Welcome to Holland.
It was here, that 400 years ago we first witnessed the extraordinary effects that money and the
market can have on our collective minds.
And how it can lead to pretty mad behaviour.
Since the 2008 financial crisis there has been much talk of economic bubbles and every
now and then the story of the Dutch Tulip Mania of 1637 pops up.
During this mania single tulip bulbs were traded for amounts of money worth upscale
houses in Amsterdam. How this happened and why tulips of all
things were the centrepiece of this economic folly will be explained in the coming few
minutes.
To the Dutch the long 17th century is known as ‘de gouden eeuw’ or the golden age.
And
it’s easy to see why. In this period the tiny republic of the united Netherlands conquered
a global empire, started the first joint stock company,
invented the modern stock exchange, successfully
invaded Britain, founded New York City, defeated the biggest empire in the world, and subsequently
wrote the declaration of independence on which this one was based. All the while dominating
global trade in anything from sugar and spice to everything, well awful.
With all those novelties and developments also came a new sort of society.
While other European countries had aristocrats
with elaborate court cultures supported by a huge class of poor people, the Dutch were
inventing the middle class.
The hard-working self-made burgers of the Dutch republic had
no titles to show who was king of the hill so they needed another way to settle hierarchy.
The answer back then as it is today was consumption.
No not that consumption, the more happy, buying things, consumption.
Much like today there was fierce competition within this class to outshine each another.
Now because of their protestant beliefs the Dutch of this period may seem a bit boring
compared to the more flamboyant peoples of the world.
But in their own way the rich and famous did show off. They did so by wearing fancy neckwear,
commissioning very costly art and consuming all the new exotic products that global trade
brought into the city.
One of the products that the Dutch merchants brought to Holland
was the Tulip. It thrived in the Dutch climate, became a symbol of the golden age and has
remained a symbol of the country ever since. In the 17th century it became very fashionable
for the well to do to plant tulips in their gardens to demonstrate how much they were
in sync with the age of success, and of course to show off their wealth.
Tulips were such a powerful symbol of success in the golden age that this man: Claes Pieterszoon,
a brilliant
doctor, writer and scientist, changed his name to Doctor Nicolaes Tulp after the Dutch
word for Tulip. Doctor Tulp was the author of the book commonly known as the book of
monsters
in which he recounted stories of medical wonders and introduced the European
public to exotic animals such as the Orang Utan.
Nowadays doctor Tulp is mostly known for being
the subject of one of Rembrandt most famous paintings. But when the painting was made,
however, the shoe was very much on the other foot and it was Tulp who made Rembrandt famous.
But there were many other ways that could be and were used to show off, so why was it
the tulip that created such a mania?
In order to understand that we must look at the flower's nature and its process of growth.
Firstly tulips are not that easy to breed. It takes around
a decade for a seed to grow into a flower. Then after just a few years of show the flower
dies. The tulips do produce offspring in the form of seeds but those again will take
ten years of care until they grow into flowers. Luckily however you can make a few clones
every year that the flower blossoms. These clones will become flowering bulbs in a much
shorter period of only 3 years.
The second important characteristic is that tulips only blossom during a few weeks every
year, between march and may.
During this time that Holland looks like this and
tourists come from all over the world to visit de Keukenhof.
In this period the tulips cannot be moved or they will perish. You have
to wait for the flower to go back to its bulb-form and retreat completely below ground. Then
between June and September the flower can be moved safely, to be planted in autumn,
so it can blossom again the coming spring. Because of this the flowers can only be exchanged
between people during a limited time each year.
So, let me sum that up: 1. Tulips are very slow to grow.
2. You can only make a few clones each year. And
3. You cannot move them whenever you want.
But these issues by themselves did not create the tulip-mania. Normal tulips were in fact
quite affordable despite these difficulties.
True. Some tulips however were unusual. Instead of being one uniform colour they showed these
distinctive marks.
Because these tulips were so rare they became the ultimate status symbol.
Nowadays we know that the lines on the tulips are the result of a disease called the Tulip-breaking
virus.
The virus affects the bulb and actually slows the development of the plant.
If you want to create a mosaic tulip you only have to infect a normal tulip’s bulb
and
voila!
Quick sidenote there: that makes it sound quite nice and not like a disease at all.
but the virus does harm the tulip quite badly and in many cases even kills the plant.
400 years ago the reasons behind the flame-like patterns were unknown. What was
known was that they were very, very rare and due
to the limited cloning were going to remain
so. Even more so because seeds from rare broken tulips produce normal single colour offspring.
Now, imagine amongst all the normal flowers in your garden you spot one broken tulip.
You may want to sell that flower, reasoning that you payed 10 florins for your entire
flowerbed and you can make it all back and then some by selling the one flower to me,
since I offer you 12 florins for it. Of course I cannot actually take the flower
with me, because pulling it out the earth would kill it. So what you actually sell to
me is a promise of a future sale of the tulip. I buy from you the right to move the bulb
when it is ready to be moved. On the stock market this right to buy something for a certain
price somewhere in the future, is a derivative known as a ‘future’.
So Imagine I know I can sell the tulip future to my brother, who is willing to pay 25 florins
for it. I then reason that I can either keep the right to the flower myself
or sell it on again to a rich friend of mine who will pay up to 50 florins for such a rare
specimen. Now so far this may cause a quick rise in
price but it does not yet make it a bubble. People are still willing to pay money for
actually owning the flower. But to the business-savvy dutch middle class
the rapidly rising price spelled opportunity. Now more and more people started buying tulip
futures, not because they wanted to own the flower but because they thought they could
make a profit, selling it on again. These people speculated on the future price of tulips
being higher that the price they had payed. But of course there was a limit to what even
the richest men were willing to pay for a tulip. As soon as the price in the market
exceeds this real price we have an economic bubble. People are only buying the flower
as a means of speculation not to actually plant it in their garden.
All you need for the bubble to burst is some indication that there
will be no more buyer for an even higher price. As soon as the confidence in future profitable
sales disappears prices drop back to the natural price level.
As the date of the actual tulip exchange grew closer people started to realise they had
paid fortunes for only a flower and they started doubting whether this had been a wise
investment. When in February of 1637, possibly due to plague scares, no one showed up for
the flower auction in Haarlem, the flower market collapsed. The speculators who owned
the futures tried to sell their investment in a frenzy, trying to minimise their losses,
speeding up the price drop. Within a few days in February, the price of
tulips dropped from the equivalent of a house like this, to that of a house like this.
The tulip suffered severely from its role
in the affair. So much so that Doctor Tulp had the tulip marking his front door, chiselled
off following the mania. But when he died 37 years later, the tulip’s reputation had
recovered and the flower marks his final resting place to this very day.
The good news for you is that nowadays, you can go to Amsterdam an indulge in buying as
many tulips as you like
By current rates you would need to sell millions of tulip bulbs to buy even the smallest canal
house
The bad news though is that no amount of money will buy you the the real deal.
The mosaic tulips at the heart of the 1637 bubble like
the Semper Augustus, the most expensive of
them all, are all extinct and none of us will ever see what the fuzz was really about...
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