the big short squeeze

The Big Short. Squeeze. What fury? Citizens.

Just other stuff.

Lessons from Tulipomania in Sixteenth Century.

Quis furor, ô cives!.

What Fury? Citizens!


Today’s story comes from a book titled, MEMOIRS OF EXTRAORDINARY POPULAR DELUSIONS AND THE Madness of Crowds. Written by CHARLES MACKAY, LL.D. in 1852.

The tulip was introduced into western Europe about the middle of the sixteenth century. The word Tulip is of Turkish origin, meaning a turban.

Conrad Gesner, first saw a beautiful Tulip in the year 1559, in a garden at Augsburg. The garden belonged to one Counsellor Herwart, who had a collection of such exotic flowers and plants. He had originally received his first Tulip bulbs from a friend at Constantinople.

From 1559 to 1570, tulips were much sought after by the rich and famous in Holland and Germany. Rich people at Amsterdam purchased the bulbs directly from Constantinople, and paid the most extravagant prices for them.

The first Tulips were planted in England were brought from Vienna in the year 1600, and the popularity of Tulips kept increasing. If you had any taste, if you were anything – you had to have those Tulips. Tulips were the status symbol of the times.

The craze for the tulips soon caught the common man, the middle class, and merchants and shopkeepers. Every one wantedTulips, and were willing to pay the preposterous prices, not to sell it again for profit, but to keep it in their living rooms and offices to show off.

One would think that there must have been some magical powers in this flower to have made it so valuable in the eyes of rich, famous, educated and Europeans!

“The tulip next appeared, all over gay,
But wanton, full of pride, and full of play;
The world can’t shew a dye but here has place;
Nay, by new mixtures, she can change her face;
Purple and gold are both beneath her care,
The richest needlework she loves to wear;
Her only study is to please the eye,
And to outshine the rest in finery.”

By Abraham Cowley

In 1634, the rage among the Dutch to possess Tulips was so great that the ordinary industry of the country was neglected, Every one was involved in the tulip trade. As the mania increased, prices increased, until, in the year 1635, one paid 100,000 florins to buy forty bulbs of Tulips.

In comparison, Here is a cost of other essentials of that time:

Four fat Ox (Male Cows): 480 Florins
Eight fat Pigs: 240 Florins
Twelve fat sheep: 120 Florins
Four tuns of beer: 32 Florins
Two tuns of butter: 192 Florins
One thousand lbs. of cheese: 120 Florins
A complete bed: 100 Florins
A suit of clothes: 80 Florins
A silver drinking-cup: 60 Florins

Again, 40 bulbs of Tulips cost Over 100,000 Florins!

Florins are coins from that era in the 12th to 16th century.

People who had not lived in Holland, and were returning when this foolishness was at its maximum, were sometimes led into awkward positions by their ignorance.

There is this amusing story from Blainville’s Travels. One time this wealthy merchant, who showed off his rare tulips, received a very valuable consignment of merchandise from the Levant. The news of the shipment was brought to him by a sailor. The merchant, to reward him for his news, gave him a present of a fine red herring for his breakfast. The sailor apparently loved his onions, and seeing a bulb that looked very much like an onion lying upon the counter of this merchant’s office, thought – This onion bulb is, very much out of its place among silks and velvets! He slipped the bulb into his pocket, as a relish for his herring. Without thinking much of it, he proceeded to the quay to eat his breakfast.

It did not take too long for the merchant to realize his Tulip Bulb was missing. It was the most valuable kind, the Semper Augustus, worth three thousand florins at the time.

The whole office and the household of the merchant were instantly in an uproar; they searched everywhere for the precious Tulip Bulb, but it was nowhere to be found. At last, someone thought of the sailor. And the unhappy merchant took to the streets, his alarmed household followed him. There was a mob, now in search of the Sailor.

The ignorant sailor had no idea. He was found quietly sitting on a coil of ropes, eating the last bites of what he still enjoyed as the most unusually delicious “onion”. The merchant demanded the sailor pay back for his prized Tulip. At the time, the cost of his breakfast would have paid the salary for the entire crew of the ship for 12 months!!

While his tulip was quite delicious with his red herring, the most unfortunate part of the business for him was, that he remained in prison for some months on a charge of a felony by the merchant.

There is a similar story of an English traveller, which I think is even funnier. This gentleman was an amateur botanist, He happened to see a tulip-root lying in the conservatory of a wealthy Dutchman. Having absolutely no idea how much a Tulip costs, he took out his penknife, and peeled off its coats, trying a few experiments to learn more about the “bulb”. He made many observations while continuing to peel this bulb, slashing it in half. And Suddenly, the owner pounced upon him, and, with fury in his eyes, asked him if he knew what he had been doing? “Peeling a most extraordinary onion,” replied the Botanist.
“It is 4000 Florins.” said the Dutchman. The botanist had no idea, yet he was extremely remorseful. But the Dutchman was so angry, he would have none of the apologies. He dragged the Botanist in the streets by his collar and took him to the Magistrate, followed by a mob of persons. When brought into the presence of the magistrate, the Botanist was ordered to pay four thousand florins to the Dutchman; He was sent to prison until he found money for the payment of this amount.

The demand for tulips of a rare species increased so much in the year 1636, that regular stores for their sale were established on the Stock Exchange of Amsterdam, in Rotterdam, Harlaem, Leyden, Alkmar, Hoorn, and other towns. And as with the Stock Markets, Gambling began. The traders started dealing large sums of money in tulips, making use of all the means they so well knew how to employ, to cause fluctuations in prices.

At first, as in all these gambling mania, confidence was at its height, and every body made money. The tulip-traders speculated in the rise and fall of the tulip stocks, and made large profits by buying when prices fell, and selling out when they rose. Many individuals grew suddenly rich.

Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.

Nobles, citizens, farmers, mechanics, sea-men, Professors, Scientists and People of all classes converted their properties into cash, and invested it in Tulips. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart.

Foreigners became smitten with the same frenzy, and money poured into Holland from all directions. The prices of the necessaries of life rose again by degrees: houses and lands, horses and carriages, and luxuries of every sort, rose in value with them.

At last, however, the bubble burst. Someone began to see that this folly could not last forever. Rich people no longer bought the flowers to keep them in their gardens, and offices but to sell them again at profits. It was seen that somebody must lose fearfully in the end. As this conviction spread, prices fell, and never rose again. Confidence was destroyed, and a universal panic seized upon the dealers.

A had agreed to purchase ten Semper Augustines from B, at four thousand florins each, at six weeks after the signing of the contract.
B was ready with the flowers at the appointed time; but the price had fallen to three or four hundred florins, and A refused either to pay the difference or receive the tulips.

Defaulters were announced day after day in all the towns of Holland.

Hundreds and Thousands of people suddenly found themselves in possessions of a few bulbs, which nobody would buy, even though they offered them at half the prices they had paid for them.

Many who, thought they became rich for the short term by owning the Tulip, were suddenly cast back into their original poverty.

Rich became poorer and people from all walks of life saw their fortunes of his house ruined, beyond redemption. The Dutch economy was in shambles for many years to come.

When the first alarm subsided, the tulip-holders in the several towns held public meetings to figure out a solution. It was generally agreed, that perhaps the government could rescue them. The government at first refused to interfere but advised the tulip-holders to agree to some plan among themselves.

Several meetings were held for this purpose, but no one could convince the people. At last, the government agreed that all contracts made in the height of the tulip mania, or prior to the month of November 1636, should be declared null and void, and that, in those made after that date, purchasers should be freed from their engagements, on paying ten percent to the vendor.

This decision did not help the vendors who had their tulips on hand. Tulips which had, at one time, been worth six thousand florins, were now to be procured for five hundred; so that the composition of ten percent was one hundred florins more than the actual value. Actions for breach of contract were threatened in all the courts of the country.

The matter was finally sent to the Provincial Council at the Hague, thinking that they would invent some measure by which credit should be restored. The members of the council continued to deliberate week after week, and at last, after thinking about it for three months, declared that they could offer no final “helpful” decision!!

They advised, however, that, in the mean time, every vendor should, in the presence of witnesses, offer the tulips to the purchaser for the sums agreed upon. If the purchasor refused to take them, they might be put up for sale by public auction, and the original contractor held responsible for the difference between the actual and the stipulated price.

There was no court in Holland that would enforce payment. The question was raised in Amsterdam, but the judges unanimously refused to interfere, on the ground that debts contracted in gambling were no debts in law.

So this is how it all ended!!

It was beyond the power of the government to rescue the people.

Those who were unlucky enough to have had loads of tulips on hand at the time were left without recourse;

Those who had made profits were allowed to keep them!!

Such is life.

The Dutch economy took a long time to recover.

The example of the Dutch was imitated in England. In the year 1636 tulips were publicly sold in the Exchange of London, and the Traders tried their best to raise the Prices to the fictitious value, they had acquired in Amsterdam. In Paris also the traders tried to create a tulipomania. In both cities, they only partially succeeded.

“Shorting” in stock market as explained by Wimpy in Popeye.

“I’d gladly pay you Tuesday for a hamburger today”

Wimpy. From Popeye.

So Indeed, Wimpy cannot get this hamburger. But you sure can borrow a stock and sell it Short.

Jerry Seinfeld Experiment: Don’t break the chain. Post #32.

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