Tulipmania: When a Single Tulip Could Buy You a House

today you can buy several tulips for a couple of dollars in 1637 you could buy every house on your street for a couple of tulips the year is 1637 right in the middle of the Dutch Golden Age this is the era of names such as Rembrandt Christian Huygens and Johannes Vermeer and even though it was in a golden age the Dutch Republic was a new country founded only half a century ago when it revolted against the Spanish Empire and started the eighty years war this golden age was spurred in a large part due to the Dutch the Republic's invention of early capitalism and it is here in Amsterdam that the first company was founded the first Stock Exchange created and as we will see over the course of this series it's the place where the first financial bubble burst this is the story of tulip mania but what even is a financial bubble for us economic nerds this is easy to understand for the rest of you here is a short example let's say you have a Bitcoin and that Bitcoin costed you $100 a little later you sell that Bitcoin for $150 and in you a profit of $50 that evening you meet with your friends and you tell them all about how you just made $50 with Bitcoin your friends of course want the same profit so they buy a bunch of bitcoins hoping to sell it later at an even higher price after a week they sell each of their Bitcoin for $200 and then new people come in to buy Bitcoin hearing of all this profit being made over time more and more people come in each person is betting they will be able to sell at a higher price to the next person but eventually you run out of buyers you run out of the next person and then the price goes down it crashes this is an economic bubble and like all bubbles they must eventually burst tulips originally came from Persia and traveled via the Ottoman trade to Western Europe in the 16th century tulips come in a variety of colors and they rapidly became prized above all other flowers the Dutch Republic saw the rise of a new middle class and these merchants and traders were willing to pay large sums of money for the newest the latest the most spectacularly colored tulips each year new varieties were cultivated in particular there was one type of tulip that was prized above all other types of tulips this tulip had dark colored stripes or flames on a light background but what is interesting is that they did not get this color due to the flowers genetics but because of a virus but this is the early 17th century and the field of genetics wouldn't exist for another 200 years this meant that as a tulip grower you could never be sure whether you had an ordinary tulip or an extremely valuable flaming tulip this made tulips a risky investment tulip traders usually had their own private garden but there were no professional tulip traders as far as I could find out none of them were they all had a day job and tulip growing and trading was a side business for them the hobby these men belonged to a new middle class which was just forming in a Dutch Republic thanks to the Dutch East India Company and the vast wealth it brought with it but just because tulips were a hobby didn't mean they were amateurs in fact these men knew a lot about this plant and groaned the best one was a serious hobby not just a casual one and by the 1620s a beautiful new flower had merged the semper Augustus God don't you just love that name anyway thus Emperor Augustus was owned by one man and he was crafty he knew that if he sought the offspring of this tulip it was only a matter of time before his customers would grow more and then he would have competitors meaning that he would have to lower his price to compete with competitors so he did what most companies would do in this situation create a monopoly meaning that he was the only one who was able to sell thus Emperor Augustus but how did he do it because if he sold his tulip his customers would automatically be able to grow more of them well he created a special kind of contract with very cific terms first you weren't even allowed to sell your tulip without the express permission of the original owner and secondly you weren't allowed to sell any of the offspring from the tulip bulb either as you might imagine many traders did not honor this contract and many an angry merchant went to the Dutch notary office to file an official complaint records of these complaints can still be found in the archives of many Dutch cities to this day and it is through these records that we know just how much tulips were worth during that time even though not all merchants honored a deal most of them did this way he was assured that he could control how many of his precious emperor augustus were being sold and as a result the price went up by 1623 the price for a single augustus semper tulip bulb was worth a thousand guilders by the end of 1625 that price had risen to three thousand guilders to put this into perspective a skilled artisan such as a carpenter would earn about three hundred guilders per year so that meant that by 1625 a carpenter would have to work ten whole years not spent any of that on food or a house or anything and then after ten years he would finally be able to take all his money to a tulip trader and buy a single bulb and that's without the price going up even further than it already did and to put this in modern-day perspective an average cobbler in the Netherlands earns about thirty thousand euros per year meaning this bulb would cost about three hundred thousand euros three hundred thousand euros for a single bulb because my audience comes from a variety of countries here is how much it would have cost in other popular countries among my viewers a single tulip of the most valuable breed could sell for ten times the average yearly wage in the 1630s the tulip trade started to change and one change led to another until eventually the whole thing had become unsustainable and the entire tulip trade would eventually collapse so let's look how this started first of all a system of colleges developed across the main towns in the Dutch Republic each composed of a corps of small traders they met at a specific in usually two or three times per week and usually in the evening as most traders had a day job Outsiders were welcomed but only through an introduction the youth took place with the mediation of one or two neutral observers and all sales were sealed with a payment of a small surcharge called divine cope or a wine purchase of about 2.5 percent this 2.5 percent was spent on food tobacco wine and other luxury goods at the end but there was a problem well there was a large variety of bulbs the problem was that they couldn't sell as many or as often as they wanted to tulips don't grow very fast you can't harvest every autumn like most crops in fact it could take several years before a tulip is able to bloom for the first time so until it bloomed you weren't sure what your tulip was going to look like and so the first change happened a new type of contract started circulating a futures contract now some of you are scratching your head wondering what the hell are future contract is well a future is a type of contract where the buyer purchases a product and then the seller delivers that product once it's ready so in the case of tulips you would sign a contract for a tulip bulb but you don't take possession of the bulb just yet because you wait until it flowers well since you have a contract which states that the owner of the contract is the owner of the tulip you can simply sell that contract after all a futures contract states that the bearer of the contract is also the owner so give that contract to someone else and now they are the owner of the tulip simple but why would you buy a tulip if you don't even know whether it is the one you want it well a future has the advantage that as the buyer you can usually purchase the product at a lower price in exchange for taking extra risk as the seller you reduce your risk by selling early and so you are assured to make maybe not as much as you would otherwise make but hey that's why you're selling futures anyway you don't want to take that risk so at this point in 1634 people had slips of paper stating the ownership of a tulip bulb remember how I said earlier that traders would only buy and sell tulips while they were in bloom so they could assess the quality well with a slip of paper you could much more easily trade tulip bulbs you no longer needed to wait until a flower bloomed you could now sell it at any time you wanted and this is the second major change in the tulip trade before tulip trading was highly seasonal people would come in they would look at the tulip and then the flower would be sold but now you could trade it at any time you want it so if a particular brand of tulips generally looks good then you'd pay whatever the price of that particular brand of tulip is at that moment this makes sense if a particular breed was worth 10 guilders at a time you could buy that breed knowing that this flower was probably around 10 guilders anyway as breeds don't vary that much in appearance that makes sense we do the same now when we purchase online we don't go to the warehouse to check if the smartphone you want to buy is really as good as we've been told we simply trust that a smartphone is a certain quality and that it is worth a certain amount of money simple well not really but before we delve further into the pit the financial collapse let's have some trivia to break up this video tulips would often be named after the owner or a city with words added to suggest high quality such as general or Admiral and as the price of tulips increased so did the extravagance of naming them in order to make their bulb sound ever more impressive there were tulips such as general of generals of howda because one general wasn't good enough apparently as someone working in marketing I can respect this type of naming system okay so people were now trading slips of paper stating the ownership of a bulb and as a result people were now trading more and more prices were soaring at this point and this led to the third major change when people heard of the insane amounts of profits the tulip traders were making they wanted in on the action so many new traders entered the tulip market that it changed everything about the tulip trade and as prices grew more and more people who knew nothing about tulips wanted to get in on the profitable tulip trade so people who knew very little about tulips started buying tulips with the idea that they could sell them for a profit in the future without ever wanting to own a tulip themselves or plan on making a profit on them that was sustainable they weren't interested in tulips they were interested in profits and these new traders changed the tulip trade it was no longer about a single bulb or a particular breed of tulip no from now on traders were far more interested in buying large amounts of tulips in order to make the most profit now not all tulips were equal and each breed had its own price but it was no longer about the quality of each individual tulip bulb futures contracts which previously told you you owned a single bulb now turned into contracts stating you out 10 or 50 bulbs and so with people who knew almost nothing about tulips buying large sums of tulips while at the same time being told that the price can only go up if you remember my example of Bitcoin in the last episodes you may have already guessed where this is going prices grew faster and faster they began to skyrocket by the end of 1636 a few months before a collapse of the tulip prices within three months individual bulbs were sold dozens of times and increasing in price more than tenfold and the prices of cheaper bobs increased as much as twenty fold all in the space of three months even the most common bulbs the ones nobody really cared about we're now sold for large sums by this point a single bulb was able to purchase a large house or if you had a really valuable one you could buy an entire villa this was the height of tulip mania the prices were not so high that you could buy an entire street for only a couple of tulip bulbs more and more people joined the tulip trade hoping to buy a couple of bulbs now and sell them for a profit later but a price only increased because people were expecting it to increase now you might have thought to yourself how is this any different from gold or company shares today people often buy it in the hopes that it will be worth more in the future the difference here is that both of these Goods provide actual value to many people and are thus valuable for more than just being a tradable good we use golden wedding rings a medium of exchange and in electronics it creates value for you jewelry while being a luxury still provides value if like in the past you can only buy something using gold then you will want gold in order to buy things you want to have and electronics are valuable so you can watch my videos likewise company shares give you value because you now own a part of a company and you receive a dividend and show a tulip has value because it's pretty but it's not ten years of salaries pretty this is what makes a bubble a bubble the actual value of the product is a lot lower than the amount of money for which it is traded and the price was just going up endlessly it seems what is important to remember is that nobody at the time knew for certain what would happen this was the first bubble so nobody was sure what would happen in the end the very idea of a bubble didn't exist yet there was no previous experience to draw upon to most people it just seemed like business as usual most people but not all the prices were becoming so high that some people couldn't help but wonder if maybe just maybe the prices were too high if maybe just maybe they wouldn't keep increasing in price in the future and if maybe just maybe they should sell that tulips before the price would drop but even though this quiet had been building the end still came sudden and unexpected it is the evening of February 5th 16:37 traders have come together inside an inn in the Dutch city of Harlem the men buy a drink light a cigar and warm up at the fire soon the trading is about to begin as men take their seats the first bubble is presented it is a small bulb weighing less than half a gram it's of a valuable breed but not even close to mature yet the men start bidding and it's sold for 56 guilders about two months worth of salaries for a carpenter next another man shows his tulips this time on a piece of paper it reads that the owner of this contract will be able to collect a bulb weighing about 5 grams still not mature yet the men look at each other but nobody makes an offer nobody thinks they can make a profit on this bulb nobody is willing to take the risk eventually an offer is made but it's lower than expected it is sold for only 10 guilders that's okay the trade of things he will just make a profit the next time this isn't so bad this is just a one-time setback right another tulip trader comes and shows his own wares a piece of paper is presented a mature bulb weighing over 50 grams again the men look around again nobody bites and again the merchants only buy it for much lower priced and expected the men start getting nervous the price appears to be going down not up they have tulips of their own tulips that are now worth far less than at the beginning of the evening so they decide to sell the tulips now instead of waiting for the price to drop even further and as soon as some traders start selling the price goes down because there are now more tulips being sold so in order to compete with the other traders they now have to lower their price but as the prices get lower more traders sell their tulips meaning they are forced to lower the prices even more leading to even more people selling leading to even lower prices meaning more people sell meaning lower price this psycho continued throughout the evening until by the end of the night prices had fallen dramatically by some estimates prices had dropped by as much as ninety five percent 95 percent in a single night and what happened in have them spread to other cities some traders decided to be crafty and take a horse to the nearest city and sell older now worthless bulbs before the price in other cities would crash as well and as buyers sellers and collectors traveled prices crashed across the country within four days the bubble had burst across the Dutch Republic so what happened why didn't nobody see this coming and an even more important question how come this cycle has repeated itself so many times since the first crisis why wasn't the first financial bubble also the last well this question can in large part be explained with one simple answer trust during the bubble there were prominent traders who everybody looked up to as sources of trustworthy information and they said that tulip bulbs are a good investment so if you don't know enough about the business to make your own assessment you trust somebody else's just as you trust a car mechanic about cars a carpenter about wood and a doctor about medicine and so people trust the traders about trade but what happens if they are wrong well you have a bad investment at best and a financial bubble at worst to compare this with a modern-day example the crisis of 2008 happened because we trusted other wise trustworthy rating agencies on so-called subprime mortgages they said they were good investments while in reality they were not and so banks investors and borrowers trusted them to be safe investments but when it turned out they were not the bubble burst and an economic crisis was created just as people trusted tulips to be a safe investment because other more knowledgeable more experienced traders said they were and when it turned out they weren't the bubble burst and people lost a lot of money hope you learn something here not just a fun story to tell at a party or at the dinner table but I hope that you learn some actual economic concepts that a financial bubble isn't created by a couple of evil people sitting in a room plotting doom but rather it's a process of one risky investment after another in the first episode we talked about how tulips were introduced to the Netherlands and became an expensive luxury product then merchants created a lucrative albeit exclusive trade in tulips then a future contract was introduced allowing people to trade papers stating the ownership of tulips rather than the physical flowers themselves that led to more people trading in them and as more people traded the price went up until eventually it just didn't anymore and then it crashed so who is to blame here was it the original traders the futures contract allowing new people to join the trade or are none of them to blame and is this just the course of events leading to an unfortunate end result you tell me I'm not going to tell you what to think I think my audience is smart enough to form their own opinion but I hope that now you understand how an economic bubble happens that this is not some evil master plan set in motion years ago but rather a series of seemingly good decisions that benefited the individual but led to the collapse of the trade for the whole collective if you liked this video give it a thumbs up and subscribe for more videos like it my next video will start a new series on the Aztec empire if you want to see that and other videos as soon as it comes out press the subscribe button

Channel: History Scope

Views: 106,195

Rating: 4.9089026 out of 5

Keywords: tulipmania, tulip mania, tulpenmania, tulpen mania

Id: db0nG-fCMGY

Length: 21min 42sec (1302 seconds)

Published: Fri Jun 05 2020