Tiptoe Through The Tulips
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The perennial herbaceous bulbiferous geophyte from the genus tulipa.
A beautiful spring-blooming flower that brightens any landscape it is a part of.
In case you thought you went to the wrong website and accidentally stumbled upon a horticulture blog rather than the financial blog you have been accustomed to (or a more likely scenario, think Xrayvsn has completely lost his mind), I want to explain my fascination with this particular flower, especially since tomorrow is the official start of spring.
But first I want to transport you back in time, the 17th century to be exact.
A time when this unassuming bulb brought down an economic empire.
“Those who cannot remember the past are condemned to repeat it.” – George Santayana
It was during this time that the land of wooden shoes and windmills was having a true economic renaissance, referred to as the Dutch Golden Age.
The Dutch were at the forefront of the global marketplace and were instrumental in ushering in the first modern economy.
Unlike its European counterparts, the Dutch did not have an aristocracy which allowed formation of a true Middle Class of citizens.
Many of the pillars of modern day financial institutions were originated by the Dutch:
- A Commodity Exchange
- Lending Banks
- The creation of one of the earlier multinational corporations (The Dutch East India Trading Company) that became the world’s first publicly listed company in the stock exchange.
If you were in the 17th century and not royalty, the Netherlands was the place to be.
So how can THE economic global powerhouse of its time be brought down to its knees?
Unlike Beatlemania, this economic collapse was not due to a rock band but, you guessed it, that pretty little flower.
How Tulipmania began:
That middle class that was created in the 17th century Netherlands?
Well those citizens now had money and much like their modern-day counterparts (us), they wanted to spend it on all sorts of luxury goods.
It was around this time that the tulip was introduced to the region and it became all the rage.
The tulip soon became a status symbol and was instrumental in the creation of the OJ (“Original Joneses”).
Citizens began flaunting their wealth and social stature through tulips.
Not only was the number of tulips a homeowner had important to determine status, but also how rare the color was.
As demand grew and supply was limited, prices rose.
The ill-fated idea:
For those unfamiliar with tulips, a little background is necessary.
A tulip is a perennial which translates to a yearly springtime flowering schedule, which often just lasts 6 weeks or so.
For the remainder of the year, the tulip is in the form of an underground bulb.
During those 6 weeks or so of flowering, a tulip cannot be moved.
However in the bulb state, it is safe to move/transplant.
It was the exploitation of this fact of nature that led to the downfall of the Dutch economy.
Certain individuals realized that the tulip market was booming as prices continued to rise.
These investors felt that, if they could lock in the current prices by entering into an agreement with the tulip merchant for the bulb, when spring approached they could then demand much higher prices during this peak season.
In essence they created Tulip Future Contracts.
In fact these investors never even had to wait till springtime, as these future contracts could go on secondary markets and sold to people willing to pay even more for them.
These investors were speculating that whatever they paid for a contract, they still could be assured of a gain as the prices were anticipated to increase even more as time went on.
This speculative investing cycle continued to the point where at the height of Tulipmania, a contract for ONE tulip bulb demanded the equivalent worth of:
- 5,700 pounds of meat
- 10x the annual salary of a skilled craftsman
- A luxury home in Amsterdam
I venture to say that most of the readers here can guess what happened next.
In February 1637, without warning, demand for tulip contracts/tulips just disappeared.
The economic tulip bubble that had formed just burst and those speculators left holding the bag were in financial ruin.
This ended up being another first in the world for the Dutch, the first recorded speculative bubble.
For those readers that find the tulip situation laughable and feel that there is no way our vastly superior modern society could ever be so gullible, may I remind you of this: Beanie Babies.
Economic bubbles, modern or old, follow the same pattern, that of speculation leading to elevated prices with an eventual bursting of said bubble.
So the next time you happen to come across a tulip, admire it for not only its beauty but also for its role in the history of finance.
And forget what the song says, do not tiptoe through them.
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