The Dutch tulip bubble that lasted between 1636 and 1637 is seen in many economic circles as the first financial bubble ever to be recorded. Many economists, in the past years after the tulip bubble, were of the view that the prices offered and paid for the tulip bulbs reflected certain economic fundamentals despite being unreasonably high. This famous phenomenon has long served as a perfect example of a financial bubble (Komaromi, 2006). Some writers in their works have described the bubble as the most famous bubble of all while others refer to the Dutch tulips as extremely overpriced. This paper seeks to discuss this financial mania and examine how and where it was conceived. In addition to that, it will look at how the theoretical view of this famous financial bubble has changed over time. Lastly, the paper will highlight the application of the tulip bubble to a business situation, and how the knowledge of such market manias can be utilized in making the right business decisions.
How the Tulip Bubble was Conceived and how it Looked Like
Tulips have for a long time been an important element in the history as well as the culture of the Dutch people since their introduction into the country from Ottoman Empire. The Dutch were so much enticed with the tulips to the extent that during the mid-1600s the tulip bulbs bubble occurred. This was a phenomenon where the prices of tulip bulbs were driven by speculative traders to very great heights before falling drastically and driving the country’s economy into a financial crisis whose impact was felt for a long time.
The modern day Netherlands was an economic powerhouse in Europe during the 17th century. The ports in the state played an important role in the country’s economy with most goods and commodities passing through them. The main players in this trade were the Dutch East India Company and the West India Company. The Dutch East India Company was founded in 1602 and conducted trade with Asia while the West India Company was founded in 1622 and mainly operated in the American slave trade (Komaromi, 2006). The first Tulip bulbs are said to have been brought to Holland and Germany from Constantinople by Conrad Segner in 1559 (Hirschey, 2003). The tulips became an instant hit and were sought after by the rich citizens.
The Tulips were brought to Holland mainly in research purposes with the botanist involved in the research refusing to give or sell the exotic bulbs to his neighbors. The neighbors eventually decided to steal the bulbs and grow them themselves thereby conceiving the tulip trade. A 1593 research into the tulips found out that they could survive and thrive in the Dutch climatic conditions. This discovery made the tulips even more desirable by many people. The tulips’ petals were intensely colorful, making the tulips very much different from any kind of flower found in that region during that period. In addition to that, a person who had tulips growing in their garden commanded a lot of respect in the society (Hirschey, 2003).
The Dutch sales of tulips were confined between September and June because the bulbs from which the plants grow flower between the ages of twelve and seven years. Tulips in Holland bloom for around a week between April and May and the bulbs appear between June and September. Buyers and sellers entered into contracts to acquire and sell off tulips by signing contracts that made future purchases possible. The contract market spurred the growth of the Dutch tulip industry making it a constant hit for traders and the government.
The Tulip market grew rapidly, and with each day, it became more sophisticated. Traders began classifying into groups with each group being priced depending on their rarity. The tulip mosaic virus made the infected tulips uniquely beautiful, and such tulips went for higher prices due to their rarity and uniqueness. Tulip prices rose steadily as their popularity continued to soar. As their popularity increased, speculators bought them at higher prices that continued to rise. Their plan was to resell the same tulips at a higher price than the one they paid for them. (Hirschey, 2003).
Speculative traders who sold off their tulips with the objective of earning more profits used the same profits to get into new tulip contracts. Other traders re-purchased the bulbs with their profits in order to sell them to other parts of the world together with spices shipped by the Dutch East India Company from Asia. The craze in the tulip trade led to many merchants selling off the little they had in possession in order to buy several tulip bulbs with the aim of planting and selling them off after they mature at higher prices. The projected profits were higher than the merchants could have earned in their shipping careers. As the tulip bubble grew, tulip bulbs that were highly priced tripled in prices for as short as a month (Hirschey, 2003).
The Dutch tulip bubble continued to expand beyond expectations, but in the winter between 1636 and 1637, the bubble eventually burst. The main catalyst of the bubble burst was a trader in Harlem who refused to show up at an auction and honor a contract. This incident implored many traders to refuse to honor the contracts, and panic started to grip traders. The number of sellers in the market started to overwhelm the number of buyers as people realized that they were trading in a piece of plant. Buyers eventually withdrew from the market, and despite the efforts of some traders to support the prices, the trade continued to fall rapidly. The Dutch government tried to intervene by promising to honor contacts at a face value of 10%, but this could not prevent the meltdown in the tulip market. The tulip bubble burst leaving many traders with debts and plunging the government into an economic crisis. The mild depression lasted for a few years, and it led to the Dutch being more careful about speculative investments (Hirschey, 2003).
How the Theoretical Base of the Dutch Tulip has Evolved over Time
Over time, economists have argued whether the Dutch tulip bubble qualified to be a financial bubble or not. Shiller (2000) defines a financial bubble as “a situation in which temporarily high prices are sustained largely by investors’ enthusiasm rather than by consistent estimation of real value.” This definition has been widely accepted by many economists and in different business circles. Garber (2000), on the other hand, challenges the validity of the Dutch tulip bubble as a financial bubble. He argues that the trend of price changes observed during the tulip sale period is similar to the patterns that one would see when highly valued luxury goods are limited, but their supply is growing gradually. Thompson (2006) argues that the extraordinary increase in the prices of tulip bulbs during 1636-1637 was as a result of marketing instruments shifting from standard futures to contracts.
Neil and Weidenmier (2003), argue that the changing trend in the prices of the tulips, which are usually used as an example of speculative excess, was actually normal. They point out that, for the very first-generation Tulip bulbs, which were of unusual beauty and which could be used to reproduce generations of subsequent blooms, it was expected that their prices would be high. The prices then collapsed as production of the tulips grew. In addition, they point out that, in the modern markets, the prices for tulips show a similar trend with the originals going for a higher price and the prices falling rapidly later. Apart from that, they are of the view that there was no contagion to financial centers from outside Holland on the Tulip trade and speculation despite the fact that the financial requirements of the Thirty Years’ War on the important commercial cities and towns in the European continent also resulted to disruptions.
Van Der Veen (2012), in his study, points out a number of factors that resulted to the Tulip bubble speculation. Firstly, he points out that the Dutch economy during this period was generally flourishing. This resulted in the creation of new wealth among the elites in the society and even among the middle class who were growing in prominence. In addition to that, he argues that the East India trade generated high profits and that this fact together with the speculation in the Dutch East India Company resulted to the Dutch being comfortable with speculative investments and risky contracts. Thirdly, he mentions that there were no barriers to the Tulip trade entry since there were no cartels or people who controlled the trade. Additionally, the Bank of Amsterdam offered a free coinage policy and this might have attracted more capital and financiers to Holland.
Van Der Veen (2012) is also of the opinion that the Holland plague of 1635-1636 played a role in the ignition of the Tulip trade. He mentions that Amsterdam alone lost about 20% of its people in a period of 2 years while Harlem lost more than 20% of people in one year. He argues that the high rate of deaths could have driven people making speculative investment without thinking about the risks involved.
Application of the Knowledge Gained from the Dutch Tulip Bubble
The Dutch Tulip Bubble can be applied in a business scenario where a business man decides to invest all his earning in a certain entity without thinking about the risks involved. This is usually common in the stock markets where after seeing the stock prices of a certain company skyrocketing, stock and securities investors decide to channel all the capital they have into buying the firm’s shares. In addition to that, the high profits in the stock and securities market have seen many companies flocking these markets. The knowledge from the Tulip mania incident can be applied when making better business decisions especially with regards to which sector to invest in. People with little investing skills get higher disposable incomes, and they are usually tempted to invest in sectors that are superficially lucrative. Another perfect application of the Tulip bubble is when a new product is introduced in the market. A new product will spur many people into dealing with the product.
Another important thing to note is that trade in stocks has become speculative due to the speed at which the traders move in and out of stocks. Most of them aim at making quick profits. It thus follows that one should seek advice from investment experts before making any huge investment. It is important to spend less than make and invest in stable sectors. In addition to that, it is vital to expand investments on a regular basis. The Tulip craze has influenced investors and financial experts in a number of ways. Firstly, it is quite clear that the speculative trade is very risky. The Dutch has become keener on speculative trade, and most of them do not engage in ventures that aim at making quick profits. In addition to that, most states have become involved in bubbles with most governments determined to regulate their scale so as to minimize the risks that come with the bursting of the bubble. It is difficult to come up with empirical analysis of this topic because most of the concepts involved are not experimental.
Conclusion
The Dutch Tulip bubble has over the years become a classical example of a financial bubble. It occurred between1636 and 1637 and was the first financial bubble ever recorded. It saw the Dutch become obsessed with the tulips after their introduction from Constantinople by Conrad Segner in 1559. It is true that the prices offered and paid for the Tulip bulbs reflected certain economic fundamentals despite being unreasonably high. As their popularity increased, speculators bought them at higher and higher prices making a single Tulip as expensive as a luxurious house. The bubble eventually burst in the winter of 1636-1637 plunging the Dutch economy into a mild depression. The theoretical view of the phenomenon has changed over time with various authors airing their views about it. A number of lessons can also be drawn from the Dutch Tulip bubble especially with regard to investment decisions.
References
Garber, P. M. (2000). Famous first bubbles: The fundamentals of early manias. Cambridge, MA: MIT Press.
Hirschey, M. (2003). Tech stock valuation. Amsterdam: Academic Press.
Komáromi, G. (2006). Anatomy of stock market bubbles. Nagarjuna Hills: ICFAI UP.
Neal, L. D., & Weidenmier, M. D. (2003). Crises in the global economy from tulips to today. In Globalization in historical perspective (pp. 473-514). Chicago: University Of Chicago Press.
Shiller, R. J. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press.
Thompson, E. A. (2006). The tulipmania: Fact or artifact. Public Choice, 130 (5): 99-114.
Van der Veen, A. M. (2012). The Dutch tulip mania: The social foundations of a financial bubble. New York: Business Expert Press.
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