When it comes to the 17th century tulip crazealso called “tulipomania”, refers to a specific historical episode that occurred in Republic of the Seven United Provincesin the territories that today constitute the Netherlands, particularly in Holland. In fact, between 1635 and 1637 the first great speculative bubble in history was formed, generated by the very high demand for tulip bulbs and by the continuous bet on the value of flowers that had not yet bloomed.
The increase in prices and the subsequent explosion of the speculative bubble showed itself quite clearly as a trading mechanism based largely on unrealistic expectations could cause, even before material damage, profound social fractures. This is also why it continues to be discussed, almost four centuries later.
How it develops “tulipomania” of the 17th century
The tulip flower was imported from Türkiye at the end of the sixteenth century and took its name from the Turkish word tülbendi.e. “turban” (the headgear whose shape it recalls). In the 17th century it became one of the symbols of prestige of the rich Dutch bourgeoisiethen in full growth. In seventeenth-century Europe many changes were taking place and Holland was experiencing a moment of strong international centrality within the political framework of the United Provincesthe federal republic established after independence from the monarchy of Spain.
The cultivation of multiple varieties of tulip bulbs then produced beautiful flowers of different colors. Some, with wonderful flaming streaks, were the result of the mosaic virus, or tulip breaking viruswhich altered the pigments of the petals. In this sense, one of the secrets of tulips lay in their singularity: the most sought after were rare, fragile and difficult to reproduce. In a word, they were precious.
Around 1635, when it was understood that the demand for tulips exceeded the supply – that is, that the bulbs available were fewer than those requested – their value increased. The more enterprising merchants and florists then began to purchase bulbs from local growers to resell them at a higher price: thus increasing their profit margin. In turn, those who purchased bulbs from merchants and florists often attempted to place them on the market again at a further increased price. Thus, many tried to seize an extraordinary opportunity: to get rich.
History of the first speculative bubble ever
The leap in quality came with the experimentation of new financial instruments. In order to profit from tulips all year round, florists and merchants stipulated contracts that allowed the purchase of buried bulbs at a price set in advance, to be paid in full only upon delivery. We went even further: bulbs were pre-purchased which, even though they had not been planted, the farmers planned to cultivate. This system known as windhandel (literally “trade in the wind”) was based on purchase documents which could in turn be sold, thus generating a potentially infinite sale of luxury items that do not yet exist: tulips, in fact.
Even small, non-wealthy professionals thought about it being able to make money easily. And sometimes, to have enough liquidity to invest, they even went as far as asking for loans or mortgaging properties. For the bulbs there were offers of up to 2000 or even 3000 Dutch guilders; notable figures for the time. Suffice it to say, as researcher Mike Dash wrote, that a family could live on 300 forints a year and a carpenter, in the same period of time, earned 250 forints. Two barrels of wine were worth 70 forints and eight “fat” pigs were worth 240 forints.
On the other hand, there was a widespread belief that there would always be someone willing to pay more for tulips, or to keep them or resell them. In short, hot that irresistible upward game seemed reasonable all in alldespite the lack of public supervision of the market.
The explosion of the tulip bubble
The illusion was shattered in February 1637, when in the city of Haarlem during an auction no submit suitable offers for the bulbs put up for sale. It was the first real warning sign: the tulip boom had reached its limits. There was now a misalignment between the value attributed to the bulbs and the actual willingness of buyers to pay the requested amounts.
Panic soon spread and investors they tried to free themselves quickly contracts for the purchase of bulbs. However, optimism was replaced by uncertainty, and almost no one wanted to spend a lot of money on tulips. The casual negotiation of the bulbs came to an abrupt end and this determined thebursting of the speculative bubblewith price drops of up to 90%. Those who were especially affected were those who had purchased very expensive bulbs through promises of payment. Finding themselves with huge debts and no longer profitable investments, some investors suffered serious consequences.
The Dutch economy resisted, also because the working classes were marginally involved, but the merchants and florists involved, although not going bankrupt, suffered a major setback. The “shock of tulip mania,” as historian Anne Goldgar has written, “produced a broad and prolonged conflict between sellers who expected transactions to close and buyers who refused to pay.” There was a “breakdown of trust” within the still small, albeit already long-distance, civil and mercantile community. It was traumatically discovered that social bonds could be broken by due financial shocks to incompetence, negligence or opportunistic behaviour.
The authorities and courts called upon to resolve disputes pushed for find compromises. Most of the time the contracts relating to the sale of the bulbs were canceled or re-formulated, resulting in a penalty being paid to those who declared that they could not honor their commitments. However, the disagreements that arose then persisted for years.
Why the tulip bubble is remembered
There tulip bubble is considered an episode capable of highlighting the most harmful consequences of unregulated financial speculation and the vulnerability of the network of relationships that bind human beings. More or less appropriately, it is also compared to contemporary crises such as the dot-com bubble of 2000 or the subprime mortgage collapse of 2008.
Ultimately, the event illustrates quite effectively what a speculative bubble is, or what it can be: a phenomenon that occurs when, in a certain period, the prices of a specific good reach levels high, anomalous or unjustified and investors tend to buy that asset to resell it at an even higher price, in the hope of doing so before the pace of transactions slows or stalls.
This generates a sort of socio-economic paradox: individual rationality, focusing on the pursuit of profit, leads to collective irrationality. In the most serious circumstances, a sudden drop in prices can lead to the loss of large sums or destabilize many people. This is what happened in Holland in the seventeenth century.
