Market crashes are as old as capitalism itself. One early
economic bubble in particular was unique since it resulted from the
trade in tulips, a seemingly unnecessary luxury item. Although the
cause, impact, and history of the event that came to be known as
Tulip Mania can be disputed, one certainty is that it serves as a
reminder that economics is an aspect of human behavior; like all
forms of human behavior, intense emotions and irrationality can cause
groups of people to engage in some pretty strange activities.
Tulips originally grew on the steppes of Central Asia. The
movement of Turkic nomads east and west, along with the traffic along
the Silk Road that led to Asia, brought the flower to the Ottoman
Empire. European traders from farther west took interest in tulips,
not as decorative luxuries, but as items of food which they called
Turkish onions. The flowers were ignored while the bulbs became a
common item on dinner tables. The edible forms of tulips have since
gone extinct because their eye-catching colors and delicate forms
attracted the attention of the aristocracy who purchased and
cultivated them for their beauty. Farmers in the Dutch Republic, now
known as Belgium and the Netherlands, discovered the flowers
flourished in the climate of northwestern Europe. By the beginning of
the 17th century, the trade and transport of tulips from
the Ottomans to the Dutch had died out while massive tulip farms
began to be established near the coast.
Members of the aristocracy took pleasure in certain breeds of
tulips; some of them began to grow with lines or veins of various
colors splitting the flower petals from top to bottom. The most
coveted ones had violet, green, or bright red veins. The cause of the
colors was unknown at the time but scientists have since learned that
they are sick flowers, carrying a virus that only attaches itself to
tulips. The price of these diseased flowers rose to astronomical
heights because cultivating them to look that way was a long and
difficult process and, in the human mind, rare items are believed to
be of greater worth than more ordinary things. The tulip market in
the Dutch Republic exploded and farmers who specialized in producing
the most unique varieties grew rich.
Growing a valuable tulip is tricky. This species of flower is
unique in that it grows first from seeds but the seeds eventually
produce a bulb which, in turn, produces other bulbs as the plant
grows. A small percentage of these secondary bulbs contract the rare
virus when they are planted to grow more tulips. A short window of
time in the Spring occurs when the original bulb produces a bulb that
catches the illness so timing and climate play a major factor in
whether a lucrative tulip can be cultivated. The flowers grow
throughout the summer and are ready for harvest in the Fall. This is
why the market for tulip trading thrives during the winter months.
The Dutch tulip trade was a futures market involving high financial
risks but one that yielded lucrative pay-offs when the desired
results were achieved.
In the winter of 1636-7, the Dutch Republic was the economic
powerhouse of its time. The tulip trade hummed along as usual as the
aristocrats bought lots of flowers, waiting to collect on their
spendings come the following Autumn. The interest in tulips had
spread down market though and lower class speculators took interest
in purchasing flowers with the intent of flipping them for a profit.
Tulip brokers started showing up in taverns, armed with contracts and
writing instruments to sign them. For small fees they were ready to
negotiate between farmers and buyers; the taverns they worked out of
were on the rougher sides of town and the tulips they would have on
offer were low grade, common flowers that would not have interested
the upper crust consumers of the business. But the speculators knew
nothing about flowers; they only knew they wanted to make a quick
buck. On a typical day at the beginning of the winter, a broker
showed up with a stack of contracts. A speculator or two arrived
early and bought them all then hired the brokers to sell the
contracts on to another buyer at a slightly inflated price. Then the
process repeated itself over and over and over again. An average
contract could be bought and sold more than ten times and by the end
of the winter, prices had gotten so high that sales began to slow
down and eventually stopped. Some of the contracts had increased in
value by as much as 400%.
The fortunes they thought they had made were nothing but castles
made of smoke. The purchaser of a contract planned to pay for the
contract after receiving the money owed to him by the next buyer of
and so on down the line. The summer of 1637 came and went then Fall
arrived. The brokers showed up to the tulip market in Haarlem to
collect payments for the contracts and to make arrangements for the
delivery of the tulips. Almost none of the purchasers showed up. The
Black Plague had been especially severe that year and most of them
had died. Then when the last purchaser of a contract did not pay, the
speculator who sold the contract on to him did not get paid and
therefore could not pay the dealer he bought the contract from before
him. Tulip prices plummeted and he courts did not support the
upholding of the final contracts because they regarded futures
speculation as gambling rather than business, claiming that the
buyers knew the inherent risk before entering into the transaction.
The whole economic chain fell apart and the farmers were left with
nothing but a bunch of plain and ordinary flowers that no one wanted.
Whether the bursting of this economic bubble had any effect on
society is still a matter of controversy. Some economic historians
say that no one actually lost a fortune since the speculators never
had a fortune to lose to begin with. The prices had inflated well
beyond the inherent monetary value of the tulips and since no money
changed hands, nothing was really lost. The crisis of Tulip Mania did
not have any impact on other financial markets and the mainstream
tulip business did not suffer either. One thing that did change was
that the Dutch Parliament altered the laws regarding trading in
futures. Previous to the crisis the forward contract was typically
upheld by law; the purchaser of a contract had to pay the agreed full
price of the contract even if the value fell before the purchase was
officially paid off. The options contract law replaced the forward
contract law, stating that if the market value dropped between the
signing of the contract and the date of payment, the purchaser had to
pay a small fee to terminate the deal rather than paying the full
amount.
Tulip Mania may have been one of the first known market crashes
but it certainly was not the worst. Since that time, it has been used
as a model for explaining the Savings and Loan Crisis of the 1980s,
the Dotcom bubble of the 1990s, the Housing Market Crisis of 2007,
and the current fervor for Bitcoin which has potential to result in a
financial crisis of its own. Some economists and historians debate
whether the Dutch tulip market crash of the 17th century
was actually a crisis at all but if anything, it has captured the
imaginations of many and makes people wonder about what a market
really is and whether money and goods even have any inherent value
anyways.
References
Dash, Mike. Tulipomania: The Story Of the World’s Most Coveted
Flower & the Passions It Aroused. Broadway Books, 2001.
Mackay, Charles. Extraordinary Popular Delusions and the Madness
of Crowds. Wordsworth Editions Ltd., 1995
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