The Tulip Mania Theory is based on a historical event from the 17th century that became the epitome of an economic bubble.
The phenomenon was characterized by a speculative frenzy in the tulip market. Prices of tulip bulbs reached exorbitant levels and later collapsed suddenly, which led to significant losses for many investors.
This article will explore the Tulip Mania historical event, highlighting its causes and the reasons that led to the collapse.
The Journey of Tulips From Obscurity to Status Symbol
The familiar story surrounding the debut of tulips in Europe involved the Flemish diplomat, ambassador, and avid herbalist Ogier Ghiselin de Busbecq.
Suleyman, the longest-reigning sultan of the Ottoman Empire, had an impressive collection of flowers, even during winter, which Ogier wrote about in a letter in the 1550s.
Many people believe the name tulip is of Turkish origin, possibly derived from the word “turban” due to its resemblance to the tulip bulb’s shape.
The buzz from overseas led to planting tulips at Leiden University’s Hortus Botanicus, one of the oldest botanical gardens in the world.
This is where the flower moved into the public consciousness, gaining mass appeal. One faculty member even had his garden raided twice in 1596 and 1598, with thieves stealing more than 100 bulbs.
In the early 1600s, tulips went from being widely admired to a necessary status symbol. By 1634, if you had any wealth yet no tulips, you were considered a person of poor taste and low social status.
The Tulip Mania
The Tulip Mania emerged in the 1630s in the Dutch Republic. It marked what is often considered the first speculative bubble in recorded history.
Interestingly, this phenomenon centered on the concept of tulip futures.
The status symbol effect directly impacted the prices of bulbs, triggering a wave of speculation that eventually led to a state of frenzy.
Although the prices were already high, the years from 1634 to 1637 marked the intensification of this trend. There were wild stories (some possibly exaggerated), such as an offer of 12 acres of land for a rare tulip.
Many people were buying tulip futures to speculate and resell them. By 1636, tulip futures were traded on exchanges.
They were traded in spot markets during the bloom period in April and May and June through September when the bulbs were in their dormant phase.
They were traded as futures for the rest of the year, though they could not be transferred and had to be notarized.
The phenomenon of the tulip mania even found mentions in memoirs, as seen in the book Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay.
The book illustrates how the collective beliefs held by a crowd of people can lead to peculiar outcomes. The author Charles Mackay notes how the tulip “has neither the beauty nor the perfume of the rose — hardly the beauty of the “sweet, sweet-pea;” neither is it as enduring as either.”
This was one of Jesse Livermore’s favorite books since its explanations of the madness of crowds could be directly applied to the market.
You may also like: Jesse Livermore – From Childhood To His Adult Trading Life
The Burst of the Tulip Mania Bubble
By February 1637, the price had surged so much that potential buyers were no longer interested in buying tulips. When it became apparent to everyone that the market had stalled, prices plummeted dramatically.
People had contracts to purchase tulips with prices way above the new market rate. According to MacKay’s account of this event, these individuals sought governmental intervention.
The government responded by decreeing that all tulip futures written after November 30, 1636, were considered option contracts.
Instead of buying the tulips at inflated prices, holders of contracts could exit the contract by paying the seller a 3.5% fee. They combined this ruling with a refusal to enforce these contracts in court, calling the speculation gambling. Speculation in tulips collapsed for good at this point.
The Tulip Mania is a Lesson in Market Bubbles
The tulip mania phenomenon encapsulates an example of an economic bubble. It unfolded as frenzied speculation that led to the surge of tulip prices and an abrupt collapse that inflicted substantial losses on investors.
This event is a lesson through time that offers insights into the nature of speculative bubbles, mass psychology, and market dynamics. It stands as a testament to the consequences of unchecked speculation.
