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.The Eternal American Battle - Humans V Money

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Wednesday, February 11, 2015

VIRUS


I want to talk about the human propensity for greed, by first discussing a small family of viruses which ignore humans completely -  the Potyviridae. These five related parasites, 100th the size of a bacteria, do not infect humans, but they do infect and quickly kill lilies – after all,  the word virus is Latin for poison. In response, lilies evolved the tulip,  resistant enough to the Potyviridae that they could reproduce for perhaps a dozen generations before succumbing to these miniature succubus. And that's when humans come into the picture, because long before humans knew there was such thing as a virus, they found a way to ruin their own lives, and the lives of thousands of their fellows, by using Potyviridae.
See, tulips evolved from lilies where Europe blends into Asia, in the Ferghana Basin, north of Afghanistan, east of the Caspian Sea and west of Lake Balkhash. The basin is surrounded by mountains, and in this isolated test tube 36 different varieties of wild tulips developed over a few thousand years. Some had multiple stalks and blooms, some only one. The blooms could be white, red, yellow or orange. And when infected with Potyviridae the blooms would be wildly stained as if a child had asymmetrically dripped paint over them. Then, the unexpected happened. In the 8th century, humans living in the Ferghana Basin converted to Islam, and tulip seeds and bulbs were transported westward to Islamic centers, as a beautiful curiosity, the more so because of the fanciful patterns they displayed when infected by Potyviridea, which traveled with its host. And because the bulbs could be be transported thousands of miles, because they were purely ornamental, and because they had to be replaced every few years, to own and grow them became a display of extreme wealth, conspicuous consumption, restricted to the caliphs in Baghdad and later Istanbul.
A century after Christopher Columbus – in 1593 - tulip bulbs were first planted in the Netherlands, by the botanist Carolus Clusius. His wealthy patrons were for the first time in history, not blue-blood royalty but the local burgomasters of the the town of Leiden. Recently freed from paying protection money to Spanish royalty, these Dutch Protestant capitalists were interested in just two things, making money, and showing everybody how much money they were making. The “Nouveau riche” adopted all the accouterments of their noble predecessors, including fine clothes, large homes, fancy carriages, portraits, and within ten years, ownership of the exotic tulip, so named because its bloom resembled a Turkish turban. And it was now that human greed enters our story, when tulips pass from being a de rigueur symbol of wealth, to the means for measuring and achieving wealth.
The Lord, it seemed, had designed the tulip to make humans rich, and a few Calvinist ministers pointed this out. The plant blooms for only a week or two in the spring. And having proven its colors, after the leaves have died back, the bulb may be dug up, marketed and sold, before being returned to the soil for the winter. So the primary tulip market was set by the plant itself, every fall. The rest of the year traders would buy and sell future contracts on the bulbs in the ground, gambling on their future vitality, which, considering they variations of color patterns being determined by a virus that were slowly killing the plant, was never a sure thing. . The futures market in tulips began to drive the price of tulips upward, until, within twenty years of Clusius' experiment - in 1610 - the burgomasters felt required to make it illegal to sell tulip futures “short”, meaning to gamble that the price for bulbs in the ground would drop before spring.
A disaster in the tulip trade was predictable as far back as the summer of 1623, when a bulb of the rarest variety (only 10 existed), Semper Augusttus, was sold for a thousand guilders. The most skilled carpenters earned only 250 guilders a year, and Carolus Clusius, the man responsible for all of this, earned a mere 750 guilders a year. But when the bulb of the Semper Augusttus (above)  was pulled from the ground, it was found to have two “daughter” bulbs, meaning the value of each Semper Augusttus bulb had just been reduced by 15%. The buyer was the fabulously rich Adriaan Pauw, and he was not happy, even though he now owned all 12 of the rare tulip.
The law against selling tulips short had been reaffirmed in 1621, and again in 1630, and yet again in 1636. Now you don't make a law unless you have to, and you don't keep making that law unless  short selling was going on. And many burgomasters saw the practise of betting on a catastrophe as dangerous. At the same time it seems safe to assume there was resistance to enforcing such laws, since no penalties were ever attached to a violation. It reminds me of the current toothless regulation of the banking industry in America. The general feeling seems to have been (and is in America today) that everybody could continue making money as long as everybody stayed greedy but smart. And that has never happened in all of human history, and it did not happen in the Netherlands in the 17th century, first because the traders were not trading in what they thought they were trading in - tulips -  but in a virus which infected tulips, and second I remind you again of a central theme in many of my essays; greed makes you stupid.
Adriaan Pauw was smart. He was rich enough he did not need to be greedy with his tulips. He kept the value of his Semper Augusttus high by the simple expedient of not selling his bulbs, which prevented anybody from noticing that they got weaker with each generation. But he did go to the expense of constructing a gazebo in his garden, covered in mirrors, to reflect his blooms during their brief existence. It also more than doubled the impression of his wealth. In 1624 Pauw's Augusttus were valued at 1,200 guilders each, then 2,000, and in 1626 at 3,000 guilders for a single bulb. By 1633 each bulb of Augusttus, which had continued to produce “daughters”, was valued at 5,500 guilders. And finally Pauw could resist temptation no more. He only sold one at that price, and with the stipulation that it could be re- sold only with his approval.  But inflation had spread like a virus to all varieties of tulips. During one two year period the price for “General of Generals” bulbs increased from 100 guilders to 750 guilders. On February 5, 1637 at an auction held in the lake side fortress village of Alkmarr, an Admiral van Enkhuizen bulb, was sold for 5, 200 guilders, several million American dollars today. Who could resist such temptation?
That single auction, saw 70 rare bulbs sold for 53,000 guilders, an all time high. But just two days earlier and 20 miles to the south in the village of Harrlem a tulip investor and grower club – called a college – had become so worried about these rising prices that they decided to test the market. They held an auction of a huge quantity of common bulbs. They meant to see how deep the demand really was. The experiment blew up in their faces. Only one buyer showed up. Realizing he was the market, he demanded a 35 % discount. And he got it. And when word of this disaster reached Alkmarr and beyond, a stunned silence settled over tulip colleges all over the Netherlands. Prices of tulips collapsed like the price of baseball trading cards or comic books after  2007. Many varieties of tulips would quickly lose 95% of their value.
Families went bankrupt -  how many has become a subject for much debate in economic circles. But many victims sought a new start in the New World. Said one Calvinist, it was “ God’s Just Plague-Punishment, for the attention of the well-to-do Netherlanders in this bold, rotten Century.”  It was the usual, "Heads, God wins; tails human lose" philosophy. There were lawsuits, and everybody wanted out of their futures contracts. The government tried to help, but any new law saving buyers was opposed by sellers, and any new law favoring sellers was opposed by buyers. So the politicians did nothing.   The very wealthy Adriaan Pauw's fortune survived, although he did take a hit. And most futures contracts were quietly closed out for 10-15% of their paper value.
A lot of people have tried to claim the Tulip Mania  was not a “market bubble”, like all the other market bubbles since. But the best description of what went wrong that I have found was by A Maurits van der Veen, from the College of William and Mary. (http://www.maurits.net/Research/TulipMania.pdf ) He wrote in 2009, “When novice traders entered the market...it became increasingly difficult to distinguish those with solid private knowledge from those who were simply following the crowd... these constituted a new kind of trade, no longer linked to individual bulbs.” In other words, greed driven investors were betting not on tulips, but tulip investors - call it tulip derevitives. And that had blown the market up. Sounds like a market bubble to me. And when Tulip mania died, so did some of the most valuable strains of tulips. There has not been a Semper Augusttus bloom seen since the middle of the 17th century.
There are many who still insist the Semper Augusttus was the most beautiful tulip that ever existed, as there are many who insist an unregulated “free market” is superior to a regulated stock market. But with its asymmetrical and varied patterns the Semper Augusttus was actually the product of Potyviridae devouring the tulip from the inside, breaking its genetic code, and slowly killing its host. It was not a true species. It lived no longer than the rich man who had the fortune to maintain its artificial existence.  Modern tulips are far stronger,  their colors symmetrical, and more resistant than the frail infected flowers  that so entranced the “Nouveau riche” of 1637. And because of that, billions of people today enjoy tulips  And some day, perhaps, the nouveau rich of our age will come to admit that like the Potyviridea infected tulip, an unregulated  “free market”, which produced the tulip mania and a thousand other manias and bubbles in the 400 years since, is merely a splash of color which distracts your attention from the parasite devouring capitalism  right before your eyes.
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