Bubble: the Boom

Economic bubbles tend to have three stages: from its formation to its crash. It starts off with a boom, grows into a bubble, and bursts at its peak crashing the entire market. In order to demonstrate how tulip mania conveys these characteristics I have to start at the beginning explaining the process in a bit of detail.

 

Tulips were sold in bulbs. The process would take a while, as it was planted in September, bloomed in May, and lifted from the ground in June. The bulbs were examined and kept dry indoors. There must have been high levels of trust between the buyer and the seller, since tulips may not have blossom (which was considered one of the major attractions and was the main argument for purchasing it) same as years before, hence increasing the fraud in the market.

The price of the bulb depended on its weight (measured in aasen=0.0017ounce) which was seen as a good way to calculate prices - immature bulbs priced less, and mature bulbs being more expensive.

The sudden increase in the prices of tulips, in 1635, shaken the market and resulted in bulbs being sold while still in the ground. A buyer and a seller would make a paper premise to agree on the price (usually measured by the weight before planting it). However, this encouraged speculation (and moral hazard) between the two parties: the value of the bulb may increase significantly during the nine - month period it is in the ground, because of its growing weight, hence heavier bulbs tend to have more “bulblets”(planting a bulblet reduced the time of maturity needed to flower by almost a half, compared to growing it from seed). To maintain a short supply of particular bulbs sellers kept some rare kinds from trading. Traders encountered losses by so called “broken” bulbs (affected by disease which would not produce bulblets or would not flower), and bulbs, which were eaten mistakenly instead of onions.

Another boost in prices of tulips was caused by an increased variety of it (vivid coloured and symmetrically marked). Enchanted Dutch went crazy for bulbs which were changing its colour over seasons; the mystery cause of such a miracle was discovered in the 20^th century being a virus transmitted by aphids.

At its peak the price of the bulb reached insane values, the most popular and rare bulbs of “Semper Augustus” and “Violetten Admirael van Enkhuizen” being sold at over 5000fl (the Dutch currency at a time ‘guilder’). It is difficult to transmute in todays' value, but if looking at the Dutch monetary values at a time, 1000fl would buy a small house in Haarlem, 100 hogshead of wine, over 25,000 pounds of rye bread, etc; whilst, a carpenter earned annually 250fl, a wealthy merchant over 1,500.

It means, a single tulip bulb was selling for over 20 times the average Dutch annual income. So, say average annual income in the UK is around £32,000, then a single bulb would cost you £700,000, would you buy it? This situation can be best described quoting Oscar Wilde – “A man knows the price of everything and the value of nothing”.