The Fundamentals of Tulipmania

Mackay (1852) passed on to economists the standard description of the tulipmania as a speculative bubble.3 In this description, the Netherlands became a center of cultivation and development of new tulip varieties after the tulip's entry into Europe from Turkey in the mid-1500s. Professional growers and wealthy flower fanciers created a market for rare varieties in which bulbs sold at high prices. For example, a Semper Augustus bulb sold for 2000 guilders in 1625, an amount of gold worth about $16,000 at $400 per ounce. Common bulb varieties, on the other hand, received very low prices. By 1636, the rapid price rises attracted speculators, and prices of many varieties surged upward from November 1636 through January 1637. In February 1637, prices suddenly collapsed, and bulbs could not be sold at 10 percent of their peak values. By 2Actually, the company involved was not called the Mississippi Company. Initially, it was the Compagnie d'Occident; and after a series of corporate takeovers, it became the Compagnie des Indes. 3Mackay plagiarized his description from Beckmann (1846). Beckmann refers to a long sequence of research about the episode, but all sources are ultimately based on a set of three anonymously written pamphlets in dialogtue form published in 1637. These pamphlets were among dozens written just after the collapse by anti-speculative partisans launched by the economic oligarchy which wished to assure that speculative capital was channeled through markets which it controlled. 38 Journal of Economic Perspectives 1739, the prices of all the most prized bulbs of the mania had fallen to no more than 0.1 guilder. This was 1/200 of 1 percent of Semper Augustus's peak price. The story concludes by asserting that the collapse led to economic distress in the Netherlands for years afterwards. The standard version of the tulipmania neglects discussion about what the market fundamental price of bulbs should have been. Mackay did not report transaction prices for the rare bulbs immediately after the collapse. Instead, he recorded tulip bulb prices from 60 or 200 years after the collapse, interpreting these much lower prices as ones justified by market fundamentals. Yet the dynamics of bulb prices during the tulip episode were typical of any market for rare bulbs, even those existing today. The tulip market involved only bulbs affected by a mosaic virus which had the effect of creating beautiful, feathered patterns in the flowers. Only diseased bulbs were valued by traders and collectors, because a particular pattern could not be reproduced through seed propagation. Only through budding of the mother bulb would a pattern breed true. A standard pricing pattern arises for new varieties of flowers, even in modern markets. When a particularly prized variety is developed, its original bulb sells for a high price. As the bulbs accumulate, the variety's price falls rapidly; after less than 30 years, bulbs sell at their reproduction cost. This pattern raises two questions. First, why did the price of bulbs increase rapidly? Second, did prices decline faster than should have been expected? The price increases prior to February 1637 occurred as the status of a variety become clear; and as its renown increased, so would its price. After all, most new varieties were not considered particularly beautiful. This would explain the steady increase in the price of Semper Augustus. Similarly, a shift in fashion toward the appreciation of tulips in general over a shorter period would generate rising prices for all the rare bulbs. To form an expectation about a typical rate of price decline of tulip bulbs, I collected data on 18th century bulb price patterns for various highly valued tulip bulbs. The level of 18th century prices was much lower than during the mania. By 1707, an enormous variety of tulip bulbs had been developed; and the tulip itself had been replaced as the most fashionable flower by the hyacinth. Nonetheless, as Table 1 shows, bulb prices still were falling sharply. The average annual rate of depreciation for these bulbs was 28.5 percent before bulb prices reached floor values. Table 2 reports prices of those bulbs for which I have been able to gather price data for years immediately after the mania. February 5, 1637 was the day on which peak prices were attained. For these bulbs from February 1637 to 1642, the average annual rate of price depreciation was 32 percent, not greatly different from the 18th century depreciation rate. If the more rapid annual rate of decline for the tulipmania bulbs was attributed entirely to the crash, and not to factors which materialized in the succeeding five years, the crash can have accounted for no more than a 16 percent price decline: large, but hardly the stuff that legends are made of. Strangely enough, if one is to speak of tulipmania, it would be more accurate to Famous First Bubbles 39 Table I Guilder Prices of Tulip Bulbs, 1707, 1722, and 1739 Bulb 1707 1722 1739 1. Premier Noble 409 --- 1.0 2. Aigle Noir 110 0.75 0.3 3. Roi de Fleurs 251 10.0 0.1 4. Diamant 71 2.5 2.0 Source: Garber (1989). Table 2 Post-Collapse Bulb Prices in Guilders Bulb Feb. 5, 1637 1642 or 1643 1. English Admiral 700. 210. (bulb) 2. Admirael van Eyck 1345. 220. (bulb) 3. General Rotgans 805. 138. Source: Garber (1989). speak of the rapid price rise and collapse in common bulbs in the last week of January and first week of February 1637. Common bulbs became objects of speculation among the lower classes in a future market which emerged in November 1636. These markets were located in local taverns, and each sale was associated with a payment of "wine money." In January 1637, prices for some common bulb varieties increased by as much as 25 times. For example, the peak price for a bulb called Switser of .17 guilders/aas was attained on February 5, the apparent peak of the market (1 aas = 1/20 gram). Data from notarized contracts on February 6 and 9 indicate a sudden decline to .11 guilders/aas. This represents a substantial decline from prices in the first five days of February, but it still exceeds the price of .035 guilders/aas attained on January 23. Price increases through mid-January, while rapid, were not as great as in the final two weeks of the speculation; and there is no evidence that they were out of line. Since serious traders ignored this market and participants in this market had almost no wealth, it can have been little more than a mid-winter diversion among tavern regulars mimicking more serious traders. Finally, there is no evidence of serious economic distress arising from the tulipmania. All histories of the period treat it as a golden age in Dutch development.