I want to talk about the human
propensity for stupidity, by first discussing a small family of
viruses which ignore humans completely, the Potyviridae. These five
related parasites, 100th the size of 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 more or less before
succumbing to the 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 had to 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, the Netherlands. 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 stupidity
enters our story, when tulips pass from being a de rigueur symbol of
wealth, to the means for 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 spring. The rest of the year traders would buy and
sell future contracts on the bulbs in the ground, gambling on their
future vitality. This market began to drive the price 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
rare 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.
The law against selling tulips short
had been reaffirmed in 1621, and again in 1630, and yet again in 1636.
So short selling was going on, and some burgomasters saw it 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 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 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 may 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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