The history and consequences of the Tulipmania


Term Paper (Advanced seminar), 2017
11 Pages, Grade: 1,7

Excerpt

Outline

Outline

1 Introduction

2 Order of events

3 Consequences

4 Scientific discussions
4.1 Discussion about effects
4.2 Discussion about the nature of the Tulipmania
4.3 Source situation

5 Conclusions

Sources

1 Introduction

The Tulipmania is usually one of the first so called bubbles referred to in economic history which took place in the 1630s in the Netherlands. Object of speculation in these days were (rare) tulip bulbs. The positive development of prices over years boosted the speculations and hence the prices. In February of 1637 the crash followed when the prices dropped immediately.

One main problem in researching the Tulipmania, is the availability and reliability of historical sources. The empirical data about prices and the economy as a whole are incomplete and often matter of interpretation.

This paper starts in chapter two with a description of how the Tulipmania took place and what circumstances influenced the development of the Tulipmania. Chapter three focuses on the consequences of the crash for the speculators as well as the Dutch economy and society. Thereby actions of the government, courts and private arrangements will be considered. Besides that, the question about the seriousness of the consequences will be discussed. The fourth chapter examines the scientific disputes about the perception of the Tulipmania that exist till today. There are contradicting views about the importance of the Tulipmania as well as the kind of crisis the Tulipmania was. Especially the term bubble is criticised, and some authors even doubt the existence of a Tulipmania entirely. As to find an explanation to these controversies the second to last chapter scrutinizes the situation of some of the most influential sources. The last chapter shortly sums up the paper and contains a few concluding remarks about the discussions mentioned before.

2 Order of events

During the first two decades of the seventeenth century the tulip market expanded in supply and demand. Professional growers could easily enter the market because the trade of tulips was neither organized nor strictly regulated by guilds as most other trades. While tulips used to be a luxury good of the high society before, people from the middle class entered the market and establishing gardens became more and more popular. Even international trade developed. The variety of suppliers restrained the prices and forced growers to create new varietals to make high profits as long as no other cultivator was able to copy these. So new creations were still able to command very high prices. This demand for varietals increased further in excess of supply in the 1630s. (Bilginsoy, 2015, p. 20) While the Dutch economy was depressed due to the resumed war with Spain in the 1620s, the fast recovery in the 1630s enhanced this trend further. (Kindleberger & Aliber, 2005, p. 99)

After 1630 a new kind of player entered the market due to the steady increase in bulb prices: florists used bulbs as assets for speculation (Bilginsoy, 2015, p. 21). Furthermore, wider spheres of the society fell prey to the temptations of fast and high profits through speculation with tulip bulbs: “Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.” (Mackay, 1852). People started selling every kind of property, even houses and land which lead to ruinously low prices on the real estate market (Mackay, 1852).

The expansion of the market induced that no longer tulip bulbs but forward bulb-purchase contracts were traded. Therefore, tulips could now be traded the whole year and not only when blooming in short periods in summer. It enabled the buyers themselves to sell these forward contracts again, which led to numerous transaction chains for a product that did not even exist yet and was therefore highly speculative. Another signal for the growth of the tulip market was the standardization of weight entities tulip bulbs were sold in. The third innovation concerned the loan system: instead of lending money from banks to buy bulbs or forward contracts, personal loans on the basis of promissory notes became common. The growth rates increased with the value of the bulbs, which was the reason why people without much starting capital tend to raise such loans. Accepting promissory notes instead of real money or goods permitted massive increases in prices that were not in proportion to real values anymore. (Bilginsoy, 2015, pp. 21-24)Kindleberger & Aliber (2005, p. 55) refer to this phenomenon as “a seventeenth-century version of ‘vendor financing’”.

The prosperous development led to a fast-growing demand in tulips exceeding the supply which caused prices for rare single bulbs that were comparable to houses in best locations. But not only rare species were affected, so the prices for ordinary bulbs’ forward contracts were twentyfold in the winter of 1636/1637 before collapsing. (Bilginsoy, 2015, p. 14)

Thompson (2006, p. 101) gives a good illustration of the price development in the peak period of the Tulipmania from November 1636 till May 1637 as shown in figure 1 below. Generating a proper price index is rather difficult because of the scattered and incomplete available data (Bilginsoy, 2015, p. 25). Used price sources were, among others, tulip books, notary records as well as records of auctions. For the methodical details see Thompson (2006, pp. 109-111).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: An index of prices recorded in Dutch tulip contracts (Thompson, 2006, p. 101)

The excitement in tulips began in earnest after September 1636, when bulbs were no longer available for examination since they were in their normal cycle and had been planted to bloom the following spring.” (Kindleberger & Aliber, 2005, p. 99)

Besides the huge general increase in prices of Dutch tulips especially in autumn 1636, which is clearly noticeable in figure 1, it is also important to mention, that the increases for exotic and rare bulbs were even larger. (Kindleberger & Aliber, 2005, p. 99)

In early February 1637, previously high valued bulbs could not be sold at an auction even when the asking prices were lowered. This news of a lack in buyers spread fastly across the Netherlands and induced holders of tulip bulbs or contracts to sell them as soon as possible in order to convert them into money as long the prices were relatively high - respectively as long they could find any buyers. This behaviour initiated a chain reaction that is typical for the burst of economic bubbles: the bulb holders trying to sell their goods or contracts expanded the supply, that led to a further decrease in price. Since the expectations for future prices were decreasing and less people were interested in buying for speculative purposes, which was the main driving force of the tulip market in these days. So, lower demand and higher supply decreased the prices, which again reduced demand and increased supply – a perfect example of a vicious circle. (Bilginsoy, 2015, p. 26)

3 Consequences

After the collapse of price the buyers refused to pay for the tulip bulbs according to the forward contracts. The growers were aware that it was unrealistic to insist on full payment and therefore met on 23rd of February 1637 in Amsterdam to find a common position. Most of them agreed on settling all contracts signed after 30st of November 1636 for the payment of 10 percent of the original price. This legally not binding proposal could not convince the buyers, who still called for complete liquidation of the contracts without any payment. (Bilginsoy, 2015, p. 27)

The failure of privately solving this conflict put official authorities on the spot. Nevertheless the central government delegated the responsibility to sort out the disputed contracts to the local authorities in order to remain impartial. In April 1637 the court of Holland decided to suspend all contracts temporarily, enabling the city magistrates to gather sufficient information to be able to resolve the disputes locally. Even though the central parliament made this decision legally binding, the cities did not act to reinforce it. The court decision as well as the refusal of the cities helped the buyers and led to high losses for the growers. The reason for that was the soon blooming season, that is the only period in which the growers could harvest and sell their tulip bulbs. Since the contractual buyers refused to pay the growers had to sell their bulbs to any other interested party for the low market prices. All the contract holders who had not paid anything till and after the crash benefited from that. It took more than one year till first the Haarlem city council ruled to cancel all contracts at 3.5 percent of the original price in May 1638 – this decision was later adopted by other cities. (Bilginsoy, 2015, p. 27)

4 Scientific discussions

Even though there are numerous papers and books examining the Tulipmania, there are still some controversies about the type of crisis the Tulipmania was as well as what kind of consequences followed. The severity of these consequences for the Dutch economy, society and development is also controversial.

4.1 Discussion about effects

The effect of the Tulipmania on the Dutch economy is matter of discussion: Kindleberger & Aliber (2005, p. 100) argue in favour of a decline in economic activity due to the Tulipmania. The main reason for that is the decline in households’ wealth that led to a decrease in the willingness to spend money.

For Bilginsoy (2015, p. 27) the impact of this crisis on the Dutch economy is negligible. He states two reasons for that:

Firstly, the whole trading of bulbs was only a marginal part of the economy. For most florists dealing tulip bulbs was only a side activity, which is why bankruptcies and suspension of their other economic activity were exceptional cases. Even though the expected gains of speculators evaporated, the owned and owed debts were mostly personal and offset each other in aggregate. Nevertheless, there were people who suffered more from the crisis as well. Like growers with huge quantities of almost worthless tulip bulbs or florists and other speculators who sold or mortgaged their real estates and lost almost everything after the price drop. However, this scattered problem did not affect the whole economy and the whole episode was brief and localized. (Bilginsoy, 2015, pp. 27-28)

The second aspect mentioned is that most of the credit used in the bulb market came from parties involved in bulb trading and not from financial institutions outside the market. So, the credit losses were isolated in the bulb market and banks were not affected in general, that led to stability in the Dutch payment and lending system. Credit freezes, that are a huge threat to economic growth, were no consequence of the Tulipmania crash. (Bilginsoy, 2015, p. 28)

Even so, Bilginsoy (2015, p. 28) does not deny any negative effect in the aftermath of the Tulipmania. Examples for that are the deterioration of mutual trust due to the lots of breaches of contracts as well as many instances of drawn-out litigation. The crisis and resulting distrust even intensified xenophobic attitudes especially against Jews and Mennonites, who were blamed to be responsible for the crisis.

4.2 Discussion about the nature of the Tulipmania

Jonathan Israel wrote that the tulipmania should be viewed against the background of the general boom and as a mania of ‘small-town dealers, tavernkeepers and horticulturalists’ with the wealthy for the most part making money in other ways. This perspective undermines one of Garber’s points that there could have been no tulipmania because there was no depressed aftermath.” [Kindlesberger & Aliber, 2005, p. 100 referring to Israel (1995, p. 533) and Garber (1994, p. 72)]

[...]

Excerpt out of 11 pages

Details

Title
The history and consequences of the Tulipmania
College
University of Agder
Course
History of Financial Crises
Grade
1,7
Author
Year
2017
Pages
11
Catalog Number
V497553
ISBN (eBook)
9783346015921
Language
English
Series
Aus der Reihe: e-fellows.net stipendiaten-wissen
Tags
Tulipmania, Netherlands, Dutch, Tulip, Crisis, Bubble, History
Quote paper
Myro Kerler (Author), 2017, The history and consequences of the Tulipmania, Munich, GRIN Verlag, https://www.grin.com/document/497553

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