1. Historical Background
2. What drove the Prices of Tulips
2.1. Pollination and Seed Dispersal
2.2. Derivatives or Empty Promises?
3. The Spectacular Fall
4. Visual Renditions of Boom & Bust
A number of the boom-bust cycles have ever been recorded over centuries, delineating similar tales. During the meteoric rise of Bitcoin throughout 2017, many economists voiced its resemblance to one of the earliest financial bubbles ever recorded, namely the Tulip Mania that broke out in 1636-37.
1. Historical background
The Dutch Golden era often refers to the 17thcentury when Vermeer, Rembrandt and Rubens were capturing the proliferating prosperity in Holland. The port city of Amsterdam grew into one of the most prosperous cities in entire Western Europe thanks to their pivotal role played in international trade at that time. Trading companies such as Verenigde Oost-Indische Compagnie (VOC), more commonly known as the Dutch East India Company, and the less successful West India Company (WIC), were the key players in bringing exotic goods from the Far East. Owing to the unprecedented prosperity that international trades brought, some merchants became extremely wealthy, but the display of wealth was frowned upon due to the widespread Calvinism in Holland at that time, although the widening wealth gap was acutely felt amongst the citizens of Amsterdam, Rotterdam, and Haarlem.
Around 1593, exotic flowers from steppes and Central Asia, probably around Himalayan plateaus, were brought to Europe via Constantinople, present-day Istanbul (Mackay, 1841). It was a Dutch ambassador to a sultan of the Ottoman Empire that first saw the exotic flower, and after bulbs and seeds were sent to the House of Habsburg in Vienna, they were finally brought to Amsterdam (Goldger, 2007).
2. What drove the Prices of Tulips
2.1. Pollination and Seed Dispersal
Tulips at that time were probably less extravagant than what they are today, however, as few Europeans had ever seen the plants before then, the botanical novelty of the exotic flowers made them highly sought-after items. Some botanists tried to grow the flowers in their own gardens, and the ubiquity of the flowers was further accelerated by the subsequent discovery that the flowers can withstand the harsher climate in Europe than their natural habitat. Thus, even commoners began to take notice of their allure, and since its introduction to the Dutch market, their prices continued to soar. The flowers caught the imagination of Dutch people, not only the wealthy but also modest merchants and craftsmen that dreamt about becoming prosperous themselves. According to one source, at one time, forty bulbs were sold for 100,000 Dutch gilders, perhaps equivalent to a few million USD in today’s economy (Mackay, 1841).
During this time various pollination techniques were explored through a number of experimentations to breed more elaborate looking petals of flowers. It was a non-fatal virus known as mosaic that had altering effects on the petals where striking flames and stripes of colours appeared (Goldger, 2007). The colour patterns vary in terms of shapes and colour combinations, and the rarity of certain flowers was the primary factor for such flowers to be traded at a premium.
2.2.Derivatives or Empty Promises?
Soon, it grew into a speculative game, especially after enthusiasts began to deal in bulb forms long before they blossomed. No one quite knew exactly what pattern a bulb would blossom into. Bulbs remain in their forms for 7-12 years until they finally flower, and only for a week do they bloom in late Spring. This speculative element added more woods to the flame. A rudimentary form of derivatives market emerged, akin to today’s options and futures contracts, as future contracts for virus alterations were also being sold alongside bulbs. The number of rare types, such as “Semper Augustus” with red flaming stripes across white petals was extremely limited and thus they were highly sought-after items (Mackay, 1841). Inevitably, contracts to secure the future ownership of those tulips were created as derivative products. Although contracts for future payment and delivery were, by nature, quite risky investment, the reward seemed to be appealing to some enthusiasts.
When investment products are not pegged at actual objects, trading volumes tend to surge according to the rate of increases in their prices. Those investment products derived from the trading of actual objects was the key to the explosion of trading volumes, analogous to the fate of many financial assets that turned into speculative games, such as Collateral Debt Obligations (CDO) in recent years or free-floating currency exchange and monetary easing policies adopted across the world since 2008. The weaker the tie becomes between financial products and actual finite objects such as properties and gold, generally, the less restrictive and more volatile the fluctuation in value would become.
The biddings were ordinarily conducted in the back of taverns and local pubs where bidders buy bulbs and futures contracts from sellers in front of a notary who wrote down contracts (Mackay, 1841). However, since no one had seen actual flowers, bulbs were often presented with finely rendered sketches of hundreds of different types by artists (Golder, 2007). In no time, elaborate cataloguing of bulbs was extensively practised to ensure which bulbs genetically belong to what patterns and colours of flowers.
Nonetheless, bulbs were sometimes mixed up inadvertently, therefore, bulbs and futures contracts were gradually becoming truly speculative in nature. Tulip bulbs at that time was turning into something similar to today’s shady financial products including the aforementioned CDO and Mortgage Backed Securities (MBS) in that few investors actually knew or understood what was inside those products, as those dealings were increasingly conducted based only on the watercolour paintings of wonderfully rendered tulips that few people had actually seen in real life.
Initially, tulip bulbs were traded at the prices of onions. Within a relatively short space of time, however, the market grew at a steeper and steeper rate, and at the height of its heat, it was traded at the price of an entire estate or a piece of land. As the basic law of economics has it that the value of a thing is as much as what someone is prepared to pay for, but the pertinent question is; based on what utility? There are various rather amusing anecdotes. For example, a sailor accidentally ate a valuable tulip bulb for his breakfast, which belonged to a wealthy Dutch merchant on board, fully enjoying the taste of the precious onion that deliciously complemented his red herring (Mackay, 1841).
As the demand for the exotics soared, in the year of 1636, a flower market was established even on the Stock Exchange of Amsterdam (Mackay, 1841). Some experienced dealers and brokers made a fortune by timely longing and shorting in the volatile market. Other traders who made a profit from selling bulbs started to reinvest all their profit into new futures contracts and different bulbs in order to sell to other Dutch citizens or foreigners on their trip alongside spices from the Dutch East India Company.
Seeing the golden bait dangling before them, some merchants, craftsmen and shopkeepers sold all their assets to purchase only a handful of bulbs, indulging themselves in the dream of reselling them to make a larger profit (Mackay, 1841). As the contagion of the craze compounded, the fantastical notion grew in the minds of the middle class as well to make money so enormous that they had never made in their lifetime. Even those of moderate means participated in the speculative game, intending to turn around and sell them for a profit, akin to present-day house flippers that often inflate a bubble in property markets.
What drove the Dutch speculators then was also the rapid internationalisation of Dutch port cities and the increasing number of immigrants, which bore a mythologised narrative that the bulbs could be sold to unenlightened and uninformed foreigners at any time in perpetuity, although their optimism was unwarranted, being unaware of the fact that they were merely playing the game of old maid (Golder, 2007).
3. The Spectacular Fall
What ensued is the history, but what triggered the spectacular fall was rather interesting. Chaos theory or the Butterfly Effect would have it that a seemingly insignificant event can trigger something disproportionately large, depending on an underlying condition (Lorenz, 1972; Boeing, 2016). In one meeting, the attendance of buyers and sellers was lower than usual, but it was not yet because they noticed that the price ceiling of the bulbs was closing in. It was due to the epidemic of the bubonic plague that struck Harlem then, which prevented sellers and buyers from entering the city centre, where the auctions were taking place. For this rather unrelated reason, traders were unable to attend the biddings. However, when the number of auction attendees dwindled to below the level of attendance that traders expected, it somehow laid bare the unhinged euphoric fascination with the plants.
By then, enough downward pressure had already been built up like muddy sediment. Thus, this seemingly insignificant event was enough to pull the trigger. It hit a tipping point and the bubble burst. In February 1637, the prices of bulbs plummeted in a dramatic fashion (Golder, 2007). Bulbs once worth a fortune fell sharply to the value of an onion as worthless as penniless sailors could buy. The fact that tulips did not have any apparent utility other than novelty and nebulous aesthetic values perhaps made the fall even more monumental and sudden (Fig.1).
Fig.1: Gouda Tulip Bulbs (December 01, 1634 – February 05, 1637)
Selected Prices in Guilders/Aas Log Scale
Source: Elliott Wave International, 1999
4.Visual Renditions of Boom & Bust
In the late 17th century and early 18th century, a number of skilful painters emerged in the Netherlands and masterfully depicted the opulence of various flowers including the precious “Semper Augustus. ” Otto Marseus van Schrieck, Willem van Aelst and his protege Rachel Ruysch are amongst such masters. Their paintings are inevitably vanitas, depicting the decadence of rising prosperity, recurring cycles of the rise and fall, and inevitable death and decay. They certainly had the knowledge of the tulip bubble and evaporation of it. They are the wonderful visual reminder of boom and bust that we never cease to wake up to.
Image 1: Otto Marseus van Schrieck (Nijmegen, circa 1619 – Amsterdam, 1678)
(circa 1660), (H.135.5 cm) x (L. 102 cm), Oil on Canvas
Image 2: Willem van Aelst
“Vase with flowers, a clock and a butterfly”, (1665), (79cm) × (60 cm), Oil on Canvas
Image 3: Rachel Ruysch, “Flower still life”,(1710), (H: 88,9 cm) x (W: 71,1 cm)