The tulip craze that hit Holland in the seventeenth century is arguably the most famous financial bubble in all of history. According to the popular account of what happened, prices for tulips began to go through the roof in 1636 as word spread that wealthy people were willing to pay huge sums of money for tulips. Soon the general population joined in the speculative fervor, many people using their life savings in order to buy bulbs, believing they could resell them at windfall profits. At the height of the mania, a single bulb cost as much as a mansion. But eventually reality set in. In 1637 panic selling commenced as people realized they were never going to make a return on their investments, and the price of bulbs crashed, losing over 90% of their value. Many people were financially ruined.
Like I said, that's the oft-told, popular account of what happened. But I've always been suspicious of it. For one thing, the main source many people rely on for their info about the tulipmania is Charles Mackay's
Extraordinary Popular Delusions and the Madness of Crowds
, which was written in the 19th century, and which doesn't offer any references to back up some of its rather far-fetched tales (such as the claim that one sailor was sentenced to months in jail for mistakenly eating a tulip bulb that he mistook for an onion).
Anne Goldgar debunks many of the legends of the tulip craze in her new book,
Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age. For instance, according to the
Financial Times review of her book, Goldgar was unable to find a single person who was bankrupted by the tulipmania.
Nor did the speculative craze include large sections of the population: "In lore, Dutch chimney sweeps spent their savings on bulbs, but in fact the buyers were mostly merchants and craftsmen from the province of Holland. These are the smug burghers we know from portraits of the era. Many were Mennonites."
A financial bubble in the tulip market really did occur, followed by a crash. However:
It's a myth that tulipmania devastated the Dutch economy. How could it, when so few people traded tulips? Even those who did survived the crash. Tulips were merely a sideline to their real professions. In any case, Goldgar explains, few buyers actually paid the exorbitant prices they had agreed. The crucial point is that this was a futures market. The flowers spent most of the year underground. Trades were made constantly, but were only paid for in summer when the bulbs were dug up. In the summer after the crash, most buyers simply refused to accept and pay for their bulbs. Some paid the sellers a small recompense, usually less than 5 per cent of the agreed price. These modest payouts don't seem to have ruined anyone. Rather, tulipmania damaged the code of honour that underlay Dutch capitalism. When buyers reneged, trust suffered. Tulipmania was a social crisis, not a financial one, argues Goldgar.
So most buyers simply refused to pay up for the bulbs after the crash. Unfortunately, in today's financial markets people don't have that kind of luxury. Nowadays, with a single click of a mouse, all your money disappears instantly and forever.
Comments
Given the appalling state of the code of honor that underlays modern capitalism (what a concept), the world of finance would grind to a halt in less than a week if buyers were allowed to default on contracts they don't like any more months after the fact.
In fact, while Mackay was basing his account on the popular tales and fables of the time (and never pretended to do anything else), Victorian ideas about the tulip craze were more influenced by the Alexander Dumas novel The Black Tulip.
Great job on the entries you've been posting these last few weeks.
Those purchases taught me a lesson in the precarious nature of speculation on the latest fad, so in a way the value of the purchase was the lesson I learned and not the actual items acquired.
Amen on the "mouse click/goodbye money" Alex...
I wish that people would read books before pronouncing on what they say.
I know some people who still refuse to acknowledge that they lost money on Magic the Gathering, and at least one who lost money on Cabbage Patch Kids. I guess as long as you cling to them and refuse to sell at a loss you can't really be said to have lost money yet. They're just waiting for that upsurge in interest to return, I suppose.
In short, the tulip speculative bubble really did occur, but some of the wilder stories told about it are exaggerations.
Still, Tulips make a fitting symbol for anything (such as stocks and bonds or gold or diamonds or real estate) whose small intrinsic value is vastly inflated by speculation (by speculation, I mean buying anything you don't intend to use yourself, but only to resell when the price goes up).
And flowers themselves were taught to paint.
The tulip white did for complexion seek,
And learned to interline its cheek;
Its onion root they then so high did hold,
That one was for a meadow sold [. . . ]
from Andrew Marvell, "The Mower, Against Gardens" 1681
As an almost entirely unrelated sidebar, I'd just like to say that the mother of one of my oldest friends emmigrated to the U.S. from Holland after living through WWII there (she now lives in San Diego, Alex), and one of the ways her family lived through WWII was eating tulip bulbs: tulip bulb soup, tulip bulb stew, etc., etc. Which says a lot more about the Netherlands under the Nazis than it does tulips, but I just thought someone might be interested.
School history lessons will have taught you that the American revolution was all about freeing the slaves and therefore will not know what script money was or why it placed brother against brother or more precise the bank of England against other new banks.
Some here may had come across the words gold standard but how many know that it was illegal for an American citizen to hold gold and they were all forced to sell it to the government at a fixed rate that was below market value and that was not that long ago.
Wild west gold miners that didn
Unless you were on the short end of the Hunt bros.'s silver contracts.