Tulip mania: the classic story of a Dutch financial bubble is mostly wrong

Discussion in 'Wall St. News' started by dealmaker, Feb 12, 2018.

  1. dealmaker


    Anne Goldgar
    February 12, 2018 6.14am GMT

    Floraes Mallewagen (Flora's wagon of fools): Hendrik Gerritsz Pot, c1640 (photo: Laura Blanchard), CC BY-SA

    Right now, it’s Bitcoin. But in the past we’ve had dotcom stocks, the 1929 crash, 19th-century railways and the South Sea Bubble of 1720. All these were compared by contemporaries to “tulip mania”, the Dutch financial craze for tulip bulbs in the 1630s. Bitcoin, according some sceptics, is “tulip mania 2.0”.

    Why this lasting fixation on tulip mania? It certainly makes an exciting story, one that has become a byword for insanity in the markets. The same aspects of it are constantly repeated, whether by casual tweeters or in widely read economics textbooks by luminaries such as John Kenneth Galbraith.

    Tulip mania was irrational, the story goes. Tulip mania was a frenzy. Everyone in the Netherlands was involved, from chimney-sweeps to aristocrats. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits – it was a phenomenon of pure greed. Tulips were sold for crazy prices – the price of houses – and fortunes were won and lost. It was the foolishness of newcomers to the market that set off the crash in February 1637. Desperate bankrupts threw themselves in canals. The government finally stepped in and ceased the trade, but not before the economy of Holland was ruined.

    Yes, it makes an exciting story. The trouble is, most of it is untrue.

    My years of research in Dutch archives while working on a book, Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, told me a different story. It was just as illuminating, but it was different.

    Gordon Gekko talks tulips. Wall Street: Money Never Sleeps / scottab140
    Tulip mania wasn’t irrational. Tulips were a newish luxury product in a country rapidly expanding its wealth and trade networks. Many more people could afford luxuries – and tulips were seen as beautiful, exotic, and redolent of the good taste and learning displayed by well-educated members of the merchant class. Many of those who bought tulips also bought paintings or collected rarities like shells.

    Prices rose, because tulips were hard to cultivate in a way that brought out the popular striped or speckled petals, and they were still rare. But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more.

    A sign of good taste? Michiel Jansz van Mierevelt, 'Double portrait with tulip, bulb, and shell', 1606
    Tulip mania wasn’t a frenzy, either. In fact, for much of the period trading was relatively calm, located in taverns and neighbourhoods rather than on the stock exchange. It also became increasingly organised, with companies set up in various towns to grow, buy, and sell, and committees of experts emerged to oversee the trade. Far from bulbs being traded hundreds of times, I never found a chain of buyers longer than five, and most were far shorter.

    And what of the much-vaunted effect of the plague on tulip mania, supposedly making people with nothing to lose gamble their all? Again, this seems not to have existed. Despite an epidemic going on during 1636, the biggest price rises occurred in January 1637, when plague (mainly a summer disease) was on the wane. Perhaps some people inheriting money had a bit more in their pockets to spend on bulbs.

    Prices could be high, but mostly they weren’t. Although it’s true that the most expensive tulips of all cost around 5,000 guilders (the price of a well-appointed house), I was able to identify only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman. Many tulips were far cheaper. With one or two exceptions, these top buyers came from the wealthy merchant class and were well able to afford the bulbs. Far from every chimneysweep or weaver being involved in the trade, the numbers were relatively small, mainly from the merchant and skilled artisan class – and many of the buyers and sellers were connected to each other by family, religion, or neighbourhood. Sellers mainly sold to people they knew.

    Patterned petals were very valuable. Hans Bollongier, 'Floral still life', 1639 (Rijksmuseum)
    When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637. None of the bulbs were actually available – they were all planted in the ground – and no money would be exchanged until the bulbs could be handed over in May or June. So those who lost money in the February crash did so only notionally: they might not get paid later. Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing. Only those waiting for payment were in trouble, and they were people able to bear the loss.

    No one drowned themselves in canals. I found not a single bankrupt in these years who could be identified as someone dealt the fatal financial blow by tulip mania. If tulip buyers and sellers appear in the bankruptcy records, it’s because they were buying houses and goods of other people who had gone bankrupt for some reason – they still had plenty of money to spend. The Dutch economy was left completely unaffected. The “government” (not a very useful term for the federal Dutch Republic) did not shut down the trade, and indeed reacted slowly and hesitantly to demands from some traders and city councils to resolve disputes. The provincial court of Holland suggested that people talk it out among themselves and try to stay out of the courts: no government regulation here.

    Monkeys dealing in tulips. When the bubble bursts, at the far right, one urinates on the now worthless flowers. Jan Brueghel the Younger, 'Satire on Tulip Mania', c1640
    Why have these myths persisted? We can blame a few authors and the fact they were bestsellers. In 1637, after the crash, the Dutch tradition of satirical songs kicked in, and pamphlets were sold making fun of traders. These were picked up by writers later in the 17th century, and then by a late 18th-century German writer of a history of inventions, which had huge success and was translated into English. This book was in turn plundered by Charles Mackay, whose Extraordinary Popular Delusions and the Madness of Crowds of 1841 has had huge and undeserved success. Much of what Mackay says about tulip mania comes straight from the satirical songs of 1637 – and it is repeated endlessly on financial websites, in blogs, on Twitter, and in popular finance books like A Random Walk down Wall Street. But what we are hearing are the fears of 17th-century people about a 17th-century situation.

    It was not actually the case that newcomers to the market caused the crash, or that foolishness and greed overtook those who traded in tulips. But this, and the possible social and cultural changes stemming from massive shifts in the distribution of wealth, were fears then and are fears now. Tulip mania gets brought up again and again, as a warning to investors not to be stupid, or to stay away from what some might call a good thing. But tulip mania was a historical event in a historical context, and whatever it is, Bitcoin is not tulip mania 2.0.

  2. So...moral of the story...tulips were about as big of news to anyone as bitcoin? Which is to say, little?
  3. The past is always automatically over-glorified and sensationalized to be something so majestic and historic and wonderful, o_O
    At present moment, then, it was just basically another day. As it is, and should be.
    beerntrading likes this.
  4. Spoken like a millennial.
  5. Assigning great value to something essentially near worthless or in the case of bitcon, easily copied, duplicated, fungible

  6. comagnum


    There will always be new bubbles & manias - stay tuned...

    A real good book on the subject is 'Devil Take the Hindmost'. You will see the markets in a whole new light after reading this book.

    srinir, zdreg and dealmaker like this.
  7. Pekelo


    That is one BS on the square article that broke my Bullshit-O-Meter.

    First, of course poor people couldn't afford to buy tulip futures for the price of a house (there was no margin trading back then that came later), so no, they didn't lose a house' value on futures. And if some rich people did, well, who cries for them?

    Second, the author is saying that the increase of the price was justified. Really? Interestlingly I found this note in Wiki:

    "Garber's theory has also been challenged for failing to explain a similar dramatic rise and fall in prices for regular tulip bulb contracts."

    Also, if the high valuation was justified, why did the market collapse or why didn't recover later on (if the fundamentals were sound)? If Bitcoin was worth 20K two months ago, why was it worth only 6K 2 weeks ago?

    So OK, if a very unique tulip's price raised a lot (but not yuge) we can understand, but why a normal tulip's price went up let's say 20 times when the supply and demand (well at least the supply) didn't change?

    Actually there is a very simple explanation, human nature. For 2 years the bulb prices were raising but only the Nov-Febr time frame is when they went vertical in Holland. Since 400 years ago now we know what happens when price goes vertical...

    And I don't give a shit how pretty or how nicely scented a tulip is, it is not worth 10 times an average skilled worker's annual salary. That is called a bulb, I mean bubble....
    piezoe likes this.
  8. Pekelo


    But at least I learnt one interesting thing, the first bubble like financial crises was this:

    "although some researchers have noted that the Kipper und Wipper (literally Tipper and See-saw) episode in 1619–1622, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble"

    Interesting to note: " that specie (metal coin) was debased, not paper money."

  9. zdreg


    was there a way to short tulips?
  10. zdreg


    it has happened to US coins in modern times/

    The Coinage Act of 1965 debased the coinage of silver from the dimes and quarter dollars and diminished the silver content of the half dollar from 90% to 40% before it, too, lost all of its silver content about 5 years later. The US government claimed the reason for the act was coin shortages caused by the increase in the price of silver. The Act also forbade the mintage silver dollars for five years.

    The demonetization of the silver came just over two year after US President John F. Kennedy delegated authority to the Secretary of the Treasury to issue silver certificates. In his book Crossfire, Jim Marrs posits that Kennedy created silver certificates to undermine the power of the Federal Reserve, though others say that Kennedy’s decision was merely a matter of convenience during a time of transition away from silver certificates. Here are parts of the speech by Lyndon B Johnson announcing the change:

    When I have signed this bill before me, we will have made the first fundamental change in our coinage in 173 years. The Coinage Act of 1965 supersedes the act of 1792. And that act had the title: An Act Establishing a Mint and Regulating the Coinage of the United States.

    Since that time our coinage of dimes, and quarters, and half dollars, and dollars have contained 90 percent silver. Today, except for the silver dollar, we are establishing a new coinage to take its place beside the old….

    The new dimes and the new quarters will contain no silver. They will be composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper. They will show a copper edge…..

    Here the President acknowledges that silver is a scarce material and that its demand is increasing. He points out that, in 1965, silver consumption was already silver production.

    Now, all of you know these changes are necessary for a very simple reason–silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.

    Despite this, he maintains that demand won’t increase for the coins once they are taken out of circulation:

    Some have asked whether our silver coins will disappear. The answer is very definitely-no.

    Our present silver coins won’t disappear and they won’t even become rarities. We estimate that there are now 12 billion–I repeat, more than 12 billion silver dimes and quarters and half dollars that are now outstanding. We will make another billion before we halt production. And they will be used side-by-side with our new coins.

    Since the life of a silver coin is about 25 years, we expect our traditional silver coins to be with us in large numbers for a long, long time.

    He affirms the US government has lots of silver on hand, and that they will manage the price of silver over time if anyone has the idea to hoard silver.

    If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.

    Now, I will sign this bill to make the first change in our coinage system since the 18th century. And to those Members of Congress, who are here on this very historic occasion, I want to assure you that in making this change from the 18th century we have no idea of returning to it.

    We are going to keep our eyes on the stars and our feet on the ground.

    As GoldSilverBitcoin has pointed out before, a lot of press before the debasement didn’t speak too highly of silver. In the summer of 1955, Business Week claimed that “No one seems to want the metal.” 50 years after The Coinage Act of 1965, silver demand is at record highs, and, as we write, dealers are having problems getting the metal.

    As the US “celebrates” 50 years with debased coins, someone is buying up lots of physical silver for September 2015, and, as Mark Dice showed, Americans have mostly forgotten what silver is anyway.
    from https://www.silverdoctors.com/gold/...o-today-us-government-debased-silver-coinage/
    Last edited: Feb 12, 2018
    #10     Feb 12, 2018