The Dutch Tulip Mania - Maurits van der Veen

The Dutch Tulip Mania: The Social Politics of a Financial Bubble
Abstract
A. Maurits van der Veen
Assistant Professor
Department of International Affairs
University of Georgia
March 2009
The Dutch tulip mania of 1636-1637 is widely seen as the first recorded instance of a
financial bubble. In recent years, however, economists have argued that prices offered
and paid for tulip bulbs, while extremely high, nevertheless reflected underlying
economic fundamentals. If valid, such claims imply that the tulip mania cannot be
considered a true bubble. This paper demonstrates that attempts to rationalize the bubble
in this manner cannot be justified with the available data: the tulip mania really did
produce a bubble. Moreover, the paper presents a model based on social networks and
information cascades that explains the emergence of the bubble as well as its subsequent
collapse. The salient feature of the tulip mania was not the astronomical prices that were
paid for bulbs, but instead the remarkably dense and localized social network within
which the tulip market was embedded.
Keywords
Tulip mania, financial bubbles, speculation, investment, social networks, Holland

The Dutch Tulip Mania: The Social Politics of a Financial Bubble
I shall eliminate…
Those who ran with rabid lust after filthy profit,
And poured so much of their poisoned juice
That they nearly corrupted the real [flower-loving] people
To no longer revere my flowers as they used to
But weigh trash with pounds and bulbs by weight
— Flora [the goddess of flowers], 1637. 1
The Dutch tulip mania of the 1630s has long served as the epitome of the financial
bubble. In his book Irrational Exuberance, Shiller calls it “the most famous bubble of
all.” 2 No asset bubble is too small or too large or its bursting will be compared to the
Dutch tulip craze. Indeed, references to tulips have come thick and fast in discussions of
the current financial crisis. The Economist refers to “all those overpriced Dutch tulips” in
an article examining financial instability, 3 while the New York Times asks: “It can’t
possibly be that in the sophisticated, computerized 21 st century, we find ourselves
experiencing the same kind of financial panic — the same kind of financial insanity,
really — that has dogged mankind at least since the Dutch tulip mania of the 1630s. Can
it?” 4
The tulip craze has maintained its grip on the public imagination not just as a
reference point in finance, but also as a fascinating episode in itself — witness Dumas’
1 (De Verstoorde, 1637) (The angry and not-yet-dead Flora.) All translations are by the author.
2 (Shiller, 2000, p. 177) Similarly, though Kindleberger’s standard work Manias, Panics and Crashes
offers only a very superficial discussion of the mania, he nonetheless lists it as the first of the “big 10
financial bubbles” (Kindleberger & Aliber, 2005, p. 8)
3 ("Wild-Animal Spirits," 2009)
4 (Nocera, 2008)

The Dutch Tulip Mania 2
classic novel The Black Tulip and Moggach’s more recent Tulip Fever. 5 In recent years,
however, some authors have called into questions its status as an early example of a
financial bubble. There is some disagreement among economists on the proper definition
of a bubble, but Shiller’s definition — “a situation in which temporarily high prices are
sustained largely by investors’ enthusiasm rather than by consistent estimation of real
value” — appears relatively uncontroversial. 6 The controversy lies in its
operationalization: how does one judge whether “consistent estimation of real value” is
taking place? Clearly, high prices do not suffice: the fact that single bulbs sold for more
than the price of a house during the tulip mania appears foolish today, but it may well
reflect the value placed on those bulbs by contemporaries.
Several authors have challenged the tulip mania’s iconic status as a financial bubble.
First, Garber has suggested that the pattern of price changes observed during the tulip
craze matches the pattern one would expect for novel luxury goods in limited but
gradually growing supply. 7 His argument is widely cited but rarely examined closely.
More recently, Thompson has claimed that the dramatic increases in tulip prices during
the winter of 1636-1637 were due to a shift in market instruments from standard futures
contracts to options. 8 If either author is correct, the literature on financial bubbles may be
forced to make do without this popular episode. As I show in this paper, however, both
are wrong.
5 (Moggach, 1999)
6 (Shiller, 2000, p. xii)
7 (Garber, 1989, 2000)
8 (Thompson, 2006)

The Dutch Tulip Mania 3
The Dutch tulip mania undeniably meets Shiller’s definition of a bubble, and as such
deserves to retain its place as an early illustration of “the madness of crowds.” 9 More
importantly, the episode sheds a valuable light on a feature of speculative bubbles often
ignored by market fundamentalists: the impact of social networks and norms. The tulip
mania illustrates the ease with which a bubble can emerge within comparatively small
and densely connected social networks. The remainder of the paper is divided into three
parts. The first part briefly presents the key features of the tulip craze. Next I analyze the
available evidence on tulip prices during the mania, which demonstrates that a bubble did
arise, and that claims to the contrary cannot be sustained by the data. The third part,
finally, shifts the emphasis to the social context that made the bubble possible, but also
limited its scope and duration.
The Tulip Craze
Tulips arrived in Western Europe from Turkey during the sixteenth century. They
rapidly came to be prized above all other flowers, and the well-to-do were willing to pay
quite extraordinary sums to obtain the latest, most spectacularly colored variety. 10
Particularly prized were tulips with darker colored stripes and “flames” on a lighter
background. Many of the most valuable striations were created, we now know, by a virus.
This was not understood at the time, however, hampering the systematic development of
new varieties. Moreover, such “flaming” tulips were always a risky investment, since it
9 (Mackay, 1932 [1852])
10 Indeed, a 1614 book of emblems displays a tulip alongside the proverb “A fool and his money are soon
parted” (Visscher, 1614)

The Dutch Tulip Mania 4
was never certain whether their patterns would be as desirable, and valuable, from one
year to the next. 11 To minimize uncertainty, serious tulip collectors contracted to buy and
sell bulbs while they were in bloom, making payment and taking delivery only later, once
the bulbs were lifted from the ground.
Tulip prices were high because supplies of the most exciting new varieties were
extremely limited. The supply of the most famous tulip of the 1620s, the Semper
Augustus was in the hands of a single owner, who held on to the bulbs as prices offered
rose from 1000 gulden per bulb in 1623 to 3000 gulden per bulb in 1625. 12 When a
Semper Augustus bulb was finally sold some time later, the owner attached the
stipulation that the buyer could sell neither the bulb itself, nor any of its offsets — small
bulbs that develop on the outside of the main bulb — without permission of the original
seller. 13 The problematic combination of uncertainty about the quality of a bulb’s next
flower and mostly informal inevitably resulted in some failed transactions. Indeed, most
of our reliable knowledge about tulip prices during this period derives from such
transactions, since the disappointed party would often approach a notary to file an official
complaint. Records of these complaints are still kept in the city archives of many cities in
Holland, whereas almost no original transaction records remain. The first of these
complaints show up in the city archives as early as 1611. 14
11 (Roman, 1637b, p. 22)
12 (Krelage, 1942a, pp. 31-33; van Wassenaer, 1625) The Dutch currency at the time was the gulden,
often translated as guilder. The annual earnings of a skilled artisan such as a carpenter around 1630
were about 300 gulden (Goldgar, 2007, p. 225) At 3000 gulden, the Semper Augustus was valued at
about 10 times the annual income of someone in the lower middle class.
13 (Roman, 1637a, pp. 18-19)
14 (Posthumus, 1927, pp. 11-13)

The Dutch Tulip Mania 5
The number of different varieties of tulips increased very rapidly during the 1620s
and 1630s — far too rapidly for any consistent naming scheme to evolve. 15 Some names
were descriptive, but many signaled high quality and the bulb’s original owner or town.
Thus we find many tulips whose name begins with Admirael or Generael, applying
military ranks to signify the fine quality of the bulb. Admirael van Enckhuysen was a
bulb originally grown in the town of Enkhuizen, while the tulip grower Van der Eijck
was the original owner of the first Generael van der Eijck bulb. 16 Despite the large
number of varieties, supply remained quite limited, as new bulbs needed to grow for a
number of years before they bloomed for the first time. Though there were dozens of
highly prized varieties, the total supply for any given variety was frequently only a
handful of bulbs, property of an even smaller number of growers.
Until the early 1630s, the market for tulips was composed almost entirely of
aficionados trading amongst themselves. These were mostly wealthy merchants whose
financial fortunes would not be negatively affected by the occasional disappointing
purchase of a bulb that turned out to be less fine than expected. Moreover, as bulb lovers
they also had a thorough knowledge of tulip growing and of the characteristics of
different varieties. Most importantly, since transactions took place during the time when
bulbs were in bloom, the quality of the flowers could be assessed. By 1634, however,
15 By the peak of the mania in early 1637 about 500 different varieties had been developed in Holland.
Few of these same varieties still exist today, but we have contemporary pictures of about 80% of them
(Krelage, 1942a, p. 59)
16 (Krelage, 1942a, pp. 35-38; see also Roman, 1637a, p. 16) Inevitably, name inflation occurred: one of
the most famous varieties during the tulip craze was the Gouda bulb, named for the Dutch town.
However, its original name was actually Generael der Generaelen van Gouda, i.e. “general of
generals.”

The Dutch Tulip Mania 6
sales had begun to take place throughout the year. 17 A futures market developed shortly
thereafter: people began to sell bulbs for which they had signed a contract but which they
did not yet have in their possession. 18 This permitted traders to make a profit without ever
having to plant a bulb of their own. Not surprisingly, it took little time for speculators to
enter the market.
A number of factors served as catalysts for speculation. First, Dutch commerce in
general was flourishing during this period, creating new wealth not only at the elite levels
but also among an increasingly prominent middle class. 19 Second, the large profits
generated by the East Indian trade — as well as speculation in the shares of the Dutch
East India Company (VOC) — generated not only high incomes, but also a level of
comfort with risky futures contracts. 20 Third, no guild controlled the tulip trade, so
barriers to entry were comparatively low. 21 Finally, it has been suggested that the free
coinage policy of the Bank of Amsterdam may have attracted additional money to
Holland. 22
One additional contributing factor deserves separate mention: the plague which
ravaged Holland in 1635-1636. Amsterdam lost about 20% of its inhabitants over two
17 (Velius, 1648)
18 (Goldgar, 2007, pp. 206-207)
19 Indeed, a near-contemporary account characterizes the tulip craze as a “remarkable example”
(verwonderenswaardig exempel) of the growth in wealth and mass participation associated with
commerce (Aitzema, 1669-1672, p. 2:503)
20 Indeed, the Dutch appear to have had an appetite for risk in general. Goldgar cites numerous examples
of contracts for the purchase or sale of bulbs that include side bets on the outcome of military
campaigns, or the survival of parties to the contract (Goldgar, 2007, pp. 219-221)
21 (Schama, 1988, p. 350)
22 (French, 2006)

The Dutch Tulip Mania 7
years. Haarlem, one of the centers of the bulb trade, lost more than 20% in 1635 alone. 23
In fact, several contemporary authors drew a causal link from the tulip craze to the
plague. The title of one pamphlet says it all: New Year’s Plague Mirror in which is on
display God’s Just Plague-Punishment, for the attention of the well-to-do Netherlanders
in this bold, rotten Century. The implication was that God was punishing the bulb
speculators for their limitless greed. 24 Recent writers reverse the causal arrow: the ever-
present threat of a rapid death may well have inclined people towards taking greater
risks. 25
As prices began to rise and new, less knowledgeable traders entered the market, three
new types of deals were introduced. First, transactions began to make explicit reference
to a bulb’s weight. The first recorded disputes to mention bulb weights concerned
contracts signed in the late summer of 1635. 26 Bulb weights were expressed in “azen”,
with one “aas” equivalent to about 0.05 grams. Next, a lively trade developed in the
offsets of bulbs. For example, buyers would offer a certain price per aas for the largest
offset of a particular bulb. The total payment would be determined when the bulb was
dug up and its offsets examined and weighed. 27 Finally, bulbs began to be sold in bulk,
by weight. The archives record many deals for 1000 azen of a particular variety —
23 (Noordegraaf & Valk, 1996, p. 54)
24 The title in Dutch is: Nieu-Iaers Pest-Spiegel waer in te sien is de Rechtveerdighe Pest-straffe Gods
voorghestelt tot opmerck der weeldige Neder-Landers in dese snoode bedurven Eeuwe. The pamphlet,
originally published in Haarlem, was sufficiently popular to be reprinted almost immediately in
neighbouring towns (Theuniszoon van der Lust, 1637).
25 (E.g. Garber, 2000, pp. 37-38; Goldgar, 2007, pp. 254-260)
26 (Posthumus, 1927, p. 17)
27 (Posthumus, 1927, pp. 23, 29, 32)

The Dutch Tulip Mania 8
usually about 3-6 bulbs. Lesser-valued cultivars could also be traded by the pound,
roughly 30-60 bulbs.
This last innovation in particular fueled the speculative bubble. As the epigram
opening the paper indicates, contemporary observers recognized this too, and many
looked askance (partially out of envy) at those who traded primarily in so-called ‘pound
goods.’ Earlier contracts had always been linked to specific bulbs. However, a contract
for 1000 azen Gouda, for example, could be filled with any set of Gouda bulbs the seller
chose. With the link to specific bulbs severed, it became possible to engage in
transactions in which neither party had any idea about the eventual source of the bulbs.
Moreover, no real knowledge of either tulips or their bulbs was required, only a sense of
the going rate per aas for a particular tulip variety. Where prices had risen gradually but
steadily over the preceding years, the rise accelerated once these bulk contracts were
introduced into the market. Single-bulb prices appreciated faster too, but prices rose
fastest on the bulk contracts.
The elimination of the need to have one’s own bulb garden or even to be a
connoisseur of tulips, combined with the lure of quick and easy profits, drew new
entrants into the tulip market in growing numbers beginning in the fall of 1635. As new
entrants multiplied, transactions increasingly moved from the gardens and drawing rooms
of the most active collectors to regular, organized venues, usually at local inns. A system
of ‘colleges’ soon developed across the main towns of Holland. These colleges,
composed of a core of regular traders, met at a specific inn two or three times per week,
usually in the evening (most traders held on to their day jobs). Outsiders were welcome,
but needed to be introduced first. Most deals took places with the mediation of one or two

The Dutch Tulip Mania 9
“neutral” observers, and all sales were sealed with the payment of a small surcharge
called the “wijnkoop” (wine purchase/fee) of about 2.5%. These funds were spent
immediately by the members of the college in attendance, on food, drink and tobacco,
thus lubricating the deal-making. Wijnkoop monies also paid for lamps and a fire, as well
as tips for the serving girls. Even the poor were not forgotten, and some alms were set
aside. 28 Prominent tulip collectors and growers regularly attended these colleges, and
some of the more successful traders in the colleges developed ties to a number of
collectors, further tightening the social networks within which all were embedded. 29
The real speculative bubble did not last very long. Prices began to rise faster once the
bulbs had been planted in October 1636. Bulk contracts became increasingly common by
December 1636, giving the market a final boost. Peak prices were paid during the last
few days of January and first few days of February 1637. From the beginning of this
three-month period to the end, some individual bulbs were sold as many as 5-10 times,
and increased more than ten-fold in price, while bulk quantities of cheaper goods
increased as much as twenty-fold. A contemporary account notes that even varieties for
which there had been no demand previously because they were too common or plain now
were sold for large sums. 30 Although disquiet about skyrocketing prices had been
building, the end still arrived suddenly and unexpectedly, with plummeting prices for
some of the most common pound goods in Haarlem on February 3rd. A public auction of
28 (Roman, 1637b, p. 5)
29 (Goldgar, 2007)
30 (Roman, 1637b, p. 24)

The Dutch Tulip Mania 10
choice bulbs in Alkmaar on February 5th garnered peak prices, 31 but this was merely a
last hurrah. 32 By February 7th, it had become clear throughout the main trading centers
that the market had crashed. I discuss the crisis and its resolution in more detail below.
First however, we need to establish that a bubble indeed took place, by taking a closer
look at the available data on bulb prices.
Data on Tulip Prices
Most tulip contracts were informal, and many were probably not even written down.
Those that were committed to paper were generally torn up once completed. Moreover,
there were no regular newspapers to cover the crisis as it unfolded: weekly newspapers
only emerged in most Holland towns in the 1660s. However, the tulip bubble fascinated
contemporary observers, who produced a wealth of — mostly critical — pamphlets,
which accordingly constitute one of the main sources of empirical data on tulip prices. 33
Unfortunately, contemporary historiographers relied almost exclusively on these
pamphlets, even where access to the principals and other original documents would have
been feasible. 34 Pamphlet authors were usually more interested in criticizing — or , in a
few case, defending — the bulb trade than in explaining it. As a result, most of the useful
31 (Lijste van Eenighe Tulpaen, 1637)
32 Though distances between Holland towns were not great, people did not travel frequently. As noted,
most bulb traders had other professions and traveling did take time away from their other pursuits. As a
result, the peak did not occur on the same day all across Holland (Krelage, 1942a, pp. 50-51)
33 (Krelage, 1942b; Posthumus, 1926)
34 (E.g. Aitzema, 1669-1672, p. 2313)

The Dutch Tulip Mania 11
specific information about the tulip mania we have today is drawn from a series of just
three pamphlets.
These pamphlets were published — and likely written —by Adriaen Roman in
Haarlem, between February and May 1637. 35 Each is presented in the form of a dialogue
between two main characters, Gaergoedt (GreedyGoods) and Waermondt (Truemouth).
Gaergoedt is a well-to-do weaver who has been active as a bulb trader, and who
undertakes to educate Waermondt about the tulip market, in order to explain and defend
his actions. Waermondt, in response, offers moralistic tales intended to highlight the folly
of various aspects of the tulip mania. One of the most valuable features of these dialogues
is that they reproduce sample bulb sale contracts as well as data on the prices fetched for
particular bulbs near the beginning and towards the end of the bubble. There is little firm
corroboration for the data provided in these dialogues, and they can be shown to contain
some errors. Accordingly, no single price or weight can be considered entirely reliable.
Nevertheless, there is no reason to suspect any systematic distortion of the price
information, and most students of the tulip mania have accepted it as valid. 36
Similar problems hamper the use of the sole other source of price data: complaints
and legal cases whose records survive in town archives. Few students of the tulip craze
have consulted these archives themselves: the only recent exceptions I am aware of are
35 (Roman, 1637a, 1637b, 1637c)
36 The dialogues are fictional, and their publisher/author does not pretend otherwise, which might lead us
to suspect all of the reported prices. Moreover, they have an agenda, which is to highlight the folly of
the tulip mania. However, no contemporary pamphlet authors challenged the data provided in these
dialogues, and some of the prices listed in the dialogues match those printed in a broadside reporting
the results of the Alkmaar auction of 5 Feb. 1637, at which some of the highest prices for any bulbs
were recorded (Lijste van Eenighe Tulpaen, 1637). Still, some of the prices in the dialogues are faulty
transcriptions from the Alkmaar auction. For example, example, a bulb of 171 azen that sold for 173
gulden is listed in the dialogue as weighing just 71 azen but selling for 175 gulden.

The Dutch Tulip Mania 12
Dash and Goldgar. 37 Instead, most rely on the collection of transcriptions published
during the 1920s and 1930s by Posthumus. 38 Unfortunately, Goldgar has found
Posthumus’ transcriptions to be “extremely sloppy” and riddled with errors. 39 In other
words, no single piece of evidence is completely reliable here either. All in all, the
available price evidence is both thin and somewhat uncertain. We have about 400 price
points, the vast majority of which refer to peak prices only. About 65 data points provide
pre-peak prices, from before late January 1637. Of these, about 50 concern the three
month-period of the bubble from November through January. These 50 observations
reference 30 different varieties of tulips. On the far side of the peak, we have data on only
about 5 transactions for the remainder of 1637 and the first part of 1638. We do,
however, have a few general statements in the third dialogue about the drastic drop in
value after the crash.
Writers on the tulip mania have adopted different strategies to overcome the difficulty
of drawing solid conclusions based on such limited data. The simplest tactic is to rely
heavily on the hyperbole found in the pamphlets. For example, the post-script to the first
dialogue between Gaergoedt and Waermondt claims that “some goods ran so high that
one or two guldens became one hundred, sometimes more.” 40 If true, this would be strong
evidence for a bubble. However, the prices listed in the dialogues — which are explicitly
intended to illustrate the dramatic nature of the price increases observed — do not
37 (Dash, 1999; Goldgar, 2007)
38 (Posthumus, 1927, 1934)
39 (Goldgar, 2007, pp. 328-329, fn. 329)
40 (Roman, 1637b, p. 23)

The Dutch Tulip Mania 13
support this claim, and only the most superficial treatments of the tulip mania take it
seriously.
A more promising approach is to interpolate based on the available data, as Garber
does. 41 Garber generates 16 charts showing the price evolution of different tulip varieties
by connecting observations in a straight line. However, each chart has only a few data
points: three of them have only an initial and a final price. While the charts demonstrate
that prices rose a lot, they cannot be used to draw any conclusions about the price
trajectory between the individual observations. Simply imposing a straight line
contradicts all contemporary accounts, which indicate a gradual increase at first, with a
far steeper slope near the end of the bubble.
Garber’s data on the other side of the peak suffer the same flaw. As noted earlier, we
have very little data from the period immediately following the bubble. Garber, therefore,
is forced to rely on prices from a sale in 1642/43. All one can do with such data is
calculate average annual depreciation; they say nothing about the actual shape of the
price curve. Nevertheless, Garber concludes that “the crash of February 1637 for rare
bulbs was not of extraordinary magnitude” simply by assuming a linear price decline for
the period between the end of the crash and 1642. 42 However, if we trust the peak price
data offered in the dialogues — as Garber does — we must also take seriously the
evidence they provide on the values of bulbs after the crash. Gaergoedt notes that it is
hard to estimate price levels “since there is no demand for bulbs; everybody is silent.”
Nevertheless, he records that a garden filled with common varieties of tulips brought only
41 (Garber, 1989, 2000)
42 (Garber, 2000, p. 70)

The Dutch Tulip Mania 14
about one hundredth of the price it might have fetched at the peak. More importantly for
our purposes, a sale of several individual bulbs only fetched about 22 gulden each,
whereas Gaergoedt suggests they might have been worth 400 gulden at their peak. 43 This
implies that prices of individual bulbs fell by as much as 95% within a few months,
invalidating Garber’s assumption of a steady, linear drop in prices over the course of the
six subsequent years. Garber does acknowledge the price surge and decline in the more
common bulbs, sold in bulk, but waves away the problem by blaming it on the lack of
regulation of contracts within the colleges. 44 I address this argument in more detail
below.
Interpolating from one observation to the next would be less problematic if we had
more data points, with less time elapsing from one to the next. This might be possible if
we could generate an index of relative prices that permits comparisons across different
tulip varieties. Thompson’s argument about the price developments in the tulip market
relies on the validity of such an index. 45 However, Thompson fails to address some fatal
problems with this approach. First, an index must be based on price observations taken at
the same point in time, but Thompson derives his baseline from a book of tulip paintings
for which neither the source nor the date of the prices listed are known. 46 Second, not all
bulb sales are directly comparable. Transactions may involve offsets, bulbs, or bulbs in
43 (Roman, 1637a, p. 12). Among these latter bulbs was a Gheel ende Root van Leyden. At the height of
the bubble, a large bulb of this variety was sold for 550 gulden, so an estimated value of 400 gulden for
a single bulb is not unreasonable (Lijste van Eenighe Tulpaen, 1637)
44 (Garber, 2000, p. 81)
45 (Thompson, 2006)
46 A number of the prices derive from the February 5th auction, but most do not. The book has been
digitized and can be seen at http://library.wur.nl/tulips/blauw_content.html (accessed 15 February
2009).

The Dutch Tulip Mania 15
bulk; the value per aas is not the same across these three transaction types, with bulk
goods worth the least and offsets the most. Nor does the value of a bulb increase linearly
with its weight. 47 The third problem, fatal all by itself, is that an index can only be used to
compare prices for different varieties at different points in time if we assume, against all
the available evidence, that the shape of the price curve over time is identical for every
tulip variety, so that relative prices remain constant. 48
In sum, neither Garber’s nor Thompson’s attempts to explain away the tulip bubble
can be sustained by the available data. Arguing that price fluctuations did not exceed
those supported by market fundamentals, as Garber does, requires ignoring key points of
evidence from the post-crash period, as well as assuming that prices increased and
decreased linearly prior to and after the peak, an assumption contradicted by every
contemporary account. Making more precise claims about the timing of particular aspects
of the bubble, as Thompson does, requires ignoring the problems inherent in aggregating
price information for bulbs of different weights and varieties at different points in time,
as well as placing complete faith in the accuracy of each individual price observation.
Though the data are limited, they quite clearly indicate a rapid rise in prices, accelerating
through December 1636 and January 1637, followed by a steep and sudden decline after
the first week of February. Contemporary pamphlets unanimously support this picture.
47 The results of the February 5th auction suggest that a doubling in weight is associated with a ≈50%
increase in price. Garber ignores this problem too (Garber, 2000, p. ch. 8)
48 To give just one example, the Gouda had doubled in price before the Oudenaerde began increasing
rapidly in price, while the Switser did not really start gaining in value until three weeks later still. If we
have only one pre-peak price for a bulb, there is no way to know where on its price curve to locate it —
has it already gained most of its value, or is the steepest rise still to come? Relative prices across
different bulbs changed day by day.

The Dutch Tulip Mania 16
Social and Informational Features of the Bubble
How, then, can we explain this bubble? In this section, I argue that the key to the
explanation lies in the dense social networks and strong social norms within which
commerce in Holland was embedded at the time. Efficient market models — of the kind
proposed by both Garber and Thompson — assume that those who bought and sold rare
and bulk bulbs used their own private knowledge about the fundamental supply of and
demand for various bulbs. Prices might rise while increases in fundamental (non-
speculative) demand exceeded increases in supply, but they would be kept under control.
Bulb traders would begin selling once prices threatened to deviate from underlying
fundamentals. As we have seen, however, in the winter of 1636/37 people behaved
differently. Still, the bubble did not develop because the traders’ private knowledge about
the actual supply of particular bulbs was faulty. As we shall see, the market was quite
localized, and those active in the trade were familiar with the gardens where the tulips
were planted and with the tulips themselves.
The key factor, instead, was the social connectedness among tulip traders, who were
linked to one another by religion, by marriage, by trade, etc. As a result, market
participants assigned a greater weight to the decisions of other traders than they would
have if they had interacted only through the arms-length transactions of the market. 49
Aggregated across the entire market, these decisions came to outweigh the influence of
private knowledge, setting the bubble in motion. The tulip bubble thus emerged as the
49 (Cf. Uzzi, 1999)

The Dutch Tulip Mania 17
result of an information cascade. 50 The basic insight associated with such cascades is
individuals may rationally ignore their own private information and be guided by the
decisions of others. Applied to markets this means that people may rationally ignore their
own knowledge about the demand for or supply of a particular good. Crucially, this also
implies that lack of knowledge need not be an impediment to a rational actor’s entrance
into a market.
In an elegant application of an information transmission model to investment bubbles,
Hong, Scheinkman, and Xiong show how a bubble can emerge in a situation where
technological innovation has rendered the knowledge of some advisors much less
valuable. 51 Those advisors who do understand the innovation have an incentive to signal
their type by inflating their forecasts so as to stand out from those whose advice is now
less valuable. If there are many naïve investors who accept any forecast at face value, a
bubble readily emerges. The mechanism I propose here is similar in many respects. The
crucial difference is that investors and advisors are not separate groups. This changes
some of the basic dynamics and makes the social connections among the actors rather
more significant.
In his earlier work on the science of social networks, Watts suggests that a densely
connected network may be resistant to information cascades, since “the more people
whose actions or opinions you take into account before making a decision, the less
influence any one of them will have.” 52 The idea is that all individuals are “locally stable”
50 (Bikhchandani, Hirshleifer, & Welch, 1992)
51 (Hong, Scheinkman, & Xiong, 2008; cf. Nairn, 2002)
52 (Watts, 2003, p. 240)

The Dutch Tulip Mania 18
and hence no shock, however large, to a single node in the network is likely to result in
any kind of cascade. However, that conclusion only applies if all members of the network
can be observed at once. If members of the network act in small groups, the potential
stabilizing influence of the rest of the network largely disappears. In fact, in subsequent
research, Watts has found that cascades are made possible by “the presence… of a critical
mass of easily influenced people, each of whom adopts… after being exposed to a single
adopting neighbor.” 53 As we shall see, the tulip bubble contains features of both of these
scenarios. The overall connectedness of the social network actually made things less,
rather than more, stable; and a small-group setting made it unnecessary for people to be
so naïve that exposure to just a single neighbor drove their decisions.
The social logic behind the tulip bubble can be illustrated by way of analogy to the art
auction market. Art dealer X, who has bought and sold art at major auctions for years,
will know most of the other active art dealers — especially the local ones — and will
have come to trust their knowledge and judgment. Imagine that a piece of art outside X’s
area of expertise has caught her eye. She would like to acquire it, but does not wish to
pay more than the work is worth. Three possible strategies readily suggest themselves: 1)
research the value of the piece, thus acquiring sufficient private knowledge to judge
value; 2) see how much her colleagues have recently bid on comparable pieces; and 3)
simply outbid any of her colleagues whose judgment she trusts, but stop bidding if an
unknown person drives up the bid further. No strategy can eliminate all uncertainty: no
two pieces of art are exactly alike, and even art experts are not always sure how much a
work of art might fetch on the open market. Hence, strategy 1 may not be worth pursuing,
53 (Watts, 2007)

The Dutch Tulip Mania 19
since it is not guaranteed to repay the considerable costs involved in acquiring sufficient
knowledge, especially compared to the far more modest costs associated with strategies 2
or 3. This implies that the adoption of strategies 2 or 3 may be rational, even if X
recognizes that these strategies are far riskier.
The risk associated with strategy 3 is the most obvious. If art buyers X and Y each
trust the knowledge and judgment of the other, they may end up in a bidding contest well
beyond the “fundamental” value of the piece, up to a point where the price reaches a level
that even the imperfect knowledge of either X or Y tells her that it is not worth that much.
At this point, she will stop bidding, leaving the other to pay far too much. The risks with
strategy 2 are less obvious but no less severe. The strategy will work well if bids made in
the recent past on similar pieces by other dealers were based on private knowledge, i.e.
on strategy 1. However, if they were based on strategies 2 or 3, the actions of X will
simply reinforce the misvaluation, and help generate an information cascade. It is easy to
see how the social context — art dealers who know and trust one another — makes such
outcomes far more likely than if nobody trusted the knowledge and judgment of her
colleagues. After all, the less one’s confidence in one’s fellow dealers, the greater is the
incentive to acquire adequate private knowledge.
Now imagine novice art dealers X1 through Xn who, one after the other, decide to get
involved in the market, attracted by the lure of easy money, or because their disposable
incomes has risen considerably in recent times. They can begin purchasing art most easily
by adopting strategies 2 and 3 exclusively. However, doing so reduces the fraction of the
auction participants with private knowledge. As a result, for each successive
collector/dealer that enters the market in this manner, there is a smaller likelihood that a

The Dutch Tulip Mania 20
randomly chosen auction participant has valuable private knowledge. Nevertheless, it
may continue to be rational for each new entrant not to invest resources in acquiring
private knowledge. Finally, the rising prices that result from such an information cascade
will attract additional works of art to the auction house. This further reduces the
comparative value of the private information of dealers who have been active longer,
because their knowledge of the total supply will be less complete.
Translating this basic model to the Dutch tulip mania is relatively straightforward. In
what follows, I first characterize the market by discussing the supply of bulbs, the nature
of tulip sale contracts and the community of tulip traders. Next I apply the basic logic
presented in the preceding paragraphs to the case of the tulip bubble. I show that the
bubble logically emerged from a combination of two factors: an innovation in the market
— bulbs sold in bulb, by total weight — and the entry of new traders embedded
alongside existing bulb lovers in a densely connected social network. A brief discussion
of the aftermath of the bubble underscores the key role played by these two factors. As
noted earlier, a number of facilitating factors were undeniably present: the Dutch were
comfortable with speculation, the plague may have made them more risk-acceptant, tulip
trading was rarely the sole source of income for the participants, and no guild existed to
impose strict regulations and penalties. But without the tight social network
encompassing all traders and the introduction of a new type of bulb contracts, we would
not have seen a bubble.
The supply of bulbs was comparatively fixed; it increased through the growth of
offsets, but these took several years to become full-grown bulbs capable of flowering and
creating their own offsets. With the newest varieties often in greatest demand, growers in

The Dutch Tulip Mania 21
possession of such bulbs could be fairly certain of controlling the market for a few years.
The rapid expansion of the professional and merchant class within the towns of Holland
meant that demand easily kept pace with the development of new varieties. With demand
growing faster than supply, as it did starting in the early 1630s, it is no surprise that
prices rose, or that a market emerged for lower-quality bulbs too. Not surprisingly, rising
prices attracted others to the market, and made existing bulb traders more enthusiastic.
Eventually, however, supply was bound to outstrip demand: the bulb supply could
grow faster than did that of wealthy burghers, and there was a limit to the number of
recognizably different varieties that could be developed. Prices would, therefore
inevitably fall in the medium term. This, in essence, is the story told by Garber, and it
adequately explains both the rise in prices up to the summer of 1636 and the gradual
decline that appears to have set in once the crash had been sorted out by the late summer
of 1637. As we have seen, however, it cannot account for the dramatic increase in the
prices not just of the bulk goods, but also of the rarest bulbs, in the fall and winter of
1636-1637. Nor does it explain the crash that followed.
Most tulip sales followed a standard format. Transactions in the colleges were
conducted in a ritualized fashion, with separate procedures for sales and purchases, and
were confirmed with the payment of the “wijnkoop” fee. 54 As Schama notes, “what is
actually striking about the popular-speculative phase of the tulip mania is how quickly it
54 The procedures are described in (Roman, 1637c, p. 23) and (Roman, 1637b, pp. 4-5), respectively.
Sales were open to multiple bidders and were done in an auction format, whereas purchases were
conducted as bilateral negotiations in which buyers and sellers tried to find a mutually acceptable
middle ground. Detailed explanations can be found in (Krelage, 1942a, pp. 70-73). In addition to
entering the sale in the college’s ledger, both sides to a transaction often wrote out a small sales note,
or enter the text in their own ledgers. The second dialogue between Gaergoedt and Waermondt gives
some examples of the latter (Roman, 1637c, p. 14).

The Dutch Tulip Mania 22
improvised highly ritualized and formal conventions in which to conduct its trade.” 55 The
sales agreement provided for simultaneous payment and delivery only at the moment a
bulb was dug up, with the opportunity to verify the flower beforehand. 56 Deals struck
outside the blooming period therefore always involved some features of a futures
transaction. Deals were usually recorded in a ledger, either that of a notary or that of one
of the colleges.
Even with the norms governing the manner of buying and selling, uncertainties
remained: buyers worried about the quality of the bulbs they were buying, while sellers
worried about being paid in full. As a result, contracts themselves were subject to norms
too. A standard, but implicit, feature of sales contracts was that when a bulb turned out to
be of a different variety than promised, the sale was nullified, and the seller did not have
to accept it. 57 To reassure the seller, a system of “borgen” — guarantors of payment —
emerged, in which one or two friends or relatives of the buyer would guarantee payment
if the buyer could not or would not pay. In addition, buyers often explicitly pledged their
assets. A sample contract listed in the second dialogue — and described as being
representative of almost all such contracts — states: “in case of non-payment of the
aforementioned sum, I hereby pledge all my goods, movable and immovable, placing
them under the control of all the laws and courts.” 58 Such language makes it hard to
sustain either Garber’s claim that these deals were the outcome of “a meaningless winter
drinking game” with insufficient “internal control over the nature of contracts” or
55 (Schama, 1988, p. 359)
56 (Cf. Goldgar, 2007, p. 241)
57 (Posthumus, 1927, p. 85)
58 (Roman, 1637c, p. 15)

The Dutch Tulip Mania 23
Thompson’s odd assertion that traders all intuited in December 1636 that the nature of
tulip contracts had suddenly but fundamentally changed. 59
Though some trading in bulbs took place among towns and even across borders, there
was virtually no systematic cultivation of bulbs for trade during the tulip mania; most
growers were aficionados working in their own small gardens. 60 Notarized complaints
make clear that the main participants regularly visited the various gardens around town in
which tulips were planted, and hence were quite knowledgeable about the locally
available supply of particular varieties, and even the quality of individual bulbs. 61 The
picture that emerges is one of mostly local markets within individual towns. Complaints
still on file in the Dutch archives reinforce this impression: most recount disputes
between traders from the same town, who all knew one another quite well.
In addition, the total number of active participants in the tulip market appears to have
been comparatively small, ranging from several dozen in the smaller towns such as
Enkhuizen or Hoorn to several hundred in Haarlem. 62 More than one merchant appears
just once in the archival record, purchasing or selling just a single bulb from or for his
garden, so the number of regular traders was smaller still. In fact, the first dialogue notes
59 (Garber, 2000, p. 81; Thompson, 2006)
60 (Krelage, 1942a, p. 69). Bulb exports only began to take off in the second half of the seventeenth
century, after the tulip mania had ended. Even then, Krelage notes, only a few growers aimed at the
export market, and quantities were small — most foreign buyers were just interested in a single bulb of
a particular variety (Krelage, 1942a, p. 102; see also Krelage, 1946, pp. 7-8,269-275)
61 (E.g. Posthumus, 1927, p. 16). A contract dispute describes how a Haarlem baker who was interested
in buying a bulb from a local merchant in one college visited another college within town and received
additional information about that same bulb. This indicates just how small and well-informed the
market was (Posthumus, 1927, pp. 27-28)
62 (Goldgar, 2007, p. 137)

The Dutch Tulip Mania 24
that new participants in the colleges attracted immediate notice. 63 Significantly, most of
those active in the tulip trade in a given town were closely connected through several
different networks. Many were related by blood or by marriage, a disproportionate
number were Mennonites, and a considerable number appear to have engaged in mutual
business transactions unrelated to the tulip trade. 64 These close ties further facilitated the
rapid dissemination of information among traders, but they may also have given new
traders an inflated sense of the expertise of their peers.
The fact that most of the bulb trade was localized, and that it appears not to have
spread much beyond a about a dozen Dutch towns, helps explain why the end of the tulip
mania had only a minor impact on the rest of the Dutch economy. 65 In fact, though there
is some disagreement among historians about rates of growth in the Dutch economy
during this period, nobody seriously suggests that the tulip mania had a sizeable impact
on its fortunes. 66 The collapse of the tulip bubble even failed to cause much local
economic dislocation. Almost all tulip traders had other careers — they were merchants,
successful artisans, or professionals — and most were comparatively wealthy. A few of
the poorer tulip speculators may have faced economic ruin, but most of the active bulb
63 (Roman, 1637b, p. 4)
64 (Goldgar, 2007, pp. 146-149)
65 Claims to the contrary in the literature are largely due to uncritical copying from Mackay’s
sensationalist account, which declares that “the commerce of the country suffered a severe shock, from
which it was many years ere it recovered (Mackay, 1932 [1852], p. 97).”
66 (E.g. de Vries & van der Woude, 1997, pp. 150-151; Israel, 1995, p. 533)

The Dutch Tulip Mania 25
traders remained quite prosperous in the late 1630s, despite losing all of their paper
profits from the bubble. 67
The tulip market functioned efficiently as long as two conditions were met: the
traders all knew one another as fellow tulip aficionados, and they all had ample private
information about the market, i.e. about the supply and quality of individual bulbs. As we
have seen, the first of these conditions probably applied until 1635, and the second until
1636. When novice traders entered the market, it became less stable, because this
produced a drop in the average amount of expertise. Once a number of new traders had
entered the market, it became increasingly difficult to distinguish those with solid private
knowledge from those who were simply following the crowd. The final straw was the
introduction of bulk sales. As noted earlier, these constituted a new kind of trade, no
longer linked to individual bulbs. This meant that the private knowledge of established
bulb lovers was suddenly much less relevant.
Returning to the art auction analogy, it was as though it had become possible to buy
and sell a piece of art to be named later by the seller, and even for the seller to import that
piece from elsewhere. Pamphlets and town records alike suggest that the established tulip
traders were not initially active in this new trade, implying that prices were determined
almost exclusively by traders playing strategies 2 and 3 from our art auction example,
with the latter dominant initially. The bubble which followed inevitably spread to the rare
bulb trade. After all, the two trades were linked: new traders were also interested in the
67 (Goldgar, 2007, pp. 166-167, 247-169). Though many accounts of the bubble suggest that people from
all walks of life were involved, these claims appear to derive from some hyperbole in the first dialogue
between Gaergoedt and Waermondt, where the latter claims that “daughters and maids, farmers and
noblemen, even letter carriers… [and] chimney-sweeps” had entered the speculation (Roman, 1637b,
p. 18)

The Dutch Tulip Mania 26
rare bulbs, and rare bulb buyers were not immune to the lure of profits from the faster-
rising prices of bulk sales. Moreover, a number of bulb lovers may have convinced
themselves that they understood the market better than the latest entrants — that their
private knowledge of individual bulbs had some value in this context too.
In the end, it probably did. Prices could rise considerably as long as bulb traders —
new entrants as well as established tulip lovers — continued to play strategies 2 and 3.
Traders could rationalize rising prices by assuming that all new entrants in the market
wanted bulbs to plant rather than merely for speculation — in other words, that
“fundamental” demand had increased several times over. Moreover, (paper) profits made
from trading bulk goods could be used to bid higher sums for prized individual bulbs. But
there were limits to the price increases one could rationalize for either rare bulbs or bulk
goods. For bulk goods, bulb traders who had been active for some years knew how long
these varieties had been around, and how easily additional supplies could be found, not
just in Holland, but also abroad. At some point, rising prices in Holland would inevitably
begin to attract tulips from France or Germany.
Most of the rare bulbs, in contrast, were new varieties, for which the supply was
inelastic. Moreover, all established bulb traders knew who owned those bulbs. Here, the
built-in limit was the price beyond which even the wealthiest merchants would not be
interested in acquiring a bulb. That such a limit existed was clear from the beginning:
even at the height of its desirability, for example, the famous Semper Augustus had never
fetched prices that were beyond the reach of most bulb lovers — they simply did not wish
to own it at all costs. Since private knowledge was more significant in rare bulb trades,
this bubble did not expand as far. In turn, this implied that the bursting of the bubble

The Dutch Tulip Mania 27
would lead to less of a price collapse. The limited price data we have suggest that this is
exactly what happened. Prices for pound goods could rise further because private
knowledge mattered less: there was more uncertainty both about local supplies and about
the price level that would attract imports.
In the end, the bubble reached its limit first for the so-called pound goods. By the end
of 1636 numerous outsiders were already predicting an imminent crash. 68 As January
progressed, and prices rose ever faster, traders, too, began to fear that prices might be
unsustainable. 69 Moreover, the dense social networks joining all tulip traders guaranteed
that such fears were common knowledge. Things went sour in Haarlem first, on February
3rd. Waermondt, in the first dialogue, recounts the episode. 70 Members of a college
decided to test market confidence by putting up for sale amongst themselves bulk
quantities of common tulips — Switsers or Croonen. Just one buyer made any bids in
three successive sales, and each of the sellers accepted his offer, even though the sum he
offered was successively 15% below, 25% below, and finally 35% below recent prices
for comparable bulbs. News of this precipitous drop in prices spread like wildfire
throughout town, and the next day trading came to a complete halt, with traders simply
staring at one another in stunned silence. 71
Still, the bubble had not burst completely, or at least not everywhere. Two days later,
at an auction in Alkmaar — only about 20 miles north of Haarlem — peak prices were
reached for many individual bulbs, as well as for numerous varieties sold in 1000 aas
68 (E.g. Theuniszoon van der Lust, 1637)
69 (Krelage, 1942a, p. 80)
70 (Roman, 1637b, p. 17)
71 (Roman, 1637b, p. 17)

The Dutch Tulip Mania 28
quantities. However, that the prices fetched by the pound goods on offer did not appear in
the broadside was published to advertise the auction results. 72 It seems plausible that
these prices had already been affected by collapse of the market in Haarlem. By this
point, moreover, news of the latter had spread to other towns, and bulb traders
everywhere were girding for the crash. The first recorded evidence of a response on the
part of the traders was a Feb 7 th meeting in Utrecht to decide which representatives to
send to a meeting to be held in Amsterdam on February 23 rd of the trading colleges
throughout Holland.
That Amsterdam meeting included representatives not only from Amsterdam and
Utrecht, but also from Haarlem, Leiden, Delft, Gouda, Alkmaar, Enkhuizen, Medemblik,
Hoorn, and De Streek. 73 In the event, it proved impossible to arrive at a jointly acceptable
solution. The final proposal was to honor all contracts signed through November 30,
1636. All those signed December 1 st or later, however, would be canceled if the buyer
announced by March 1637 that he wished to cancel the contract, and paid a buyout fee
(“roucoop,” i.e. regret fee) of 10% of the agreed purchase price. In the latter case, the
seller would retain ownership of the bulbs. 74
Local authorities did not feel bound to sign on to the solution proposed by the
colleges. On March 7, Haarlem officials announced they were inclined to annul all
contracts signed since the bulbs had been planted in September or October. 75 Similarly,
72 (Lijste van Eenighe Tulpaen, 1637)
73 The tulip colleges of Rotterdam did not send delegates, but announced ahead of time that they would
abide by any solution arrived at during the meeting.
74 (Barckman, 1637)
75 (Posthumus, 1927, p. 51)

The Dutch Tulip Mania 29
the regents of Hoorn instructed their representatives in the States General of Holland to
propose annulling all contracts, to avoid bankrupting buyers who had agreed to high-
priced deals. 76 The Alkmaar authorities, on the other hand, recommended on March 14
that all contracts be upheld, and encouraged their deputies the States assembly to
convince the Haarlem representatives to change their mind. 77 By early April, they appear
to have succeeded, as the Haarlem authorities now suggested that contracts agreed to in
the colleges ought to be upheld. 78 Overall, it is clear that local regulation, which had
played no role during the bubble, was not going to have much of an impact on its
resolution either.
Some looked to the provincial authorities for resolution instead. The States finally
agreed to address the issue on April 11th. 79 A few days later the Haarlem officials had
changed their mind again, and sent a missive supporting their colleagues from Hoorn in
the effort to have all contracts nullified. They argued that the bulb trade had involved
“purely imaginary value” and hence was noting more than “empty commerce, tending to
divert people and resources from other honest and necessary trades”. Of equal
importance, they emphasized that annulling contracts “would not only preserve many
hundreds of persons of good name and reputation from ruin and scandal”, but also would
not involve anybody outside these circles, thus preserving peace and tranquility. 80 The
implication that the crisis was both localized and limited is clear.
76 (Posthumus, 1927, p. 52)
77 (Goldgar, 2007, p. 236)
78 (Dash, 1999, p. 182)
79 (Posthumus, 1927, p. 53)
80 (Posthumus, 1927, pp. 57-58)

The Dutch Tulip Mania 30
On April 25th the Court of Holland recommended that the States pursue further
inquiries into to the origin and starting date of the bubble, as well as of the sudden price
collapse. Pending a final decision by the States, all contracts were to remain valid, and
the town authorities were to do their best to mediate and negotiate contract disputes.
Although contracts were to remain in force, the Court recommended a moratorium on any
official enforcement of contracts. Two days later, the States of Holland adopted the
Court’s recommendation verbatim. 81 Numerous towns took the moratorium to mean that
they should not allow their officers to intervene on behalf of one party or another to a
dispute by issuing writs, summons, etc., and passed decrees to this effect. 82
In the absence of government involvement, bulb traders were forced to resolve
contract disputes amongst themselves, as they had been attempting to do all along. The
first record of a sales contract canceled by mutual consent dates to February 10th. The
seller accepted a buy-out payment of 160 gulden for a contract that had been worth 1800
gulden. 83 Many contract disputes were, in fact, settled more or less amicably. Some
contracts already contained buyout clauses, often specifying a penalty payment of 10% of
the purchase price. 84 For those that did not, traders arrived at their own figures, which
were typically lower. One notary certified that buyout rates ranged from 1-5%, with
plenty of buyers in default refusing to make any payment at all. 85
81 (Posthumus, 1927, pp. 58-60)
82 (Dash, 1999, p. 188; Posthumus, 1927, p. 61)
83 (Posthumus, 1927, pp. 45-46)
84 (Munting, 1696, p. 911)
85 (Posthumus, 1927, pp. 70-71)

The Dutch Tulip Mania 31
Many cases appear to have turned on the principle of honoring contracts, rather than
on the sums involved, which were often quite modest compared to each party’s assets.
What appears to have disturbed those involved in complaints most was the breach of
social norms implied by the refusal to abide by a contract. Here, once again, we see the
importance of the social network within which the tulip traded had been embedded. The
bursting of the bubble was not much of an economic threat, but it did pose a threat to the
strength of the social network. Since the commercial success of the Dutch merchant class
relied heavily on social network ties, such a threat could have serious wider implications.
As Goldgar notes, “the tulip crash struck at the heart of a commercial society that by
necessity relied on reputation and mutual credit.” Moreover, reputation and trust were
particularly important in commercial interactions with high levels of uncertainty — not
just tulips, but also the highly profitable exploitation of the East and West Indies. As a
result, “It was this social anxiety, this sense of not having the measure of others, that was
most frightening for contemporaries.” 86 While broken contracts were nothing new, they
had always been the exception. In the aftermath of the tulip bubble, they briefly became
the rule, and that was deeply disconcerting. 87
Conclusion
The Dutch tulip mania of 1636-1637 clearly qualifies as a bubble, in the sense that
prices were not sustained by private estimations of value. Claims that market
fundamentals explain the observed price patterns cannot be sustained, despite their
86 (Goldgar, 2007, p. 267)
87 (Goldgar, 2007, p. 294; cf. Krelage, 1942a, p. 101)

The Dutch Tulip Mania 32
popularity in recent years. Nor do arguments about inadequate government regulation
offer much explanatory leverage. Authorities remained largely uninvolved in the bubble
— although the States did consider taxing tulip profits in 1636-1637 — and they mostly
refused to be drawn into the adjudication of individual cases, at least until a year later. 88
However, this does not mean that there was no regulation: the market was regulated by
the rituals and norms that developed around the tulip trade, as well as by the broader
social connections within which it was embedded.
The social network that made the bubble possible also was the strongest promoter of
amicable resolutions. As we have seen, contemporary observers often blamed the
problems on a few speculators in pound goods. However, while such speculators clearly
existed, what made them influential was that socially they were almost indistinguishable
from tulip traders of long standing. Despite what the epigram at the start of this paper
suggests, they could not be neatly separated from such “true” bulb lovers. In the end, it
was the very strength of the social network that tied all bulb traders together, new and old
alike, that made the bubble possible.
All this suggests that the tulip mania deserves to retain its position as a classic
financial bubble. However, it also indicates that the lessons to be drawn from the bubble
are less about a spectacular rise in prices followed by a collapse, and more about the
social structures within which the market is embedded. The collapse of Bernard Madoff’s
investment empire has led many to highlight to the importance of the social connections
that made investors forego due diligence. 89 However, similar problems also arose in the
88 (Goldgar, 2007, p. 224; Posthumus, 1927, pp. 80-81)
89 (E.g. Schweitzer & Shell, 2009)

The Dutch Tulip Mania 33
much more extensive subprime mortgage market, as Lewis shows in his analysis of the
current crisis. Much of his story centers around the degree to which the collapse of the
subprime mortgage edifice was inevitable, foreseeable, and indeed foreseen by some. The
message is that those who continued to invest in subprime mortgages and the various
derivates thereof were simply stupid. 90
However, one of the key components in the argument is that Moody’s, the rating
company, misvalued collateralized debt obligations constructed from the weakest part of
the mortgage market. Many other actors in the market trusted Moody’s because they had
been working with Moody’s for a long time and had come to trust its judgment. 91 Indeed,
the current crisis reinforces a central lesson from the tulip bubble: the dangers associated
with a relatively small number of key players embedded in a social network that has
developed over a longer period of time, producing network connections in which trust
and judgment have become dissociated from the specific arena in which they developed.
People trusted Moody’s not because they were experts on subprime mortgages, but
because their judgment had proven reliable in other fields. The tulip bubble continues to
be relevant, then, not because it shows that there have always been people willing to pay
many times what something is fundamentally worth, but because it demonstrates that
such people tend to be social fools rather than economic idiots.
90 (Lewis, 2008)
91 (Lewis, 2008)

The Dutch Tulip Mania 34
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