Tulip mania
[3][4] The term tulip mania is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.
The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small cost, thus lowering the risk to buyers.
[20] Their popularity and cultivation in the United Provinces (now the Netherlands)[21] started in earnest around 1593 after the Southern Netherlandish botanist Carolus Clusius had taken up a post at the University of Leiden and established the hortus academicus.
The appearance of the nonpareil tulip as a status symbol coincides with the rise of newly independent Holland's trade fortunes.
[26] The multicolour effects of intricate lines and flame-like streaks on the petals were vivid and spectacular, making the bulbs that produced these even more exotic-looking plants highly sought-after.
During the plant's dormant phase from June to September, bulbs can be uprooted and moved about, so actual purchases (in the spot market) occurred during these months.
Short sellers were not prosecuted under these edicts, but forward contracts were deemed unenforceable, so traders could repudiate deals if faced with a loss.
[35] Traders met in "college" at taverns and buyers were required to pay a 2.5% "wine money" fee, up to a maximum of three guilders per trade.
[36] A contemporary satire suggests that the crisis started to unravel at 3 February in Haarlem, where an auctioneer failed to find willing buyers, despite lowering the asking price several times.
[39][43] The matter was brought before the Court of Holland, which declined to rule one way or the other and referred the question back to the city councils.
[49] The modern discussion of tulip mania began with the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay.
He proposed that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company scheme, one of his primary examples.
His popular but flawed description of tulip mania as a speculative bubble remains prominent, even though since the 1980s economists have debunked many aspects of his account.
Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.
[11]The increasing mania generated several amusing, if unlikely, anecdotes that Mackay recounted, such as a sailor who mistook the valuable tulip bulb of a merchant for an onion and grabbed it to eat.
In her 2007 scholarly analysis Tulipmania, Anne Goldgar states that the phenomenon was limited to "a fairly small group", and that most accounts from the period "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism".
[9] Peter Garber argues that the trade in common bulbs "was no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market.
Goldgar, who identified many prominent buyers and sellers in the market, found fewer than half a dozen who experienced financial troubles in the time period, and even of these cases it is not clear that tulips were to blame.
[58] It is well established that prices for tulip bulb contracts rose and then fell between 1636 and 1637; however, such dramatic curves do not necessarily imply that an economic or speculative bubble developed and then burst.
After the Peace of Prague the French and the Dutch decided to support the Swedish and German Protestants with money and arms against the Habsburg empire, and to occupy the Spanish Netherlands in 1636.
[61] Garber notes that, "a small quantity of prototype lily bulbs recently was sold for 1 million guilders ($US480,000 at 1987 exchange rates)", demonstrating that even in the modern world, flowers can command extremely high prices.
[64] Garber's theory has also been challenged for failing to explain a similar dramatic rise and fall in prices for regular tulip bulb contracts.
[5] Some economists also point to other factors associated with speculative bubbles, such as a growth in the supply of money, demonstrated by an increase in deposits at the Bank of Amsterdam during that period.
[65] Earl Thompson argued in a 2007 paper that Garber's explanation cannot account for the extremely swift drop in tulip bulb contract prices.
This change in law meant that, in modern terminology, the forward contracts had been transformed into options contracts—contracts which were extremely favourable to the buyers.
[citation needed] Thompson argues that the "bubble" in the price of tulip bulb forward prior to the February 1637 decree was due primarily to buyers' awareness of what was coming.
[67] In other words, many investors were making an "additional gamble with respect to the prices the buyers would eventually have to pay for their options"[68]—a factor unrelated to the intrinsic value of the tulip bulbs themselves.
[citation needed] Goldgar argues that although tulip mania may not have constituted an economic or speculative bubble, it was nonetheless traumatic to the Dutch for other reasons: "Even though the financial crisis affected very few, the shock of tulipmania was considerable.
The idea that the prices of flowers that grow only in the summer could fluctuate so wildly in the winter, threw into chaos the very understanding of "value".
[72] Many of the sources telling of the woes of tulip mania, such as the anti-speculative pamphlets that were later reported by Beckmann and Mackay, have been cited as evidence of the extent of the economic damage.
