Would you sell your house in exchange for a few flower
bulbs? , No? If I had put this offer across 375 years back in Netherlands (Holland),
you probably would.
For those who don’t know, I’m referring to “Tulip mania”, one of the first economic
bubbles in recorded history. Tulips were originally introduced to “The Dutch” by the Flemish botanist ~ Carolus Clusius in the
late 16th century, It was unlike any other flower known to Europe at
the time, it soon rose in popularity and became a status symbol among the rich
and affluent.
It usually takes between 7-12 years for the seeds to grow into
flowering bulbs, so you can imagine the scarcity in production in contrast to
the prevailing demand.
Combined forces of their demand, rarity and time taken to grow
these beautiful and exotic flowers caused prices to rise dramatically over a
period between 1600’-1636’. This hike in prices was fueled by speculative
trade, traders and merchants entered into formal futures contracts to buy and
sell bulbs at the end of the season, what is more surprising is that neither
party paid any margin money or mark-to-market margins, only a paltry deposit- “Wine money” prior to entering into a contract.
Things got out of hand when at its peak a single tulip bulb sold
for more than 10 times the annual salary of a skilled craftsman, sometime
around 1635, 40 bulbs were exchanged for 100,000 florins which equates to 2500
florins for a single bulb, For that amount you could buy all of the following:
2 Lasts of wheat
|
448 f
|
4 Lasts of Rye
|
558 f
|
4 fat oxen
|
480 f
|
8 fat swine
|
240 f
|
12 fat sheep
|
120 f
|
2 hogshead of wine
|
70 f
|
4 tuns beer
|
32 f
|
2 tons butter
|
192 f
|
1000 lb. cheese
|
120 f
|
A Bed
|
100 f
|
A Suit of clothes
|
80 f
|
A Silver drinking cup
|
60 f
|
Total
|
2500 f
|
*Courtesy Wikipedia
By 1636, it wasn't just the traders and merchants involved in this
rampant speculation, the common masses joined in too, so much so that people
ignored their primary occupations and participated in Tulip trade. In the last
few months leading to the subsequent crash of this irrational euphoria, the
prices of tulip bulbs rose by close to 20 times.
Tulip trade reached its peak during the winter of 1636’-37 and had
attention of the entire nation. February 1637, tulip bulb contract prices
suddenly began to fall, and no deliveries were made to fulfill any of the
contracts, this lead to free-fall in the prices of these bulbs, the market for “Tulips” evaporated overnight, there
were simply no buyers for any contracts any more, only sellers. There was widespread
panic and merchants turned to the government for help. Tauntingly, the
Government announced that anybody could pay a 10 percent fee and void the contracts;
the courts of law wouldn't help either as they termed this activity as “Gambling” and declared that these
contracts weren't enforceable by law. This led to further fall in Tulip prices,
any attempts to reach an agreeable solution failed and they couldn't find any
brakes to halt or even slow down this continued fall in prices.
The mania finally ended and People were left with flowers, worth
a fortune just a few weeks back, now fetched a fraction of that amount.
The Dutch economy was in mild recession for a few years following this event.
The market values of various commodities was questioned, people were now fearful and
more cautious than ever.
Think about it, Prices of these bulbs which took years to appreciate
and rise in value were beaten down to almost nothing in just a few weeks.
At the crux of this incident lies a very basic human instinct and
emotion ~ Greed. It’s a drug which
you simply can’t afford to abuse.
* Primary source of facts and figures - Wikipedia.
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