In this book, the author continues his crusade to debunk the irrationality of the tulip bulb craze and other historical manias.

As students of the financial markets have read countless times, the Dutch tulipmania of 1634–1637 epitomized a type of manic episode in which asset prices completely lose touch with their intrinsic values. Absurdly, a single Semper Augustus bulb sold for $33,000 at the height of the folly. When the bubble suddenly and inexplicably burst, speculators paid dearly for losing sight of the fundamentals. In the aftermath of the debacle, the Netherlands suffered a prolonged economic decline.

Financial pundits revel in citing the tulip bulb craze as proof of the herd's irrational tendencies and, by extension, of their own superior common sense. In reality, sermonizers on the text of tulipmania perpetuate a long- debunked myth. Former Brown University economist Peter M. Garber, now an investment strategist at Deutsche Bank, has been busily setting the record straight since 1989.1

The supposedly exorbitant price of the single Semper Augustus bulb is not preposterous to anyone familiar with the origin of rare varieties of tulips. When a bulb is invaded by a mosaic virus, it produces flowers of a unique pattern. Seeds from those flowers are unaffected by the virus and, therefore, do not propagate tulips with the distinctive coloration. Consequently, only the original bulb (and buds taken from it) can generate the novel variety, which may become highly prized. The prototype's enormous price derives from the aggregate value of its innumerable progeny. Somewhat analogously, a champion thoroughbred horse put out to stud may sell for millions at auction, despite the horse having no intrinsic value in the sense of an ongoing potential to win purses.

These basic principles of biology and economics affect the flower trade today just as they did in the 17th century. In 1987, a small quantity of lily bulbs sold for a million guilders ($480,000 at then-prevailing exchange rates). Nobody proclaimed an outbreak of speculative mania, Garber points out, even though this comparatively recent lily bulb price would appear, to the uninitiated, as outlandish as the Semper Augustus quotation of 300 years ago.

Garber also demonstrates that no actual record exists of a sudden, sharp price decline in tulip bulbs during 1637, at least in the rare varieties. According to Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds (1841),2 the single source upon which latter-day tulipmania preachers almost invariably rely, the bursting of the tulip bubble left holders of rare bulbs unable to find buyers at 10 percent of previous prices. “No evidence of immediate post-collapse transaction prices of the rare bulbs was produced by Mackay, however,” writes Garber. “Rather, Mackay cited prices from bulb sales from 60 years, 130 years, or 200 years later as indicators of the magnitude of the collapse and of the obvious misalignment of prices at the peak of the speculation.” Over such long spans, Garber shows, prices of rare varieties of bulbs decline along a predictable curve as a consequence of proliferation.

Sudden severe price drops did occur in 1637 in commonplace bulbs, which were disdained by established dealers. Dutch tradesmen of modest means congregated in taverns to trade futures on these goods of inherently low value. Unfortunately, the newly hatched financial operators failed to establish such essential safeguards as margin requirements and mandatory marking-to-market of trading positions. Furthermore, the traffic in run-of-the-mill bulbs flourished without the benefit of an exchange to interpose itself as a reliable counterparty to trades. Transactors, therefore, had to depend on the commitments of undercapitalized novices. To make matters worse, futures contracts were illegal in the Netherlands. Garber quite reasonably argues that extraordinary price volatility was inevitable under such conditions. He comments, “These markets consisted of a collection of people without equity making ever-increasing numbers of ‘million-dollar bets’ with one another with some knowledge that the state would not enforce the contracts.”

Garber possibly overstates the case in calling the tavern-based trading in ordinary bulbs “a meaningless winter drinking game.” His discussion of the flawed market structure, however, refutes Burton Malkiel's claim that “Garber can find no rational explanation for such phenomena as a twenty-fold increase in tulip-bulb prices during January of 1637 followed by an even larger decline in prices in February.”3 Defiantly committed to the tulipmania tale that has served him so well, Malkiel repeats Mackay's greatly embellished account of a sailor who ate a valuable bulb he mistook for an onion. Garber traces that anecdote to its original source and concludes that “the context of the paragraph in which the story appears seems to indicate that it happened after the tulip speculation.”

Garber scores against another of his estimable critics, Charles Kindleberger (2000, p. 110), by documenting that detailed economic histories of the Netherlands mention no contraction precipitated by a tulipmania. Kindleberger lamely counters that “the Dutch economy slowed down to a degree in the 1640s”—that is, at least three years after the price collapse in ordinary bulbs. (Emphasis added.) In a patent error born of reliance on secondary sources, Kindleberger asserts that 17th century tulip traders made down payments in kind (e.g., grain, pigs, clothing, and furniture). Garber shows that this chestnut originated not as an account of actual transactions but, rather, as an illustration of the quantity of goods that could be purchased for the price of an especially valuable bulb.

Historian Mike Dash (1999), after studying the record far more meticulously than either Malkiel or Kindleberger, concluded, “My general feeling, after reviewing the available material, is that even after sounding the necessary notes of caution about the reliability of the popular accounts, historians and particularly economists remain guilty of exaggerating the real importance and extent of the tulipmania” (p. 222).

Sober assessments like Dash's and Garber's are not as morally instructive (or as exciting to book publicists) as Malkiel's characterization of the 1636–37 events as “one of the most spectacular get-rich-quick binges in history” (p. 35). Accordingly, the myth of mass hysteria in Holland will probably endure. The tulip bulb craze is catnip for true believers in the irrationality of financial markets, a trait that it shares with the South Sea and Mississippi bubbles. (Garber's book also dissects these episodes, showing substantially greater insight than Extraordinary Popular Delusions did a century and a half earlier.) It is a sad reflection that most commentators have progressed so little beyond Mackay's theoretically primitive and factually unreliable book of 1841.


1One of Garber's seminal articles (1990) appeared in Eugene White's anthology, which was reviewed in the January/February 1991 issue of the Financial Analysts Journal.

2For a recent edition of this classic, see MacKay and De la Vega (1996).

3Malkiel (1999, p. 38). Malkiel graciously concedes that Garber “makes some good points.” On the other hand, he disdainfully lumps Garber with “the current glut of historians” who allegedly “generate work for themselves by reinterpreting the past.”

Book Review Editor Information

Martin S. Fridson, CFA, is chief high-yield strategist at Merrill Lynch & Company in New York.

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