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The History of Tulip ManiaHow a Simple Flower and Bulb Ruined Many in 17th-century Holland
Tulip mania would read like a humorous text, a grand example of human folly and madness of scale if it were not for its strong resonance with current economic events.
The tulip, its name derived from the Turkish word denoting ‘turban,’ arrived in Europe sometime in the 16th century. Allegedly, a gentleman by the name of Conrad Gesner claims the dubious honor of introducing the exotic flower to many of Europe’s wealthy, particularly in Holland and Germany. To this day, it is not clear how a flower bulb could create such an elaborate financial bubble, though some explanation emerges in the form of an oxymoron. Namely, there are very few plants that actually become more beautiful the more they are exposed to cultivation accidents, the more their weaknesses are exploited, and the more they are plagued by disease. If it had been left uncultivated, a tulip would likely have been a boring and ordinary plant. But weakened by horticultural experimentation, it offered the potential of colors and shapes yet undreamed of. By 1634, the Tulip Was All the Rage Among the DutchThe tulip mania could also be ascribed to man’s quintessential love for the underdogs. There is hardly any other logical explanation as to why anyone would pay exorbitant prices for an Admiral Liefken bulb that could cost 4,400 florins, or for a Semper Augustus, which was thought to be cheap at 5,500 florins. To put tulip bulb costs in perspective, according to the U.S. Netherlands Flower Bulb Information Center, a Semper Augustus could have very likely cost between $2,000 and $2,500 in contemporary U.S. dollars transported to 1636. Furthermore, to give you a better idea of the tulip mania that existed in 17th century Holland, the best stories belong to those who ventured among the delusional not knowing where the source of their "nuttiness" laid. One of the more popular stories was that of a sailor who came to a rich merchant’s home to announce the arrival of an important consignment of goods. To reward the sailor for bringing him the good news, the merchant offered the sailor anything he wanted for breakfast. Unfortunately, what the sailor wanted was a peculiar looking onion that he unwittingly grabbed from the merchant’s counter to savor with his herring. As the sailor was cutting through the last bit of the "onion," the panic stricken merchant fell upon him, screaming how the sailor ate his Semper Augustus, worth three thousand florins, or 280 pounds sterling silver. The sailor's merry breakfast cost him many months in jail, while the merchant not only suffered the injury of losing an expensive piece of property, but also the insult of having his prized possession perish in such an undignified manner - through someone's digestive system. As the Bubble Swelled…By 1636, inflated prices of tulip bulbs created extraordinary demand, so much so that jobbers, (today’s equivalents of specialists or floor traders), set up their own corners on the commodity exchanges of Amsterdam, Rotterdam, Haarlem, Leyden, Alkmaar, Hoorn, and in many other Dutch towns. For those who could not travel to commodiy exchanges, tulip trading occurred in town taverns, over dinner and brew, and in generally very merry spirits. Since the prize were flowers that had yet to bloom, tulip bulbs were traded as futures contracts, whereby the trade terms were set in the present for the delivery and exchange of goods and payments in the future. At the time, it appeared the demand for tulip bulbs would last forever. Not only had the wealthy and nobility attended bulb auctions at the exchanges, but they were soon joined by merchants, ordinary citizens, farmers, tradesmen, housewives, etc. People sold their homes, their carriages, silk, tools, land, anything and everything that could be converted to cash. And then they invested it all into those beautiful, fragile flowers. The Rude AwakeningWithin the few short months in 1636, a number of investors realized that the tulip folly had little time left on its sand clock. It was the rich who first stopped buying new bulbs, quietly moving to the sell side in an effort to exploit the fact that the middle class and tradesmen would have had a much harder time giving up on their tickets to higher society than those who were already there. Eventually, however, the pool of buyers was exhausted, leading to more and more buy-side investors defaulting on their contracts. By the time the first alarm was sounded, the damage was already irreversible. Tulip holders sought help from the Dutch government, but it refused to throw more good money after the bad. Then the tulip holders sought help from the courts, but they refused to enforce contracts that made no economic sense. In the end, the fragile flower left in its wake destroyed lives and fortunes, shattered faith in the derivatives trading system, and the uneasy feeling that the safety net allegedly cast by the government and regulators might only be an illusion. Today’s Particular Brand of FollyIf this story seems entertaining yet implausible in the modern world, think again. Just because today’s investors are not likely to fall in love with something as silly as a tulip bulb, does not mean investors are unable to succumb to mass delusions just the same. How else could one describe the havoc wreaked on global financial markets by an obscure market segment such as the subprime mortgages and similar types of debt. Source: Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, LL.D., Three Rivers Press, New York, 1980
The copyright of the article The History of Tulip Mania in Investment is owned by Inya Ivkovic. Permission to republish The History of Tulip Mania in print or online must be granted by the author in writing.
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