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Tulip Mania As Pyramid Scheme

the-greatest-scams - Tulip Mania As Pyramid Scheme

Pyramid schemes emerged simultaneously with the monetary relations, because commodity exchange could not satisfy all market participants. Money immediately became a universal tool for evaluation of all that the eye would catch. Furthermore, it was due to money emergence that allowed pyramids to have reached the international level.

The tremendous boom in tulips in Holland in the first half of the 1600s selves an example of the first financial pyramid. Today we know the Netherlands for selecting tulips of various sizes and colors, but until the XVII century there had been no tulips in the country.

It all started with a broad expansion of the Dutch fleet (the largest in the world in those days). In a relatively short period of time the Amsterdam port had become the center of European trade, 1,000 ships passed through it daily.

Commodity-money relations entered a new phase, when stock exchanges were opened in Amsterdam and Antwerp. This strengthened the banking system and began to draw in the business area entrepreneurs from all over Europe. The income level of the Dutch was growing steadily, there were available funds that were eagerly like to spend on art, beauty and exotic things.

First tulips appeared at the court of the King of Austria in Europe, where they came from Turkey. a Frenchman Charles de l’Ecluse was the court gardener who successfully selected several kinds of tulips adjustable to the European climate. several decades later one of the merchant ships brought the bulbs into the Amsterdam port… Tulips quickly became an exotic decoration, their bulbs cost a lot and grew rapidly in price due to excessive demand among merchants – everyone wanted to join the elite society.

The problem was only that the product was seasonal and demand was not satisfied. It was then that dealers began offering to buy their bulbs of the next season. It was so simple at first sight that the amount of such futures transactions grew like a snowball. Enterprising people started buying receipts from trade organizations for the purchase of bulbs in the hope of selling them at a competitive price in high season. So a certain rate was set on tulips, which was steadily growing.

The Dutch began to go mad: craftsmen gave up their activities, citizens mortgaged property, peasants left their homes – all joined the race for the “paper” tulips. Snowballing demand for a specific product dramatically increased its rate against the commodity equivalent. There was a “tulip exchange” at each corner. The rate for tulips was so high that at some point a single bulb could cost a fortune.

A wanderer traveling the Netherlands described what he saw in such a way: “A rich merchant buys tulips for 1000 guilders from a water carrier, to immediately resell them for fifteen hundred to a doctor. However, neither the merchant nor the water carrier nor the doctor has real flower bulbs, nor wish to have them. All are only interested in gains from the transaction».

At the peak of tulip mania prices for these goods rose so high that no other type of business could compete with the flower contract business. Even previously considered extremely profitable trade of oriental spices and opium did not to come within miles of tulip trade.

For example, why should an industrialist build a new woolen manufactory, if he could earn as much money as the factory was to bring him for a whole year of work by trading a few tiny bulbs without too much trouble for a month?

Why should a merchant send a ship to distant India, risking his own cargo and head into the sea, threatening with storms and pirates (according to statistics of that time, out of every three ships sent to the distant sea, only one ship returned back) if he could receive fantastic profits without leaving home port.

Judge: The kind of the tulip bulb — Admiral de Maan, which cost 15 guilders a piece in 1636, two months later was sold for 175 guilders. The most demanded Semper Augustus («Eternal August”) at first cost 500 guilders but in a short time rose by tenfold! That is a profit of holders of such a valuable asset amounted to 1000%! At the end of 1637 Semper Augustus was worth 10,000 guilders — worth a major ship owner’s profit a year.

It should be noted that in those times the Dutch guilder was considered one of the most stable European currencies. Many wealthy people from other countries preferred to keep their money in guilders. And to make it clear about amounts involved, as an example, we give some prices: a well-fed pig cost 30 guilders, a thousand liter (!) barrel of beer — 8 guilders, and a cow — a hundred.
It is an interesting fact that passers-by could read a curious inscription on an ancient wall plate on the street in Amsterdam until the 1970s. It said that two stone houses were purchased for three tulip bulbs on this street in 1636. Now this part of ancient masonry is stored in a private museum.

Of course, the bubble had to burst at some point. The reason turned out to become the ship that brought a huge lot of bulbs to Amsterdam in spring 1637, which instantly collapsed price rates for tulips across the country. The bulbs were devalued as well as all “exchange shares” on tulips. People tried unsuccessfully to sell their shares and to cash receipts available on hand. Panic swept the country as well as a year ago it brought the tulip fever.

The rate collapse of the tulips resulted in widespread bankruptcy and economic depression from which Holland could not soon recover. It suddenly lost its title of the most developed European country, giving way to a new maritime country — Britain.

Only tulip fields which are a real gem and the hallmark of Holland remind of the tragedy now.

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