Tulips and the Tulip Bubbles

Tulips and the Tulip Bubbles

They're a riot of color that make people smile.

Yet economists make a Bad Example of tulips. Tulips created the earliest well-recorded bubble, defined by dictionary.com as "A period of wild speculation in which the price of a commodity or stock or an entire market is inflated far beyond its real value." Bubbles �burst� when a general awareness of the folly emerges and the price drops.

The story gets a lot of attention because it seems so bizarre. How could someone spend thousands of dollars on a single tulip bulb? People did. At the peak of the tulip bubble, a bulb was traded for a house on the canal in Amsterdam, one of the most expensive locations in the world at the time. That's millions of dollars at today's prices. 

I have three books that cover the subject in depth, Anna Pavord  The Tulip (1999), Mike Dash Tulipomania (1999), and Anna Goldgar Tulipmania  (2007), and there are chapters on it in John Kenneth Galbraith's A Short History of Financial Euphoria (1990) and Michael Pollan The Botany of Desire (2002). Those alone are thousands of words more than I am going to write. You can easily read pages and pages online too. I can't cover much detail, I can hope to pique your interest to read more.

I'll cover the tulip bubble in two blog posts. This first one sets the stage.

Tulips, the genus Tulipa (lily family, Liliaceae) are not European. They are native to western Asia and were unknown in ancient Greece and Rome and through the Middle Ages in Europe.

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The Ottoman Empire dominated Asia Minor from the early 14th century to 1922. Most of that time they were at odds with Christian Europe and blocked trade from Asia. Flowers and beauty were important to the Ottomans. Tulips were brought to Constantinople and were soon grown in great numbers in the gardens of the palaces of the emperors. 

Europeans distrusted the Ottomans but they sent ambassadors. Many ambassadors admired the flowers of the emperors' gardens. By the middle 1500s, the first records of tulips appear in Europe, as garden novelties. For Holland and Belgium, sharing history and climate, tulips were first reported in Antwerp in 1562. 

Over the next half century tulip growing expanded across Europe but demand exceeded supply. Plant enthusiasts and collectors fueled the interest. The colors of tulips were wonderfully intense. They grow from bulbs, unusual among European garden favorites at the time, and a feature that made them an easy plant to buy and sell. The Dutch particularly liked "flame pattern" tulips. These have irregular "flame-like" patterns in two and sometimes three colors. The problem was that they didn't breed true. The seeds of a tulip with a wonderful pattern could be a solid color, or an unattractive combination of the same colors. The only way to get the exact same flower was to wait for the tulip bulb to form secondary bulbs, called offsets. Offsets were clones so they were identical to the original. However, most bulbs only made one or two offsets at a time and it might take three years for the offsets to grow big enough to reliably survive transplanting. Tulips became more available in the 1600s but the really wonderful ones remained very, very rare.

MEANWHILE, it was an age of change. The Age of Exploration was underway. Sailing ships were going south around Africa to India and Asia or across the Atlantic to the Americas. Ships were frequently lost, but those that returned sold their cargoes of pepper, cinnamon, cloves, nutmeg, silks and other exotic items for great profit. 

We forget that economics has evolved over time just like every other part of our culture. In the Middle Ages, trade was pretty much on a cash basis: items were exchanged for other items or for coins. The Catholic Church called charging interest on a loan the sin of usury. That made it hard to raise money for projects larger than one person could finance. The Dutch in particular experimented with companies in the 1500s, where several people pooled their resources, usually to finance a ship. The companies generally disbanded upon the return of the ship, but it was a big step forward in economics. These trading companies grew out of trading families, and so when the ships returned with a profit, and sometimes it was a staggering profit, the beneficiaries were middle class merchants, not the nobility.

A small middle class was becoming very rich.

Holland, then part of the Holy Roman Empire, had nobles who were, of course, jealous of their prerogatives. Sumptuary laws, coming out of the Middle Ages, restricted many luxury goods to those of noble birth. (See the English sumptuary laws online). At the same time, the Reformation was spreading across the Europe. Many Dutchmen became Protestants, rejecting the showy splendor of the Catholic Church in favor of simplicity. Pious merchants wore somber clothes. 

What should a rich merchant DO with his wealth? 

He could purchase expensive (austere) houses and buy rare plants in the garden.

You can see where this is going -- to be continued

Comments and corrections welcome.

References

Dash, M. 1999. Tulipomania. Three Rivers Press, New York. 

Galbraith, J. K. 1999. A short history of financial euphoria. Whittle Direct Books, New York.

Goldgar, A. 2007. Tulipmania. University of Chicago Press, Chicago.

Pavord, A. 1999.  The tulip. Bloomsbury Press, New York.

Pollan, M. 2002. The botany of desire. Random House, New York.