We hear about the economic and financial crisis happening worldwide from time to time. These crises are not just limited to the current world. In such economic breakdowns, people start to suffer. This article is about the first financial crisis recorded in history, the Tulip Mania.
What is Tulip Mania?
The earliest documented financial catastrophe, Tulip Mania, was one of the most well-known market bubbles. It occurred in Holland in the early to mid-1600s, when tulip bulb prices rocketed due to speculation. The most valuable tulip bulbs traded for up to six times the typical person’s annual wage during the market peak.
It started in a very innocent way. Tulips were first cultivated in Western Europe in the 16th century. But even then, Tulip cultivation was widespread in Constantinople (present Turkey).
The tulips are believed to have been brought to Western Europe by the Dutch botanist Carolus Cluesius. That was in 1593. He researched tulips at Leiden University. But for the next ten years, the Tulip was popularized in Europe by Conde Jessner. He imported tulip seeds and tubers from Constantinople. This exotic flower attracted wealthy men and women in the Netherlands.
What causes Tulip Mania?
By this time, the Dutch economic situation was at an all-time high due to their strong trade relationships with Asia. With this expanding trade and commerce, Dutch people accumulated enormous wealth. And they became the most powerful nation in Europe in terms of wealth and economic power.
Furthermore, The Dutch were the driving force behind trade in Europe in the 17th century. The Dutch East India Company was the trading hub of the Netherlands. Also, Amsterdam was the great center of international trade. And It had become the wealthiest city in Western Europe. In this era, Amsterdam was a paradise for wealthy merchants. Their houses were adorned with ornaments. The exotic tulip flower, which entered into this sensation, quickly became popular among the rich.
Many wealthy merchants wanted to see their houses full of blooming tulips. As a result, the demand for tulips began to rise sharply. So, rich people in Amsterdam bought tulip seeds and tubers from Constantinople. At the same time, tulip prices began to rise sharply. In fact, being a tulip owner at the time was considered a determinant of each other’s status in society.
Gradually, Tulip turned into a social phenomenon. At that time, an elite who did not have a collection of tulips was despised as a people who had no taste, no matter how prosperous they were. Many of the scholars, scholars, and celebrities who lived at this time were passionate tulip lovers.
Tulip turns into a mania
With the social acceptance of tulips, many people began to pursue them. Hence, it was no longer limited to the rich. Even average-income merchants and shopkeepers competed with each other to become tulip owners. Unfortunately, with the rising demand to buy tulip flowers, they had to pay unnaturally unfair prices. According to literature trader in Harlem has spent half of his life saving to buy a single tulip. However, this was not a way to make a profit but rather to get friends’ compliments.
“Extraordinary Popular Delusions and the Madness of Crowds,” the first book on the Tulip Mania, was written in 1841 by the Scottish writer Charles Mackay. According to this book, demand for tulips was so high that one buyer had sold 12 acres of land to buy a tulip tuber. In his article, “The Tulipmania: Fact or Artifact,” Earl Thompson, a professor of economics, noted that the price of a tulip is higher than the value of a fully-featured luxury home in 17th-century Amsterdam.
Before entering Holland or under natural conditions, the Tulip flower was a monochromatic flower with large leaflets and unusually long stalk. These attributes were changed soon after the arrival of Holland. Shortly after entering Holland, Tulips was infected with a virus called Mosaic. Tulips infected with the virus were much different from usual. Their color, as well as their nature, changed. Instead of a single color, new tulips emerged in different colors. The petals were small and had colorful patterns. The leaves were soft and light green.
From the 1620s to the 1630s, there were many varieties of tulips. At the height of the 1637 mania, there were about 500 varieties of tulips. These hybrid tulips were thus more pleasing to the eye of florists. Different names were given to tulips that originated in Holland. These were often attributed to planters, as well as to those who excelled in seafaring and warfare. E.g., Admiral Leifken, Admiral von de Ike. Sometimes, names like Alexander the Great, Admiral of Admirals, and General of Generals were given to attribute a more sublime status to the flower.
Although there are many varieties of tulips, the demand for each type is not the same. The bright dark-colored striped tulips on a light background were the most attractive.
Semper Augustus tulip
At the time of Tulip Mania, the most expensive Tulip was Semper Augustus. By early 1636, the whole of Holland had only two Semper Augustus tulips. One was with a merchant in Amsterdam and the other in Harlem. They were not such good-quality bulbs either. Yet, tulip enthusiasts had a fierce competition to own these Semper Augustus tulip tubers. According to sources, a buyer dedicated 12 acres of land with buildings to get the last Harlem tulip. The other bulb in Amsterdam was priced at a full-featured horse-drawn carriage with gray horses. At the height of prices in February 1637, the price of bulbs of some tulips was more than ten times the annual income of a skilled craftsman.
Growth of marketing strategies
Tulips usually bloom for about a week between April and May. Between the period of June to September, tulips are not seedlings. During this time, the tulip bulbs were removed and sold at the market. In front of notaries, florists, or Tulip, sellers signed agreements (futures) with buyers to buy tulips at the end of the season for the rest of the year. This way Dutch developed various technologies in modern finance and trade, thus creating a diverse tulip market.
A significant issue with Tulip harvesting was that it could not be harvested in a short time. Tulip seeds usually take 7-12 years to germinate and flower. Tulips bulbs can flower in as little as 1–3 years, but only two or three new tips per year. Due to this, Tulip farmers could not fulfill the increasing demand for Tulips.
By about 1634, Tulip mania completely disrupted the daily activities of the Dutch people. Although only a small section of the society was involved in the tulip trade, its influence continued to spread throughout the community. As the trend peaked day by day, prices rose incredibly fast. Prices of flowering tulips, especially those with viral infections, have skyrocketed.
Tulips become a profit-earning mechanism.
In 1634, many speculators entered the tulip market, with the demand for tulips coming from France. In 1635, people spent as much as 100,000 guilders to acquire 40 tulip seeds. Initially, people who entered the Tulip market were Tulip lovers. But as tulip prices skyrocketed, the sole purpose of people who entered the market was to make profits. Later, Tulips were transformed into stocks for sale in the stock market. Many buyers who bought tulips had no idea how to grow them. They attempted to buy bulbs at a lower price and sell them later at a high price. So, people began to act relentlessly. They even sold their most valuable assets to buy one tulip bulb. According to literature, at this period, people have spent $ 17,000 – $ 76,000 to buy a single tulip at the current price. With this, Tulips were no longer an agricultural or horticultural crop.
In 1636 the demand for rare tulips increased sharply. Merchants sold them on the Amsterdam Stock Exchange and in Rotterdam Harlem, Leiden, and other cities. By November 1636, prices had risen not only for the rare and colorful tulips but also for the ordinary tulips. In the same year, the Dutch created a formal futures market to sign agreements to buy and sell tulips at the end of the season.
During the period, the tulip trade was pervasive. As a result, the government imposed rules to guide customers. Government officers were also involved in the tulip trade. In small towns where there were no exchange centers for tulip trade, the main inn was used as a tulip gallery. Tulip traders placed the tulip pots with flowers in the inn’s space for display. Customers met at these inns to discuss transactions, enter into agreements, and sign contracts. Each person agreed in the way they negotiated. However, Tulips were not physically exchanged during the trade. Hence, this trading system is called a wind trade.
The peak of the Tulip Mania
By the winter of 1636-37, the tulip fever was at its peak. Stockbrokers were constantly on the lookout for new investment opportunities connected to tulips. Some brokers exchanged Tulips about ten times a day. They made every effort to fluctuate the price. In the end, Tulip trading becomes a gamble.
Those who reaped the benefits of this game were stockbrokers. They bought tulips when prices were low and made huge profits by selling them when prices were high. With time, this craziness spread beyond the Dutch border. As expected, money began to flow into the Netherlands. As an inevitable consequence, inflation also began to rise alarmingly. Many people suddenly became very rich. The prices of essential commodities rose sharply. The value of luxury goods, including houses and land, horses and carts, also increased. People rushed to the tulip trade like ants gathering in a honey jar—people began to believe that rich people worldwide would buy tulips from the Netherlands at any cost.
Crash of the Tulip Mania
By this time, the rich were not buying tulips to decorate their gardens or show off their social status, as they had in the early days of the Tulip mania. Their sole purpose was reselling and making a profit.
The brokers who wanted to make a large sum of money started to create a deficit in the market by keeping the bulbs in their possession. This process caused prices to rise further. This artificial deficit paused when harvested Tulips were released to the market. In the meantime, brokers also released the Tulip, making the supplied double. As a result, Tulips were no longer rare.
As supply increased, tulip prices began to fall. As a result, the market for tulips was on the verge of collapse. Prices began to fall at a faster rate. Suddenly, in February 1637, tulip prices plummeted. In six weeks, tulip prices fall by 90 percent. At the same time, the tulip trade plummeted. The crash commenced in Harlem. For the first time in its tulip season, buyers turned down offers. Quickly this spread all over the country. No matter how many attempts were made by the traders to increase the demand, it was not successful. Within a few weeks, the price of Tulips dropped from 5,000 gilders to 100 gilders.
With the sharp price decrease, confidence in the tulip deal had been shattered. Customers were overwhelmed with excitement and panic. As a result, violations of trade agreements were reported all over the country.
According to the literature, a buyer agreed to buy 10 Semper Augustus tulips from a dealer for 4,000 gilders. The transaction had to be done within six weeks of signing the agreement. The dealer was ready to make the transaction on time, but the price had dropped from 4,000 guilders to 300 or 400. Because of this, the buyer refused to pay the price or buy the tulips. Daily, people reported such violations of agreements in every city.
Within several days many people became extremely poor, owning only a few worthless tulips, which they had sold their property for a large sum of money. Some wealthy families became even more impoverished than the poor.
The government initially refused to intervene and advised traders to negotiate and agree on a plan. Although there were many meetings for this, it all ended, fortunately. After many discussions, traders concluded to terminate all contracts entered at the peak of the mania or before November 1636. However, many did not agree with this conclusion. So, complaints of breach of contract were pouring into the courts from almost every corner of the country. But the court refused to intervene, considering the Tulip deal a gamble. With this, Tulip Mania came to an end.
Impact of Tulip Mania
However, the emergence and crash of the Tulip mania created several new market methods. And also, arose the importance of a formal regulatory framework for trade. Furthermore, it signaled the dangers of investing in risky, high-risk sources for instant profit.