the asset is priced irrationally.
  5. Prices plummeted as demands drop and many go to bankruptcy.

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