AT LAST, I MAY PUNISH ALL WITH MY MASTERPIECE!!!

Oh, and I can get some rest.

I just finished my 10-hour labor of love. With a severely twisted left wrist. Cuts on my knees and shoulder. Extreme fatigue (what's new?). Is this starting to sound like some military mission?

Mayhaps not.

The total project (of which the paper itself is a tiny small part) is about the size of a major textbook.

Though I *did* write this paper for my class, I also wrote it to make people weep.

And if nobody weeps, then I will.


Behold: Proof-of-Concept paper that no one but your enemies should gaze upon!

Roots and Effects of Tulipmania

The tulip, a flower well known to symbolize the Netherlands, did not originate in Europe. The tulip’s beginnings with humanity began in the Ottoman Empire, where it quickly rose in popularity as a beautiful flower. In fact, its exotic status and popularity became so great there that it became a national symbol of peace – so much so that the Ottomans named their major era of peace The Tulip Era!

From the Ottoman Empire, European diplomats discovered the exotic flower. One such diplomat, Ogier de Busbecq, relates to us in his book The Turkish Letters of Ogier Ghiselin de Busbecq that “[t]he tulip has little or no scent, but it is admired for its beauty and the variety of its colors” (25). From diplomats, the tulip made its way to the Netherlands, where its value skyrocketed. Its value became so high that Dutchmen of all classes, being commercial fanatics, began to trade in what has only in recent history been classified as futures contracts. The tulip value was so high, according to Michael Pollan in his book The Botany of Desire: A Plant’s-eye View of the World, that a single tulip could cost “ten thousand guilders … a sum that at the time would have bought one of the grandest canal houses in Amsterdam” (63). However, as the tulips rocketing price began to slow down, speculators panicked and began to dump their tulips into the market. The rapid increase of supply, combined with the fearful attitude toward future tulip value, caused the price of tulip bulbs to drop rapidly. Suddenly, people who spent a fortune on a tulip realized that they had spent a fortune for something not worth much. Collectively, the monetary loss from this tulipmania, as it is called all over the world, damaged the economy of the Netherlands.

Although the history of the tulipmania is well known, recently the true cause has been hotly disputed. In this paper, I will argue that tulipmania came from a combination of social, economic and political forces. Through five differing arguments concerning the cause, I will attempt to show that each source is just a piece of my argument. Let’s begin by looking at the classical idea on the cause first, and then build from there.

Until the 19^th century, the Tulipmania wasn’t understood very well. Then, in 1841, Charles MacKay, an English journalist, published his famous book Extraordinary Popular Delusions and the Madness of Crowds. In this book, MacKay argues how popular opinion can cause irrational market behavior. This book is important because, among other events, it is one of the first of its kind to describe the Tulipmania in layman’s terms, and is still considered to be the primary source on Tulipmania. In this book, MacKay compares the Tulipmania to “Symptoms of gambling” (93) whereby “[the] stock-jobbers, ever on the alert for a new speculation, dealt largely in tulips, making use of all the means they so well knew how to employ to cause fluctuations in prices” (93-4). According to MacKay, these allegedly greedy stock-jobbers did such a good job at manipulating prices that “A golden bait hung temptingly out before the people, and one after the other, they rushed … like flies around a honey-pot” (94). MacKay explains that not just the stock-jobbers, but everyone incorrectly “imagined that the passion for tulips would last for ever, and that the wealthy would … pay whatever prices were asked for them”(94). Finally, MacKay defends his main argument by concluding that “[p]eople of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart” (94). Although he doesn’t use any hard evidence, MacKay’s vivid portrayals and anecdotes, including a tale of an Englishman jailed for consuming what he thought was an onion but was, in fact, a tulip, paints an interesting and believable story, and it’s little wonder that his argument was accepted until the latter half of the 20^th century, when Peter Garber, an economist, decided to tackle the economics at that time.

If MacKay was a 19^th century doctor, Garber would have to be a 20^th century surgeon. Using economics, Garber, A Brown University economist, shows us in his article “Tulipmania” two important facts. First, Garber proves that MacKay’s section on Tulipmania is, at best, not credible, and may be plagiarized. Second, Garber shows us that the rational economic principles of supply and demand, not frenzied mobs, played a more important role in causing Tulipmania.

On the former, Garber presents several of MacKay’s claims, of which three are provided in this paper, and then explains why each claim is not credible. In the first claim, Garber writes that “[a]ccording to MacKay, … a single Semper Augustus bulb was sold at the height of the speculation for 5,500 guilders, equal to $50,000 evaluated at $450 per ounce” (537). Garber then goes on to explain that MacKay “provided neither the sources of these bulb prices nor the dates on which they were observed” (537). From this, we can agree that the credibility of MacKay’s work is in jeopardy; another example from Garber, however, all but assures us. In the second claim, Garber begins by writing that, according to MacKay, “large amounts of foreign funds entered the country to add to the speculation and people from all classes hurriedly liquidated other assets to participate in the tulip market” (538). Garber then refutes this claim by mentioning that MacKay “presents no evidence of the sources and quantity of these foreign funds”. Finally, as a third claim, we are assured that MacKay’s work is fraudulent when Garber concludes that MacKay’s work has “no evidence … provided of the general economic context from which the speculation emerged” (538).

After debunking MacKay’s arguments, Garber argues that “the extremely high prices reported for rare bulbs and their rapid decline ... reflects normal pricing behavior in bulb markets” (536) with regards to the tulipmania. To prove this, Garber uses historical documents to trace various tulip prices over time, and even plots the prices on graphs (547-56). To explain his argument, Garber breaks the Tulipmania event into three periods: before, during, and after the crash. In addition, he also splits the tulip prices into two groups: piece goods, which are especially exotic tulips sold individually; and pound goods, which are non-rare tulips, sold by weight. Using these two groups, along with the charts and tables, Garber explains that in before the crash “[t]he pound goods sold at much lower prices … than the piece goods” (546). He then quickly adds that the prices for pound goods rose at a faster rate on the last month of the mania speculation, “rising twentyfold” (546), but then concludes that, overall, “the prices of the piece goods doubled or perhaps tripled” (546) compared to the pound goods. For us, what makes this information important is that, unlike the classical thought, “the figures do not indicate a price explosion at an infinite rate” (545) – the prices weren’t madness; they were rational! Continuing on to explain the 100 years following the crash, Garber reports that “records of transaction prices virtually disappeared … and only an occasional estate auction … reveal[ed] the magnitude of prices” (550). Despite the lack of data, however, Garber notes that high prices were available in “much later periods, and these are of an order of magnitude lower than these quoted during the speculation” (551). He presents to us that, during the crash, prices fell “to levels of 1 percent, 0.5 percent, 0.1 percent or .005 percent of their January 1637 values” (552) within a century. Further, Garber notes that the prices “of all individually sold bulbs [converge] to a common value, regardless of initial bulb values” (552) – a sign that the market had corrected itself. Finally, viewing the data after the crash, Garber compares the prices from the tulipmania event to the “price patterns for eighteenth-century tulip and hyacinth bulbs and for modern bulbs” (556), and concludes that the tulipmania “is typical of the market dynamics for newly developed bulb varieties”.

As we have seen, what Garber found out about Tulipmania was momentous. It practically debunked MacKay’s argument, and drastically deepened our understanding of Tulipmania. Despite this triumph, however, Garber’s leaves many questions without explanation. It does not discuss the plausibility of alternative factors such as the Dutch monetary strength, the reasoning of 16^th Century Dutch peoples, or even the possibility of market price manipulation. As we shall see, these were factors that contributed to the Tulipmania and cannot be ignored. Let’s begin by looking at the mindset of the Dutch in the 16^th Century, according to Michael Pollan.

Pollan, an environmental journalist at UC Berkeley, explains that the tulipmania happened because the tulip was an extraordinary item of beauty and rarity to the 16^th century Dutch. The Dutch, being industrious people who live in a “spectacularly flat, monotonous, and swampy” (The Botany of Desire 85) land, hard to work hard on the land to make it more beautiful. In particular, according to Pollan, “the Dutch have never been content to accept nature as they found it. … [w]hat beauty there is in the Netherlands is largely the result of human effort” (85). According to Pollan, the culmination of creating beautiful landscape would naturally bring about gardens, which “[t]he Dutch thought of … as jewel boxes”(86). These gardens could be so important that “even a single flower … could make a powerful statement” (86).

We then learn from Pollan that the Dutch introduction of the tulip, thought to be “a thing of beauty, no more, no less” (87), into the Dutch gardens was like “a festival of Dionysus, by turns ecstatic and destructive, transplanted from the forest or temple to the orderly precincts of the marketplace” (101). Thus, the tulipmania that ensued, Pollan argues, “bore all the hallmarks of a medieval carnival” (101), where a “social ritual of sanctioned craziness and release” (101) occurred. This craziness, Pollan states, began in “the Autumn of 1635 … when the trade in actual bulbs gave way to the trade in promissory notes” (102), and achieved its peak with the introduction of “‘colleges’ – back rooms of taverns given over to the new [tulip note] business two or three days a week” (102). These colleges, according to Pollan were like “a cross between orderly stock market protocol and a drinking contest” (102). In these colleges, not only do the parties partake in establishing prices on tulip futures, but also in heavy drinking – in what Pollan acquired from a pamphlet, for example, there’s advice that “trade must be done with an intoxicated head, and the bolder one is, the better” (103). However, Pollan goes on to tell us that the craziness had to end – “[e]very bubble sooner or later must burst” (104), and when the carnival was over, “many Dutch blamed the flower for their folly” (104). Pollan tells us that the flower, once prized above all other plants, became hated. Best-selling books denouncing the flower were published (105), and even the Professor of Botany at the University of Leiden, “could be seen patrolling the streets of the city, beating any tulip he encountered with his cane” (105).

Clearly, from Pollan’s work, we can see that although rational market principles were at play, as Garber demonstrates, ultimately it was the attitude towards tulips that determined its popularity, and this makes sense. Now that we understand the mentality of the Dutch in this period, we may understand an alternative explanation of Garber’s explanation of the cause of Tulipmania, presented by Earl Thompson.

Thompson, an economics professor at UCLA, asserts that, rather than being a normal market pattern in the floral industry, Tulipmania was “an artifact created by … Dutch futures buyers and public officials to bail themselves out of previously incurred speculative losses” (“The Tulipmania: Fact or Artifact?”, 1). In other words, tulipmania was indeed caused by market manipulators, just as MacKay argued. Unlike MacKay’s argument, however, the manipulators were the buyers and the public officials, not the sellers! In his article, Thompson explains defends his argument by discrediting Garber, introducing of data from the period, and then presenting his reasons from the data. Let’s look at how he discredits Garber first.

According to Thompson, Garber had three major inaccuracies in his article “Tulipmania”. Garber’s first inaccuracy was when he stated that “other bulb markets have displayed price patterns very similar to those possessed by 17^th century tulips” (1-2). Though Garber’s argument looks credible, Thompson argues that “a more complete data set, … would have shown [Garber’s] many readers that the decline in bulb prices at the end of the tulipmania displayed a crash that required much less time” (2) than declines in the floral industry. Thompson states that this is so because, if all the data is taken into account, the peak price reached is “over 20 times higher than tulip prices only three months after this peak” (2). Further, Thompson argues that the calculation would show a decline of 99.999% over the annual period, not “the 18^th-19^th century maximum average annual rate of 40%” (2) that Garber matches to the Tulipmania! In addition, Garber makes the second mistake when he overlooked a tulip price decline that occurred in the Fall of 1636, instead choosing “to characterize tulips as increasingly fashionable up to its February 1637 peak” (2). According to Thompson, “Once this initial … price-decline is recognized, there is a 20-fold price rise and matching decline” (2) from the Winter of 1636 to the Summer of 1637 – an interval that the February price peak is a part of. “Garber”, Thompson writes, “offers no rational explanation for this tulipmania” (2). Finally, Thompson claims that “Garber ignores the fact that his own data reveal the existence of some … transactions that were from 1/12 to 1/20 of the prices in nearly simultaneous normal futures transactions” (2). In other words, Garber ignored price anomalies that were, in fact, correct and important. According to Thompson, if one takes these three details into account, a very different account of the tulipmania appears. Let’s take a look at what Thompson proposes with these details included, by seeing whether the tulip was a fact or artifact.

As it turns out, Thompson declares that the Tulip was both a “Fact and Artifact” (3). Thompson explains that several accounts of the period, including MacKay’s account, “point out a highly peculiar part of this episode” (3). Apparently, “a large organization of Dutch florists and planters … announced that all contracts written … [between the November and the spring] possessed [new] provisions” (3) in the contracts. In particular, the provision allowed purchasers to opt-out of their contract in exchange for a fixed percentage of the contract. This was later backed by the government – a critical backer of this provision. To this, Thompson asks, “Why did Holland’s legislatures and judges approve of the seemingly buyer-favoring conversions of the contracts?” (4) To which he answers, after using data from his appendices, that “heavy public participation in the boom [occurred]. Even public officials were buying” (4). Furthermore, Thompson frames this within the historical context of European history. “[T]he October crash” (5), he explains, “and subsequent Tulipmania roughly coincided with the end of the … Thirty Years War” (5). As it turns out, the Dutch and Germans were steadily beating opposing armies, which allowed the establishment of stable nations. This establishment allowed tulips to enter the country which, combined with the prosperity that stable nations gain, further increased acceptance and demand for tulips. However, as the second phase of the Thirty Years War came into play, havoc spread throughout Germany again, and it was this that “eliminated the enormous prospective German demand for tulips in the foreseeable future” (5-6). Thus, Thompson argues, the “series of fundamental shocks” (6) from the war “should completely eliminate [the idea of tulipmania] from consideration” (6).

However, these shocks caused losses that “represented a personal financial disaster to many buyers, including several public officials” (6), and these officials “quickly met with the concerned public after the (Fall of 1636) crash in order to discuss the ‘problem’” (6). Thus, according to Thompson, the new provision, mentioned above, was introduced to protect purchasers from losing money if the futures price was higher than the value of the tulips at delivery. However, Thompson writes, “the planters were not totally lacking in political power” (6). Through negotiation, planters and officials compromised, agreeing that a “price equal to a mere 10% of the contract price” (6) was acceptable. Thus, by converting losing contracts from the Fall crash to the new contracts, the public officials, “being much more informed than the public” (6), could bail out of their losses, while the planters could still retain some profit. Unfortunately, however, the public at large did not understand this. The “innocent late November buyers” (7), Thompson states, “were the real victims of the contractual conversion” (7), because they became not only the ones paying the current contracts, but also the ones paying the brunt of the pre-converted contracts.

Now we’ve seen that an alternative theory to both MacKay and Garber is possible. However, all of these theories leave out another important factor – money. The article “The Dutch Monetary Environment During Tulipmania”, by Dough French, explains precisely that. In this article, French, an Executive Vice President of a Southern Nevada bank, argues that Garber’s article is incorrect because it “does not explain the price history of the common Witte Croonen bulb, that rose in price twenty-six times …, only to fall to one-twentieth of its peak price a week later” (3). Further, French admits being skeptical to Garber’s postulation of the Bubonic Plague as a cause of the tulipmania, declaring that “[t]his fatalistic extension of Keynes’s ‘animal spirits’ hypothesis is less than convincing” (3). To explain the price increase, French argues that “the supply of money did increase dramatically in 1630s Holland, serving to engender the tulipmania episode” (4). To begin, French gives us a quick overview on the religious significance of money throughout the ages; in particular, religious superstition discouraged nations from converting their metal coin into other coins. However, “[a]fter the fall of Byzantium, coins struck with sacred images disappeared” (4), and coin’s value and national identity shifted. The concept of money began to be tinkered with, culminating in the use of free coinage in the Netherlands, and was, according to French, “an immediate success”(5) because, prior to this idea, “gold and silver bullion obtained in America” (5) was taxed to one degree or another in other countries, and sometimes banned altogether. Because of this popularity, as well as need for a national coin in Amsterdam, “the Bank of Amsterdam was originated in 1609” (6). According to French, this bank had two major advantages over other banks. First, the “City of Amsterdam was responsible for the coin or bullion’s security while at the bank, against fire, robbery, or any other accident” (6). This means that deposits, being backed 100% by the city, were safe to make with the bank – something that few banks during the era could claim. Second, the fees from the bank were relatively low. To paraphrase French, “to retrieve a bullion deposit, a person had to present to the bank … a receipt for the bullion, … an amount of bank money equal to the book entry, and … payment of a ¼ percent fee for silver deposits, or ½ percent fee for gold deposits” (6). Moreover, to encourage active banking, “the depositor would receive a receipt that entitled [him] to draw the amount … deposited … within six months” (6). Thus, the bank “channeled the large amounts of precious metals”(8) discovered around the world to Amsterdam. However, because of the large influx of money, French argues that this “served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips” (12). Using bankruptcy and loan rates during the era, French shows that, indeed, a huge, sudden influx of money must have coincided with the tulipmania.

Now that we’ve seen so many different arguments on the cause of tulipmania, it’s easy to see that this topic truly is hotly debated. As I stated in the beginning, tulipmania was caused by a combination of economic, political, and social factors, with each source presenting only a piece. To do this, I will present the overall picture by summarizing the correct parts of each source. First, we learn from MacKay that the tulipmania was created by social instability. Next, we learned from Garber that rational economic principles were a very important factor being overlooked. Third, we gain a deeper insight from Pollan, who also validates MacKay’s argument of social instability (in particular, greed). Fourth, we learn from Thompson that, perhaps those social and economic principles were intertwined by individuals trying to get out of debt. Finally, we understand that the Dutch were heading towards economic fallout because they rapidly acquired plenty of capital, and also lacked commercial restraint. Thus, the picture portrayed is like this: economic prosperity allowed the Dutch to spend. Around the same time, the tulip is introduced. The tulip is considered beautiful by the Dutch, and demand soars, with the money-infused Dutch being able to speculate. The Thirty Years’ War affects the prices, however, and officials wanting to spare themselves from further financial damage, modify the contracts for their benefit. Those Dutch not in government, not realizing the idea, see a bargain of having to pay only a percentage if things don’t work out, and bet heavily in “colleges.” Economic forces dictate that a bubble forms and, as prices tumble, panic sets in, with the bubble collapsing. From this, we can see from this that all of the sources have correct postulations; they only needed to consider more than they did to create an accurate snapshot of the event.

Works Cited

De Busbecq, Ogier Ghiselin. The Turkish Letter of Ogier Ghiselin de Busbecq. Trans. Edward Seymour Forster. Oxford: Oxford UP, 1968.

French, Doug. “The Dutch Monetary Environment During Tulipmania”. The Quarterly Journal of Austrian Economics. 9.1. Spring 2006. 28 Oct. 2006. .

Garber, Peter M. “Tulipmania”. Journal of Political Economy.97.3 (1989):535-60. Chicago UP: Chicago. JStor. U of California, San Diego lib., La Jolla. 28 Oct. 2006. .

Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds. London: Savill, Edwards, 1841.

Pollan, Michael. The Botany of Desire: A Plant’s-eye View of the World. New York: Random House, 2001.

Thompson, Earl. “The Tulipmania: Fact or Artifact?”. Public Choice. 10.1007 (2006): Springer. 28 Oct. 2006. .