The tulip craze that hit Holland in the seventeenth century is arguably the most famous financial bubble in all of history. According to the popular account of what happened, prices for tulips began to go through the roof in 1636 as word spread that wealthy people were willing to pay huge sums of money for tulips. Soon the general population joined in the speculative fervor, many people using their life savings in order to buy bulbs, believing they could resell them at windfall profits. At the height of the mania, a single bulb cost as much as a mansion. But eventually reality set in. In 1637 panic selling commenced as people realized they were never going to make a return on their investments, and the price of bulbs crashed, losing over 90% of their value. Many people were financially ruined.
Like I said, that's the oft-told, popular account of what happened. But I've always been suspicious of it. For one thing, the main source many people rely on for their info about the tulipmania is Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds
, which was written in the 19th century, and which doesn't offer any references to back up some of its rather far-fetched tales (such as the claim that one sailor was sentenced to months in jail for mistakenly eating a tulip bulb that he mistook for an onion).
Anne Goldgar debunks many of the legends of the tulip craze in her new book, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age
. For instance, according to the Financial Times review of her book
, Goldgar was unable to find a single person who was bankrupted by the tulipmania.
Nor did the speculative craze include large sections of the population: "In lore, Dutch chimney sweeps spent their savings on bulbs, but in fact the buyers were mostly merchants and craftsmen from the province of Holland. These are the smug burghers we know from portraits of the era. Many were Mennonites."
A financial bubble in the tulip market really did occur, followed by a crash. However:
It's a myth that tulipmania devastated the Dutch economy. How could it, when so few people traded tulips? Even those who did survived the crash. Tulips were merely a sideline to their real professions. In any case, Goldgar explains, few buyers actually paid the exorbitant prices they had agreed. The crucial point is that this was a futures market. The flowers spent most of the year underground. Trades were made constantly, but were only paid for in summer when the bulbs were dug up. In the summer after the crash, most buyers simply refused to accept and pay for their bulbs. Some paid the sellers a small recompense, usually less than 5 per cent of the agreed price. These modest payouts don't seem to have ruined anyone. Rather, tulipmania damaged the code of honour that underlay Dutch capitalism. When buyers reneged, trust suffered. Tulipmania was a social crisis, not a financial one, argues Goldgar.
So most buyers simply refused to pay up for the bulbs after the crash. Unfortunately, in today's financial markets people don't have that kind of luxury. Nowadays, with a single click of a mouse, all your money disappears instantly and forever.