In insolvency work, we often see speculation, all kinds of speculation.
Some measured, calculated, rational and controlled, some bold, imaginative and creative, and other rash, reckless and without substance.
One of the earliest recorded and often quoted speculative bubble is that of Tulip Mania during the Dutch Golden Age (early to mid 1600s), when speculation drove the value of tulip bulbs to extremes.
Tulips were introduced to Holland in 1593, arriving via the spice trading routes, that lent a sense of exoticism to the imported flower. The pioneer botanist Carolus Clusius planted and cultivated tulips, leading to a profusion of varieties.
At the same time as the tulip’s introduction and development, the Dutch Republic was becoming one of the world’s leading economic and financial powers, with the highest per capita income in the world from about 1600 to 1720.
The tulip was different from other flowers known in Europe at the time because of its intense saturated petal colour. Tulips became a coveted luxury item and “it was deemed a proof of bad taste in any man of fortune to be without a collection of tulips”. Particularly prized were the striped, multi-coloured tulips, with intricate lines and flame-like streaks on the vivid petals, known as “broken bulb” tulips . Unknown then, the treasured striated effect was actually the result of the tulip–specific mosaic virus.
The major acceleration in tulip prices started in 1634, with increasing demand and higher and higher prices. Many professional traders were using margined derivatives contracts to buy more than they could afford. Others simply purchased bulbs on credit to be repaid with sale profits.
Tulip mania reached its peak in the Dutch winter of 1636/37, with the best of tulips costing upwards of $1 million in today’s money, and many bulbs trading in the $50,000 to $150,000 range. Some tulips were selling for the equivalent value of a mansion on the Amsterdam Grand Canal.
In the first week of February 1637, the tulip market collapsed.
Contract disputes arose, reputations were lost and relationships broken. Disputes devolved into distressed accusations and recriminations.
Although earlier accounts (in particular, Charles Mackay 1841) may have exaggerated the extent and impact of the phenomenon on Dutch society, tulip mania is still often touted as a model for the general cycle of a financial bubble:
- Investors lose track of rational expectations.
- Psychological biases lead to a massive upswing in asset price.
- A positive-feedback cycle continues to inflate prices.
- Investors realise they are holding an irrationally priced asset.
- Prices collapse due to a massive sell-off.
In 2013, Nout Wellink, former president of the Dutch Central Bank, described Bitcoin as “worse than the tulip mania”, adding, “At least then you got a tulip, now you get nothing.”
March 2024