Tulip mania Totally Explained

Everything about Tulip Bubble totally explained

The term tulip mania (alternatively tulipomania; Dutch names include tulpenmanie, ulpomanie, tulpenwoede, tulpengekte, bollengekte) is used metaphorically to refer to any large economic bubble. The term originally came from the period in the history of the Netherlands during which demand for tulip bulbs reached such a peak that enormous prices were charged for a single bulb. It took place in the first part of the 17th century, especially in 1636–37.
The event is remembered in part because of its extended discussion in the book Extraordinary Popular Delusions and the Madness of Crowds, written by popular British journalist Charles Mackay in 1843, more than two centuries after the event. Mackay omitted mentioning that during 1636-37, the Netherlands suffered from an epidemic of bubonic plague, and severe setbacks in the Thirty Years War. Modern scholars (for example Peter Garber) consider the event much less extraordinary than did Mackay.
Obsession with various plant groups has happened a number of times — the Victorian Period saw both ferns and orchids becoming extremely desirable, while presently succulents are much sought after and cycads have been stolen and traded for the last century.

History

The tulip, introduced to Europe in the middle of the 16th century from the Ottoman Empire, experienced a strong growth in popularity in the United Provinces (now the Netherlands), boosted by competition between members of the upper classes for possession of the rarest tulips. Competition escalated until prices reached very high levels.
Tulip cultivation in the United Provinces is thought to have started in 1593, when Charles de L'Ecluse first bred tulips able to tolerate the harsher conditions of the Low Countries from bulbs sent to him from Turkey by Ogier de Busbecq. The flower rapidly became a coveted luxury item and a status symbol. Special breeds were given exotic names or named after Dutch naval admirals. The most spectacular and highly sought-after tulips had vivid colors, lines, and flames on the petals as a result of being infected with a tulip-specific virus known as the "Tulip Breaking potyvirus."

Popular view

In 1623, a single bulb of a famous tulip variety could cost as much as a thousand Dutch florins (the average yearly income at the time was 150 florins). Tulips were also exchanged for land, valuable livestock and houses. Allegedly, a good trader could earn six thousand florins a month.
   By 1635, a sale of 40 bulbs for 100,000 florins was recorded. By way of comparison, a ton of butter cost around 100 florins and "eight fat swine" 240 florins. A record was the sale of the most famous bulb, the Semper Augustus, for 6,000 florins in Haarlem.
   By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of society, with many people selling or trading their other possessions in order to speculate in the tulip market. Some speculators made large profits as a result. Others lost all or even more than they had.
   Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon was dubbed windhandel, or "wind trade", and took place mostly in the taverns of small towns using an arcane slate system to indicate bid prices. (The term windhandel is similar to the recent term vaporware: both have much the same metaphor.) A state edict from 1610 (well before the alleged bubble) made that trade illegal by refusing to enforce the contracts, but the legislation failed to curtail the activity.
   In February 1637 tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst. People began to suspect that the demand for tulips couldn't last, and as this spread a panic developed. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they'd paid. Allegedly, thousands of Dutch, including businessmen and dignitaries, were financially ruined.
   Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. Ultimately, individuals were stuck with the bulbs they held at the end of the crash—no court would enforce payment of a contract, since judges regarded the debts as contracted through gambling, and thus not enforceable in law.
   The aftermath of the tulip price deflation led to a widespread economic chill throughout the Netherlands for a number of years afterwards, resulting in what we'd describe today as a mild or moderate economic depression. (Galbraith 1990, p. 34)
   Lesser versions of the tulipomania also occurred in other parts of Europe, although matters never reached the state they'd in the Netherlands. In England in 1800, it was common to pay fifteen guineas for a single tulip bulb. This sum would have kept a labourer and his family in food, clothes and lodging for six months. Charles Mackay, in his book "Extraordinary Popular Delusions and the Madness of Crowds", tells a story of the time:
   A wealthy merchant had paid 3,000 florins (280 pounds sterling) for a rare Semper Augustus tulip bulb, and it disappeared from his warehouse. After thoroughly searching his warehouse, he saw a sailor (who had mistaken the tulip bulb for an onion) eating it. The sailor was promptly arrested and spent months in jail.

Dissenting views

Mike Dash, author of the modern popular history "Tulipomania," states ť The history of the tulip mania itself, however, remains remarkably obscure, and even now it has never been the subject of an exhaustive scholarly inquiry.

ť …My general feeling, after reviewing the available material, is that even after sounding the necessary notes of caution about the reliability of the popular accounts, historians and particularly economists remain guilty of exaggerating the real importance and extent of the tulip mania. (p.222, footnote)

Anne Goldgar, in her scholarly analysis Tulipmania, argues that the phenomenon was limited to "a fairly small group" and that most accounts of the period "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism". She argues that tulips were treated more like art, for which high-status people paid exorbitant prices in the pursuit of beauty. She also notes that deals for tulips were made far in advance of when the tulips were dug out of the ground and paid for and that when the tulip market crashed, buyers simply didn't pay for their trades.
A 2007 paper appearing in the journal, Public Choice, by UCLA's Earl A. Thompson "The Tulipmania: Fact or Artifact? (External Link

), provides an alternate explanation for Dutch tulip mania: that it wasn't caused by irrational speculation, but rather by a Dutch parliamentary decree (originally sponsored by Dutch investors made skittish by the Thirty Years' War then in progress) that made the purchase of tulip-bulb "futures contracts" a nearly risk-free proposition:
ť "…both the famous popular discussion of Mackay and the famous academic discussion of Posthumus, 1929, point out a highly peculiar part of this episode. In particular, they tell us that, on February 24, 1637, the self-regulating guild of Dutch florists, in a decision that was later ratified by the Dutch Parliament, announced that all futures contracts written after November 30, 1636 and before the re-opening of the cash market in the early Spring, were to be interpreted as option contracts. They did this by simply relieving the futures buyers of the obligation to buy the future tulips, forcing them merely to compensate the sellers with a small fixed percentage of the contract price."

Given data about the specific payoffs present in the futures and option contracts, the authors determine that tulip bulb prices in fact hewed closely to what a rational economic model would dictate: "tulip contract prices before, during, and after the 'tulipmania' appear to provide a remarkable illustration of "market efficiency."

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