Tulipmania: The Archetype of Financial Bubbles

F.T. de la Waile writes:


“No more gorgeous than its sisters but priced as if a Queen. The bright deep petals commanded fortunes built from a lifetime of drudgery. A flower of hardy ability and striking beauty, but does that truthfully equate to an entire house? Voltaire, a great friend of mine, once warned, “Those who can make you believe absurdities, can make you commit atrocities.” His quote was directed at more socially urgent issues but can be applied to all facets of life. Do not be swept up by the misgivings of zealots, think for yourself and become the leader of your own choices socially and economically.”


Tulipmania was one of the most interesting economic topics studied by F.T. de la Waile. In 1633, 60 years before his birth, the beginnings of this transformative event were taking place. Rare Tulip bulbs were being traded for outrageous prices; James Narron and David Skeie write, “A house in Hoorn was exchanged for three rare tulips and a Frisian farmhouse was traded for a number of tulip bulbs.” These flowers were being traded in pubs where no commissions were necessary, which helped fuel the market and droves prices for a single bulb well beyond a year’s pay for a skilled craftsman. This event was imperative in understanding the dangers, signs, and effects of economic bubbles. Therefore, I would like to share with you a short history of Tulipmania, how it connects to more recent economic events, and more thoughts from F.T. de la Waile.


A Quick History of Tulipmania:


Botanist Carolus Clusius accepted a position at the University of Leiden where he brought his prized Tulip bulbs to try and grow them in the conditions of the Netherlands. By 1594, he was successful in his attempt, thus proving the tenacity of the Tulip. Combining that durability with the Tulip’s rarity and beauty proved to create a highly sought-after commodity in the Netherlands where harsher environments existed. Meanwhile, as the Tulip was being recognized for its perfection, the world was witnessing the Dutch Golden Age (1581 to 1672). This was a period in which the Dutch were renowned for their progress in many components of their country including art, science, and trade. Dutch confidence was at an all-time high; the economy was roaring, their army was elite, and their culture was being tasted by everyone. Consequently, with the wealth flowing, the rare and seemingly magical tulip became a coveted status symbol for the people of the Netherlands. This was the moment for the Tulip to take root as varieties began to emerge, and promissory notes were exchanged with no true guarantee of quality, color, and kind. However, Dutch confidence and the hysteria of trying to match or exceed the status of their neighbor fueled trades, where exchanges of single bulbs exceeded 10x a day at peak value without physically trading the bulb. Tulip pricing and trading began steady but quickly ascended, creating a spike in price, which reached its highest in 1636-1637. Prudent investors began to sell at this high price to reap profits and others bluntly refused to honor contracts, which created a panic to sell and drove the price down. To make matters worse, the Dutch government began to offer 10% of contracts that were not being fulfilled. This did not ease minds as the government showed their lack of faith in the Tulip market and it only created more panic. Then, very abruptly, all confidence in the Tulip market was lost and the bottom completely fell out, bankrupting many people.


How Tulipmania Connects to Today:


Tulipmania is considered the very first recorded example of an economic bubble burst. Aronson.com explains, “Because the fluctuation of the tulip market was not caused by massive changes to production costs, or the usefulness of the flower, most people assume that Tulip mania was the result of the irrationality of the financial market.” This means, the perceived beauty of the Tulip did not change, the cost to create a Tulip did not change, delivery costs of the Tulip did not change; yet, the price plummeted in less then a year and all confidence in the market was lost. It all comes down to believing the hype and getting wrapped up in the hysteria of not missing out. People were not buying Tulips because they were essential and helped with everyday life or because people accurately concluded a high staying power of a flower that bears no fruit or vegetable. This was the result of believing something could not fail and taking the word of other investors instead of doing one’s own research and relying on one’s own rationality to fundamentally understand what is happening in the market.


Tulipmania can be used as a warning and/or outline for future economic bubbles as it closely relates to events like the dotcom bubble and the rise of digital currencies. Regarding, the dotcom bubble, Chris Nolter wrote, “In the stock markets on Dec. 5, 1995, the Nasdaq stood at 2,843.11 — an increase of 28% from the start of that year. The benchmark tech index then climbed another 78% to peak at 5,048.62 on March 10, 2000, the index then began crashing back to earth, eventually bottoming at 1,114.11 in October, 2002” (2017). The Internet and its capabilities were not widely understood. People were buying to not miss out on gains, not because they understood the true value the Internet would bring to the future of humankind. Therefore, when an economical gain is sparked by FOMO and hysteria, not fundamentals, that spark will eventually go out, leading to loss of confidence and panic selling. We can equate this to what is happening to digital currencies. Chris Nolter also writes, “Bitcoin is “worse than tulip bulbs,” said JPMorgan Chase & Co. Chairman and CEO (JPM) – Get Report CEO Jamie Dimon at a September media conference” (2017). Some say that Bitcoin and digital currencies have not and may not bubble, but we disagree; we think the bubble already burst. Bitcoin had an exceedingly rapid rise in price in 2017 soaring 1700%. At one point, Bitcoin reached over $20,000 a Bitcoin and has since been reduced to under $10,000 with fluctuations as low as $4,000 in 2019. It is now 2020 and Bitcoin is still a volatile landscape only supported by the faith of its investors. The world will watch and wait to see if Bitcoin can ever level out and become mainstream with real structural support.

It is important to note two key ideas that these events all have in common, so that an investor may heed the warnings in future allocation of funds:

  1. People did not understand on a fundamental level what they were investing in. They merely wanted to get in on the action.

  2. Long-term and sustainable wealth is not generated by quick spikes. All these events showed sky-rocketing prices based on invalid confidence that eventually broke and ruined people’s lives.

More Thoughts from F.T. de la Waile on Tulipmania:

(Sourced from his journals)


“To invest is to rationalize and understand the value of a something that goes beyond their price, their smile or the recommendation of a neighbor.”


“Be wary of the flower that gets all of the attention. For what do the others have now but time to plot and plan for the overthrow.”


“Hysteria of the people is like a tornado sweeping up everything in its path. Soon, you will all become a spinning collection of gray unable to gather your own thoughts until you run out of energy, scatter, and land where you started…or worse.”


“Investing in the present will, most likely, not yield you the results you are looking for in the future.”



References


https://Aronson.com/Tulip-mania/

https://libertystreeteconomics.newyorkfed.org/2013/09/crisis-chronicles-tulip-mania-1633-37.html

https://www.thestreet.com/technology/bitcoin-bubble-versus-dot-com-boom-tulipmania-14416869