Spring flower has huge remark on history of trade : Tulip Mania

By | 31/03/2015

Spring flower has huge remark on history of trade: Tulip Mania

 

Spring of 2015 has finally come with the arrival of March. Spring is a time for life to regenerate, and the New Year to begin anew, with sprouts shooting up, snow melting, and flowers blooming. With the season’s arrival, we’d like to talk about flowers decorating these beautiful times, especially about Tulip and its trade, along with the history of the Tulip Bubble.

Tulip Bubble, otherwise referred to as Tulip Mania, was a trend of speculation displayed in the 17th century Netherlands, and economists consider it the first bubble economy displayed in a capitalist society. It is considered as an economic crisis in the classical economic period, along with Britain’s South Sea Company Bubble and France’s Mississippi Bubble.

The Netherlands at the time was going through a golden age. The bulb of Tulip, a plant new to the country at the time, was being sold at an overly high contract price, until the price plummeted. The peak of the Tulip Mania was in February 1637. Tulip was sold at a price ten times higher than the yearly income of a skilled master artisan. According to Professor Shiller, a Nobel Economic Prize winner, “Tulip Mania is the first recorded case of bubble caused by speculation,” and the term Tulip Bubble is being used as a metaphor for large economic bubble (a time when the price of an asset does not match its inherent value).

 

Rate of Price Increase (%)

Increase Period (in Months)

Rate of Price Decrease (%)

Decrease Period (in Months)

Tulip

(1634~1637)

5,900

36

93

10

Mississippi

 (1719~1721)

6,200

13

99

13

South Sea Company (1719~1721)

1,000

18

84

6

The Great Depression (1923~1929)

345

21

89

34

Japanese Stock (1983~1992)

385

84

63

31

NASDAQ (1996~2002)

384

44

78

31

As shown in the table above, Tulip Bubble is one of the bubbles in which the price shot and fell in the shortest amount of time. It is also a bubble that created the largest rate of price increase with a primary industry produce, flower, rather than other momentums such as stock market. In numbers, the bubble saw twenty times more rapid increase and decrease of price.

 

History of Tulip

Tulip originated not in Europe, but in Tian Shan mountain ranges in Central Asia. The Ottoman Turks found the flower, and after being taken by its beauty, the mighty Ottoman Empire developed various breeds of the flower, which were spread to various places in Europe in the 16th century by merchants. The Italians must have been reminded of Turkish turbans upon seeing the flower: The origin of the word Tulip is Italian word tulipano (turban-shaped), from Turkish word tulbent. Tulip gained increasing popularity in France and the Netherlands from mid-16th century, and Tulip boom overtook the Netherlands around 1634. As mentioned above, the price of tulip bulb was ten to twenty times of the yearly income of a skilled master artisan. Considering that a master artisan’s yearly income was about $100,000 in today’s currency, a bulb of tulip would have cost about $1 million, an astounding figure.

 

Why Tulip?

Why was tulip, not rose, so popular? One might argue that rose, a symbol of love, is more valuable. The answer is simple: roses wither. Tulip is a perennial plant that blooms again next year after blooming and withering this year. Because of this, it was not the flower of tulip that was traded, but the bulb or root of the flower that was the subject of trade. This reason created a trade market for tulip, generating a mania and ultimately a futures market for it. Rose without a trade market was not able to generate a bubble in the same way that tulip did.

Another reason for this was that tulip had an “unidentified future value”. You would understand that the Tulip Mania was in essence a series of investments or speculations based on price, not value. This is to say that tulip at the time did not have a certain identified future value. A good example of this is America’s sub-prime market. As vague expectation that house prices will increase cause a bubble to grow, the vanity of the aristocrats fueled the madness of the bubble. Because luxury goods were limited in the past, there were not many goods to conduct conspicuous consumption with.

Semper_Augustus_Tulip_17th_century

Semper_Augustus_Tulip_17th_century

The last reason for the Tulip Bubble is limited supply. The picture above is a mutation of Tulip called Semper Augustus. Such mutations are rare. It takes seven to ten years for a tulip seed to grow into a bulb. That supply is limited means that supply elasticity is very low, which caused the price of Tulip to increase more rapidly than other goods with more elastic supply when demand for the plant increased.

 

Why the Netherlands?

The Netherlands is an extremely open and progressive country with commerce that developed from an early stage in history. The country was a superpower in the early 17th century. The Netherlands established East India Company before Britain did, and it became a trading power in the world that owned 16,000 merchant ships, compared to 20,000 merchant ships Britain, France, Spain, and Portugal owned collectively. The country also issues world’s first stocks through its East India Company, which was a high success that generated a dividend of eight times the original price for fifty years, and scored 27% yearly rate of profit. Tulip futures market opened amidst such amazing success. No need to explain all of these factors drive the bubble.

 

How It Collapsed

Tulip_price_index_Tulip Mania

Tulip_price_index_Tulip Mania

The price of tulip bulbs that continued to increase throughout 1636 peaked in January 1637. The price jumped two or three times in a day, and one month saw 2,600 percent price increase. The value of a tulip bulb was unimaginable: In 1636, the most expensive bulb called the Emperor cost 2,500 guilders, which could be eight fat pigs, four large oxen, twelve plump sheep, twenty four tons of wheat, two barrels of wine (240-630 liters), 600 liters of beer, two tons of butter, 450 kilograms of cheese, silver cups, 108 kilograms of cloth, and bed and linen. Such ridiculous price did not last when it turned for the worse. Tulip market that was traded madly until the day before February 3, 1637 collapsed without a reason. After a period of price increase that took place amidst an extreme anxiety, a short decrease in price caused even more rapid fall in the price, which continued to cut 95 to 99 percent in just four months. Considering that the price fell by 75% in two years during the Great Depression, this is the worst price drop in history.

Because of this collapse, the Netherlands yields trade dominance to Britain later in the 17th century.

 

We looked into the Tulip Bubble today. We learned that trade or transactions that are not supported by clear analysis of profits and systematical management are prone to wrong decisions caused by human errors or emotions. This is why we computerize and systemize companies’ procedures.

Click the button below to ask us about our maritime system, terminal system, forwarding system, and other systematic KPI management, along with client management, record management, and income statement. We look forward to your inquiry.
 

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