Chas Craig, BridgeTower Media Newswires
“I can calculate the motion of heavenly bodies, but not the madness of people.”
— Sir Isaac Newton
The above quote, attributed to Issac Newton, came in the wake of the great scientist losing a large sum of money speculating in shares of the South Sea Company in the early 1700s, the financial bubble of his day. However, it is also especially fitting for the bubble that inflated and later popped about a century prior in Holland, a financial power of the time, which later became known as Tulip Mania. Tulip Mania was first popularized in Charles Mackay’s 1841 book, Extraordinary Popular Delusions and the Madness of Crowds. While more recent analysis has challenged the magnitude of the rise and fall in the price of tulips in Holland during that time and the depth of the economic downturn that followed, it is widely recognized that tulips rose to especially high price levels from at least 1634 before collapsing in early 1637.
Imported from Turkey in the late 1500s, tulips were a status symbol, so it is reasonable to assume that the beautiful and durable flowers took on the characteristics of a Veblen good (we discussed Veblen goods in “A Digression on Diamonds”) whereby higher prices spurred more demand and, therefore, higher prices. However, it appears that the mania did not fully take hold until several decades later when some tulip varieties were infected by a benign virus that caused the petals to develop multi-colored patterns. Like all other speculative bubbles, the fact that prices had risen became confirmation of an otherwise half-baked investment thesis (i.e. foreigners would have an insatiable appetite for Dutch tulips).
Official price data from the period is sparse. However, at its peak, the most favored tulip varieties apparently fetched prices many multiples of not only a full year’s wages for an average worker, but also that of a typical home. The flowers were also reportedly used as currency in some property sales. The speculative hunger for tulips was also fed during that time by poor legal protections and ill-conceived public policies that introduced enough moral hazard into the market for tulips to make officials tasked with regulating the U.S. housing market in the mid-2000s blush.
Despite the present day being separated from this episode in 17th-century Holland by several centuries, the parallels that can be drawn between Tulip Mania and the current manic speculation in cryptocurrencies like bitcoin are striking. Now, this is not to say that the current craze won’t serve some long-term societal good. Just like the lessons learned from Tulip Mania helped form modern futures markets, the proving out of a new technology, blockchain, is likely to increase trust and logistical ease across global supply chains. Having said that, we do expect this current round of hot potato will end much like those that preceded it.
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Chas Craig is president of Meliora Capital in Tulsa (www. melcapital.com).
