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Trading guides, webinars and stories
Trading guides, webinars and stories
In the 1630s a strange thing happened in the Dutch Republic. It was widely known as Tulip Mania. The Dutch created what is often considered the first speculative bubble in history. Funnily enough it revolved around tulip futures. Let’s see how this happened.
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The common story for tulips being introduced to Europe involves a Flemish diplomat named Ogier Ghiselin de Busbecq. He was the ambassador from Emperor Ferdinand I. to Suleyman the Magnificent, and an avid herbalist. Suleyman, who was the longest-reigning sultan of the Ottoman Empire, had an impressive collection of flowers, even during winter, which Ogier wrote about in a letter in the 1550s. It is believed the name tulip is Turkish, being based on the word turban, due to the shape of the tulip bulb.
This buzz from abroad led to tulips being planted at Leiden University’s Hortus Botanicus. This is a botanical garden which is now one of the oldest in the world. This is where the flower moved into the public consciousness, gaining mass appeal. One of the faculty members at Leiden even had his garden raided twice in 1596 and 1598, with thieves stealing more than 100 bulbs.
In the early 1600s tulips went from being widely admired to a necessary status symbol. By the year 1634, if you had any wealth yet no tulips, you were considered a person of poor taste and lost social status.
Tulip Mania is mentioned in Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (Link.) This is a book on how crowds can create strange outcomes because of the beliefs they hold. The author Charles Mackay notes how the tulip “has neither the beauty nor the perfume of the rose — hardly the beauty of the “sweet, sweet-pea;” neither is it as enduring as either”. This was one of Jesse Livermore’s favorite books since its explanations of the madness of crowds could readily be applied to the market.
The status symbol effect increased prices for bulbs, which then led to speculation, which in this case was followed by madness. Although the prices were already high, 1634 to 1637 were the years that it got out of hand. There are wild stories (some possibly exaggerated), such as an offer of 12 acres of land for a rare tulip. Many people were buying tulip futures simply to speculate and resell them. By 1636 tulip futures were traded on exchanges. They were traded in spot markets during the bloom weeks in April and May and from June to September as bulbs (during its dormant phase). For the rest of the year they were traded as futures, though they lacked the ability to be transferred and had to be notarized.
By February 1637 the price had risen so high that no one else would buy any tulips. When it became obvious to everyone that the market had stalled, prices fell through the floor. People were left holding contracts to purchase tulips that had prices way above the new market rate. The way Mackay tells this part of the story, these people lobbied the government. The government responded by making a decree that all tulip futures written after November 30 1636, were now considered options contracts. Instead of having to buy the tulips at the inflated prices, holder of contracts could exit the contract by paying the seller a 3.5% fee. They combined this ruling with a refusal to enforce these contracts in court, calling the speculation gambling. Speculation in tulips collapsed for good at this point.
This is one example of what mass hysteria can become. It is an amusing anecdote, but that’s not all. Looking at a situation like this, you can get insight into other bubbles in modern (and more complicated) markets. Learning from the past is always a great way to prepare for the future. In this case, it might also lead to a nice garden.