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lly by jean léon gérôme 1882 tulip mania reached its peak during the winter of 1636 37 when some contracts were changing hands five times no deliveries were ever made to fulfil these contracts because in february 1637 tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt 42 a contemporary satire suggests that the crisis started to unravel at february 3 in haarlem where an auctioneer failed to find willing buyers despite lowering the asking price several times 43 44 the actual circumstances of the crash are unknown 45 46 the collapse seems to have occurred by the end of the first week of february 1637 which caused a number of disputes over the extant contracts 47 on february 7 tulip growers scrambled in utrecht to elect representatives for a national assembly in amsterdam 46 their situation had become uncertain as the buyers no longer had any interest in honouring the contracts and there was no legal basis for enforcing them 48 by the end of february the representatives gathered in amsterdam for deliberations they decided on a compromise where all contracts entered before december 1636 would be binding but later contracts could be cancelled by paying a fee amounting to 10 of the price 45 49 the matter was brought before the court which declined to rule one way or the other and referred the question back to the city councils 50 the dutch legislature decided to cancel all contracts to allow fresh deals to be struck during the summer 51 52 in haarlem the issue dragged on since the government left it to the parties to solve their issues by arbitration or other means in may the city ruled that buyers could cancel any extant contracts at a fee of 3 5 of the price 51 the dutch court system remained busy with a number of tulip disputes throughout 1639 53 in the end most contracts were simply never honoured 54 55 available price data edit the lack of consistently recorded price data from the 1630s makes the extent of the tulip mania difficult to discern the bulk of available data comes from an anonymous satire dialogues between waermondt and gaergoedt written just after the bubble economist peter m garber de collected data on the sales of 161 bulbs of 39 varieties between 1633 and 1637 with 53 being recorded in the dialogues 56 ninety eight sales were recorded for the last date of the bubble february 5 1637 at wildly varying prices the sales were made using several market mechanisms forward trading at the colleges spot sales by growers notarised forward sales by growers and estate sales to a great extent the available price data are a blend of apples and oranges according to garber 56 mackay s madness of crowds edit basket of goods allegedly exchanged for a single bulb of the viceroy 57 item value in dutch guilders two lasts of wheat ƒ 448 four lasts of rye ƒ 558 four fat oxen ƒ 480 eight fat swine ƒ 240 twelve fat sheep ƒ 120 two okshoofden 464l of wine ƒ 70 four tuns 4kl of beer ƒ 32 two tuns 2kl of butter ƒ 192 1 000 ponden 494kg of cheese ƒ 120 a complete bed ƒ 100 a suit of clothes ƒ 80 a silver drinking cup ƒ 60 total equal to the viceroy ƒ 2500 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 account was largely sourced from a 1797 work by johann beckmann titled a history of inventions discoveries and origins 58 beckmann in turn used several available sources but all of them drew heavily from the satirical dialogues that were written to mock the speculators 59 mackay s vivid book was popular among generations of economists and stock market participants 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 59 according to mackay the growing popularity of tulips in the early 17th century caught the attention of the entire nation the population even to its lowest dregs embarked in the tulip trade 14 by 1635 a sale of 40 bulbs for ƒ100 000 was recorded by way of comparison a tun 930 kg or 2 050 lb of butter cost around ƒ100 a skilled labourer might earn ƒ150 350 a year and eight fat swine cost ƒ240 14 by 1636 tulips were traded on the exchanges of numerous dutch towns and cities this encouraged trade by all members of society mackay recounted people selling possessions in order to speculate on the tulip market such as an offer of 5 ha 12 acres of land for one of two existing semper augustus bulbs or a single bulb of the viceroy that he said was purchased in exchange for a basket of goods shown in table worth ƒ2 500 57 many individuals suddenly became rich a golden bait hung temptingly out before the people and one after the other they rushed to the tulip marts like flies around a honey pot every one imagined that the passion for tulips would last for ever and that the wealthy from every part of the world would send to the dutch republic and pay whatever prices were asked for them the riches of europe would be concentrated on the shores of the zuyder zee zuiderzee and poverty banished from the favoured clime of the dutch republic nobles citizens farmers mechanics seamen footmen maidservants even chimney sweeps and old clotheswomen dabbled in tulips 14 pamphlet of a theatre play on the tulipomania amsterdam 1637 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 according to mackay the merchant and his family hunted down the sailor to find him eating a breakfast whose cost might have regaled a whole ship s crew for a twelvemonth the sailor was supposedly jailed for eating the bulb 14 however tulips are poisonous if prepared incorrectly taste bad and are considered to be only marginally edible even during famines 60 this directly contradicts mackay s claim that the tulip bulb had been quite delicious 14 people were purchasing bulbs at higher and higher prices intending to re sell them for a profit such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs in february 1637 tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs as this realisation set in the demand for tulips collapsed and prices plummeted the speculative bubble burst some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market while others found themselves in possession of bulbs now worth a fraction of the price they had paid mackay says the dutch devolved into distressed accusations and recriminations against others in the trade 14 in mackay s account the panicked tulip speculators sought help from the government of the netherlands which responded by declaring that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10 fee attempts were made to resolve the situation to the satisfaction of all parties but these were unsuccessful the mania finally ended mackay says with individuals stuck with the bulbs they held at the end of the crash no court would enforce payment of a contract since judges regarded the debts as contracted through gambling and thus not enforceable by law 14 according to mackay lesser tulip manias also occurred in other parts of europe although matters never reached the state they had in the netherlands he also thought that the aftermath of the tulip price deflation led to a widespread economic chill throughout the netherlands for many years afterwards 14 modern views edit mackay s account of inexplicable mania was unchallenged and mostly unexamined until the 1980s 61 research into tulip mania since then especially by proponents of the efficient market hypothesis 18 suggests that his story was incomplete and inaccurate 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 12 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 62 while mackay s account held that a wide array of society was involved in the tulip trade goldgar s study of archived contracts found that even at its peak the trade in tulips was conducted almost exclusively by merchants and skilled craftsmen who were wealthy but not members of the nobility 63 any economic fallout from the bubble was very limited 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 64 this is not altogether surprising although prices had risen money had not changed hands between buyers and sellers thus profits were never realised for sellers unless sellers had made other purchases on credit in expectation of the profits the collapse in prices did not cause anyone to lose money 65 still life with flowers 1639 by hans bollongier 1623 1672 showcases the prized semper augustus tulip rational explanations edit 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 for the then tulip market to qualify as an economic bubble the price of bulbs would need to have been mutually agreed and surpassed the intrinsic value of the bulbs modern economists have advanced several possible reasons for why the rise and fall in prices may not have constituted a bubble even though a viceroy tulip was worth upwards of five times the cost of an average house at the time 66 the increases of the 1630s corresponded with a lull in the thirty years war 67 in 1634 1635 the german and swedish armies lost ground in the south of germany then cardinal infante ferdinand of austria moved north 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 hence market prices at least initially were responding rationally to a rise in demand the fall in prices was faster and more dramatic than the rise data on sales largely disappeared after the february 1637 collapse in prices but a few other data points on bulb prices after tulip mania show that bulbs continued to lose value for decades thereafter citation needed natural volatility in flower prices edit garber compared the available price data on tulips to hyacinth prices at the beginning of the 19th century when the hyacinth replaced the tulip as the fashionable flower and found a similar pattern when hyacinths were introduced florists strove with one another to grow beautiful hyacinth flowers as demand was strong as people became more accustomed to hyacinths the prices began to fall the most expensive bulbs fell to 1 2 of their peak value within 30 years 68 garber notes in 1989 that a small quantity of prototype lily bulbs recently was sold for ƒ1 million demonstrating that even in the modern world flowers can command extremely high prices 69 because the rise in prices occurred after bulbs were planted for the year growers would not have had an opportunity to increase production in response to price 70 critiques edit other economists believe that these elements cannot completely explain the dramatic rise and fall in tulip prices 71 garber s theory has also been challenged for failing to explain a similar dramatic rise and fall in prices for regular tulip bulb contracts 7 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 72 legal changes edit earl thompson argued in a 2007 paper that garber s explanation cannot account for the extremely swift drop in tulip bulb contract prices the annualised rate of price decline was 99 999 instead of the average 40 for other flowers 66 he provided another explanation for dutch tulip mania since late 1636 the dutch parliament had been considering a decree originally sponsored by dutch tulip investors who had lost money because of a german setback in the thirty years war 73 that changed the way tulip contracts functioned on 24 february 1637 the self regulating guild of dutch florists in a decision that was later ratified by the dutch parliament announced that all futures contracts written after 30 november 1636 and before the re opening of the cash market in the early spring were to be interpreted as option contracts they did this by simply relieving the futures buyers of the obligation to buy the future tulips forcing them merely to compensate the sellers with a small fixed percentage of the contract price 74 before this parliamentary decree the purchaser of a tulip contract known in modern finance as a forward contract was legally obliged to buy the bulbs the decree changed the nature of these contracts so that if the current market price fell the purchaser could opt to pay a penalty and forgo receipt of the bulb rather than pay the full contracted price 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 although the final 3 5 premium was not actually settled until february 24 thompson writes as information entered the market in late november contract prices soared to reflect the expectation that the contract price was now a call option exercise or strike price rather than a price committed to be paid 74 thompson concludes that the real victims of the contractual conversion were the investors who had bought forward contracts prior to november 30 1636 on the incorrect assumption that their contracts would benefit from the february 1637 decree 74 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 75 a factor unrelated to the intrinsic value of the tulip bulbs themselves using data about the specific payoffs present in the forward and options contracts thompson argued that tulip bulb contract prices hewed closely to what a rati...
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