by elmads

Introduction

Markets are gathering places for people to trade. People with different personalities and interests transact in one place, or in today’s world, it is the digital investment market via the web by using investment platforms.

Despite our individual differences, there is still one commonality among all market participants: they’re in it to make money.

Investing, a legal and decent way to grow our hard-earned money. Yet, we have to remember that markets, though legal, It still consist of people.

In a state of market balance, there is no such market that can make money for everyone; there will always be someone who will take home money and those who will lose it.

However, the markets rarely stay at equilibrium. It is usually pushed by its participants into an euphoric state, to the extent where prices are inflated to the point of madness. An exuberance that even one of the smartest men who lived in this world couldn’t even fathom.

The Tulip Mania

The tulip is a gorgeous and stunning flower that possesses brilliant colours and, with its striking shapes and stately height, thrives in climates with long, cool springs and dry summers.

Would you believe me if I were to tell you that this vibrant and alluring flower caused a financial mania and its eventual financial collapse for those who participated in it? Yes or no, it doesn’t matter because history itself supports what I’ve told you. The 17th-century tulip mania was the first documented financial bubble in history. 

NOTE: The above painting was made by Jan Brueghel in 1640 where he ridiculed the Tulip mania by depicting the speculators as foolish monkeys.

The Dutch

To understand how such market mania started, we first need to go back to the 16^th century in the Netherlands. It was a time of hardship for the Dutch people as a portion of their country became part of the Spanish Empire. It was the time of the Netherlands 80-year’s war to gain independence from Spain.

The Dutch were seafaring people who served as spice middlemen throughout Europe. They bought the spices from the Lisbon port and sold them to other European colonies at a profit, but then the Spanish absorbed Portugal in the late 16^th century and closed off the Dutch docking in Lisbon. This caused a major problem for the Dutch, as one of their revenue streams was cut off. They were forced into a corner and had no choice but to find and form spice routes for themselves.

The Dutch had an ingenious market invention that the world still uses to this day. You see, as seafaring people, going to the far east of the globe to get spices takes a lot of energy, time, manpower, and capital. Not to mention that voyages were very risky, as the majority of ships that set sail for the far reaches of the world didn’t come back.

To solve this problem, Dutch merchants funded ships and sailors to look for trade routes and spices in the far east. This funding method ushered in the first stock market and the beginning of capitalism in the Middle Ages. Yes, the first stock market exchange started in Amsterdam, Netherlands, with the Amsterdam Stock Exchange.

Unfortunately, competition between merchants occurred, and resources were decentralized. They realised that, unlike the Portuguese, Spanish, and English, who were all unified and were building their own trade routes, they were not.

The Most Valuable Company of All Time

In 1602, with the blessing of the Dutch government and its prime minister, Johan van Oldenbarnevelt, the various expedition companies were united into a single company that held supreme power. Verenigde Oostindische Compagnie (VOC), also known as the Dutch East India Company was born. It is the most renowned global company of its time and in history

The Dutch Golden Age is said to have occurred since the creation of VOC. The Dutch government granted VOC a trade monopoly. It’s not just that, they also gave the company the blessing to train its own army, declare war, negotiate with other countries and/or tribes, and occupy land. It possessed a deadly vertical integration business model where they owned everything that the company needed to run the business, from raw materials to production to output and other things.

In the case of VOC, they own ships, ports, and plantations, to name a few. They no longer need a middleman for how they move about their operations because they own everything within the business. Oh, and they had their own army to protect them from attacks by other colonies.

Due to VOC’s overseas trade, it substantially stimulated their country’s economy and caused massive growth in the Netherlands’ cities and ports.

While central Europe was plagued by the Thirty Years’ War, the Dutch economy had boomed and reached its golden age. And, just like with Italy’s Renaissance, art also blossomed. Do you know Johannes Vermeer and his popular painting of the “Girl with a Pearl Earring”? that was painted during the Dutch Golden Age.

Calvinism

In this tulip mania, we must understand why such a beautiful flower caused financial exuberance when it could just as easily was caused by property, gold, or other things that possess value.

Unlike the Netherlands’ neighbouring countries at that time (the rest of Europe), it was enjoying a more comfortable life and a higher standard of living.

Merchants became wealthier, and the rest of the Dutch population had a good life. Yet, despite their wealth, they were not allowed to display it extravagantly. Why? well, because of Calvinism

Calvinism was a religious belief that was popular and practised in 17^th-century Netherlands. This religious belief was started by John Calvin (he is the person in photograph above).

“It is a major branch of Protestantism that follows the theological tradition and forms of Christian practise set down by John Calvin and other Reformation-era theologians. It emphasises the sovereignty of God and the authority of the Bible. Calvinists broke from the Roman Catholic Church in the 16th century.” – Wikipedia

To understand their core beliefs, one must first understand the five principles, which are summarised in the acronym “TULIP” – ironic, haha! an acronym for “Total depravity, Unconditional election, Limited atonement, Irresistibility of grace, and Perseverance of the saints.”

Displaying your wealth through material things is blasphemous under Calvinism and directly against the “Total Depravity” principle.

Perhaps you’re wondering, “What could the Dutch do with their wealth back then?” That’s a good question. They still displayed their wealth, but in a way that glorified God, and that was through gardening. Thus, the Dutch love and obsession for gardens.

Can you see now where this is going? This clearly sheds light on why a flower caused a bubble rather than real estate or gold.

The Tulips and its Migration to Europe

Tulips are an exceptionally pretty flower that symbolises unconditional love. Today, this beautiful flower is commonly used as a gift to express one’s affection and appreciation for a special loved one, but where did it come from?

The answer lies in central Asia, in the rocky mountains of Kazakhstan. This is where tulips are naturally born.

In the 16^th century, the Ottomans (historically and commonly known as the Turkish Empire) discovered the tulip flowers in the rocky mountains of Kazakhstan. The tulips awed the Ottomans. Thus, they brought some of it to their grand ottoman capital (modern-day Istanbul, Turkey). Sultan Suleiman, the Ottoman Empire’s then-leader, was the first to cultivate tulips in Turkey.

Back then, the tulip was seen as holy, a symbol of power and wealth. The word “tulip” was even derived from the turban worn by the Ottomans before, as the tulip bulb resembles the shape of their turbans.

Sultan Suleiman gifted some tulips to his esteemed and important guests, like the Viennese ambassador of the Ottoman Empire. From that simple gift, the tulips spread across Europe, such as Austria and the Czech Republic, and ultimately to the Netherlands.

Eventually, the popularity of this rare and exquisite flower exploded.

The Trading of the Tulip Bulbs

Today, we have regulated markets for buying and selling assets such as stocks, bonds, real estate, and commodities. But back then, there were no regulations in place yet. People can trade with themselves in any place they want.

Tulip bulb trading took place in small groups (forming unregulated small trading groups like small stock exchanges) in a variety of locations, typically in taverns. Can you imagine someone drinking, smoking, and then gambling on tulip bulbs while under the influence of alcohol? It’s just like the modern-day casinos.

Notice: It was the tulip bulbs that were traded, not the tulip flowers.

Speculative trading and investing are not new; they’re as old as humanity itself. Our desire to make money is natural, but it appears that the negative aspect of it has always been present. What exactly do I mean by this? SPECULATION, whether the past or the present, it always has been a part of people’s financial lives. The desire to make high returns and easy money without even making an effort to understand what they are investing or trading in. Plus, FOMO (Fear Of Missing Out), “everyone is making money except for me, so I might as well join the game.”

The majority is riding the hype train, playing the game of predicting an asset’s future price, but rarely understanding the asset itself. This is exactly what happened during the Tulip Mania as well. The Dutch wanted to make money, more money, easy money, money, money, money. As long as the price of the tulip bulbs went up, everything was fine, until it didn’t.

The trading of tulip bulbs happen in this way. Every group has a chairman who organises the trade.

1. All bulbs in the trading group were weighed.
2. The seller wrote on a board how much he would want to sell the tulip bulb. Then he’ll give the price to the chairman of the trading group.
3. The would-be buyers wrote down how much they would want to purchase the tulip bulb.
4. The chairman would fix the price of the tulip bulb based on the average of the seller’s expectations and the would-be buyers’ highest offer.

For example:

• A specific tulip bulb would be sold for 10 Dutch Guilders as asked by the seller.
• The highest bid for that specific tulip bulb was 7 Dutch Guilders.
• The chairman’s fixed price would be 8.5 Dutch Guilders (The average price of 10 and 7 Dutch guilders).

NOTE: Dutch guilders were the currency used in the 17^th-century Netherlands.

Tulip bulb prices rose in tandem with their popularity. This presented an opportunity for the Dutch to ride the wave of tulip prices. The tulip bubble was said to have primarily started in 1634.

Increasing demand + increasing prices + a lot people making money = increasing market speculation.

It’s easy to get pulled into a mania when everyone jumps on the hype train. Plus, it is addictive when your initial investment appreciates in value despite not knowing the fundamental reasons why. It sounds familiar, doesn’t it? because it’s certainly still happening today.

Remember that the 16th and 17th centuries in the Netherlands were a Calvinist religious era. Flaunting wealth was religiously prohibited, so the rich individuals of that time were only able to spend money on things that glorified God, and gardening was one of the popular ways to do it. Then came this new, vibrant and beautiful tulip flower in the Netherlands.

It was indeed a perfect storm brewing for the price of tulips during that time. The flower collectors, the rich, the middle class, and generally everyone who has money to trade for tulips were able to join the tulip market, or shall I say mania.

The Tulip Breed is where the Money is

Different Tulip colours were not well known at the time, and people were unaware that this flower came in a variety of colours. When these different-coloured tulips arrived in the Netherlands, the tulip bulbs that stemmed from the extraordinary, finer and more vivid parent tulips were bought and sold at a higher price.

The more unique, scarce, and vibrant the colour of the flower is, the more expensive the daughter tulip bulb would have cost in the market at that time.

The most expensive tulip bulb sold during this market bubble was from the line of the Semper Augustus tulip.

“In 1633, one Semper Augustus was said to have sold for 5,500 guilders, and in 1637, just before the crash, a price of 10,000 guilders was asked—an exorbitant amount that would have purchased a grand house on the most fashionable canal in Amsterdam, or clothed and fed an entire Dutch family for half a lifetime.” – Keukenhof Facebook page.

To put the 10,000 Dutch guilders into perspective, let’s convert it to today’s USD amount, shall we? As per Amsterdam’s International Institute of Social History (see link below for their currency calculator website), in 1637, one Dutch guilder was worth approximately $13.6. This means that the highest price ever paid for a tulip bulb during the mania was around $136,370.46.

https://iisg.amsterdam/en/research/projects/hpw/calculate.php

The Semper Augustus tulip no longer exists. Today, It is debated if Semper Augustus was even a real tulip breed, or was it just probably a unique colour that was caused by the natural virus that tulip flowers possess.

Back then, what drove the market price of tulips other than their perceived and speculatory never-ending increase in its price, was its breed. They even had a catalogue of breeds for each type of tulip flower.

Due diligence and prudence in investing on this flowers was not practiced by its market participants back then. And, little was known about the biology of the tulips and its reproduction, which is the first and foremost fundamental aspect of any living thing.

Trust

In the trading point of view, people traded tulip bulbs, not the tulip flower. It’s the same as with coffee beans; people trade the beans, not the coffee tree.

There was one fundamental problem with trading tulip bulbs: there was no specific way to know if a specific bulb will have the desired breed based on what the seller said it would be.

Let me give you an example. Let’s say I will sell a tulip bulb to you for a specific amount equal to the current trading price of the Semper Augustus tulip flower.

How would you know that the tulip bulb I am selling to you is actually from the Semper Augustus breed? when all bulbs are alike and don’t have any distinct indication of what tulip breed they came from. Recall that the price of a tulip depends on its breed and the colour of the flower it would blossom into.

There was no way to know if a certain bulb being traded was actually the correct tulip breed that the seller said it came from. As a result, the element of trust was heavily present in these transactions back then.

To gain the confidence of the buyers, the rich breeders and sellers of these tulip bulbs took it one step further by cataloguing the tulip breeds that they have and cultivated themselves.

Photography wasn’t even used during this time, so these breeders and sellers employed great painters to illustrate the flowers in their inventory via watercolour. This was where the Tulip Books were created. It was also a means of marketing and advertising the tulip bulbs that a specific tulip seller and cultivator have.

If you’re curious to know what tulip flowers were included in a tulip catalogue book during that time, You could see it by going to this website. http://oldtulips.org/index.php?section=broken&content=early_tulip_catalogs. It shows the lists of tulips that were written on “The Great Tulip Book, c. 1640.” See a sample of the watercolour tulip flowers below.

The Futures Market and the Escalation of the Bubble

The futures market is like an auction market where market participants buy and sell commodities and contracts for delivery on a specified future date. This is commonly used with commodities.

These contracts where also used during the tulip mania. For us to understand how these contracts work, we first need to understand the simple life cycle of a tulip bulb.

• Tulip bulbs are typically planted in autumn, when soil temperatures are around 10 degrees Celsius.
• After a few weeks, the sprouting of its roots occurs, followed by stems and leaves. (Winter season)
• Flowering of the tulip happens 8 weeks or more after planting the tulip bulb. (Spring season)
• A fully bloomed tulip flower typically lasts for 2–4 weeks, then it withers afterwards. (Spring to early summer)
• Once the leaves have fallen back and the tulip bulbs have formed after the plant has finished blooming, It can now be harvested afterwards. (usually in the summer)

This tulip bulb cycle varies depending on the weather and soil where it is planted, but it usually takes around 16 weeks or more (between 4 and 6 months) from planting to flowering and harvesting the new tulip bulb.

During the time of planting, there are no tulip bulbs to be traded on the market, as all bulbs are planted in the soil.

The winter months were quiet for the Dutch tulip bulb market, but this did not last for long. Even though there are no physical bulbs to buy and sell, the Dutch acted ingeniously and invented a new way to make money.

Enter The Futures Market

Basically, what they did was, they made a contract between a seller of the tulip bulb that would be harvested in the next harvest season and a willing buyer of that future harvest today. Let me illustrate this.

As shown in the images above, what the buyer would be purchasing is the contract, the piece of paper that states the terms of the deal. The terms of the contract will apply once the event happens. In the example above, the buyer can claim the Fosterania tulip bulb once it has been harvested; he just needs to show the contract to the owner of the tulip garden. Then the tulip garden owner would need to give the contract owner the tulip bulb as promised and as stated in the contract.

PROs:

• You’ll be able to gain more money if the price you paid for the futures contract on an asset is higher than the actual amount of the commodity when the time comes for you to get the actual asset.
  
  Let’s use my example scenario above. The buyer bought the Fosterania tulip bulb futures contract at 11 guilders, and let’s just say the next harvest arrived. He had already exchanged the contract for the actual Fosterania tulip bulb, and the price of the Fosterania tulip bulb at that time was 15 guilders. That means he gained 4 guilders more from his original purchase contract price of 11 guilders a few weeks ago.
• The contract can be traded (bought and sold) to third parties.

CONs:

• If the market price of the asset you have today is less than the futures contract you bought it for. Using our example above, let’s say at the time of the harvest the Fosterania tulip bulb is now worth 10 guilders, but the futures contract you bought it for was worth 11 guilders.
  
  In this scenario, the buyer would have lost a guilder if he sells the tulip bulb in the market during that time. If he wants to gain money from it then he needs to wait for its price to appreciate before selling it – only if the price would still appreciate.
• If a natural disaster occurs and destroys the planted tulip bulbs, or if someone steals the tulip flowers in the seller’s garden. This would invalidate the contract as the seller would not be able to produce the promised tulip bulb anymore. The seller would need to return the money paid to him in advance by the buyer. The problem occurs when the seller doesn’t have the money to give back the amount paid to him by the buyers for the futures contract. 
• Things can get out of hand when the futures contract itself deviates from the underlying number of assets it can actually produce, in this case the tulip bulbs. This is where the tulip bulb market speculation exploded to higher levels. The bubble inflated rapidly, and people just poured money in, not because of the tulips anymore but because of the piece of paper that promised the tulip bulbs in the future.
  
  People kept on buying it because they thought that the price would forever go up and did not consider the risk that the tulip bulbs might not even be produced in the next harvest due to unexpected events. There are some who even went into debt just to be able to buy the tulip bulb futures contract, and others even traded their precious belongings for that piece of paper.

It got so out of hand that from 1636 to 1637, the price soared four times. But bubbles don’t last forever, as there is nothing supporting that growing speculation at its core.

Like any bubble, it popped. In February 1637, when the next harvest came no one bought the actual tulip bulbs at a higher price anymore. There was no more gas to add to the fire, and eventually the speculative fire was put out.

The price of tulip bulbs crashed rapidly. Tulips, the beautiful flower that symbolises not only love but also wealth and fortune, were no longer a luxury in the months leading up to May 1637. Reality has set in, and the speculation has died down.

Despite the fact that this human-borne greed and mania was the first example of a historical market financial exuberance, there were no written records of individuals or businesses declaring bankruptcy.

Nevertheless, there were people who lost favour and relationships with others, particularly those who went into debt to speculate on tulip bulb prices. There were individuals who were only able to repay 10%–20% of their total outstanding debt, while others weren’t able to pay back anything at all.

The Tulips Industry Today

Today, tulip flowers are one of the most bought and sold flowers worldwide. And guess what? The Netherlands is still the country that plants, cultivates, and sells these flowers across the globe. They are the major exporter of tulip flowers worldwide.

“Dutch Flower Export” Holland is the country of the world’s beautiful flowers. As many of you may know, Holland is world famous for its wide fields of tulips with wonderful colours. Around 2 billion of these tulips are exported to many countries worldwide; with this number, the tulip is the most exported flower in the Netherlands. But there is more, because Holland is not just a flower export country; it is the most famous flower export country in the world, with the largest export amounts. ” – taken from the Flowercompanies website.

In fiscal year 2021, the Netherlands exported $5.77 billion worth of flowers worldwide.

It’s not the market that gets greedy or fearful; it’s the people who participate in it. When individuals are blinded by money, they often disregard or do not even try to understand the underlying value of an asset. It is by then that the inevitable bubble happens, which is usually followed by an eventual disaster and turmoil.

Most of the time, the industry where the mania started survives, but the people and organization who participated in it don’t. The tulip industry is a clear testament to this.

Extra Content Regarding The Dutch East India Company

Why is it considered the most valuable company of all time? see visualcapitalist’s infographics below.

NOTE: This was made in 2017, therefore the market capitalization of the modern companies are now different. Nonetheless, VOC or Dutch East India Company is still a behemoth compared to the top companies of today based on their respective market capitalization.

Let’s Sum It Up

• The Dutch
  • The Spanish empires possessed a portion of the Netherlands in the mid-16th century, as the crown was passed to King Philipp II of Spain .
  • The Eighty Year’s War happened.
  • The Dutch were seafarers. They became the spice middlemen of Europe.
  • They encountered a substantial problem with trading spices. This forced them to make their own spice trade route.
• The Most Valuable Company of All Time
  • The first stock market was born.
  • The government supported the wealthy merchants. They consolidated all the small maritime companies into one.
  • The birth of the Verenigde Oostindische Compagnie (VOC), also known as the Dutch East India Company.
• Calvinism
  • Displaying your wealth through material things is blasphemous under Calvinism and directly against the “Total Depravity” principle.
  • Perhaps you’re wondering, “What could the Dutch do with their wealth back then?” That’s a good question. They still displayed their wealth, but in a way that glorified God, and that was through gardening. Thus, the Dutch love and obsession with gardens.
• The Tulips and its Migration to Europe
  • Tulips originate in Kazakhstan.
  • In the 16^th century, the Ottoman Empire discovered the tulip flowers in the rocky mountains of Kazakhstan.
  • The Ottomans were awed by the tulip flowers. They took it home and cultivated it. The Ottoman sultan of that time gifted it to his esteemed guests, and subsequently, the flower was spread across Europe.
• The Trading of the Tulip Bulb
  • The popularity of the flower exploded, the demand increased, and so did its price.
  • The Dutch people traded the tulip bulb on a daily basis in taverns.
  • There were no robust regulations yet for trading groups, investor protection, or fraud.
• The Tulip Breed is where the Money is.
  • The more unique the colour of the tulip flower is, the more expensive its tulip bulbs would be.
  • The tulip bulb from a Semper Augustus tulip flower was the most expensive tulip bulb sold at the height of the mania. The highest price it was sold would have purchased a grand house on the most fashionable canal in Amsterdam, or clothed and fed an entire Dutch family for half a lifetime.
• Trust
  • There was one fundamental problem with trading tulip bulbs: there was no specific way to know if a specific bulb would have the desired breed based on what the seller said it would be. Buyers would have to trust what the sellers said.
  • Sellers and owners of a garden who planted tulip bulbs employed painters to make a tulip book for them. This book shows the seller’s inventory of the their tulip flowers via watercolour. It is a marketing strategy to gain the trust of their would-be buyers.
• The Futures Market and the Escalation of the Bubble
  • I’ll buy the future tulip bulb for the next harvest of the soon-to-be tulip flower you just planted this season. Let’s make a contract about it. Once the time comes that the tulip bulb is available, I’ll show you our “futures contract” that signifies your promise to give me the would be tulip bulb next harvest.
  • People eventually traded more on the tulip “futures contract” than the actual and physical tulip bulbs. This further inflated the bubble, which eventually popped. No one wanted to buy the tulip bulbs anymore at a higher price. This caused panic, and everyone started to sell all of their tulip bulbs at lower prices.
  • No one wanted to buy the tulip bulbs anymore, and eventually the tulip flower lost its favour.
  • People lost a substantial part of their wealth, but there were no records of anyone or businesses who underwent bankruptcy. Yet, there were a lot of relationships destroyed, especially for the ones who went into debt just to speculate with tulip prices.
• The Tulips Industry today
  • The tulip industry is a very profitable industry today, and the Netherlands holds 53% of the global flower export market as of fiscal year 2021.

I thought people would have learned a lot from the first market speculation in history and would help prevent another one from occurring, but apparently we don’t and never will.

In my next blog, I’ll take you exactly 83 years after the Tulip Bubble popped, in the southwest neighbouring country of the Netherlands. In the early 18th-century French colonial empire, where a person who was convicted of manslaughter, a gambler, and an economist started a great financial market crisis that even caused the bankruptcy of the first central bank of France and, in turn, the whole nation.

“History gives us the opportunity to learn from others’ past mistakes. It helps us understand the many reasons why people may behave the way they do. As a result, it helps us become more impartial as decision-makers.”

-UoPeople

https://www.uopeople.edu/blog/why-is-history-important/#:~:text=History%20gives%20us%20the%20opportunity,more%20impartial%20as%20decision%2Dmakers.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.