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The Pit and Pendulum

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The Pit and Pendulum An extract from PART II WINTON EXTRACT BOOK 2.indd 1 05/04/2016 12:00 WINTON EXTRACT BOOK 2.indd 2 05/04/2016 12:00 PART II WINTON EXTRACT BOOK 2.indd 3 05/04/2016 12:00 WINTON EXTRACT BOOK 2.indd 4 05/04/2016 12:00 THE DUTCH FLOWER DERANGEMENT tulipomania 1637 When Dutch speculators heard about rising tulip prices, they thought they had a cut-and-dried way of making organic profits and sowed their life savings in bulb futures. Watered by imaginary credits, bulb prices bloomed to the most extraordinary levels but, with the approach of the contract settlement season, wilted almost overnight. ‘A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot’ CHARLES MCKAY (1846) ON TULIPOMANIA Free coinage Tulipomania Mania extends (3 February) laws starts in earnest to common bulb varieties Tulip bubble bursts 1634 1635 1636 1637 WINTON EXTRACT BOOK 2.indd 5 05/04/2016 12:00 4 | THE PIT & THE PENDULUM FERTILE GROWING CONDITIONS By the early 1630s, the Dutch economy was in and an essential status symbol for the wealthy, bloom. Following major victories against the especially in Holland and Germany. Tulip bulbs had Spanish in the Dutch War of Independence, always commanded high prices – a single bulb of Holland’s merchants revelled in their new-found the exotic Semper Augustus variety had sold for the freedom and eagerly anticipated the acquisition of equivalent of $480 in 1624 – though things took a new colonies. Amsterdam had become the world’s new step ten years later. fi nance capital and was animated by a number By 1634, the market for tulip bulbs was highly of profound innovations such as the joint-stock speculative. Originally bulbs were traded on the companies, the central bank, and new speculative spot during the fallow period of summer. From the techniques such as short selling: windhandel. mid-1620s, however, bulbs began to be traded on Monetary conditions were also very easy. Interest a futures basis throughout the year. Consequently rates had fallen drastically while immense liquidity buyers purchased a bulb ‘on the grow’ without was produced by the seizures of Spanish silver on seeing a specimen – they could only go by the the high seas, the introduction of a sound money registered weight of the bulb at the time of policy (backing all coins with specie to mitigate planting. Simultaneously, a futures trade developed the effects of debasement) and the free coinage in the ‘excrescences’ or outgrowths on the mother laws of 1634. bulbs, which can be separated from the mother The subsequent years witnessed manias in canals, bulb after a certain period and replanted on their property and Dutch East India Company stock, own. The trade in excrescences was particularly but it was the dramatic bubble in tulip bulbs that speculative, since no-one could guarantee that they became a legend. Tulips were originally introduced would ever grow or produce fl owers resembling from Turkey to Western Europe in the mid-15th those of the mother bulb. century, where they became famed for their beauty INCREASE IN PRICE OF SELECTED TULIP BULBS TOTAL MINT OUTPUT OF THE FROM JANUARY TO FEBRUARY 1637 SOUTH NETHERLANDS WITTE CROONEN MILLIONS OF FLORINS 25 ADMIRAEL DE MAN SILVER OUDENAERDE 20 GOLD GOUDA 15 CENT SCIPIO 10 VICEROY ADMIRAEL 5 VAN DER EYCK ADMIRAEL LIEFKENS 0 0 1000 2000 3000 1628 1630 1633 1636 1639 1642 % CHANGE Most bulb varieties experienced signifi cant gains with rarer The infl ux of South American silver preceding the mania varieties exceeding all limits increased liquidity in Netherlands and created the fertile conditions for speculation WINTON EXTRACT BOOK 2.indd 6 05/04/2016 12:00 TULIPOMANIA | 5 GREEN WITH ENVY Highly speculative markets are not generally suitable Previously bulb deals involved written contracts, but places for greenhorns. At fi rst only professional bulb these were too elaborate and time-consuming for growers were allowed to participate, but after the most of the newly arrived outsiders. Consequently, tulip futures market was opened up to outsiders in they set up ‘colleges’ – informal organisations for late 1634, crowds of fi nancially inexperienced and dealing in bulb futures. Although they evolved their credulous spinners, cobblers, weavers and other own conventions, these colleges, typically based in small tradesmen piled in, attracted by the sweet taverns, were completely unregulated and fostered scent of easy gain. Many were encouraged by an atmosphere of reckless risk-taking, not least rumours of the high tulip prices in Paris. because many participants had little to lose: futures dealing and alcohol were probably not a great The mania started in earnest in mid-1635 following combination. By November, the market for bulb two new developments. For the fi rst time, bulb futures had turned into a shameless gambling mania growers now offered credit, allowing buyers to where sellers sold bulbs they did not have for money agree to unaffordable prices. Moreover, bulbs were that buyers did not have, the buyers hoping to pass now sold in lots of one ace (a weight unit equivalent on their bulb contracts to an even ‘greater fool’. In to 0.05 grams), replacing the previous system in this way, it was possible for many speculators to which bulbs were sold individually according to their make large paper profi ts of several thousand fl orins registered weight (i.e. the weight of the individual a day. bulb before planting). Thus tulip bulbs were now treated as a fungible commodity like grain or milk, providing much greater possibilities for speculation. BLOOMING PRICES Bulb prices reached incredible levels. The following items were exchanged for a single bulb of the Viceroy species: fl orins Two lasts of wheat 448 Four lasts of rye 558 Four fat oxen 480 Eight fat swine 240 Twelve fat sheep 120 Two hogsheads of wine 70 Four tuns of beer 32 Two tuns of butter 192 One thousand lbs. of cheese 120 A complete bed 100 A suit of clothes 80 above | A satire on Tulipomania A silver drinking-cup 60 above inset | Pamphlet about Tulipomania right | Tulip bulb prices (1637) 2,500 WINTON EXTRACT BOOK 2.indd 7 05/04/2016 12:00 6 | THE PIT & THE PENDULUM Predictably enough, bulbs were jealously guarded, WITHERING PROFITS since theft or damage to a bulb cowwuld ruin its owner. A poor cobbler succeeded in growing a By early 1637, many of the original participants, black tulip – an extremely rare occurrence. When ‘the insiders’, had taken their profi ts and left. Many the local guild of fl orists heard of this, they came to rookie speculators, however, were still willing to the cobbler’s house and offered him one thousand believe that prices would go on rising indefi nitely. fl orins for the tulip, which he readily accepted. As Suddenly, for reasons that are not clear, fear seized soon as the transaction was concluded, however, the market on 3 February and the crisis broke like the fl orists trampled the tulip underfoot exclaiming, a cumulonimbus, dousing the febrile delusions of ‘Fool, we already have a black tulip and would have Tulipomania in a trice. The spot price of tulip bulbs given you 10,000 fl orins if only you had asked.’ The plummeted, such that many buyers were left holding distraught cobbler took to his bed and instantly contracts to buy tulips for over ten times the market expired, from thinking what might have been. There price, which many of them would not have been was also the story of a sailor who arrived in Holland able to honour. at the height of Tulipomania; mistaking a merchant’s Seeking to stave off ruin, representatives of the Semper Augustus bulb for an onion he ate it for fl orists throughout Holland met in Amsterdam on 24 breakfast; and another of an English botanist who February and discussed what to do. It was resolved dissected a Dutchman’s bulb worth 4,000 fl orins in that all tulip sales made before 30 November 1636 the belief that it was ‘a most extraordinary onion’. would be executed, whilst buyers would have the Both events nearly ruined their owners and resulted right to cancel any sale made after this date on in lengthy prison sentences. condition that the seller would receive 10% of the Thus far, the mania had been based on rare, exotic sale price. Despite the many grievances between breeds such as the Semper Augustus. By the end of buyers and sellers, the national government chose 1636, however, new and cheaper varieties had been not to intervene, so the resolution was carried out. introduced to the market and the mania extended to even the most common garden varieties. This had FUNDAMENTAL modish commodity and mirrored similar occurrences after the introduction of other fl owers (though it the effect of generalising the mania by allowing even MISCONCEPTION the poorest sections of society to join in. could equally be argued that these frequent spikes Several economists have tried to explain the dramatic merely show the susceptibility of the Dutch fl ower price movements of tulips between 1634 and 1637 market to speculative manias). Garber also claims in terms of changing fundamentals. The that when the tulip prices declined there was no most notable attempt was made by economic depression such as one would expect Peter Garber, an American economist, after a speculative bubble. In fact, before resuming in the wake of the 1987 stock its upward course in the 1650s, the Dutch economy market crash.
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