The weirdest economic bubble in the world’s history
In the Year of 1637
THE TULIP CRASH
Exposé for a documentary film 52 min., 4K © June 2010, kreativKraft
DON´T LEARN EVER!
What happened in The Netherlands in 1637 overshadows many examples of speculative frenzies in the world’s history: In an incomparable attack of collective madness and boundless greed, the country’s citizens put millions into speculation involving derivatives, futures, options and investment certificates for tulip bulbs. People sold all they had for a few bulbs or financial products involving potential tulip bulbs that didn’t even exist. The prices and market values of these colorful blossoms soared. Three tulip bulbs were sold for the same price as a posh villa.
How could such an enormous bubble, one that a country’s entire population took part in, that involved a delicate and short-lived plant, arise from nowhere? With astronomically high, fake profits and a full-blown crash in which market values fell by 95% in record time?
Modern-day financial crises have shown how quickly individuals can forget when there are profits to be made.
So let’s do it! Why just invest in hog bellies, or real estate, or countries in financial trouble? It’ll work with tulips too!
A 10-step film guide for marketing strategists who want to create a stock craze.
Step 1: The Discovery Ogier Ghislain de Busbecq was a diplomat Ferdinand I sent to Constantinople and the Ottoman court of Sultan Suleiman I. He brought back with him bulbs of a plant with blossoms more brilliant than anything else known in European gardens at the time. Tulips, which got their name from the Turkish word for turban (tülband), immediately interested one of the greatest botanists of the day, Charles de l’Écluse, who was in the emperor’s service at the time. He began to grow the first tulips, and they became wildly popular in the royal gardens of Emperor Rudolf II. When the emperor dismissed all the Protestants at his court, Charles de l’Écluse left the country, taking the knowledge of this colorful plant with him to Calvinist Holland.
Step 2: The Spread In those days in Holland, some merchants had become incredibly wealthy thanks to the trade with goods from the East Indian colonies. And they invested this wealth in status symbols. As a result, the tulip turned into one of the most desired objects among Holland’s upper class. Growers of the plant, who had until then produced solely bright-red blossoms, worked to produce an increasing variety of new colors and variants. Holland’s gardens took on more and more color, and more and more people wanted to brighten their lives with the brilliant plants.
Step 3: Fashion Tulips became the vogue in Holland. People that didn’t have any were out, people that had a lot were in, and everyone listened to whoever produced new and unusual strains. Everybody wanted tulips. However, tulips have a certain characteristic: They bloom only once each year. The rest of the time they’re a bulb that can be dug up at any time, and they can survive quite well without soil for months. A brisk trade in tulip bulbs developed. Bulbs were auctioned off to the highest bidders at inns. Depictions of the plants were intended to indicate the colors the humble bulb would display when spring came around. Thousands of tulip bulbs changed hands. And the prices kept pace with demand.
Step 4: The Boom Flower peddlers were soon faced with a problem: The demand for tulip bulbs was greater than the supply. Then they had an idea: Why not sell the bulbs? Why not sell options to purchase bulbs than didn’t even exist yet? For the first time ever, option certificates were issued for products that would be made in the future. Of course, trade in these certificates followed soon after that. People forgot all about the plant’s beauty; its monetary value was the only thing that mattered. Prices hit the roof.
Step 5: New Specimens Dutch gardeners constantly produced a large number of new and fascinating tulip variations. Growing methods, somewhat odd at the beginning, were refined. While, in attempt to make the blossoms’ red more powerful, growers poured red wine over the bulbs, they soon found more effective methods. Some of the most exotic specimens were produced through a virus that no one knew about at the time, the mosaic virus. This infection resulted in the most attractive and desired specimens of tulip, one example being the Semper Augustus, which was the most expensive tulip and probably the most expensive plant in history. At an auction it was sold for the price of a house in Amsterdam’s best neighborhood.
Step 6: Creation of New Financial Products There was a problem: Tulips had become so expensive that many people were no longer able to participate in the speculation. Then a few clever businessmen had an idea: The purchaser didn’t receive a tulip bulb, or an option to own a tulip bulb either. The purchaser bought the right to purchase a tulip bulb at a certain time and for a certain price. For example, 100 guilders would buy the right to purchase a tulip bulb for 1000 guilders in two months’ time. And that opened the door to low-income groups. Since the price of a tulip bulb was becoming astronomical, you could expect that it would be at least 2000 guilders in two months. A wager of only 100 guilders would make it possible to buy a bulb for half its expected price, and the rest was profit. Or, this option could be resold to someone else. The prices of tulip bulbs that did not yet exist continued to climb. And the principle of futures trading was born!
Step 7: The Peak The prices climbed higher and higher. The entire population was involved in the boom, and the demand for tulips, tulip bulbs and financial products involving bulbs grew and grew. Prices climbed along with the demand, and with them the incentive for all social classes to speculate. And this drove the prices even higher. Famous Dutch personalities such as Rembrandt van Rijn invested their fortunes in tulip securities. At some point the prices became ridiculous in comparison with the actual value of the good. But they continued to climb, often by more than 100 percent in the course of a day. Everybody: Stop working and start speculating!!!
Step 8: Widespread Mania All reason had been abandoned. A report from the time bore witness to the widespread mania: For a tulip of the specimen known as Viceroy, a buyer paid “two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four casks of beer, 1000 pounds of cheese, a silver drinking cup, a complete bed and a suit of clothes.” Investors sold all they had or mortgaged their houses to purchase futures and shares of tulip bulbs. Some went into debt so they could speculate. This created a perfect scenario for a crash.
Step 9: The Crash and the Resulting Hangover Early in February 1637 one of the many auctions for tulip bulbs was held at an inn in Haarlem. The seller wanted 1250 guilders for his bulbs, but he received only 1000. This was a shock: For the first time ever, a seller failed to receive the asking price for his bulbs. Suddenly, everyone realized that the prices wouldn’t continue to climb. The news spread like wildfire. Everyone tried to unload their holdings as soon as possible, especially speculators who had borrowed money or purchased some kind of futures. Within a short period the prices dropped by 95 percent. This meant ruin for a great many people.
Step 10: The Government Steps In Taking disputes to court was prohibited. As a result, speculators had to settle things among themselves, and bodies of arbitration were set up when they were unsuccessful. Then a guideline was laid down, according to which a purchaser could withdraw from a contract by paying three to four percent of the purchase price. Many people never saw their money again.
And humankind forgot all about it, as the events in the fall of 2008 show.
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