Camille Van Vyve
09 Apr 2024
Stories of crises and recoveries: the tulip crisis
The tulip crisis is considered to be one of the first documented speculative bubbles. Despite the doubts that remain about the true consequences of the event, it is nevertheless very instructive on the principles at work in this type of case: very rare product, growing demand, soaring prices… then collapse.
What is the context?
We are in 1637 in the Netherlands. For about forty years, tulips have been appearing in the gardens of wealthy Dutch merchants who bring them back from Istanbul, thus becoming a sign of prosperity. Due to a virus that alters the monochromy of the petals, some tulips at this time have a mottled color which makes them even more popular.
The first futures market
Knowing that the bulb can only be uprooted and transported from June to September – limiting the effective transaction period – the florists sign contracts before a notary for the purchase of bulbs at the end of the season. The "Tulip Stock Exchange" is thus open all year round, and the market becomes speculative. In 1635, it even became possible to buy bulb shares.
What happened?
Demand intensified, also coming from France, to such an extent that the price began to soar: between November 1636 and February 1637, the value of a tulip bulb was multiplied by 20! At its peak, one of the most prized varieties probably fetched a price of around 5,000 Florins per bulb, the price of a bourgeois building in Amsterdam at the time. To afford them, some do not hesitate to pledge their savings or a plot of land.
Price collapse
The rise in prices is such that speculators are beginning to massively want to take their profits. The sales spiral begins and the price suddenly collapses in February 1637, so that almost no contract can be honored.
Nobody loses, nobody wins
Given that the tulip futures contracts were promises to buy and sell, with no transfer of funds before the actual transaction and no legislation specifically governing this type of contract, it seems that the crisis was resolved fairly quickly, the most of the contracts being de facto simply cancelled. The consequences for the Dutch economy were therefore relatively small.
Bubble or no bubble?
If it is proven that the price of the tulip bulb did indeed soar during the winter of 1636-37, the consequences of the story are not entirely clear given the unreliability of the sources of the time. The Scottish journalist Charles Mackay popularized this episode in a work published in 1841, according to which the crisis would have affected all layers of Dutch society and could effectively be called a speculative bubble. Since 1980, this theory has been challenged by several economists who claim that the phenomenon ultimately remained fairly local, with more or less acceptable price variations.
Awareness
Be that as it may, this episode in history will undoubtedly have helped to raise awareness about the dangers of speculation, the crowd effect and the lack of diversification. Flemish painters took up the subject on many occasions, notably Jan Brueghel the Elder and Jan Brueghel the Younger, whose "Satire of tulipomania" you can admire here, where we see speculators represented as panicked monkeys :
Read other episodes in this series about market crashes and recoveries : Black Monday, the Gulf War, the Greek debt crisis