Tulpenwindhandel: No, That’s Not English

| April 25, 2018
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After the introduction of the tulip to Europe from the Ottoman Empire, trade in the plant’s bulbs became what was essentially one of the first speculative bubbles. Europeans were fascinated with the flower that differed from any other then cultivated in Europe, and it soon became a status symbol and luxury good. Before the mania was over, entire fortunes had been made and lost.  While historically, the tulip bubble did not impact the then booming Dutch economy, it provides an early example of the socio-economic phenomenon that leads to speculative buying, and the inherent deviation of asset pricing from intrinsic value.

As the demand for tulips grew, a distinct market for tulip bulbs emerged and they were traded as a durable good, bought and sold both in the spot market and effectively via futures contracts. Tulips grow from bulbs, and during their dormant months (June – September in the Northern Hemisphere) they could be uprooted for actual purchase, and the changing of hands. For the rest of the year, tulip traders signed what amounted to futures contracts before a notary to buy the bulbs at the end of a season. The term windhandel translates as ‘wind-trade” and this refers to the nature of the futures trade in tulips and the fact that, frequently, no bulbs were actually changing hands.  Interestingly, short selling in these markets was banned by edict in 1610 and then this prohibition was reiterated in 1621, 1630 and 1636, though the reasons for this are not clear.

Tulips continued to experience upward inflationary pressure to the extent that a Viceroy bulb, a sought after strain, was worth at least five times the cost of an average house at that time. Then, in the winter of 1636-37 the demand for tulips crashed. The locus of the crash was Haarlem, where there had been and outbreak of bubonic plague that likely contributed to buyers failing to appear in force for a tulip auction. It is also possible that legal changes to the nature of tulip contracts helped spur the decline of the tulip market.

In the decades that followed many anti-speculative pamphlets were published decrying the woes of the tulip bubble. However, it appears that many of these were not actually written by victims of the bubble, but where religiously motivated. The idea that a flower could fetch more than what most earned in a year shocked the European value system at the time. To this day, using “tulip mania” as an analogy for various speculative, or potentially speculative, investments is a common trope.

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