‘Our descendants doubtless will laugh at the human insanity of our Age, that in our times the tulip-flowers have been so revered.’
(Theodorus Schrevelius, 1648)1
The mania for buying and selling tulip bulbs in the Netherlands during the 17th century was arguably the earliest asset bubble in history and the precursor of financial manias over the following centuries. Tulipmania still provides valuable lessons for investors today.
Dutch Economic Miracle (The Golden Age)
The Dutch economy grew spectacularly in the 16th and early 17th centuries as foreign trade with the East Indies boomed. Amsterdam became the centre of global capitalism with a stock exchange, savings bank and thriving consumer market. The art market ballooned; Dutch culture of the Golden Age was mirrored in the paintings of Rembrandt and Vermeer. Gardens and gardening became popular and the Dutch fell in love with one particular flower – the tulip.
The tulip was introduced into Europe in the 16th century from the Ottoman Empire. First cultivated by the nobility, its popularity quickly spread, reflected in a catalogue of 1612, which included 100 plates of the flower. The Dutch middle-class were soon intoxicated with the tulip.
As demand for bulbs grew, prices rose, encouraging the cultivation of new varieties. The popularity of highly prized tulips, such as flamed and striped blooms like the Semper Augustus2, spread across Northern Europe and western parts of Germany and there was rising demand for bulbs in France.3
In the early 1630s, Dutch horticulturists became increasingly entrepreneurial, renting land for cultivation and significantly increasing supply.4 At the same time, the minimum number of bulbs an individual could buy dropped. Bulbs could be bought by the basket, pound or even individually, boosting demand significantly as many more people could afford to enter the market.
By the winter of 1635, buyers included a broad range of the population, from merchants and shopkeepers to skilled workers and artisans.5 The historian Goldgar notes that buyers were mostly merchants and skilled craftsmen, rather than nobles, and they were based in cities rather than the countryside. In Haarlem, a town close to Amsterdam, they included manufacturers, lawyers, surgeons, doctors, notaries, artists, silversmiths and a variety of craftsmen.6 In other words, the bubble was limited to those with access to capital. Six companies and a number of partnerships were set up especially to buy and sell tulips.7
At the time, there was no official market for trading bulbs, like a stock exchange. Deals were conducted by private arrangement at auctions in gardens, or at informal and formal sales in inns, in a similar way to the trading of company shares in the coffee-houses of London in the 1690s.8
The frenzy for bulb trading was relatively short-lived and reached its peak during the winter months of 1636/7. Rising prices attracted speculators into the market, increasing transaction volumes and pushing prices further into bubble territory.
A contributing factor was the development of a futures market which became the primary focus of trading.9 This was an important piece of financial engineering and contributed significantly to the bubble. Futures were not a new phenomenon in the Dutch Republic as Baltic grain futures dated back to the mid-16th century.
Prices of bulbs continued to rise in early 1637. Switsers, one of the most popular varieties, rose from 125 florins per pound on 31 December 1636 to a high of 1500 on 3 February 1637 – a 12-fold increase in the space of a month.10 This was the peak of the market. Prices collapsed in early February 1637, the fall beginning in Haarlem, where many investors were based.
Goldgar has convincingly argued that some aspects of the tulip bubble, and its impact, have been exaggerated by later commentators who did not base their accounts on contemporary historical sources. However, Tulipmania was perceived as something remarkable and unprecedented by contemporaries.
The mania spilled out of the financial world to influence broader Dutch culture. Jan Brueghel the Younger depicted bulb traders as monkeys in his painting A Satire of Tulip Mania and, in Wagon of Fools, Hendrik Pot painted them as a ‘Ship of Fools.’
(Jan Brueghel the Younger, Satire on Tulip Mania, c. 1640. Source: Wikipedia)
Many contemporaries were bamboozled by the bubble. They had known religious frenzies in the past, but a mania focused on a tulip bulb! What particularly concerned them was how it undermined their notion of ‘value’ - how could a tulip bulb suddenly be worth a sum equivalent to a tract of land or the annual wages of a skilled worker.11 The large number of pamphlets published in the wake of the bubble, criticising the folly of investors, was a reflection of this unease.
Perhaps surprisingly, the Dutch economy did not suffer significantly from the collapse. The amount of debt taken on to invest was not significant enough to cause a major credit crunch. Individual investors did, of course, make significant losses, especially if they purchased bulbs near the top of the market. It has been argued, however, that rather than an economic crisis, the impact was more subtle, contributing to a breakdown of honour and a destruction of trust, with significant long-term effects on Dutch society.
Tulipmania became a symbol of the ‘madness of crowds’, often cited as a warning during the asset bubbles that followed. It was the first appearance in history of a new financial and cultural phenomenon, an important milestone in the history of the modern financial world. Indeed it could be argued that tulipmania was an early sign of the ‘blooming’ of modernity.
(Sotheby’s technician with flower still life by Jan Brueghel the Elder. Source: Getty)
Lessons for Investors
The earliest bubble was an unusual one - it was focused on a plant, rather than the shares of a company or a precious metal. Nonetheless, it offers a number of lessons for investors today. It shows how a combination of factors, including an extended period of economic growth, plentiful liquidity, financial engineering and a group of new investors can produce an asset bubble.
At Stewart Investors we believe it is important to identify and acknowledge asset bubbles. By applying strict valuation discipline, we aim to avoid paying excessive prices for shares in the companies in which we invest.
We believe our first duty as investors is to preserve our clients’ capital. Along with our emphasis on stewardship and focus on the quality of franchise and financials, an important aspect of doing this is identifying and avoiding extreme levels of valuation.