Thursday, November 1, 2012

What is Tulip Mania?

Holland in the early part of the 17th century saw a craze of tulip bulb speculation that had never been seen before and made the price of gold and silver look like small change by comparison.

Tulips became the most desirable commodity in Holland and led to wild speculation that has become familiar to us in more recent years with the banking scandal dot com boom and others.

For a while in the 1600s, Dutch people were paying more for a 1lb of tulip bulbs than they were for a house or sailing ship.

How on earth did that happen?
In the early 1600s, Holland was a very rich country, with its wealth based on trade and spices. The world’s First Stock Market had been established in 1607 and a new and wealthy middle class had been created.

These newly affluent Dutch people looked for things to buy as status symbols and art, fashion and porcelain were popular but the latest craze was tulips.

Tulip connoisseurs had discovered that a rare virus that infected tulip bulbs led to unusual petals, striped colours and started paying a high price to get these desirable flowers.

They loved the colour and bloom of tulips and of course, the rarest ones became the most expensive.

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Rapidly, everyone started speculating in tulips.

The craze meant that anyone could do it and make a fortune. Buying tulip bulbs became like buying a lottery ticket and your bulbs could turn out to be rare and beautiful and so make you rich overnight.

The Dutch people loved gambling and very soon, the price of tulip bulbs rocketed.

You could make huge profits without having to do anything more than hold on to the bulbs for a few days and sell them at the increased price.

Auctions for tulip bulbs were held in the back rooms of bars and fired up by drink usually supplied by the auctioneer, buyers paid increasingly high prices for tulip bulbs, often passing IOU s between themselves to fund their purchases.

The boom in speculation of tulip bulbs spread very quickly

At a middle class home in Haarlem on February 1st 1637, wealthy merchant Peter Wienitz was entertaining friends and family to dinner.

He offered dinner guest Gertrude Schoote, 1lb of tulip bulbs for 1400 florins which at this time, was the price of a house.

Gertrude was tempted by the offer but reluctant to commit until other guests Jacob de Bloche and his wife offered to guarantee the cost of the investment for 8 days.

The de Bloche’s thinking was that 8 days gave Gertrude enough time to raise the money, and, if she failed to do this, they would get to keep the tulip bulbs at an 8-day-old price. A win win situation for them.

The price of tulips was rising by the hour so they were very keen with this proposal and talked Gertrude out of accepting another offer at the dinner table from another guest who offered to buy her tulips straight away (although she didn’t actually own them ) at a 100 florins profit.

Two days later the price of tulips was still rocketing and then something very strange happened.

At an auction, a 1lb of white crown tulip bulbs was offered for a starting price of 1250 florins.

This was the going rate but there were no bidders. Unnerved, the auctioneer started dropping his price but still no one bought the bulbs.

It was as if everyone had suddenly realised it was insane to pay so much money for flower bulbs and had just woken up to the fact.

The fever had broken and now it seemed that the buyers had lost confidence.

With the drunkenness of optimism over, there was a clamour to sell and the price of tulips plummeted.

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The bubble had burst and within 4 days, tulip mania was over.

Back at the Wienitz household, Gertrude Schoot was still legally committed to buying the 1lb of now practically worthless tulip bulbs that had cost her the equivalent of buying a house.

Lawyers were called in and the de Bloches managed to wriggle out of the deal.

History does not record what Gertrude did with the bulbs although we can probably imagine what she felt like doing with them to Peter Wienitz and the de Bloches!

It is easy to laugh at the Dutch and their tulip mania but it just goes to show how rational people can be swept along by something if it becomes commonplace enough and seems to be a way of making a lot of money. The current banking crisis worked in much the same way and The Dutch tulip bubble can be seen as the first example of speculation on this scale and an early example of what happens when capitalism gets out of control.

Today the Dutch are the leading exporters of tulips in the world so this beautiful although inexpensive flower still adds millions of Euros to the Dutch economy.

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