Speculative financial bubbles are certainly nothing new, and lessons can be taken from each one with the benefit of hindsight. The Tulipmania phenomenon of the 17th century is a fascinating example of what can happen when the price of an investment greatly outpaces its intrinsic value.
Despite its modest stature, the tulip looms large in West Michigan. It serves as an unofficial emblem for the region’s substantial Dutch population with its own annual festival as well as an urban legend surrounding the criminality of picking tulips in the city of Holland. But before the tulip was the representative symbol it is today for cities near the Lake Michigan shoreline, it was part of a noteworthy financial bubble that reverberated throughout the Dutch economy in a series of events collectively known as Tulipmania.
While the tulip is most frequently associated with the Netherlands, its origins can be traced back to even more distant lands, to Asia Minor and Turkey. During what is commonly known as the Age of Discovery, the plant made its way westward to ports around Europe and by the late 1500s, they became a recurring feature of collections of Dutch merchants and nobility.
One man in particular, Carolus Clusius, is often cited as a founding member of the Dutch tulip trade. With a large network of wealthy merchants and noblemen who considered themselves amateur horticulturists or enthusiasts, he would receive regular requests from them for tulip bulbs for their gardens.
Initially, the trade of tulips in the Netherlands consisted of this informal network of aficionados and enthusiasts, with men like Clusius serving as conduits. During this time, the Dutch economy in the northern part of the country continued to grow and more affluent Dutch citizens came north. This was partly due to an unintended consequence of the war with Spain. In the southern part of the country, those that could afford to relocate did, often making their way from Spanish Netherlands (part of present-day Belgium) to the independent northern cities like Amsterdam and Haarlem. As they arrived, they brought with them not only their business acumen and financial skills, but the wealth and status provided by their acumen and skills. Their wealth and status (or at least the appearance of it) manifesting itself in their collections of tulips and other novelties.
As the popularity of tulips grew steadily, ownership of tulips with rare or unique patterns become a status symbol within the upper rungs of Dutch society, with one-upmanship becoming a dangerous attribute of the group’s members. As Anne Goldgar notes in her book, Tulipmania, “the concentration of a well-off group on the acquisition and cultivation of one precious and fragile object was not necessarily a recipe for longstanding harmony.” Even before the era that was known as Tulipmania, the desire to possess the rarest and most interesting bulbs became so rampant and theft became so commonplace that by 1596, having suffered thefts of nearly 100 of his most beautiful tulips in that year alone, Clusius nearly gave up gardening altogether.
As for Tulipmania itself, myth, legend and fact often get intertwined without much regard for each other. Amidst the chaos, certain tall tales have emerged and bump into what actually took place. A popular story of a sailor thinking he was eating an onion and instead consumed an expensive tulip bulb at the height of the frenzy almost certainly did not happen. Nor did the Dutch economy halt from 1636-1637 due to Tulipmania. The general consensus is that a runup in prices did take place, but amongst a much smaller contingent of Dutch elites with little direct investment from the whole of the Netherlands. Bulb prices did rise steadily in the years and even more quickly the weeks before the crash, but these prices were based on what is known as a futures contract, which is an agreement to buy or sell assets (usually commodities, for example tulip bulbs) at a fixed price and to be delivered and paid for later.
An example of the Dutch financial acumen is on display in an edict from 1610 that banned certain risky investment activity such as “windhandel” or “trading in the wind” which meant trading in shares that the trader did not possess. Additionally, futures contracts that were seen as speculative in nature were prohibited. These edicts were renewed several times before Tulipmania including in 1636, just before the pricing collapse in February 1637. According to economist Peter Garber, there was no punishment for violating these rules. Authorities simply refused to enforce such contracts, thus making those involved the sole bearers of risk of payment or delivery. In a normal environment, this is fine as a buyer would not risk his reputation of nonpayment if they had the money.
But then in February of 1637 the floor fell out and contract prices crumbled. According to Garber, there is no real explanation for the timing of the collapse. It was likely as simple as contract sellers could no longer find buyers willing to pay the excessively high prices and the trust in payment of the current contracts evaporated, causing a crash. As mentioned earlier, in the fallout, the seller had no legal recourse to collect the money owed to them and they were often left literally holding a bag of bulbs. After several weeks of confusion, a tentative and unofficial arrangement was put in place in Amsterdam where buyers could reject their contract upon payment of ten percent of the sale price. In Haarlem, the price of termination was 3.5 percent of the contract price. Some of the contracts were settled in this manner, while others simply had the buyer walking away entirely.
Recent scholarship on the topic has contested the spread and severity of Tulipmania on the Dutch economy. Early reporting from the 1800s about Tulipmania paint the event as widespread and crippling to the Dutch economy. More recent studies suggest that while several speculators lost large amounts during the bubble, it was for the most part, confined to a small group of Dutch merchants and artisans. The story is still worth examining, as it has echoes throughout economic history with comparisons to other more recent bubbles such as those involving NFTs (non-fungible tokens). For those of us who remember the 1990s, another comparison could be made with Beanie Babies and, to a wider more devastating scale, technology stocks during the Dot-Com Bubble. So while history doesn’t necessarily repeat itself, it does often rhyme.
Ultimately, Tulipmania was, as Garber puts it, “no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market.” The plague reference is no mere metaphor. An outbreak of the Bubonic Plague, AKA “The Plague” laid waste to much of the Netherlands between 1635 to 1637. Like the speculation in “meme stocks” in early 2021, a fair amount of speculation in tulips can be explained more as seeking an escape from boredom than for sound investment reasons.
The story of Tulipmania is part legend and part morality tale with just enough fact sprinkled in to make it true. Of the many lessons that can be learned, one of the most beneficial to investors is to not become overly enthused by every bright and shiny new investment opportunity. The tulip was only ever something pretty to look at. It pays no dividends and its only appreciation probably should have been in the form of admiration for its delightful patterns and vibrant colors. While there can be a time and place for small, speculative positions within a well-diversified investment portfolio, the fate of one’s wealth should not be left to something so fragile as tulips.
— Gavin Anderson is a financial analyst at Legacy Trust in Grand Rapids.
This article originally appeared on The Holland Sentinel: My Take: What Tulipmania can teach us about financial investing, wealth management