What caused tulip mania in the 17th century in the Netherlands and how is it similar to Bitcoin?
In this episode you’ll learn:
- Why discretionary income is needed for a mania to occur.
- Why the tulip trade was one of the first futures market.
- How much were speculators paying for tulip bulbs at the top of the market.
- What was the impact of the tulip bulb crash.
- How Bitcoin is like tulipmania.
Welcome to Money for The Rest of Us. This is a personal finance show; it’s on money, how it works, how to invest it and how to live without worrying about it. I’m your host David Stein. Today is episode 182. It’s titled “Tulip Mania and Bitcoin”.
Bitcoin’s Rapid Rise: A Mania?
A year ago, November 2016, Bitcoin was selling for $700 for one bitcoin. Then by August 2017, when I recorded episode 167, which was titled “Is Bitcoin Better at Money Than the Dollar?”, it was selling for $2700 per bitcoin and at that point I added some exposure to Bitcoin.
Then probably at just over a month later, September 12th, Jamie Dimon CEO of JP Morgan Chase said both at a conference and then later on CNBC said of Bitcoin, “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed”. By then Bitcoin was selling for $4100 for one bitcoin and today, as I’m recording this, it’s $8200 per bitcoin.
Is that tulip mania? Tulip mania is a tulip bulb bubble, you could call it a mania, in the 17th century. It peaked in February 1637. I don’t know if you invested in Bitcoin but one of the members of Money for the Rest of Us Plus, a listener, (he said, ‘please don’t use my name but you can use my e-mail’) he started investing in Bitcoin in mid-2016.
He invested in Bitcoin, Ethereum, some other crypto currencies and over a six-month period invested 3-4% of his liquid net worth. Now it’s 27% of his net worth and he’s been selling. He’s already sold two times the amount that he invested and every time, every month or so, he sells another 5% but it’s still 27% of his net worth.
He writes, “I’m bullish on cryptocurrencies in the long term, so it feels odd to sell a large quantity right now, and I would have regrets if I did that and it continued its current trend. It also feels odd to have a large percentage of my net worth in such a volatile asset class”. And so, he’s looking for insights. What do I do with this sort of, what he calls, an obviously fortuitous situation. Is investing in Bitcoin like investing in tulips back in 1637?
Popular Perception: “One of the Most Spectacular Get-Rich-Quick Binges”
I first became aware of tulip mania from a book I found. I had some clients in New Orleans, I was in the French Quarter, I went to Crescent City Books–it’s a used bookstore–and I found the 1932 edition of a book that was published in 1841 by Charles Mackay. It was called Extraordinary Popular Delusions and the Madness of Crowds. In there, he wrote about this tulip mania.
He writes, “Everyone imagined that the passion for tulips would last forever and that the wealthy from every part of the world would send to Holland and pay whatever price were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favored clime of Holland. Nobles, citizens, farmers, mechanics, seaman, footman, maid-servants, even chimney sweeps and old clothes women, dabbled in tulips”. Since everybody was doing it.
Burton Mackay, he wrote “A Random Walk Down Wall Street” and in there he called the tulip mania, “The tulip bulb craze was one of the most spectacular get-rich-quick binges in history”. Later he said, the final chapter of tulip mania “is that the shock generated by the boom in collapse was followed by a long depression in Holland. No one was spared”.
That’s kind of the popular perception of tulip mania: everyone involved, huge bubble, big crash, major depression. Turns out it wasn’t quite like that. I read a book this past week called “Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age” by Anne Goldgar, 450 pages and the quotes on Amazon say it reads like a college textbook. I liked it because it was packed full of original sources.
It’s from those original sources she realized that it wasn’t quite the extent of the mania that a lot of–that Mackay mentioned–and a lot of the pamphlets that were published afterwards, sort of moralizing on this crisis, they tended to exaggerate a little bit.
The Foundations of a “Mania”
For a mania to occur, here’s what you need: you need money, people with discretionary income, and in the late 1500s, early 1600s, the Dutch, they had money.
Goldgar writes, “While other populations suffered economically in the 17th century, the Dutch prospered, their high wages attracting immigrant labor from surrounding regions. Whereas their neighbors in Europe tended to rely, often precariously, on subsistence agriculture for their livelihoods, the Dutch relied on the Baltic grain trade to feed their population, freeing labor for specialized agriculture, such as dairy farming; for rural industry, fishing, and overseas trade”.
Many of the Dutch merchants were traders. They traded and they were independent merchants who invested in individual voyages. Holland, the Netherlands, opened up a commodity exchange in 1618. So, they were used to trading and tulips were just another thing to trade.
Goldgar writes, “As luxury objects, tulips fit well into a culture of both abundant capital and a new cosmopolitanism, a culture springing at least in part from the more aristocratic tastes entering the Dutch Republic from the south. Gardening, collecting, an interest in natural history, an interest in art: all these brought tulips to the attention of merchants in cities like Amsterdam, Haarlem, and Delft . . .
“Tulips came to the Netherlands in part because of an interest in science, but they were embraced because such an interest was shared by more ordinary citizens with some money in their pockets. They came also because they must have inspired some of the same kinds of feelings as paintings, another object in which such people invested their money. And they came because they were in fashion”. These tulips coming into it because they were luxury items and there were just hobbyists sort of trading them.
A “Fine Blossom” from Turkey
Tulips originated in Asia Minor, but the Europeans became aware of them about mid-to-late 1500s in Turkey. Ogier Ghislain de Busbecq, he was the Flemish envoy of the Holy Roman Emperor, Ferdinand II, and in September 1st, 1555 he wrote a letter describing his journey to Constantinople.
In the letter he says, “As we passed through this district we everywhere came across quantities of flowers–narcissi, hyacinths, and tulipans as the Turks call them. We were surprised to find them flowering in mid-winter, scarcely a favorable season . . . The tulip has little or no scent, but it is admired for its beauty and the variety of its colors. The Turks are very fond of flowers, and, although they are otherwise anything but extravagant, they do not hesitate to pay several aspers for a fine blossom”.
Tulips were introduced about thirty years later into the Netherlands and people had never seen them. At times they got mistaken for onions and eaten and it didn’t taste so great. But, Jehan Somer–he was a wealthy, well educated, multi-lingual resident of Middleburg, in the western province of the Netherlands, Zeeland–he did an extended pleasure trip from 1590 to 1592 and he described Constantinople as “such a very beautiful sight that everyone who sees it would say that it seems rather a paradise than a city”.
And he described how the Turks loved their gardens and herbs. Even the poor would have these gardens with flowers in them. They were very much flowers, and there was a whole market in Constantinople that was just dedicated to flowers and herbs that came from the Black Sea and from other places like Egypt and India.
So, he brought back bulbs and they would trade among his friends; they were hobbyists. The name they used is a Dutch name–I don’t even know what it means; it’s lief hebbers–and that’s what they would do.
“The Most Variegated Count for Most”
They were rare and exotic and the tulips that they value the most were variegated tulips, those that were like they had flames or were striped. It was this unpredictability of how sometimes you would plant a bulb and you knew what it was like, but they would cut off offsets from these bulbs and you would plant it and something would change: the color might change, it might not be as variegated. It wasn’t until the 20th century that they realized that these variegated colors were produced by a virus, an aphid born mosaic virus, and that led to the unpredictability and sense of wonder with these flowers.
In 1618 Joost van Ravelingen wrote about which tulips were most prized in the northern Netherlands. He writes, “Here in this country people value most the flamed, winged, speckled, jagged, shredded, and the most variegated count for most and the ones that are most valued are not the most beautiful or the nicest, but the ones which are the rarest to find; or which belong to one master, who can keep them in high price or worth”.
Now bulbs, tulip bulbs, spend most of the time under the ground. So, as they became more popular among the hobbyists–and some were in it for the profit–you found people would steal tulip bulbs out of gardens, even though the garden walls were locked. And some of the hobbyist’s got frustrated by this, all this sort of mania that started developing in the early 1600s. Again, the peak wasn’t until 1637.
Hobbyists and Professionals
One of the early hobbyists, and one of the earliest growers of tulips in the Netherlands, was a man named Clusius. He writes, “This pursuit [of gardening] will in the end be cheapened, my dear Lipsius, because even merchants, yes even artisans, low-grade laborers, and other base craftsmen are getting involved in it. For they can see that rich men sometimes hand out much money in order to buy some little plant or other that is recommended because it is so rare, so that they can boast to their friends that they own it.
“To hell with those who started all this buying and selling! I have always kept a garden, sometimes for my own pleasure, sometimes so that I might serve my friends, who, I saw, took pleasure in that pursuit. But now, when I see all these worthless people, sometimes even those whose names I have never heard, so impudent in their requests, sometimes I feel like giving up my pastime altogether”.
Who were these traders in tulips? Well, generally speaking, Goldgar mentioned, they were “middle-level to well-off merchants, often pursuing international trade”. Sometimes you had professionals, such as lawyers, surgeons, doctors and notaries. They were business people, professionals, sort of trading in tulips, but it was kind of a side business.
It wasn’t thousands and thousands of people. Really, it was just hundreds involved in this trade and certainly not the poor. The tulips were sold sometimes in auctions, but mostly in private sales arranged between individual parties, sometimes in taverns or private homes.
Tulips and the Futures Market
Now, there were some logistical challenges with growing tulips. They only bloomed for a few weeks in April, May or June. Then after they blossom, what they believed, is that you had to take the bulbs out of the ground–this was called the “dry bulb time”– and just for a couple of months. That was really when they could be traded. Then, by September, they were replanted and they would remain in the ground until the next flowering season in the late spring or summer.
So, if bulbs were sold in this trading, most of the time it wasn’t during this “dry bulb time”; it was during the fall or winter. So, there was risk that, one, the bulbs wouldn’t make it or that the colors were not as rich. There was definitely some risk in it, but there was also kind of a futures market, because you would pay for a bulb in the fall and not take possession until the next summer, during the next dry bulb time, when you can actually get it out. So, you were paying, sometimes a little bit, oftentimes just a small payment, until the time of delivery. So, you were basically purchasing the right to buy a bulb the next summer.
Now the Dutch already had futures markets, because they were trading commodities. They were very comfortable buying something, paying a small premium for a future delivery. They would do that for spices and for ships that hadn’t come yet; it was very common. This trading, in this case, was just sort of a sidelight, these tulip bulbs.
Things Start to Escalate
So, there was a lot of trading in bulbs by merchants and professionals, just hundreds of them. It was hobbyists, then more got involved and then into the mid-1630s things started to heat up. There were a number of partnerships and companies set up to buy and sell tulips, but it wasn’t really until the fall of 1636, into the winter 1637, that things started to escalate.
This happened to be right after several years of the plague had hit the Netherlands and it was almost like there was a sense of relief that the plague seemed to have dissipated to some extent. And, as Goldgar looked at it, there was some evidence that market prices were accelerating.
But it’s hard, because often these bulbs were sold by weight, the heavier the bulb and the rarer the bulb the more it was worth, but the heaviest especially because they could cut off and do offsets. It took eight years to grow a tulip from seed, but you could split a bulb and plant it. And so, the bigger the bulb, in terms of weight, the more valuable and the rarer they were, the more valuable they were.
Here’s an example that Goldgar gives: this is a bulb, the Admirael van der Eyck bulb, sold in January 1637 for 1000 guilders. Now a thousand guilders at that time would buy roughly 4600 pounds of figs, 3500 pounds of almonds, 5600 pounds of raisins or 370 pounds of skin cinnamon. 1000 guilders was three years wages for a master carpenter and worth roughly $12,000 in 2007 dollars. So, certainly a lot of money. Compare that to Da Vinci’s “Salvatore Mundi” painting which just sold for four $450 million.
“Nothing Intrinsically Crazy”
Now, Goldgar points out that these weren’t the poor buying this and these traders were used to dealing with sums of 1000 guilders as a they would trade with on ships. These were certainly high prices, but not unseemly or extravagant prices for something that was rare and exotic.
In a lot of the post bubble literature, it talked about hundreds of chains as people would sell one tulip bulb that was still in the ground and then resell it, resell it and resell it. Goldgar only found chains from one seller to another of five times that the bulb had been sold, one same bulb to a different person. You didn’t see it like some, like Malkay, talked about; she could only, in the original literature, find 37 people that spent more than 400 guilders on bulbs, which would be equivalent to about $4000.
This bubble, this mania, they would look back and say, ‘But this was just bulbs. Why would it be that kind of money for a plant?’. Goldgar writes, “After the fact–as happened in other financial crises in later centuries–it is easy to preach irrationality, but there was nothing intrinsically crazy–nor did most before the crash say there was–about buying a product it was clear one could sell on at a higher price. The unsustainability of the price was not predictable, and if a crash happened, it was not necessarily to be foreseen. The tulip, as we will see, was blamed in pamphlets after the crash as being merely a ‘paltry flower'”.
But the value of tulip was simply the value placed on it by buyers and sellers. One might just as well say ‘paltry gold’ or, in our case, ‘paltry Bitcoin’. The value is just what buyers and sellers place on it. And in that time, they valued tulips.
What’s In a Bubble?
Was it a bubble? My view of a bubble is that you can actually value it. There’s objective criteria. It was something like a tulip, something aesthetic like that, or piece of art or even gold; it’s whatever buyers and sellers are willing to transact at. And so you can’t say it’s a bubble, you can say it’s a mania and Bitcoin has some aspects of that when we look at the number of Bitcoin wallets in place.
A year ago, there were 10 million wallets, people that have the public private key combination. Now there’s 19 million. So, you have more people coming in, just like you had more coming in to the tulip trade. 19 million, given the population of the world, that’s still just a small amount, with not everybody participating in Bitcoin. But, there’s enough that the price is going up and we can’t say when it will stop. There’s no way of knowing objectively know when a mania, if it is that, will end. There wasn’t any way to know about the tulips.
It did happen in February (1637) that they peaked. And why? Nobody knows. It is suspected, that maybe there was more supply coming on, but perhaps people saw the prices go up significantly in January and February 1637 and just felt like it wasn’t sustainable. So, then they stopped and the price fell. And this was the challenge, because this was sort of a futures market.
Those that had bought bulbs, or paid a premium to be able to take delivery of bulbs in the summer, no longer wanted the bulbs, because the price had fallen. They were stuck. The buyers didn’t want them and the sellers obviously wanted to enforce the contract, but they reneged.
They would say, “I will do as another does”. “I’m not inclined to accept them”. “What another does, it would be needless for me to do more”. These are various people that the buyers said ‘I’m not taking delivery. I’m not paying for something that has crashed in price’. And there was sort of a standstill; it was about a year before they resolved it.
There was a commission set up: Commissioners for Flower Affairs in Haarlem, and other cities set up these commissions to figure out ‘well, what do we do?’. At the end, they decided that the contracts could be annulled if the buyer would pay a fee of 3.5% of what they agreed to pay. But even then, they didn’t want to do that; it was just to renege.
A Fallout with No Depression
This just kind of went on for several years and that was what a lot of the morals of the pamphlets were. It was this reneging on their honor of contracts. That is why; it wasn’t so much that you had the bulbs go up in price and crash, but the profound effect was the fact that people wouldn’t honor what they said they would take delivery for. So, these purchased contracts were reneged on, people didn’t honor them, you had the seller stuck with bulbs that were diminished in price, but it didn’t lead to a depression.
Goldgar looked at the original documents she could find and found that among the economic historians who study the Netherlands, nobody suggests that a decline, an economic decline, occurred in the late 1630s and early 1640s, either as a result of Tulip Mania or for other reasons. In fact, they believe that the economy continued to grow until the mid-17th century in nearly every area.
So, it didn’t cause a depression because it wasn’t hundreds of thousands involved, even tens of thousands. It was hundreds. A mania did occur, mainly concentrated in that six month period where you had a huge jump in prices– again, it’s difficult to determine by exactly how much–and then sales stopped, prices fell, it took them several years to kind of work it out, but then life went on.
“Only Irrational After the Fact”
Goldgar writes, “Tulip Mania was only irrational after the fact, if the market had held, it would have been supremely sensible to invest one’s money in tulip bulbs”. The same can be said for Bitcoin; if the market holds it would be sensible. If it crashes? Well, maybe not.
In episode 163, I sort of talked about Bitcoin, the limited supply, the things that could let it be a sort of digital gold, a store of value. But there are things against Bitcoin. The forks that can occur, that means that there are more cryptocurrencies outstanding. The energy use to create and mine Bitcoin is a concern. We don’t know.
The reader or listener that has 27 percent of his net worth in Bitcoin wants to know what to do. It comes down to regret. Take profits. But how much profit do you take? I don’t know what other assets he has, but it’s been a good run. Maybe it’s time to take some profits. But you’ve got to weigh the regret of Bitcoin continuing to rise. The regret if you hold on and the price of Bitcoin collapses. We just don’t know. In that way, it’s just like tulips: we don’t know how it will end.