Key Takeaways
- The Velocity of Paper: The intense speculative frenzy in the Dutch Tulipmania was primarily a phenomenon of a futures market, where bulbs were sold entirely **"on paper"** from mid-September onward, accelerating price swings twentyfold in a single month.
- Macro Greed, Government Scale: The Mississippi and South Sea Bubbles were not simply crowd folly, but **grandiose macroeconomic schemes**—large-scale **government debt-for-equity swaps**—backed by the entire apparatus of the governments of England and France.
- The Plausible Theory: Speculators gather around **convincing theories**, not each other. Law's scheme was initially a **plausible theory** for revitalizing the French economy through financial innovation, lending credibility to the resulting price surge.
- The Destruction of Honor: The critical system flaw in all early manias was the dependence on **honor and credit** to uphold paper promises. The collapse of the tulip trade manifested as a wholesale **breaking of promises** (or "bad faith") by buyers who refused to receive and pay for worthless goods.
The most shocking element of the Dutch tulip speculation—the rapid, astonishing rise in prices—was fundamentally driven by a simple, yet powerful, mechanism: the futures market. While the high prices of rare bulbs were a “standard feature of markets in newly developed varieties,” the notorious “mania” centered on the common bulbs was an extremely short-lived phenomenon: a frenzy lasting only one month between January 2 and February 5, 1637.
This velocity was made possible because the trade operated almost entirely “on paper” from mid-September onward, anticipating the delivery and payment of bulbs during the “dry bulb time” in the summer. Buyers in January were not paying for physical bulbs but for the right to acquire them months later. This system of promises allowed prices for common bulbs to surge up to twentyfold in this single month. The widespread desire for quick profit transformed the trade into a form of gambling (in the wind) that quickly extended beyond flowers into shares, commodity futures (grain), and land.
Macro Greed on a Government Scale
If the tulip market exemplified greed applied to a simple commodity, the later, greater manias—the Mississippi Bubble and the South Sea Bubble—represented the sin applied on a macroeconomic scale, aided and launched by high government officials. These episodes are conventionally cited as examples of crowd irrationality. However, examining them through the lens of financial fundamentals reveals a deeper pattern: speculators really gather around theories, not each other.
In the case of the Mississippi Bubble, John Law presented a compelling and plausible theory to revitalize the French economy through financial innovation and fiscal reform. His plan involved a large-scale money printing operation and a government debt-for-equity swap. Likewise, the South Sea Company launched a similar debt-for-equity swap in Britain. These were schemes that were structurally unsound (Palgrave defined a bubble as an “unsound commercial undertaking”) but which, if successful, would have been described as brilliantly audacious. Investors were factoring the possibility of success into the share prices, a decision rooted in perception of market fundamentals and Law’s astounding rise to power.
Greed in the Time of Plague
The speculative drive for quick, “odious” gain in the tulip trade was so intense that it occurred simultaneously with a massive outbreak of the bubonic plague. The plague killed 14% of the population in Haarlem, the center of the tulip speculation, between August and November 1636. Yet, during the most frantic part of the common bulb speculation in January 1637, the trade continued in the taverns.
This suggests that the pursuit of instant wealth offered an irresistible distraction from death and disaster. The speculation in common bulbs became a “drinking phenomenon held in the taverns”, drawing in capitalizing workers such as the weavers and middle-class traders. The pursuit of money through speculation, viewed by critics as gambling, was inherently dishonorable compared to labor and diligence. While the mania was not pervasive across all of Dutch society, it was concentrated among those who were in a position to leverage this fleeting “paper wealth” through social networks of family, religion, or profession.
The Broken Chain of Trust
Whether dealing in rare tulips or complex government debt swaps, the system flaw that allowed speculative manias to implode was the same: the total reliance on honor and credit to uphold promises. The trading of tulips, operating as an active futures market, was based entirely upon trust.
When the inevitable price collapse came in February 1637, virtually no money had been exchanged since August or September of the previous year. The crisis instantly became one of wholesale breaking of promises and the destruction of credit. Buyers refused to pay for bulbs that were now worth a fraction of the contracted price. They acted “in bad faith,” causing disputes and social disorder. The official suggestion that later contracts could be rejected upon payment of 10% of the sale price reflects the severity of this breakdown, though this payment was merely a contract settlement fee, not an indicator of the post-crash price of the bulb itself. The refusal to honor deals showed that “Without honor there was no credit, and without credit no honor”.
What's Next?
The panic over paper wealth was matched only by the moral panic over who was acquiring it. The destructive power of avarice didn't just smash fortunes; it shattered the existing social hierarchy. When weavers become 'seeming-gentlemen' and honest toil is abandoned for tavern gambling, society itself feels turned upside down.In the next post, we delve into the social calculus of greed: Analyzing the social inversion and class anxiety—the ‘foul rabble’ who became princes—that defined the moral outrage of the Golden Age. Continue to: Plague Inspire Greed: When Epidemics and Speculation Collide →
Within this Blog
- Futures Shock: How Paper Promises Unleash the Unstoppable Engine of Market Collapse - The mechanics of futures trading and government-backed bubbles.
- The Fidenae Stadium Collapse: When Profit Killed 20,000 in Ancient Rome - Economic incentives overriding safety in ancient Rome
External Sources
- Garber, Peter M. Famous First Bubbles: The Fundamentals of Early Manias (2000).
- Goldgar, Anne. Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age (2007).
- Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds (1841).
- Roman, Adriaen. Samen-spraeck tusschen Waermondt ende Gaergoedt (1637).
- Posthumus, N. W. Articles on the Tulip Mania in the Economisch-Historisch Jaarboek (1926-1934).
- Price Discovery: Trading established market prices for future delivery