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The tulip.
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?
One word.
Tulipmania.
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.
Modern Day:
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.
Note:
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-Xrayvsn
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The mortgage backed security bubble was similar, right? People think properties will keep going up forever, but we were wrong. Future contracts and leverage made things a lot worse. People are just greedy by nature.
Hey Joe. Exactly. If there is something that can be gambled on, humans have found a way to do it trying to be greedy and get a profit. Unfortunately we don’t seem to ever learn our lesson and history will continue to repeat with the next bubble probably forming as we speak.
Crazy demand and the lack of supply can lead to great bubbles. Internet stocks with negative cash flows in the 90s, housing in the 2000s, and more recently crypto. I guess the key is to recognize them before the run up, make a strong investment catching the wave at the right time and then get out before they come crashing down.
Not too many people get lucky at riding the wave and getting out before it crashes. Even if you are lucky to invest early and enjoy a run up most would be tempted to hold it even longer because of greed and then left holding the bag
I have hundreds of tulip bulbs in my yard…just waiting to bloom. It will be hard not to think of this post when they start popping up this spring. Thanks.
Wow. If you were back in the day at the height of Tulipmania you would be considered on the same level as Bill Gates.
Bet they look amazing when in bloom
“bulbiferous geophyte” sounds like an insult I am definitely going to start using.
Tulips are my favorite and I can honestly say I had NO idea that they had such a wiiiillldd story attached to them! Thank you for this useful trivia knowledge 🙂
LOL. I’m still laughing after reading your comment. I do think it would make for a great insult.
Glad I got to drop some history on you. It was a pretty cool story when I first came across it and I know there were only a few super nerds like me that were aware of it 🙂
Just finished Bernstein’s “Birth of Plenty” and Holland was a remarkable place in that time as a source of financial innovation. Can’t recall the speaker to credit him or her, but one of the big signs of a bubble is the belief that, “This time it’s different.” Tulips were the first but by no means the last speculative bubble. Great post, my friend!
I always am amazed by your voracious reading appetite. It is no wonder why it has translated well to your writing.
I haven’t read as much as I used to (and when I did it was more along the lines of Dan Brown and JK Rowling)
We are living tulip mania today. The commodity is not bulbs but unsecured consumer debt such as car and college loans and credit cards and sub prime mortgages. The process is dopamine driven the same as tulip mania, and therefore amenable to psychological manipulation. We are frogs living in a pot of slowly increasing temperature. Next comes the political despots with their free money give away, another form of unsecured debt and dopaminergic manipulation.
I do think that there will always be threat of a bubble because it is part of human nature. The name of the bubble changes but the principle behind it does not throughout time
It’s not “human nature” it’s “market nature” and it’s not the nature of bubbles but of gambling and it happens every day and every FIRE aficionado is participating in it. The degree of participation is determined by the leverage a person has on the future. If you can survive all in cash your leverage is inflation, and if your leverage is greater than inflation, that is your risk. This is the risky nature of a “futures market”
It’s quite interesting how people valued an inedible tulip to be worth more than food and water that can keep them alive. It reminds me of beanie babies where people paid thousands of dollars for something that took dollars to make. Why not just reach out to the manufacturer and buy direct? Hmm..
Yeah I found the tulip situation fascinating. Greed has a lot to do with it and FOMO sets in regardless of what century we are in.