Tulip Crisis in Holland: One of the First Pyramid Schemes

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

In the 1630s, an unusual investment frenzy swept across Holland. Tulips became the subject of grandiose speculation that ruined one of the most economically developed countries in Europe at the beginning of the 17th century.

Why did thousands of Dutch people invest all their savings in flower bulbs, and not in emeralds, overseas spices and other goods?

At the end of the 16th century, the center of the tulip industry was based in France. Wealthy clients from England, the Netherlands and the German principalities willingly bought bulbs from French gardens. The Dutch became seriously interested in tulips only at the beginning of the 17th century. Holland's golden age has already arrived.

In 1593 Karl Clusius, head of the Herbal Garden of Emperor Maximilian II, planted several tulip bulbs in the soil of the Leiden University Botanical Garden.

The next year, flowers appeared that determined the entire future fate of the country. The Dutch, looking at the curiosity, offered Clusius a lot of money for the bulbs of these unprecedented flowers, but he did not want to "share his experience." After unsuccessful attempts to resolve the matter peacefully, in the end, the bulbs were simply stolen.

Very soon it came to gambling stock exchange game. The most important innovation of 1634-1635 was the transition from transactions of purchase and sale of cash goods to futures trading. In the Netherlands, tulips bloom in April-May. Young bulbs are dug up in the middle of summer and planted in a new location in late autumn. The buyer can purchase young bulbs from July to October. It is impossible to dig up and replant already rooted bulbs.

To get around the restrictions imposed by nature, in the fall of 1634, Dutch gardeners began to trade in bulbs in the ground - with the obligation to hand over the dug up bulbs to the buyer the following summer. The following season, in the fall of 1635, the Dutch switched from bulb deals to bulb deals.

The speculators resold each other receipts for the same bulbs. As a contemporary put it: "Traders sold bulbs that did not belong to them to buyers who had neither the money nor the desire to grow tulips."

In conditions of constant price increases, each transaction brought a considerable profit to the seller of the receipt. These profits could have been realized next summer, provided that the resold bulb survives and is not reborn, and that all participants in the chain of transactions fulfill their obligations. The refusal of at least one participant from the transaction brought down the entire chain.

Transactions were usually secured by notarization and surety of respected citizens. Sellers often took a deposit from buyers. The business involved more and more simpletons and reached enormous proportions: at that time, more than 10 million of these tulip receipts were walking around in the hands of ordinary people.

During the period of the stock market rush, prices for rare varieties of flower bulbs reached 4 thousand guilders (at current prices, approximately $ 30,000) per piece. One of the cities put into circulation tulips with a total value of 10 million guilders. At the same amount on the stock exchange, all the movable and real estate of the East India Company, the largest colonial monopoly of that time, was evaluated.

Prices grew by leaps and bounds. The documented record was a deal of 100,000 florins for 40 tulip bulbs. Tulip mania gripped all strata of society.

Everyone believed that there was nothing easier than buying a few tulip bulbs, planting them and, having received the bulbs from them in the first year, selling them for a lot of money as a promising new variety. To attract poor people, sellers began to take small advances in cash, and the buyer’s property was pledged for the rest.

As unexpectedly as this fever arose, collapse broke out. With a sharp increase in the number of players on the tulip exchange, prices began to jump in both directions faster than real demand decreased or increased. Only experts could figure out the intricacies of the market.

They advised at the beginning of 1637 to reduce purchases. On February 2, 1637, purchases actually stopped, everyone was selling.

Prices fell catastrophically. They all went broke. It was especially bad for those who speculated on credit: the prices of bulbs were constantly falling, and they were left with debts and interest. Panic erupted: no one wanted to buy tulips, despite big promotions.

Finally, the Dutch government in Harlem passed a law on April 27, 1637, according to which all transactions in tulip bulbs were deemed harmful, and any speculation in tulips was severely punished.

Tulips have become what they were again - ordinary garden flowers.