Tulips for Sale?

Have you heard about tulipmania?

Photo: Ellywa. Source: Wikimedia

During the Golden Age of Holland, merchants from around the world traded their silver, spices, and textiles in Amsterdam, the capital of the Dutch Republic. Holland had cheap energy, skilled labor, and excellent ports, making an ideal trading center, just as trade with the New World and the Far East was expanding rapidly. The growth of commerce and wealth allowed Holland to lead the world in art, science, agriculture, and military prowess.

Their position as a financial center encouraged innovations: bills of exchange (paper currency), joint stock companies (the East India Company), and futures contracts. Futures contracts developed around all kinds of goods, including wheat, herring, and tulips. Tulips had been imported to Europe from Turkey in the 16th century, and by the 17th it was well-known that Holland had an ideal climate for their growth and cultivation. They became quite popular, and their idiosyncratic colors and the ability to preserve varietals caused their prices to grow rapidly. At one point a single rare bulb was exchanged for 12 acres of productive farmland.

Illustration: Jay Henry. Source: Earl Thompson, Wikipedia

But there was no enforcement mechanism for delivery, either for the bulbs or their financial proceeds. Futures contracts were simply private agreements, based on a merchant’s personal reputations. One day, traders simply refused to show up at a routine price auction in Haarlem and prices fell dramatically. But because the contracts weren’t enforceable in court, the collapse of the tulip bubble didn’t lead to widespread bankruptcy or a financial crisis.

Tulipmania is an illustration of how prices can become divorced from their economic reality. Tulips were fashionable flowers, but fashions come and go. Tulips were later displaced by hyacinths as the most popular blossom. Wars and blight can also disrupt agriculture. It was never likely that the wealth of Europe would migrate to Holland because of a flower bulb. Entertainment and leisure are important, but not as important as industry, trade, and commerce.

I always look forward to the emergence of spring bulbs: crocuses pushing up through the snow, daffodils, and tulips. But let’s not get carried away. At the end of the day, a flower is just a flower.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-04-12T07:00:28-04:00April 12th, 2019|Global Market Update|Comments Off on Tulips for Sale?

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