Last week we took you through how a flower became a financial asset. This week we are talking about how the tulip craze impacted Holland.
Inflation soared in Holland, as daily necessities and the industry of a nation was completely side swept by the craze for tulips. The tulip trade became so huge, that a code of laws specific to the trading of tulips was drawn up. While the bigger cities had a proper location to conduct the trade of tulips, smaller towns with no such location relied on the local tavern as the showplace to trade in tulips and the richest and the poorest of these towns all congregated here to buy and sell, with numbers going into hundreds, to bid for large vases of tulips.
Interesting anecdotes about the tulip craze abound. A merchant who was a collector of tulip bulbs received a precious consignment from the Levant via a sailor. He graciously offered the sailor a fine red herring for breakfast. On the counter, the sailor saw what he thought was an onion and picked it unthinkingly, meaning to have it along with the herring for his breakfast.
The merchant suddenly realised his valuable Semper Augustus bulb, worth around three thousand florins, was missing. The household was turned upside down but the missing bulb was not found, until one of the staff thought that perhaps the sailor could have picked it up.
The entire household ran into the streets to find the sailor, and when they did find him, he was quietly sitting by the quay eating the last of his breakfast, the herring with what he thought was an ordinary onion bulb, but could have in fact paid the entire crew of his ship for a year. The breakfast proved too costly for the sailor, the merchant had him thrown into jail for felony.
This bubble could not last for long. Those prudent amongst the investors could make out that the bubble would soon burst. The rich were no longer bringing the flowers to plant in their gardens but to resell them at great profit. And then came the fall, the prices fell drastically and would not rise again. Panic spread like wildfire. Dealers were anxious to rid themselves of the stock they had gathered of the bulbs but soon found there were no takers. Scenarios like this became common.
A had agreed to purchase ten tulips from B at four thousand florins each at six weeks after signing the contract. When B was ready with the flowers at the appointed time the price had fallen by 90 per cent to four hundred florins which led A to refuse to pay the difference or receive the tulips.
Defaulting on deals became the norm. Nobody was willing to buy the bulbs which a few months ago had been selling at a premium. Prices touched rock bottom. Those who had suddenly become wealthy trading in tulips found themselves back again in the dregs of poverty. Those who were smart enough to move out, having foreseen the fall, took their money and went out of the country. Merchants became beggars, noble families stared ruin in the face.
A public meeting was called for in the towns of Holland by the tulip holders, to decide what measures needed to be taken to restore public credit. They decided to ask the government for a solution. The government was reluctant to intervene, but did tell the tulip holders to plan amongst themselves. There were many high-octane meetings to come to some resolution, but no measure could be found that would please everyone.
Finally, after a lot of bickering and strong words being hurled around it was decided by the assembled deputies in Amsterdam, that all the contracts made in the height of the mania, or before November 1636 be declared null and void and all made after that date purchasers should not be liable to pay the full amount and would only owe ten percent to the vendors.
The vendors were outraged, they were left holding stock of tulips that no one was willing to buy, and felt they had been mistreated. Tulips which had at the peak been worth six thousand florins were now to be sold at five hundred florins, the compensation of ten percent was a hundred florins more than the actual value. Across Holland, courts saw cases for breach of contract being filed but the courts considered these gambling transactions and refused to consider them.
The matter of the tulips was finally referred to the provincial council at Hague, and the traders facing unspeakable losses were in the hope that this body would find a solution by which they could recover what they owned. The court deliberated over this matter for weeks and months and at the end of three months said that they could not offer any final decision unless they were in possession of all the information.
They advised the vendors should, in the presence of witnesses, give the tulips as they were to the purchasers for the sums agreed upon. If the latter refused to accept them, the tulips would be put up for sale by public auction and the original contractor would bear the onus for the difference between the actual and the stipulated price. While this was a noble plan, no court in Holland could actually enforce this payment. The judges could not interfere regarding this because the debts contracted during gambling were not debts under the court of law.
And thus, burst the tulip mania bubble. The government was at a loss to find a solution. The unfortunates left with stocks of tulips in hand could do nothing but face the ruin of their finances with as much stoicism as they could muster, but the country itself saw a severe setback in its economy which would take years to restore back to the pre-tulip mania levels of stability.
Reference: Extraordinary Popular Delusions by Charles Mackay
Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral