JULY 2018

JULY 2018
One Hundred Years Later, Same Message. 1916 - 2017


Saturday, August 05, 2017


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. But 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 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 bulb. And because the bulbs could be transported thousands of miles, because they were purely ornamental, and because they had to be replaced every decade or so,  to own and grow them became a display of extreme wealth, conspicuous consumption, restricted to the ruling 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, personal 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 a means of  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 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 their pattern variations was being determined by a virus that was 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 the next spring bloom.
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 owner of all 12 bulbs was the wealthy  Adriaan Pauw.  
The law against selling tulips short had been reaffirmed in 1621, and again in 1630, and yet again in 1636. Clearly many burgomasters saw the practice of betting on a catastrophe as dangerous. At the same time it seems safe to assume there were few bets being made that the price of tulip bulbs was going to go down, since no penalties were ever attached to a violation. The general feeling in Holland seems to have been (as it is in America today about the big banks and hedge funds ) that everybody could continue making money as long as everybody stayed greedy but smart. But that has never happened in all of human history. And it did not happen in 17th Century Holland - first because the traders were not trading in what they thought they were trading in, which was tulips, but in a virus which infected tulips. And second I have now arrived at the central theme of this essay -  greed makes you stupid.
Adriaan Pauw was smart. 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 12 prized  Augusttus were valued at 1,200 guilders each. The next year that went up to 2,000 guilders each, and in 1626 up to 3,000 guilders for a single bulb. Inflation spread like a virus to all varieties of tulips. During one two year period the price for a “General of Generals” bulb increased from 100 guilders to 750 guilders. On 5 February, 1637 at an auction held in the lake side fortress village of Alkmarr, 70 rare bulbs sold for 53,000 guilders, an all time high - several hundred million American dollars today. Who could resist such temptation? Not  Pauw.  He finally sold a single bulb of Augusttus for 5,500 guilders. But the bloom was about to fall off the rose.
Just two days earlier and 20 miles to the south in the village of Harrlem, a tulip investor club – called a college – decided to see how deep the demand for tulips really was. They held an auction of a huge quantity of common bulbs. 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 prices of tulips collapsed like the price of baseball trading cards or houses in 2007.  Many varieties of tulips would quickly lose 95% of their value.
Families went bankrupt -  heads of households and sons committed suicide - how many has become a subject for much debate in economic circles. 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. But why get God involved when there are so many lawyers around? There were endless lawsuits, because every buyer wanted out of their futures contracts and every seller wanted them enforced. So the politicians did nothing.   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 written by A Maurits van der Veen, from the Virginia college of William and Mary. (BUBBLE)   He wrote in 2009, “...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 on other tulip investors - call it the tulip derivatives market. That was where the market had first blown up. Sounds like a market bubble to me. And when Tulip mania died, so did some of the most valuable tulips, because their viruses were not passed on. There has not been a Semper Augusttus bloom 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 morally and functionally superior to regulated markets. But Semper Augusttus was not a true species, but the by-product of Potyviridae devouring the tulip from the inside, consuming its genetic code, and eventually killing the bulb and flower.  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  Some day, perhaps, the nouveau riche of a new age will come to admit that like the Potyviridea infected tulip, an unregulated  “free market”, is merely a splash of color which distracts your attention from the parasite devouring capitalism from the inside - unrestricted uninhibited greed.
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