How did a tulip bulb sell for over $1 million, in today’s money, back in 1630s Holland? During the fall and winter of 1636, tulip bulb prices increased by several hundred percent — some rose by over one thousand. People from all levels of society traded tulip bulbs. Many quit their jobs, and more bought on credit. While the Dutch Tulip Bubble is one of the most famous financial stories, most explanations are insufficient. The tulip mania cannot be explained without considering the rise of Dutch East India Company stock that coincided with the tulip bubble. During the bubble, the Dutch company’s stock doubled, catalyzing an increase in wealth that led to rising investment and real estate prices along with tulip mania.
Founded in 1602, VOC sold shares to the public of the United Provinces, making it the first stock corporation. The first stock market soon followed. A secondary market soon developed in an Amsterdam courtyard where shareholders traded stock.
The Dutch East India Company turned Holland into a world power. The company, also called VOC, monopolized the spice trade. Holland developed a substantial trade surplus by selling spice to all of Europe. Capital flowed into the country. By the time of the tulip bubble, the company had grown into a highly successful and powerful organization, and its shareholders profited.
Before the mania, tulips were a status symbol for the upper class. Imported from the East, the flowers are exceptionally delicate, and wealthy individuals could display their extensive wealth by spending large sums taking care of the expensive flowers.
During the tulip mania, the VOC share price increased from 229 in March 1636 to 412 in August 1639. This rise coincided with the most extreme growth in tulip bulb prices, which started in September 1636. Then, throughout the fall, Dutch tulip prices increased by several hundred percent. Growth in Dutch East India Company shares catalyzed the bubble in tulips.
In the fall of 1636, tulip bulbs were planted to bloom for the spring. However, out-of-sight bulbs did not stop the bubble, as speculators began purchasing the buried bulbs even though they had no proof they existed.
The bubble is especially absurd because tulips do not provide cash flows, which investments usually do. Furthermore, prices were guaranteed to come down once enough tulips were grown to satisfy demand, yet people still traded them.
During this period, investors began making down payments for the bulbs. Often, the down payments consisted of bartering. The most expensive tulips required a fortune. One of the rare Viceroys, which cost 2,500 guilders, required two lasts of wheat, four lasts of rye, eight pigs, a dozen sheep, two oxheads of wine, four tons of butter, a thousand pounds of cheese, a bed, some clothing, and a silver beaker. Basically, one tulip was worth a large farm.
The bubble did not just affect rare varieties of tulips. Ordinary tulips, which common people planted in their gardens, also rose to dizzying heights. For instance, a pound of White Crowns, an ordinary garden-variety tulip, received a down payment of four cows. Later, during delivery, the buyer would pay 525 guilders to the seller. Other forms of down payments included land, houses, gold and silver, paintings, suits, and coaches. As it affected all the classes of Holland, the tulip mania was a democratic bubble.
Down payments also reveal the growth of credit within the tulip bulb market. Unlike most bubbles, a bank did not provide credit; the seller did. The expansion of credit became the driving force behind the growth of tulip prices. During the fall and winter of 1636, buyers purchased on credit while the bulbs were planted, which caused tulip prices to surge.
The tulip bubble coincided with an increase in overall economic activity. While house prices had dipped at the start of the decade, they jumped in the middle of the 1630s, and construction increased. New investments occurred in drainage schemes, the new West Indies Company, and canals.
Constructions of canals between towns began as merchants and officials wanted travel that was more reliable than taking sailboats. Breaking ground in 1636, Amsterdam started building canals with the nearby downs of Leiden and Delft. The rise in economic activity in all these markets also further assisted in each’s growth–the tulip bubble helped move the housing market.
By the spring of 1637, tulip prices began to falter. Since most tulips were purchased on credit, the price drop left many buyers unable to pay their debts, and a crash was imminent. The bubble bursting affected Holland’s overall economy. Economic activity slowed into the 1640s as reduced wealth caused individuals to reduce their consumption.
The unique nature of the Dutch tulip reveals many fundamental traits of bubbles. Like bubbles in financial markets, the rise in tulip prices was fueled by an expanding credit supply. The crash is also similar to many financial crises. The tulip mania also shows how economic euphoria can spread to other markets. Originating from a rise in the Dutch East India Company stock, economic euphoria affected housing prices, the West India Company stock, canal constructions, and the price of tulips. Thus, the tulip bubble was founded on overall economic activity — its origins are not as random as some argue. Nevertheless, the Dutch Tulip Bubble is truly fascinating, revealing, and slightly majestic.
