Tulip Mania – What was it and why does it matter today? – Episode 107

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Tulip Mania – What was it and why does it matter today? – Episode 107

You know how sometimes in the media or perhaps in a social setting, a self-declared expert will make reference to some historical event that they know full well most of us know little about, but they say it in such a way as to imply you’d be an imbecile if you weren’t aware of this world altering event.
This is the first in a series of episodes in which we’re going to explore some of these often quoted financial events – the Great Depression, Hyperinflation in Germany, and this week’s episode – Tulip Mania. I’ll be keeping things short and sharp, as usual, but armed with the knowledge you’ve absorbed through these episodes, next time someone attempts to assert intellectual superiority, you can get right back in their face – “yes, I did know that”, you can say, “but actually the real tragedy was the way…”. Put them right back in their place.
From the early 1600’s to the 1720’s, the Netherlands was the wealthiest country in the world. This was largely the result of a fair judicial system which meant that merchants from other parts of Europe, who were regularly imposed upon by their Kings to fund egotistical wars, (with imprisonment the outcome of non-compliance), where attracted to Amsterdam as a place where they could focus on what they did best – making money – relatively unimpeded.

The Amsterdam Stock Exchange was the first such exchange in the world, founded in 1602 to enable trade in shares of the Dutch East India Company.
So where does the Tulip fit in? The flower was introduced into Europe from Turkey in the 1500’s, initially into the French royal court, and then spreading north to the Netherlands. They were a luxury, exotic item associated with wealth and royalty and so rapidly became a status symbol for success and power. Tulips we’re collected like paintings, in fact the early tulip traders often came from the art scene.
Amsterdam, with its wealth and developed financial markets, became a place where these precious bulbs could be traded. In fact what was really happening was Futures trading, a concept many of us struggle to get our head around today, yet something mastered by the Dutch 400 odd years ago.
Bulbs need to stay in the ground for most of the year. They could only be exchanged between late May and August each year. So most of the trading done was for the right to buy a certain bulb in the future.
Prices started rising in the 1620’s, and things really started getting silly in the early 1630’s. Most valued were the tulips with streaks on them, for instance red with white streaks. Interestingly the reason for these two coloured tulips was a disease carried by the bulb. The picture below is of one of the most spectacular and highly valued, the Semper Augustus. It certainly is an attractive flower.

So valuable were these bulbs that one trader offered his entire house for 10 bulbs – and the trade was rejected!
As word spread that tulip trading was making some Dutch citizens extremely wealthy, speculators came in and prices skyrocketed. At a time when a reasonable annual wage was around 300 guilders, the price of one type of bulb rose from 5,500 guilders in 1633, to 10,000 guilders in 1637.
Then, in February 1637 a bulb went to auction and didn’t sell.
Prices started to drop. The falls accelerated, and by May of 1637 prices had fallen to a tiny fraction of their previous perceived value.
This event was made famous in a book published in 1841 – Extraordinary Popular Delusions and the Madness of Crowds. Tulip Mania is often referred to as the first ever investment bubble, and came up frequently during the Bitcoin price run of 2017. References to Tulip Mania are intended to imply that people are putting value on things that actually aren’t especially valuable – that they’re not being rationale – and that it was just a matter a time before things all came crashing down.
Humans ascribing value to things for questionable reasons is not something rare however. At one point the western world’s entire monetary system was linked to a shiny yellow metal that was useful for little else than decoration – the Gold Standard, something I will explore in a future episode. Even today gold is bought and held by investors and central banks as a store of wealth despite it having almost no practical use.
Diamonds and other precious stones could perhaps fall into the same category.
A couple of interesting asides that I came across in my research.
Firstly, just as the collapse of the Bitcoin price in early 2018 did not lead to a world-wide recession or any significant financial contagion, so to the collapse of tulip prices did not greatly effect the Dutch populace and had no meaningful impact on its economy. Researchers generally seem to concur that most who lost money in the Tulip price collapse, were those who could afford it.
Whilst all this tulip enthusiasm was bubbling away, some historians point to an outbreak of the plague as providing a weird feedback loop. The theory goes that many in Amsterdam inherited wealth from recently deceased relatives. Real estate wasn’t an attractive investment – all the deaths had meant they had more houses than were needed. Shares were no doubt bought up, but for those a little brasher, a punt on some tulip bulbs provided an attractive financial diversion.
So next time some modern day investment gets compared to Tulips, you’ll know what they’re talking about – quite possibly more so than the person making the reference in the first place.
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