The noun auction usually denotes a public sale in which each bidder offers an increase upon the price offered by the preceding, the article put up being sold to the highest bidder.

In its first edition (1885), A New English Dictionary (as the Oxford English Dictionary was known) explained:

In a Dutch auction, property is offered at a price beyond its value, the price being gradually lowered till some one accepts it as purchaser.

In Trading Agents (Morgan & Claypool, 2011), Michael P. Wellman writes that the Dutch auction is “so called due its prominence in Amsterdam’s wholesale flower markets” (according to Getting to Know Dutch Auctions, it was specifically invented as the best solution to selling tulip bulbs); Michael P. Wellman adds that “Dutch auctions are commonly favored for their speed and simplicity of operation: important for efficient operation of open-air markets in perishable goods, like flowers or fish.”

In Dutch auction therefore, Dutch is used neither as a synonym of German (as it is in Dutch treat and High Dutch) nor derogatorily (as it is in Dutch courage, Dutch uncle and double Dutch).

The earliest instance of Dutch auction that I have found is from The Times (London) of Wednesday 16^th July 1788:

LAW REPORT.
Guildhall, London, June 28, 1788.
BEFORE LORD KENYON and a SPECIAL JURY.
MARTINEAU against HENSLOW and MARCH.

Mr. Bearcroft stated to the Court and Jury, that this action had been brought by his Client to recover a sum of money of the Defendants. There was a sale of his Majesty’s Cutter, called the Rambler, before the Defendants, who were Commissioners of his Majesty’s Navy. They were only nominal Defendants, and merely trustees for the public. This vessel was sold by Dutch auction, that is, they began with a high price; in this case with a thousand pounds, and came lower and lower till they found a purchaser. When they had come so low as 230l. his Client agreed to pay this sum for the Rambler. There was a printed inventory of all the articles belonging to this vessel; but afterwards, when the Plaintiff began to compare the items mentioned in this inventory with the Cutter herself, he found a vast deficiency in the number of sails. He had calculated the amount of this deficiency at 222l. and it was to recover this sum the present action was brought. The sails mentioned in the inventory were very considerable, and it was on their account the Plaintiff had purchased this ship.

This announcement was published in the Hampshire Chronicle (Winchester, Hampshire) of Monday 12^th May 1794:

NEW FOREST, Hants.
TO be SOLD by DUTCH AUCTION,
at Lyndhurst, on Friday next, the 16^th of May instant, the following Lots of
NAVAL BARK:
In Lady-Cross Walk,      113 Trees
Rhinefield-walk,  134
Lyndhurst-walk,  262
Wilvesley-walk,  110
Ashurst-walk,  81
Total                 700
Ower, May 1, 1794.                              JOSEPH MORTIMER, D. S.