The madness of Dutch tulips: this is how the first speculative bubble in history was born

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Four hundred years before the Bitcoin case, the Netherlands first experienced the irrational euphoria linked to a good – the characteristic flower bulbs of the country – and its consequences on prices. With a disastrous result for investors.

 

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ROME – The painting by the Flemish painter Jan Brueghel the Younger today is considered a still life, but in the seventeenth century Amsterdam, the tulips that depicts something more: a substitute for the middle classes, to hang on the walls, in the absence of money to participate in fashion and the status of the moment, the purchase of a bulb of the precious flower.

The crisis developed during what was to be called the Dutch century, while England still had to take off economically and the war for independence from Spain of the United Provinces was about to be won.

The climate was of optimism and euphoria, the Dutch company of the East Indies made lucrative business. Crushed to the sea the Dutch conquered the leadership of the grain trade, built a huge fleet with the timber of the northern forests that accounted for half the world tonnage and employed 120 thousand men.

The Netherlands is called the emporium mundi and there is a great deal of liquidity around ready to seize new investment opportunities. There is everything: sea and sextant maps, spices and medicines, prints and fresh agricultural products. In such ferment when the first tulips, coming from the Ottoman gardens of Istanbul and preceded by the fame of “flower of God”, arrived in the port of Rotterdam, interest was unleashed. Then fashion and the rush to purchase.

To understand the psychological mechanism we must consider that in addition to the exotic charm, the tulip had colors more clear than those who were accustomed Europeans: from red to the scarlet and purple to the incredible black, which a few years later will inspire a novel to Alexander Dumas, the black tulip in fact, set in the climate of growing euphoria.

The exchanges took place in the taverns of Utrecht, Rotterdam and Haarlem. The object of the bargaining – it is worth emphasizing – was not the flowers, with their chalice and their long and elegant stems, but the bulbs, that is, that sort of cipolloni that buried give life to the tulip. The bulbs, moreover, have the characteristic of keeping for a long time, up to two-three years, to be quite resistant and to make other bulbs moan. Someone has already wanted to see in the very concept of bulb, or the incubation of a future good, the signs of the first financial revolution: the bulb is already a future, or a future contract on the tulip. It should also be noted that the obsessive obsession with the tulips was directed to the flower bulbs attacked by a particular disease that stained the surface: these were rarities that could only come to light after the bulb had turned into a tulip. So the price rose and the wait for flowering became feverish, unleashing the market and irrational expectations.

 

The floriculturists, who could count on a flower that was trendy, began to baptize, with skilful marketing, the new “products” with names of generals or admirals, the Semper Augustus was the most appreciated and sought after species. Specialized street vendors beat the countryside creating curiosity and expectations. The Semper Augustus, which became a benchmark, which traded 1,000 florins in 1623, rose to more than 3,000 years later. In the four years, from 1634 to 1637, the bubble swelled out of proportion: the Semper Augustus came to quote 6000 florins. With incredible peaks: it is said that, in the summer of 1633, a house located in the town of Hoorn, in the North of Holland, changed hands for the equivalent of a bulb.

Speculation and financial innovation quickly walked. The purchase rights of the bulbs began to be dealt with in the form of real futures (a “derivative” that obliges the purchase at the expiry of the contract at a fixed price): that is, a down payment is paid and the balance on delivery. With this mechanism, with a little money you can generate a strong leverage and you expose yourself to high losses. It could happen to buy a right-futures of the value of one hundred to buy the bulb at maturity by paying 900. But if the market value at the time of closing the contract was halved, you were forced by the purchase contract and the loss could be huge . It was the culture of speculation because the rights were exchanged, bought and sold, with no more reference to the intention to buy the goods,

 

To further inflame the bubble, starting from November 1636, there was a further circumstance, which does not detract from the climate of irrational euphoria that marked the whole affair where the bulb of a Turkish flower is worth as much as a house. Many German nobles and notables had invested in futures on tulips, but because of the military defeat suffered in comparison with the Swedes in 1636 (in Europe the Thirty Years War was in the religious background), they found it difficult to close the contracts. The reasons were two: the first concerned the reduced financial resources of the German nobility, the second the fall in the prices of the bulbs that made terribly penalizing the forced closure of the future contract that had predicted a conversion price for the definitive purchase of the bulb well higher than the market. According to this reconstruction the Germans made a lobby and obtained a change in the rules of the market from the Dutch government: futures were turned into options, therefore into contracts whose conversion and purchase of the bulb was not compulsory but optional. To compensate producers-sellers of bulbs for the loss of the right to sell at a fixed price, with the transformation of contracts into simple options, it was established that they were entitled to a 3 percent penalty on the part of the buyers.

When the news leaked onto the market, the tulip producers’ strategy changed: to encourage the conversion of options, a relationship of convenience had to be established, and therefore prices had to rise. So it was and this further circumstance gave the last push to the bubble, already well swollen before the German defeat. Naturally, once the contracts had expired, the reason for keeping prices high did not exist anymore and the bubble deflated. Panic and irrationality did the rest. A further mad rush, until in February 1637, at the auction of Alkmaar, there was a price collapse. The bubble burst.

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