When tulip mania visited Dutch towns centuries ago

Anyone taken as an individual is tolerably sensible and reasonable - as a member of a crowd, he at once becomes a blockhead
- Friedrich Von Schiller as quoted by Bernard Baruch

We don’t learn from bubbles. And that is why they keep popping up now and then particularly in stock markets all around the world. As the late John Kenneth Galbraith points out in A Short History of Financial Euphoria,  “The first modern stock market — modern especially as to the volume of transactions — appeared… in Amsterdam at the beginning of the 17th century. And it was in the stable, wide-horizoned land of the Dutch with its stable and sombre people, that there came in the 1630s the first of the great speculative explosions known to history.”

But this bubble did not happen in the stock market. “It was not, however, in stock-market offerings or in real estate or, as one might have expected in the superb Dutch paintings; the speculation was in tulip bulbs,” writes Galbraith.

What made this bubble particularly interesting was the instrument of the bubble: tulip — essentially a flower. As Galbraith writes “The tulip — Tulipa of the lily family Liliaceae, of which there are around 160 species — grows wild in the Eastern Mediterranean countries and on east from there.

The bulbs first came to Western Europe in the 16th century; a cargo of them that arrived in Antwerp from Constantinople in 1562 is thought to have been especially important in spreading knowledge and appreciation of the flower. This appreciation became, in time, very great, enormous prestige was soon attached to the possession and cultivation of the plant.”  And once owning a tulip became a prestige issue, buyers couldn’t have been far behind.

“The rush to invest engulfed the whole of Holland. No person of minimal sensitivity of mind felt that he could be left behind,” writes Galbraith. Given this, prices soon became extravagant. “By 1636, a bulb of no previously apparent worth might be exchanged for ‘a new carriage, two grey horses and a complete harness’.”

In fact, Charles Mackay recounts a hilarious story in his book Extraordinary Delusions and the Madness of Crowds, “of a young sailor who, for bringing word of a shipment of goods from the Levant, was rewarded by a merchant with a fine red herring for his breakfast. Presently the merchant, who was much involved in the tulip speculation, found missing a bulb of a Semper Augustus worth some 3000 florins, an unimaginable $25,000 to $50,000 today. When he sought out the sailor to question him, the latter was discovered contentedly finishing the onion, as he had supposed it to be, along with the fish.”

As prices rose, as happens often happens in bubbles, more and more people who owned tulips thought the increase in price would be sustained forever. “Every one imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them…People of all grades converted their property into cash, and invested it in flowers,” writes Galbraith.

When this happened “in keeping with the immutable rules governing such episodes, each upsurge in prices persuaded more speculators to participate”.  And the increasing prices of tulips justified the “hopes of those already participating, paving the way for yet further action and increase, and so assuring yet more and ever continued enrichment”.

But as often happens in case of bubbles, “the supply of new buyers needed to sustain the upward thrust” dries up at some point of time and there is a mad rush to get out. “In 1637 came the end…The wise and the nervous began to detach, no one knows for what reason; others saw them go; the rush to sell became a panic; the prices dropped as is over a precipice,” writes Galbraith. And this how all bubbles burst.

As Galbraith writes “Those who had been riding the upward wave decide that now is the time to get out. Those who thought the increase would be forever, find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang.” In the aftermath of the burst, the search for scapegoats started. But no one wanted to mention the “mass mania that was the true cause”.

This episode which happened a little under four centuries back, leaves us with a lot to learn. Replace the word tulip with the word stocks, real estate, commodities or even art and you can see the same story happening over and over again.