Contrary to what it may see from the titlem, I am not going to deal with botany here, nor with some biological pathology similar to hay fever. It's about economic history. Do you think the episode I recount below holds any lessons to today's cypto mania? Please leave your comment: I'm keen to hear your thoughts!
Speculations are not unique to modernity; they occur since biblical times: as reported in the Old Testament, the Pharaoh, in possession of the privileged information that seven years of plenty would come, followed by another seven of scarcity, speculated. Even if somewhat biased, this view of researchers (1) of the great speculations of history is still correct. There are cases like this, in which a single person manages, through speculation, to affect an entire society. And there are cases in which the entire society plunges headlong into the speculative wave. The object of speculation does not necessarily have to have intrinsic utility. All that is required is to attribute a high imaginary value and for everyone to believe that this is real for the speculative movement to be ignited. And one of the most fantastically bizarre cases of speculation in history had an innocent asset behind it: flowers. More precisely, in Holland in the 1630s, what came to be called Tulip Fever (or Mania) occurred.
Tulips arrive in the West - The introduction of tulips in the West is a controversial topic. Contrary to what many people think, this angiosperm plant is not native to the Netherlands. Its "discovery" in 1554 is attributed by many to an ambassador and naturalist named Busbeck; other sources claim that the plant was introduced to Europe by the botanist Conrad von Gesner, in 1560. However, it is known that “tulip” comes from Turkish: tulipan, in Turkish, means “turban”. Busbeck, who served in the Turkish-Ottoman Empire, would have named it so, given its resemblance to this arab accessory. Today, tulips are the national flowers of Turkey and Iran, although some references cite China as their country of origin. The fact is that tulips very early became a passion in Holland, which was already, in the 17th century, one of the richest societies in Europe.
In 1602, the East India Company was created and, in 1621, the West India Company. The first European “central bank” had been founded in 1609 and, when the speculative movement started (around 1634), a stock exchange had already existed in Amsterdam for over 150 years. In other words, at the time, the quirks and trickery of financial speculation were already dominated by skilled Dutch citizens.
The trigger - It is not known for sure which fact triggered the speculative mania. In the beginning, only naturalists were interested in the exquisite flower. Over time, the bourgeoisie began to decorate the flowerbeds of their large houses with tulips. As early as 1573, the gardens of the Fugger dynasty of bankers, in Augsburg, displayed beautiful examples of the plant. With the growing attraction that tulips aroused, someone soon realized that they could profit from the plant's bulbs. Tulips are relatively easy to grow flowers (in temperate climates). Furthermore, at the time, there was no knowledge of the factor that caused transformations in their varieties (actually, a virus that infects bulbs, which was only discovered in the 20th century). This was the perfect recipe: tulips and their bulbs could be a great asset for speculation!
A speculator who wanted to cultivate a patch of tulips could, at low cost, obtain one of its most valuable varieties: Admiral Eyck, Admiral Liefken or, the rarest, Semper Augustus. This variety, in 1624 (that is, before the Tulip Fever that swept the country), due to the appreciation of wealthy collectors, was worth the equivalent of a small house in Amsterdam.
Soon all kinds of workers were attracted by the siren song. It was possible, without much effort, to make extraordinary profits, greater than a year's salary, simply by buying and selling bulbs from a plant. It seemed that poverty, in Holland, would become a legend! Foreigners were attracted and the business spread from north to south. At the height of the mania, with the price of a tulip (2,500 guilders) it was possible to buy – amazing! – two loads (about 25 tons) of wheat, four loads of rice, four fat oxen, four pigs, twelve sheep, two barrels of wine, another two of beer, two barrels of butter, a ton of cheese, a bed with sheets, a full wardrobe and a silver cup. In 1637, 120 tulips were donated to the community orphanage in the city of Alkmaar, with the aim of promoting a charity auction. The number of people who wanted to participate in the auction was so large that it was held in front of the orphanage, and not in the room that had been reserved for the event. Everyone wanted to guarantee their bulb, which was passed on to someone else at a huge profit immediately. As not everyone was able to buy one, the mob started pushing and shoving and only with the arrival of the police did the crowd disperse. The orphanage raised 90,000 guilders – or 750 guilders per tulip. And the orphans thanked heaven for the moment of giving, as a few weeks later the speculative bubble burst.
The beginning of the end - This speculative craze ended as suddenly as it began. All that was needed was for the inflated bulbs to run aground in the sellers' stocks for the process to begin. On February 3, 1637, in Haarlem, the great commercial center for flowers, it was rumored that the demand for tulips had been destroyed. It turns out that not only was there speculation on spot price of bulbs: derivative contracts – guarantees of future deliveries – had been negotiated. And it was not just with money that transactions were paid for: promises of payment, debt securities, were issued. Panic set in. Tulips were no longer sold at any price.
Unlike what happened in other countries plagued by speculative movements, the collapse of this financial bubble did not economically ruin the Dutch Republic. The big merchants, who supported the Dutch economy, kept themselves aloof from the tulip market; they invested not in imaginary assets, but in real estate or in shares of the India Companies, for example. The most affected were the unwary poor, who, attracted by the singing of the tulips, entered the speculative circle. In 1638, the Dutch government mandated that tulip contracts be honored at 3.5% of their face value – a merely symbolic price. Gradually, the Dutch Republic returned to normalcy. It was then realized that Tulip Fever had hurt the Calvinist ethic, which governed society's mores. As my friend Piedras quoted in his article on the topic (3):
What need have the merchants to proceed with the method or risk their goods overseas, the children to learn a trade, the peasants to sow and work the soil so hard, the navigator to sail terrible and dangerous seas, the soldier to risk his life for so little gain, if it is possible to make profits in this way?
Wärmondt (the Sincere), in the pamphlet of Diallogues (4)
Sources:
(1) MARTIN, Peter N.; HOLLNAGEL, Bruno. Die grossen Spekulationen der Welktgeschichte, vom Altertum bis zur New Economy (As grandes especulações da História Mundial, da antiguidade à nova economia). München: Herbig, 2002.
(2) THOMPSON, Earl (2007), "The tulipmania: Fact or artifact?", Public Choice 130(1–2): 99–114
(3) PIEDRAS, Ricardo Lopes. Semper Augustus, a “blue chip” da vez. In: Oikos, n°. 1, pp. 173-184. Rio de Janeiro: Oikos, 2002.
(4) POSTHUMOS, N. W. The Tulip mania in Holland in the years 1636 and 1637. In: Journal of Economic and Business History, v. 1, n°. 3, pp. 434-466. Cambridge: Harvard University Press, 1929.
