Speculation on tulips in seventeenth-century Holland-Phool's GOLD

Bubble Rap

Phool’s GOLD

Speculation on tulips in seventeenth-century Holland severely damaged the country’s economy

ASILVER drinking cup, a suit of clothes, a complete bed, one thousand pounds of cheese, two tuns of butter, four tuns of beer, twelve fat sheep, eight fat swine, four fat oxen, two lasts of wheat, four lasts of rye. That was the price a merchant paid for a single tulip bulb in Holland circa 1635. The total value of all those goods at the time was 2,500 florins (the average annual income of a family was 150 florins).
    The early 1600s were a golden age in Holland. The region had recently gained independence after a war against Spain. Resources that had been used for war were now available for trade and commerce. Country had a well-established banking system, stock exchanges, and a well-governed society. Amsterdam merchants dominated the European trade in the East Indies. Sometimes, their profit from a single voyage would be 400%. Wealth was being created—and flaunted.
    Tulips, originally from Turkey, had been brought to Europe in the mid-sixteenth century. By the 1600s, Europe’s wealthiest would send their agents to Constantinople to procure tulip bulbs at exorbitant prices. As the fashion caught on, it was considered “a proof of bad taste in any man of fortune to be without a collection of them” according to Charles Mackay in his book Extraordinary Popular Delusions and The Madness of Crowds.
    The passion for possessing tulips, which was initially restricted to the upper class, soon caught fancy of the middle strata of society. Small shop owners, traders and merchants all started buying tulip bulbs. A trader in Haarlem parted with half his fortune for a single bulb. His main motivation was not to trade, but to earn the admiration of his acquaintances.
    Passion soon engendered greed. People started dabbling in tulip bulbs, not to sow them in their gardens, but to sell them at a premium. Prices rose moderately until 1634, but then grew exponentially in the last leg of tulip mania. Trading was so frenzied that a tulip bulb might change hands about 10 times in a single day. Like too many bubbles, things reached a stage where general trade and commerce were neglected, because everyone was busy trying to cash in on the tulip craze.
By 1635-36, regular markets had been set up for tulips, near the stock exchange in Amsterdam, Rotterdam, Haarlem, Hoorn, and other cities. In small towns, the largest tavern would double up as a “show-place”. Tulips would be set up in large vases, and highs-lows traded. Often, 200-300 people turned up at these tavern shows in a single day. The tulip trade was so intense that a code of trade was considered necessary, and tulip notaries appointed.
There was a general assumption that rich people from around the world would come to Holland to buy tulips. Everyone thought the demand would last forever. People converted their homes, land, and personal possessions into cash so they could trade in tulips. Sometimes, they used their assets as guarantees for future payments for tulips. The result of increased speculation was a “shortage” of bulbs; people now started trading tulip roots. They even started making forward contracts.
Visitors to Holland sometimes found themselves in awkward or funny situations. Abraham Munting, a seventeenth-century author who wrote more than 1,000pages on the tulip mania, tells the story of a sailor who had brought a consignment of silk for a Dutch merchant. The silk would bring large profits to the merchant, so, as a reward, the merchant offered the sailor a sumptuous breakfast. Now, the sailor loved onions. When leaving the merchant’s house, he saw a tulip bulb lying on the table. Mistaking it for an onion, he took it, thinking generous merchant would not mind. But before long, the merchant noticed that his prize tulip bulb was missing. Orders were given to scour the entire house. Nothing was found. Then the merchant remembered the sailor. The rich man and his servants hunted all the taverns in town, and eventually found the sailor sitting on a pile of ropes, quietly munching the last morsel of the “onion”. Little did the sailor know he had eaten something worth the cost of maintaining an entire ship crew for a year! The hapless seaman was sent to prison for committing a crime against the merchant.
    Between 1634 and 1635, tulip prices shot up by more than 10 times. The bubble peaked in the winter of 1636. This was when people started entering forward contracts, because of the shortage of bulbs. A speculator would promise to pay the cultivator a price agreed in advance, for the delivery of tulips that would grow at a future date. This was called “wind-trade”, because such contracts occurred only in the air, for flowers that did not exist.
    Eventually, a few people realised that the craze—which was just fools buying bulbs, and selling them at a higher price to greater fools—could not last forever. Prudent investors sold off their holdings as quickly as they could. And before long, “greater fools” could no longer be found. The market crashed. People reneged on their forward contracts. Cultivators were stuck with huge piles of flowers. Prices fell to a twentieth of their peak value.
    The list of defaulters grew by the day. People who had expected to become rich for life only a few weeks before, now found themselves on the brink of poverty and even bankruptcy. Their homes, land, and possessions had been traded for tulip bulbs—which were now worth a fraction of their earlier price.
    Cases piled up in the courts, but the courts refused to hear them, arguing that debt contracts in gambling were not debts in law. Several meetings were held locally, and even nationally, but no one could come up with a satisfactory solution. The government couldn’t find a way out, either. Those who had made profits got to keep the money. Those who were stuck with heaps of tulips had to watch them wilt. The country’s trade and commerce took such a severe beating that it was years before the economy recovered.

Times of India Mumbai, 19th Feb 2008, Page 46

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