Great Tulip Mania, The
Great Tulip Mania, The
The Great Tulip Mania refers to the spectacular rise and fall in the price of tulip bulbs between the end of 1634 and February of 1637 in what is now the Netherlands. The episode is less significant as an event of great historical importance than as a paradigm of a speculative mania ending in a panic, and it produced a term, tulipomania, that often is used as a metaphor for economic bubbles.
References to the Tulip Mania in economics and finance cite Charles MacKay’s 1852 account, though, as with the event itself, the value of this account lies more in its portrayal of the emotions and irrational action that typify frenzied speculation than in its veracity as historical record. Such references typically motivate discussions of the dynamic instability in heterogeneous capital goods models and discussions of speculative bubbles in financial markets.
Nicholaas Posthumus (1929) provided English-language readers with the first serious documentation of historical details and an interpretation of the event based on excerpts from contemporaneous pamphlets and notary transcripts. Centered in the tulip-growing region of the municipality of Haarlem, the mania was the result of a speculation in tulips that spread from professional tulip growers and experts to those who had no previous connection to bulb growing, first the wealthy and then the lower-middle and working classes.
As much as historians are able to discern from surviving records, evidence suggests that there was heightened speculation in the trading of contracts on rare, and later common, tulip bulbs. At its peak, the event saw the rarer bulbs commanding prices that exceeded the estimated average annual per capita income by a considerable margin. Yet, whether the prices were “excessive” in relation to the fundamental, nonspeculative elements governing the demand for and supply of the bulbs is as debatable as the possibility that the subsequent crash in the market for tulip bulbs caused any economic crisis. What is apparent is that institutionally, the episode is an early experience with futures and options contracts, although this emerged only after the fact when a group of professional traders, attempting to calm the market, permitted holders of futures contracts the right to decline to buy in exchange for a small fraction of the previously agreed-upon price.
Researchers have examined the records of the seventeenth-century tulip market for evidence of a speculative bubble with prices rising in excess of that which might have been warranted by fundamentals. Peter Garber’s 1989 study, for example, suggests that the bulb speculation did not lead to obvious excesses, at least for much of the 1634 to 1637 “mania.” As with most attempts to debate the efficiency of a given market wherein prices reflect fundamentals rather than irrational speculative influences, conflicting interpretations typically revolve around the interpretation of econometric signals. There will always exist scope for considerable debate, however, because a speculative bubble in the market price of tulips—or any other object of speculation—is indistinguishable in the data from time-varying expected returns and disappointed but otherwise well-grounded expectations of optimistic outcomes.
SEE ALSO Economic Crises; Manias; Panic
BIBLIOGRAPHY
Garber, Peter M. 1989. Tulipmania. Journal of Political Economy 97 (3): 535–560. Reprinted in 1996 Stock Market Crashes and Speculative Manias, ed. Eugene N. White, 36–61. Cheltenham, U.K.: Elgar.
MacKay, Charles. [1852] 1980. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. Vol. 1, 2nd ed. London and New York: Harmony Books.
Posthumus, Nicholaas W. 1929. The Tulip Mania in Holland in the Years 1636 and 1637. Journal of Economic and Business History 1 (3): 434–466. Reprinted in 1996 Stock Market Crashes and Speculative Manias, ed. Eugene N. White, 3–35. Cheltenham, U.K.: Elgar.
Brenda Spotton Visano