Mackay’s story, although still popular and often quoted in discussions of the tulipmania, is not really respected by economists and historians. It is based mainly on religiously motivated pamphlets against speculation that tell a story about evils of dealing with material matters instead of focusing on spiritual ones. Scientific credibility of such sources is low, because they most probably exaggerate their depictions of the events. Economists call into question both the scale of speculation, and the extent of consequences of the bubble bursting. Some even deny the very existence of the speculative mania. They admit that the tulip bulbs actually reached prices that seem gargantuan to us, and that thereafter the prices fell sharply, but these critics claim that even then the prices were in tune with the fundamentals. The analysis of the issue presents a challenge, as the data is rather inaccessible, incomplete and incomparable. But in spite of that, several potential scientific explanations of the phenomenon exist and together they form a certain story. Needless to say, the discussion between economists is, as usual, far from conclusion. Prepare yourself though, as that these explanations are somewhat intricate.
One such economist, Peter Garber, argues that mania is an inadequate term for the tulip market at the beginning of the seventeenth century. In Tulipmania he compares prices of new varieties of tulips with historically later prices of new varieties of hyacinths, and then he analyzes their price declines in the long run. What Garber finds is that on the flower market extremely high initial prices of rare varieties of flowers are not really such an anomaly. He also finds that there is nothing strange about prices falling to a fraction of their initial value. In addition, Garber compares the long-term decline in prices during the tulipmania with similar phenomena in later periods, which are not considered manias nor bubbles. He notes that the annual rates at which prices declined are similar in all cases and amount to around 40%. He finds that even in modern history the prices of new prototype varieties can reach amazing prices. One of his examples is a new variety of lilies. A small quantity of its bulbs were sold for the equivalent of $480,000 at 1987 exchange rates of guilder, apparently proving that very high prices for rare plants are not necessarily a sign of the “madness of crowds.” He concludes that most of the 1634 to 1637 period was nothing like such a madness. He admits, however, that his study does not explain the huge increase in prices of ordinary common bulbs in the last month of speculation and concludes that it may signify a potential bubble.
Another economist who tackled the topic is Earl Thompson with his article The Tulipmania: Fact or Artifact? He uses a more complete data set of the period in order to refute Garber’s conclusions. Thompson finds that although in the long run the annual price drop could amount to around 40%, in the three months after the peak of the bubble, prices fell more sharply and more violently. According to Thompson, prices declined by as much as 99.999%. Thompson disagrees with Garber as for the causes of the situation. As mentioned, the buyers of all futures contracts made between November 30, 1636 and the reopening of the cash market in spring could pay only a small percentage of the contracted price in order to back away from buying the tulips at contracted price. Thompson writes that in effect this decision basically converted the futures into options contracts. The difference is that in case of futures contracts buyers have an obligation to purchase at specified contract price, and in case of options the obligation disappears leaving buyers with the right to either buy at specified contract price, or resign and incur only relatively small fees. Thompson further explains that this legislation was publicly discussed much earlier. His wider examination of the entire tulip boom period reveals that after 1634 both prices and the number of tulip trade participants were rising until in October 1636 the prices suddenly declined in the first crash. Thompson argues that the collapse was caused by the news of the Battle of Wittstock, where at the start of October 1636 Germans were suddenly defeated by the French. German princes eagerly bought tulips to decorate their summer estates, and threats from the French as well as from domestic rebels could hamper their demand. Many people, including state officials, lost a lot of money during the decline. According to Thompson the debates about market futures that started in the aftermath led market participants to expect with a high degree of certainty that all futures contracts made after the October collapse would be legally changed into options. These expectations caused the sudden rise in prices. People figured that they will profit in case of spot price exceeding contracted price, and in the opposite scenario they will simply refuse to buy bulbs; this expectation caused the prices to skyrocket. Thompson points out that well informed speculators, officials and breeders could make up for losses by setting a different date of conversion of contracts than what was previously announced:
“Settling on a November 30th rather than an October termination date for the original contracts heavily favored, besides the planters, those speculators who sold contracts in late November to individuals who held the common expectation that contracts written in November would be options rather than futures contracts. The negotiating public officials, being much more informed than the public, could therefore more than offset their losses on their earlier purchases by selling contracts in late November, when, based on the previous announcements of the trusted public officials, the buyers had already begun treating the contract prices as option strike prices set at around 10 times the actual prices […].”