Selling flowers to the greater fool
Speculative bubbles in the economy can occur in any asset. They involve a rapid increase in the price of a particular asset fueled by outlandish demand that drives the price higher and higher. The asset attracts so much attention that they become valued not for their inherent features but their ability to be readily exchanged. In this case they are bought and sold on at higher and higher prices in pure speculation; that you will be able to find someone else to buy and secure a profit. This demand fueled surge can only last until no ‘greater fool’ can be found to buy the asset at a higher price than bought for. All that is needed for this phenomenon to arise is credit to be invested and a satisfactory feeling of ‘economic euphoria’ towards one or several assets to pool credit into. Nowhere is this more evident that in the case of Tulipmania a speculative event occurring in Amsterdam during 1634 to 1637. To understand the nature of this particular speculative bubble it is first necessary to delve a little deeper into the asset that the euphoric bubble grew out of: the tulip.
The tulip plant’s characteristics, as with any asset that is the root of a bubble, directly influenced the characteristics of the bubble. For instance the tulip plant is a perennial plant meaning that it can be reproduced every six to eight months. Tulips can be reproduced many different ways including producing seeds that are used normally, in cross pollination or they also can also be reproduced asexually in a cobweb like formation. In this kind of reproduction bulbs grow bulblets on themselves which will also spring into fully fledged tulips either shooting out of the bulb itself or, if cut off, can be grown separately. The tulip bulbs are normally planted in September and flower in April/ May.
The tulip also has one more distinguishing feature, it has the ability to flower with distinct patterns apart from the normal Gouda, Switzer and White Crown varieties producing mutant tulips, victims of natures psychedelic street art.
The virus that burdens the tulip with its distinct pattern also disallows it to share it through normal reproduction. To emulate the pattern the plant must be made to reproduce asexually, making it sprout small tumor like bulblets that will succumb to the virus. Now back to Amsterdam 1634.
In this year the demand rose for these peculiar painted plants driving the price steadily up. This drove entrepreneurs into the tulip market to capitalise on the higher profits to be had.
The higher demand and prices for the ‘rarer’ tulips spread to the common tulips in 1636. This increased the euphoria associated with tulip profit causing people to seek alternative ways to increase their holdings of the plant. Some bought on credit at interest, some developed a futures market around tulip production, speculating and setting future contract terms in taverns nicknamed ‘colleges’. Selling plants in colleges has been a practice around far longer than some assume. These buyers bought the right to ‘merchandise’ still locked in the ground in the last two months of 1636 and January 1637 at prices they predicted would gain them future profit in the April/ May flowering.
Some of the down payments made to secure contracts on the hidden ‘growing gold’ have been sought out by the notable historian Simon Schama and include: land, houses, gold, silver, paintings, a suit, eight pigs, a dozen sheep, four cows, four tons of butter, a bed and a silver beaker. This points to the desperation of the buyers to secure the merchandise as prices were predicted keep rising. Most where already caught in the bubble of demand as outsiders; predicting a forever increasing price or insiders; hedging to find a ‘greater fool’ and exit the market before the price adjustment.
The Tulipmania bubble as with any speculative bubble cannot be saw as an isolated event apart from the economy as a whole. It is when the context of the wider economy is took into consideration that the ‘why’ of something as superfluous as the Tulip becoming the root of desperate speculation becomes evident.
The Mercantile nature of the 17th century meant that accumulation of land and metal through pillage were the economic norm. Recovering from a depression in the 1620’s Amsterdam started to feel the euphoria of recovery in the 1630’s and started to speculate chaotically investing towards the future gains to be had. The Dutch regularly took to pillaging Portuguese and Spanish ships filled with spoils of war from Asia, especially India as well as having one of the most respected banks of the century, the Bank of Amsterdam. This lead to huge expansions in the gold and silver in circulation throughout Amsterdam at the time the capital for trade in the Netherlands. This increase in the supply of gold and silver as the coinage of the time drove down their relative values and therefore increased overall prices. The highest decade of importation of gold and silver during the 17th century being in the 1630’s where overall prices in the market began to rise. The rapid recovery and intake of gold and silver monies made credit access easier and began a market euphoria. The shares in the Dutch East India Trading Company doubled in price in the thirties, housing construction doubled mid-century, investment in canals and drainage schemes dramatically increased while construction was undertook to make trade routes in and around Amsterdam easier and of course the rapid investment in Tulips.
‘Under the stimulus of “free” coinage, an immense quantity of the precious metals now found their way to Holland, and a rise of prices ensued, which found one form of expression in the curious mania of buying tulips at prices often exceeding that of the ground on which they were grown.’ (Del Mar, History of Monetary Systems, P. 354)
What is noteworthy here is that the money supply was not increased through a fractional reserve system or the straight printing of notes that have no backing in assets. The money supply increased drastically through government mercantile policies of war and pillaging and trade through the Bank of Amsterdam. It wasn’t long until the Bank of Amsterdam gave up the guarantee of 100% backed notes, using their authority to increase leverage and give out overdrafts and loans not backed by any wealth, increasing an already saturated monetary system.
Eventually as with all speculative bubbles the price adjustment came, in this case in 1637, when no ‘greater fool’ could be found to buy at higher rates. At this point the pendulum swung back and those that had contracts for tulips and trying to sell found no demand for their price and had to sell at or below cost. This drove prices down rapidly as speculators tried to reduce their losses and sell before the price dropped any further. Those that had taken out loans speculating future incomes from sale of tulips now defaulted and loans dried up. With this investment slowed and economic growth declined. Such is the lesson of speculation where short-term gains are sought through debt and inflationary means instead of slow value invested growth.