History of Tulipmania - Essay Example

Nicolas Carbo Dr. Amy Carney History 002 3/18 A defining moment represents a turning point in history. In early western civilization, Tulipmaniawas one of those moments. Tulipmania is etched into Dutch history (as well as the history of western civilization broadly) as a good story and one that connects Dutch culture to the cultures of other nations, but it is also etched into the history of economics as a valuable lesson in wealth. Economists glean from the story that the value of an asset like a tulip is determined by the price the market is willing to pay for it, rather than its intrinsic value. From history we gain the lesson that if someone is going to conduct business in a speculative market, he or she must properly estimate the risk and reward he or she is willing to accept. In order to understand this history and these lessons, one must first understand the historical developments that made Tulipmania possible. Tulipmania began with the introduction of tulips to the Netherlands in the 1500s by Ogier de Busbecq, the ambassador of Ferdinand I to the Sultan of Turkey, who sent the first seeds to Vienna in 1554 from the Ottoman Empire. He sent them out of a passion for herbalism to his friend Charles de l’Ecluse – a pioneering botanist who initiated the practice of creating different colors of tulips. That led to their eventual rise in popularity over the next 100 years (Thompson 102). Aiding the popularity of the tulips was the fact that tulips could survive the harsh northern-European weather, which made them even more desirable especially to the Dutch, whose weather was not ideal for growing other kinds of bulbs. Among the middle class, tulips were a status symbol, representing beauty and rarity. As a result of different coloration varieties in the flower, tulips were classified into different categories – creating a sophisticated market for the product. Generally speaking, solid-colored tulips were sold at a discount to multi-colored tulips that had red, pink, or white in them. The most popular tulip varieties had a yellow background with red, brown, or purple coloration. Tulips having been infected with a benign virus caused “flames” of color on petals were selling at a much higher cost due to their rarity. While this was happening, general tulip demand was increasing rapidly by the 1630s when prices skyrocketed. Flower cultivation, now a lucrative business and a wonderful opportunity for farmers who recognized the opportunity, boomed as an industry (Gerber 535). As more farmers entered the industry, contracts were drawn up to buy bulbs in futures contracts, normally toward the end of the growing season. Especially toward the end of the growing season, prices would soar for tulip bulbs requiring people to trade everything: from the land they owned to the livestock they needed to live – essentially putting everything they owned up as collateral only to own some tulip bulbs of high value. The purpose of this investment was to sell these tulip bulbs to foreigners at a higher price and to make a substantial profit. However, like all speculative investment decisions, the road that many farmers found themselves taking was unsustainable and shows how repetitive history can be. Even worse, tulip cultivators would re-invest their profits from previous growing cycles into the next growing cycles, essentially making their bets double-or-nothing on the future value of tulips, which would leave them with virtually nothing if the prices did not hold up (Beattie). The tulip market collapsed on account of a continuous increase in the price for tulips through the end of 1636. When the market was booming, sellers would offload their inventory for large profits – which caused growers to continue working hard to produce the flowers. However, in February 1637, an excess of sellers came to market with surplus goods; like all crashes, it started small: a single tulip buyer defaulted on a deal, which had ripple effects through the entire market. Consequently, the prices of tulips decreased dramatically – to just a hundredth of their former price. Suddenly, people who had given up everything to play in the market were sitting on goods that were no more valuable than the flowers in the corner shop. Tulip traders became fearful of the future, since the majority of them had already agreed on contracts for tulip deliveries. Because the price of bulbs had decreased for tulips so rapidly, continuing with the contract would represent a huge loss – causing some to reject their previously agreed to arrangements with buyers. Traders could not face the reality that they had traded everything they possessed for something that now had almost no value. No doubt a painful experience, these traders were now facing a calamitous loss – the opposite of the massive profits they had been enjoying for the past few years (Beattie). The Dutch government attempted to intercede in the crisis to aid in the recovery, but their plans did not achieve their intended effect. In fact, those efforts only made the situation worse. The government declared that anyone who bought contracts to buy bulbs in the future could void those contracts by paying a 10 percent fee. However, attempts to resolve the problems for all parties involved ended poorly, as the courts could not relieve debts under the premise that the contracts were essentially “gambling” (Mackay 36). Speculators faced both financial and mental problems, caused by their own doing. But the legacy of the tulip would live on in Dutch common history. In fact, they occupy a very significant role in Dutch history and culture, and Tulipmania is an equally significant event in the country’s shared memory – it is a definitive piece of the Dutch Golden Age in which its trade, science, military, and art were well-regarded (Goldgar 309). It is worth noting that Tulipmania is etched into Dutch history as a key moment in time where hard lessons were learned for many people. As a result, speculative investments would be seen suspiciously throughout Dutch culture and even today, phrases like “going Dutch” reflect the popular stereotype of the Dutch people as stingy and frugal. However, Tulipmania is also instructive in the history of economics as well. At the time of the tulip market crash, in March 1637, a sole tulip could sell for at least ten times the annual earnings of an accomplished professional. Basically, anyone looking to buy a tulip would have had to pay a ship full of goods just to get one. Following the market collapse, however, their value was that of any other normal flower (French 6). For that reason, Tulipmania is regarded as the first economic bubble and the term itself is now used metaphorically to refer to any economic bubble. During the crisis, the price swings witnessed for tulips was not caused by an underlying change to production costs or a change in the usefulness of tulips. As a result, one must assume the change was due to irrationality, which is the explanation provided by mid-19th century Scottish writer Charles Mackay; in other words, speculators were so caught up in the idea of fortune and material wealth that they did not apply reasonable analysis to the business decision to trade away all of their material belongings to participate in the tulip market. That explanation of the history also reflects a common modern concept of economic bubbles. Tulipmania was preceded by a number of political and economic events, including the Dutch revolt, an economic collapse, and a cultural crisis. The Dutch revolt was a long event, lasting from 1560 to 1609, and actually consisted of numerous distinct revolts. Initially, the northern part of the Netherlands consisted of seven Protestant provinces, existing independently. The seven provinces chose to resist the rule of the Roman Catholic King Philip II of Spain, who had inherited the region from the defunct Duchy of Burgundy. Because of the religious differences, the provinces resisted violently and were initially unsuccessful – but the revolts carried on for decade after decade and eventually led to the founding of the Dutch Republic as a major power in Europe. On the other side, the Spanish Empire – at war both in Europe and in the Americas – suffered financially and was seriously weakened by its conflict with the Dutch. In 1609, the twelve-year truce between the Spanish King and the Dutch marked the end of the struggle and Spanish rule was repelled (French 6). The Spanish Empire returned everything extracted from the Dutch, including lands, and the Dutch used those lands in the cultivation of tulip bulbs, earning the people great sums of money. The Spanish fell even further behind to the Dutch throughout the 1600s with the birth of the Dutch East India Company. The Dutch revolt, in that sense, precipitated the Tulipmania event by giving the Dutch people the gardens in which the tulips could be grown and by giving the Dutch the freedom and the exploration to pursue its own independent trade with other countries. Second, a preceding economic collapse may have led to Tulipmania in the sense that from 1619 to 1622, there was a Europe-wide debasement of the mental content of coins to fund warfare. After this currency devaluation, a period of prosperity started in the early 1630s. The prosperity coincided with the spread of plague and a resulting labor shortage, which led to an increase in wages across the board and accompanying surplus income. Along with this increase in real wages, the cultural notion that social mobility was a real possibility for people at all levels of Dutch society was common thanks to an era of prosperity – inspiring many from the lower and middle classes to work harder and smarter toward achieving their economic goals. Another important factor was that the Netherlands was able to harness the wind through the invention of the windmill and by using readily available peat, produced cheap and abundant energy sources to power the construction of ships for worldwide trading (Goldgar 25). In addition, the entire 17th century for the Dutch was known as the “Golden Century” based on the fact that Amsterdam was the richest of all cities in Europe thanks to international trade. The VOC (otherwise, the Dutch East India Company) was an internationally recognized trading company and did business with Indonesia and other faraway places, drawing exports into the city of Amsterdam before trading those goods further to other parts of Europe for substantial profits. The Company was the first multinational corporation with shares traded on a stock exchange, starting with its founding in 1602. One of the things that the Company would trade were tulips in other parts of the world; just like any other exotic spice, to people in foreign lands. In that sense, tulips were really a bridge between Dutch cultures and the cultures of other nations globally and made the Netherlands instantly recognizable. For traders, this also meant the possibility of international travel and adventure. The idea that social mobility was desirable, combined with the overall climate of economic prosperity, created a context in which the trading of tulips for huge profits and at huge risks was an opportunity many were willing to take (Beattie). All in all, Tulipmania has great significance to western civilization primarily because of its continual relevance to our modern capitalist economic system in which markets like those for real estate, website domains, and insurance can become dangerous bubbles ready to pop. When they do inevitably pop, the result is often catastrophic for those who decided to speculatively participate in the market and invested a great deal for the chance for large profits (Tulipmania in 1637: Corporate Scandals Have Deep Roots). Even today, the concept of Tulipmania is used to invoke comparisons between present day phenomena, like recent investment interest in biotech stocks (Covestor), and the entire economic community is expected to know what is being referred to. But the effects of economic bubbles have much farther reaching consequences than just for the speculators; in many ways, the popping of the tulip market put a damper on the entire Golden Century in the Netherlands,. Bibliography Beattie, Andrew. Market Crashes: The Tulip and Bulb Craze. 2014. http://www.investopedia.com/features/crashes/crashes2.asp. 5 April 2015. Covestor. Biotech: Anatomy Of An Investing Mania? 7 April 2015. http://www.benzinga.com/analyst-ratings/analyst-color/15/04/5385121/biotech-anatomy-of-an-investing-mania. 7 April 2015. French, Doug. "The Dutch Monetary Environment during Tulipmania." The Quarterly Journal of Austrian Economics 9.1 (2006): 3-14. Print. Gerber, Peter M. "Tulipmania." Journal of Political Economy 97.3 (1989): 535. Print. Goldgar, A. Tulipmania. London: Faber and Faber, 2006. Print. Mackay, Charles. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. London: Richard Bentley, 1841. Print. Thompson, Earl A. "The Tulipmania: Fact or Artifact?" Public Choice 130.1-2 (2007): 99-114. Print. "Tulipmania in 1637: Corporate Scandals Have Deep Roots." Strategic Direction 19.6 (2003): 5-6. Print. Read More