Few know of the mania that spread across the Netherlands in the 17th century. In a period of immense prosperity and cultural flourishing, often known as the Dutch Golden Age, a curious phenomenon occurred where the recently introduced and fashionable tulip’s popularity rose to extraordinary levels. Although most may just find this to be a simple little story, to Economists, this has been a cautionary tale in economic history and a textbook example of speculation, the role of psychology in financial markets, economic bubbles, and the perils of unchecked euphoria. What was the ‘Tulip Mania and what can we learn from it? 

Tulips originated in Central Asia and were first cultivated in 10th-century Iran (then Persia). By the 16th century, they were cultivated in the Ottoman Empire and were introduced to the Netherlands shortly thereafter. 

The Netherlands, in its Golden Age, was an economic powerhouse with a burgeoning merchant class and a newfound fascination with exotic goods from distant lands. In this atmosphere of prosperity and curiosity, the Tulip, a vibrant and captivating flower, found its way into Dutch gardens and captured the hearts of the wealthy elite. Before you knew it, it had transformed into a status symbol, coveted by merchants, nobles, and even ordinary citizens eager to display their wealth and taste.

Tulips display a fascinating phenomenon of “breaking”, where the colour patterns on the petals of the tulip mutate, leaving a stripe pattern on the tulip leaves, breaking the colour of the flowers and creating new and even more prized varieties of the flower. Today, with the advances we have made in science, we know that this exciting marvel of “breaking” was the result of a plant virus called the ‘Tulip Breaking Virus’ or the ‘Tulip Mosaic Virus’. Without getting into the complexities of the science behind the same, one can safely say that it was this virus that single-handedly increased the value of tulips with decorative flower breaking and was part of the reason behind the mania.

Such a phenomenon seemed nothing short of magical to the 17th-century populace of the Netherlands. It fueled a sense of gambling as people realised that there existed a potential for earning quick profits. This coincided with the rise of "futures contracts" in the tulip trade. These contracts allowed individuals to buy and sell the rights to tulips that weren't even planted yet, allowing them to bet on future price increases. This enabled widespread participation in the tulip market, regardless of actual ownership of the bulbs themselves, allowing people from all walks of life to trade. The promise of future profits enticed investors to engage in increasingly extravagant transactions, often leveraging their assets to participate in the euphoria sweeping throughout Dutch society.

People began buying and selling tulip futures contracts, hoping to cash in on the rising prices before the inevitable market correction. It is said that the frenzy reached a fever pitch in 1637 when a single bulb of the revered Semper Augustus variety (a broken red and white tulip that is now no longer in existence) reportedly sold for the astronomical sum equivalent to the cost of a grand mansion on the Amsterdam Grand Canal at the time. Although this example was later proved to be more fiction than fact by Anne Goldgar, an American historian, author, and academic, in her latest findings in “Tulipmania: Money, Honour and Knowledge in the Dutch Golden Age”, it is still an important point of reference that highlights the heights to which the craze of the century reached. 

Mike Dash, a Cambridge-educated writer and magazine publisher, talked of extravagant tulip parties where bulbs were paraded like prized jewels and fortunes were wagered on the outcome of a single bulb's future price in his book "Tulipomania: The Story of the World's Most Coveted Flower and the Extraordinary Passions That Aroused”. Charles Mackay, a Scottish poet, journalist, author, songwriter, and anthologist, also has tall stories to tell. In 1841, he wrote in his classic analysis “Extraordinary Popular Delusions and the Madness of Crowds”, “The rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.”

But the reality is far more boring. No, the nation didn't lose its mind over tulips- only certain sections of society did. Speculators spent incredible amounts of money on bulbs that only produced flowers for a week. Few people paid very high prices for a few very rare bulbs, and a few people lost a lot of money as well- but these were all wealthy individuals, and losing that much money over tulips didn’t cause them great problems, much to Mackay’s dismay. 

Stories need some spice, and writers often exaggerate- the reasons for this change of narrative are plenty. The Smithsonian Magazine blames tetchy Christian moralists, or more precisely, propaganda pamphlets published by Dutch Calvinists who worried that this tulip-propelled consumerism boom would lead to the decay of Dutch society. So, while this tulipmania wasn’t all that it was made to be, it was still an event with a considerable impact. 

Back to the story at hand- as the mania grew and the prices rose (due to speculation, not intrinsic value, mind you), it was realised that the market had soon become detached from reality. Futures trading, with its inherently volatile nature, and tulips, with their highly subjective nature, had come together to create the perfect recipe for a bubble. 

And just like any other bubble, this one, too, met its inevitable demise and burst spectacularly. Although the burst didn’t exactly wreck the Dutch economy, it did cause a certain level of “cultural shock”. The economy had been based on trade and elaborate credit relationships, so when more and more people defaulted on their agreement to buy the tulips and the traders who had already made their payments were left in debt, several reputations were lost and relationships were broken (sending a wave of interesting, new cases to the courts).

The whole incident has been a great model for the general cycle of a financial bubble. Investors, initially swayed by a hot new trend, lost sight of logic. The price of tulips, a fashionable statement piece, exploded due to a society’s collective psychological bias, leading to the generation of a positive feedback loop where each purchase drove prices higher. This bubble did as all bubbles do- it popped. Soon enough, investors realised the inflated value of their tulips and a massive sell-off ensued. Prices crashed, and most were left holding the wilted remains of their tulips (literally).

Once tulip bulbs were the object of unwarranted euphoria, but now modern-day digital assets have taken their place. With these assets comes the possibility of creating bubbles that may have far more severe consequences when they inevitably burst. Tulip mania is an illustration of the underlying mechanisms at work in a bubble and after careful dissection can help us understand more recent examples like the real estate bubble of the late 2000s, the dot com bubble, the US housing bubble, and the bitcoin bubble among several others.

By Navya Ariqa Singh