The Tulip Mania

History often serves as a cautionary tale for investors, reminding us that speculative bubbles are usually recognised only after they burst. Just as the Tulip Mania of the 17th century has become a symbol for irrational exuberance, today’s rapid advances and soaring valuations in artificial intelligence (AI) have prompted some to wonder if we are witnessing the formation of a new bubble in equity markets. While it’s easy to draw parallels with the past, it’s important to remember that hindsight always offers a clearer perspective than the present.

Whenever asset prices seem exaggerated, comparisons are often drawn with the infamous Tulip Mania in 17th-century Netherlands—a phenomenon sometimes referred to as the first speculative bubble.

What really happened?

After studying the subject, it remains unclear what truly transpired. Research is challenging due to limited data from 1630–1639 – much of what exists comes from pamphlets written by opponents of the tulip trade.

A folly?

The best-known account is Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds,” written two centuries later. Mackay described a nation “running wild after a golden vision,” but he was not a rigorous historian and likely exercised artistic license.

In reality, few people were ruined by tulip trading, and few fortunes were made. Most participants were already well-off and earned a modest extra income by timing their trades well. Even the highest prices, which could buy a car today, may never have resulted in actual cash transactions.

Despite the story being less spectacular than commonly thought, the tulip trade’s transformation into a bubble offers interesting insights.

The origins

Tulips arrived in the Netherlands in the late 16th century from the Ottoman Empire. This era of exploration brought many new plants to Europe, but tulips stood out for their ability to develop new varieties. Flamed, feathered, or striped tulips became highly sought after, and breeders focused on these patterns.

Rare breeds were especially valuable due to their unpredictability, later discovered to be caused by a virus. This marbled effect made certain bulbs elusive and increased their intrinsic value among enthusiasts. Tulip breeding became an art form, with creative names like “Gehmarmerde de Goyer” and “General de Goyer.” Only a few varieties received royal names, such as “Semper Augustus,” though these were less popular in the Dutch Republic.

Hortus Floridus & Tulip Crazies

By 1600, a new generation of growers began trading tulips, initially among insiders. The trade became more open after the publication of “Hortus Floridus” in 1614, which listed tulip growers across Europe and essentially created a market. Some growers felt tulips should remain special for true enthusiasts and not become a commodity.

Prices rose steadily. In 1610, two friends mentioned paying 50 Guilders (about EUR 1,000 today) for a prized tulip, which they cultivated in their gardens. Prices remained high, but only in the winter of 1636 did prices truly explode, shifting from a niche trade to widespread speculation.

Rich merchants like Abraham de Goyer built garden empires, attracting more enthusiasts. Notably, Amsterdam’s mayor Nicolaes Pietersz Tulp, though passionate about flowers, was not involved in the tulip trade.

Geopolitical uncertainty and religion

This period was marked by the Eighty Years’ War and rapid economic growth. New sources of income were needed for survival, and innovations like tradeable equity (introduced in 1602) allowed broader participation in profits from East Indies trade.

Religion also played a role. The war with Spain began over religious differences, and Amsterdam became Protestant in the 16th century. The Synod of Dordrecht (1618–1619) ushered in strict Calvinism, banning gambling and lotteries. Speculation became the only way for many to seek quick profits, and even ordinary people could profit from trading VOC shares.

From scarcity to availability

Tulips were scarce until 1630, but cheap varieties became widely available in the early 1630s. The trade spread through the urban middle class, and bulbs became objects of speculation due to high demand and variety.

Trading expanded beyond the usual June–October window, with winter purchases for future delivery becoming common around 1634. Buyers began selling bulbs before delivery, sometimes multiple times. By early 1637, tulip purchases had become negotiable contracts with delivery dates.

Unregulated trade

The trade adapted to the common man, who lacked the means or understanding for formal contracts. Instead, trading took place in taverns among informal groups called colleges. The government took notice in 1636, mainly for tax reasons, but ultimately did not levy taxes due to impracticality. The trade remained largely unregulated.

The Bubble and Aftermath

The climax came in winter 1636–37. Prices for varieties like the “Switser” rose tenfold in two weeks, from 120 to 1,500 Guilders per pound. Soon after, prices collapsed, and trading halted. The reasons remain unclear—perhaps rumours of government intervention or buyers’ reluctance to pay higher prices. Chaos ensued, with disputes over contract validity.

In February, leading growers and traders met in Amsterdam to resolve disagreements, allowing buyers to exit contracts by paying 10% of the agreed sum. The government did not ratify this, and the measure had little effect. Haarlem’s magistrate later barred officials from tulip cases, helping some buyers avoid bankruptcy.

Prices stabilised after 1637, and tulips became the product we know today. Three centuries later, tulip bulbs even became a lifesaver during the Hunger Winter of 1944.

Conclusion

Geopolitical uncertainty, social disruption, rapid innovation, a pandemic, and lack of regulation all contributed to the first known speculative bubble. Looking at today’s markets, some observers see echoes of Tulip Mania in the excitement and soaring valuations around artificial intelligence (AI) in equity markets. While it’s tempting to draw direct comparisons, history reminds us that bubbles are only obvious in hindsight. The lessons of the past urge us to approach new technological revolutions with both curiosity and caution.

 

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