Wednesday 21 October 2009

Tulipomania: A tulip bulb priced an equivalent of 12 acres of good land became as worthless as an onion

17th century Holland.

Belonging to the onion family, the tulip flowers are grown from bulbs.  Propagation is very slow for it takes a season for a plant to reproduce itself. 

The 17th century Dutchmen developed a great passion for tulips and rich people showed off their tulip collection with as much pride as their rare paintings.l 

As is usual for all speculative manias, there were sound economic reasons to begin with.  Tulips are indeed beautiful flowers and were in much demand all  over Europe.  Growing tulips was indeed a very profitable industry.  However, as with all manias, the profits of the pioneers attracted more and more people into the business.  (Reminds me of the MLM model too.)  The latecomers, not willing to undergo the long period necessary for the establishment of a nursery, bidded up the price of the existing limited supply.

By the 1620s, some of the rare varieties were beginning to command astronomical prices.  Semper Augustus (a beautiful white and blue flower with red stripes) were being sold for 1,200 florins.  In perspective, this was equivalent to the cost of 10,000 pounds of cheese or 120 sheep!  At this price level, the earlier entrants to the business were making incredible profits and tales of such gains naturally pulled in even more people.  By 1634, the race among the Dutch to cultivate tulips was so great that the ordinary businesses of the country were neglected.  The same Sempler Augustus had by then reached an incredible price of 5,500 florins, an equivalent of 12 acres of good land. 

By 1636, the trade in tulips became so great that regular markets were established for them in Amsterdam, Rotterdam, Harleem, Leyden, Alkmar and other towns.  For the first time, symptoms of gambling became apparent.  The stock brokers, always alert for a new speculation, switched to tulips and used every means at their disposal to cause fluctuations in  prices. 

As in all manias, confidence and prices soared to their highest just before the collapse of the market.  Everyone imagined that the passion for tulips would last forever.  Wealthy people from all over the world sent in large sums of money to Holland to invest in the boom.  Houses, land, and valuables were sold at ruinously low prices so that their owners could take part in tulip speculation. 

However, the seed of its destruction had by then been sown.  The huge increase in money supply and the sense of prosperity created by populace's holding of tulip bulbs caused the prices of everyday necessities to increase by considerable degrees.

Like all wonderful dreams or delightful parties, good things do eventually come to an end.  On a day in February 1637, about FIFTEEN years after the beginning of the mania, a speculator bought a bulb and found that he could not resell it for a higher price.  He was then forced to reduce its price to dispose of it.  This move caused a panic among all other speculators and the rush to sell became increasingly intense.  The prices fell drastically and within a short time, tulips which once commanded the price of houses became as worthless as onions.

Ref:  Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

1 comment:

Hels said...

I know a lot about tulip fever as it influenced 17th century Dutch paintings and ceramincs, but never thought much about the commercial consequences. I hope my readers pick up on the non-art issues.

Thanks for your post and thanks for the link,
Hels
Art and Architecture, mainly