Neal Auch— Tulip Mania

Although it was still a relatively new country, by the early 1600s the Netherlands was already entering into “golden age” of economic prosperity driven, in large part, by the consolidation of various trading companies into a massive multinational corporation. The United East India Company—Vereenigde Oost Indische (VOC) in Dutch—was granted an alarming amount of power by the government. Not only did the VOC enjoy a monopoly on trading, but it also had the ability to train its own army, to negotiate or declare war, to occupy land, and to enforce slavery. In order to finance its colonial ambitions, the VOC built a trading house in the centre of Amsterdam where every Dutch citizen could purchase shares of the company, thereby providing the VOC with much-needed capital in exchange for a shares of its profits in the future. This idea sounds perfectly obvious nowadays, but it’s worth emphasizing how revolutionary it was at the time: this was the world’s first publicly traded company. Moreover, the VOC had essentially created the world’s first stock market—a concept that would become the cornerstone of modern capitalism.

Relatively quickly, the VOC managed to establish a monopoly on the shipping and trade of various spices and commodities, bringing considerable prosperity to Dutch shareholders and resulting in the creation of a new middle class. This was an era of great prosperity for the Dutch but these gains were achieved through brutality, violence, and subjugation. Like any massive corporation, the VOC was driven by the singular goal of maximizing profits and it was responsible for a number of crimes against humanity including (but not limited to) ethnic cleansing in Indonesia’s Banda Islands.

It is in the context of this newfound embarrassment of riches that the first financial bubble in human history would burst.

Not long after their introduction to the Netherlands, tulips became a highly valued luxury item. In an effort to assert their status, newly wealthy tulip enthusiasts were willing to pay a considerable amount for the newest and most brilliantly coloured varieties. In particular, so-called “broken” tulips were prized above all others for their distinctive flame-like colour patterns. It was not understood at the time, but this ostentatious display of beauty is caused by a virus that, generation by generation, destroys the plant. This made tulips a risky investment: until the flower actually bloomed (which can take years) a grower could never be 100% sure if they had a regular tulip or an ultra-valuable broken tulip.

By the 1620s a beautiful new tulip had emerged: the Semper Augustus. This highly-prized flower was owned by one man who understood that if he sold it his competitors might grow their own Semper Augustus, undercutting his profits. To ensure a monopoly, he sold these tulips with a special contract prohibiting the customer from reselling either the flower or its offspring without his express permission. This clever marketing move paid off, and the price of the Semper Augustus skyrocketed. By the end of 1625, a single Semper Augustus bulb was worth 3,000 guilders—the equivalent of about 10 years salary for a skilled labourer like a carpenter. (That’s about 400,000 USD in today’s currency.) It’s worth noting the role that artificial scarcity plays here: although the Semper Augustus was indeed rare, that rarity had as much to do with clauses in the sales contract as it did with botany or genetics.

Although it’s difficult to verify, fraud and theft seem to have been rampant in the tulip trade. After all: these incredibly valuable flowers were just sitting in someone’s garden. On one occasion Carolus Clusius—the first director of Leiden University's Hortus Botanicus—had some unique flowers stolen, only to find them in the garden of a Viennese aristocrat who denied all knowledge of their origins. Moreover, lawsuits from the time seem to indicate that a considerable number of early Semper Augustus buyers violated the terms of their contract and re-sold their own “knock-off” bulbs for considerable profits.

By the early 1630s, the tulip market changed in an interesting way: speculators began trading not in actual tulips, but in futures contracts. Tulips, after all, are seasonal and grow very slowly, so it was difficult for people to buy/sell as often as they would like to. To solve this “problem,” actual tulip bulbs were increasingly replaced by documents declaring that the owner of the receipt was entitled to a bulb with some particular specifications. This innovation was crucial to keep the momentum going; now these abstract contracts could be purchased and resold for profit many times over without any need for the hassle of an actual tulip ever changing hands.

As profits soared, more and more investors were attracted to the market. For the most part, these later investors were not particularly savvy, nor were they interested in tulips at all. Instead, they viewed tulips and tulip futures contracts as nothing more than a speculative asset. They were not buying in because they were hoping to actually decorate their home with a beautiful flower; they were only interested in reselling their tulip for profit to some hypothetical future buyer. By this point, the market was fundamentally not about flowers at all. The tulips and all their attendant beauty were irrelevant. They were nothing more than gambling tokens.

As the feedback loop reinforced itself, prices grew faster and faster. In 1636, in the span of just a few months, bulbs and futures contracts changed hands a dizzying number of times and prices increased as much as tenfold. By this point, a single bulb might purchase an entire villa. This was the height of tulip mania.

*Still Life with Tulip in Glass Vase*, by Balthasar van der Ast

It’s worth noting that not everyone in the Netherlands was caught up in this mania and the market had its fair share of detractors. Already in 1614 the moralist writer Visscher published a popular book of emblems including a picture of tulips accompanied by the words “a fool and his money are soon parted.” The philosopher Justus Lipsius described the Dutch fixation on tulips as “merry madness.” Critique of the vain pursuit of profits and status inherent to the tulip trade also manifested in still life paintings from the time. Balthasar van der Ast painted his “still life with tulip in glass vase” in 1625. It is hard not to read a moralizing lesson in the juxtaposition of the butterfly and housefly—the former being associated with the resurrection of Christ and the latter with evil, death, and decay.

The end of the bubble came, as they always do, swiftly and unexpectedly. In the Dutch city of Haarlem, in a small inn where trades were carried out, consumer confidence began to crack with bulbs and futures contracts selling for less and less throughout the evening. By the end of the night prices had dropped by as much as 95%, prompting sellers to try to liquidate their tulip stores before the price could fall any lower. This, in turn, flooded the market with new tulips, further driving down prices. What happened in Haarlem spread to other cities and the market collapsed. Within 4 days, the bubble had finally burst all across the Dutch republic.

While the overall Dutch economy was mostly unaffected by the collapse, the fallout for tulip investors was painful and, because much of what was being traded was merely the promise of a tulip, there was a great deal of confusion about who owed what to whom. A small handful of people (mostly very early adopters) came away from the debacle with a great deal of wealth; however, the majority of speculators were left holding nothing more than a worthless slip of paper.

Of course, very little was learned from the ordeal; by 1733 Dutch hype surrounding hyacinth flowers had driven the price of a single bulb up to 1,600 guilders (comparable to 200,000 USD today). And we would see this same dynamic play out over and over and over again in the modern world, from the 90s Dotcom bubble to the 2008 US housing bubble.

Regardless of the era or the commodity that is being traded, bubbles always happen for more-or-less the same reason: speculators flock to purchase some trendy new thing with the intention of reselling it at profit to some bigger fool down the line, driving up prices until they vastly exceed the actual value of the item being traded. Inevitably, the supply of prospective future investors runs dry. The market runs out of bigger fools. And the bubble bursts.

This series of Vanitas compositions are inspired by Tulip Mania. The tulips here might stand-in for any speculative asset that is traded in the hopes of future riches. The dice remind us that such speculation is, fundamentally, no different than gambling. Coins reinforce the underlying themes of greed and consumption, while the juxtaposition of those items with bones suggests that the blind pursuit of wealth and status is meaningless vanity in the face of certain death. Bubbles often represent the transient nature of beauty; here they serve an even more literal purpose because every bubble—whether physical or financial—must eventually burst.

Of course, the tulips in these images are nothing like prized Semper Augustus. They are artificial: mass produced, plastic, worthless. These artificial tulips are, in many ways, similar to the futures contracts that Dutch speculators traded during the peak of tulip mania. They are a token item, a place holder. They are an abstract representation of a flower that might, for an all too brief moment, conjure in the viewer’s mind some vague recollection of the inimitable beauty of a real flower. But any impression of beauty cannot last; like a soap bubble, it is gone all too soon.

At the core of every financial bubble is a shared delusion—a collective willingness to believe that some commodity is worth vastly more than it would be when evaluated on its own merits.

Here, I have chosen to break that illusion.

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Tulip Mania