Explaining the Timing of the Tulipmania Boom and Bust: Historical Context, Sequestered Capital, and Market Signals

Abstract

Framing Tulipmania in terms of sticky consumption and sequestered capital — capital whose quantities, usages, and future yields are hidden from market participants — offers a richer and more straightforward explanation of this famous financial bubble than either of the ex post economic rationalizations offered by Garber (1989 & 2001) or Thompson (2006). Simply put, the tulip bulbs planted in 1636 were sequestered capital. Planting them (underground) blindfolded 17th century Dutch speculators regarding the planted quantities and their development and future yields. The price-boom began in mid-November of 1636, coinciding with the time of planting. The price-collapse occurred in the first week of February 1637, coinciding with the time of bulb sprouting (signaling bulb quantities, development, and future yields). Also consistent with our theory is the initial price-collapse location, in the Dutch city of Haarlem, where temperature and geography favored early sprouting and sprout-visibility.

Keywords: Tulipmania, Tulips, Business Cycles, Sequestered Capital, Structure of Capital

JEL Classification: N13, E32, E14