“Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps, and old clothes-women, dabbled in tulips.” ~ Charles MacKay
In all of the plant species, there is one that outshines the rest. This is the story of one of the most beautiful and enchanting flowers that made men greedy. Semper Augustus, a breed of Tulip flowers, in 17th century Netherlands was worth approximately five crores and fifty-five lakhs in today’s money.
The story begins in the Netherlands at a time when its economy was flourishing, it was not only the richest country in Europe but also one of the only countries to be run by government councils.
Artisans and peasants would go to work in the morning and join speculative games in the evening. They would form their very own little trading groups and bet on commodities. They were prone to take more risks, as most of the bets occurred in pubs while they were drunk.
One such speculation was on the Tulip plant. Flowers at the time were a coveted decorative item in Dutch gardens, specifically this species of tulip, for which demand had drastically increased because of a virus attack that changed its appearance to make it look like a multicoloured gem with patterned stripes. The prices were tied closely to the colour and the species of the tulip. And as demand rose, peasants quit their daily job and entered the tulip business. The finer the colours were, the costlier the tulip was. It got to such a point that to encourage such beautiful patterns various tricks were applied, such as storing the tulip bulbs in red wine.
What disappointed the traders was the fact that Tulips don’t grow fast. It takes years before a tulip blooms for the first time. Tulip flowers bloom in spring and last for 2 weeks. However, the bulb of the plant can be dug up and traded as a physical good (once sown again it would flower). Because of this Tulip traders had their warehouses empty for most of the year. To increase profits a new kind of contract was made. They invented what we call today ‘Future Contracts’ or ‘Futures’. Essentially, traders wouldn’t actually buy the commodity but instead buy the right to purchase the commodity on a future date (when the flower blooms) at a fixed price, so now they could sell something they didn’t possess. This was the beginning of the Dutch Tulip bulb market Bubble.
Traders would now receive slips of paper when they bought futures, and then sell the right to purchase the commodity to another trader at a higher price, thus making a profit. They were not interested in the flower’s beauty but instead in the beauty of profit. The prices started to skyrocket as more and more traders entered the market, trading on fantasy figures resulting in prices of some varieties of tulips rising by 2000% in just a few weeks.
A bubble is formed when the price of the asset greatly exceeds its intrinsic value, thereby initially resulting in an increase in prices and then a collapse. That's exactly what happened, and as with every bubble, it also eventually burst. There came a point when prices were so high that no buyer was willing to buy. This caused havoc in the country and all the traders started selling their tulip bulbs at a loss. Which eventually led to the downfall of the tulip market and the dreams of thousands were shattered overnight.
George Santayana once wrote that those who cannot remember the past are condemned to repeat it, the same is true in markets. The Dutch Tulip market bubble also known as 'Tulipmania' was just the first, there were several after and several to come.
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