Tulip Mania: The First Economic Bubble

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… Thank you for watching. If you liked our video please click here to subscribe to our channel for more interesting videos in the future.

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