Wall Street History

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Wall Street History

05/02/2008

Tulipmania, part II

Last week I retold the story of tulipmania, primarily from the
eyes of Charles Mackay’s 1841 “Memoirs of Extraordinary
Popular Delusions.” Today, I thought we’d look at Johann
Beckmann (1739-1811) and his version of the events of 1637, as
told in his “Beytrage zur Geshichte der Erfindungen,” which
most peg as being originally published in 1783. And how did I
stumble on this? Let’s just say I purchased a series of very
expensive books and I’ll be damned if I’m not going to use them.
The following Beckmann passage is from the “Great Bubbles,”
edited by Ross B. Emmett.

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“The price of tulips rose always higher from the year 1634 to the
year 1637; but had the object of the purchaser been to get
possession of the flowers, the price in such a length of time must
have fallen instead of risen. ‘Raise the prices of the productions
of agriculture, when you wish to reduce them,’ says Young; and
in this he is undoubtedly right, for a great consumption causes a
greater production .

“During the time of the Tulipmania, a speculator often offered
and paid large sums for a root which he never received, and
never wished to receive. Another sold roots which he never
possessed or delivered. Oft did a nobleman purchase of a
chimney-sweep tulips to the amount of 2,000 florins, and sell
them at the same time to a farmer; and neither the nobleman,
chimney-sweep or farmer had roots in their possession, or
wished to possess them. Before the tulip season was over, more
roots were sold and purchased, bespoke and promised to be
delivered, than in all probability were to be found in the gardens
of Holland; and when Semper Augustus was not to be had, which
happened twice, no species perhaps was oftener purchased and
sold .

“To understand this gambling traffic, it may be necessary to
make the following supposition. A nobleman bespoke of a
merchant a tulip-root, to be delivered in six months, at the price
of 1,000 florins. During these six months the price of that
species of tulip must have risen or fallen, or remained as it was.
We shall suppose that at the expiration of that time the price was
1,500 florins; in that case the nobleman did not wish to have the
tulip, and the merchant paid him 500 florins, which the latter lost
and the former won. If the price was fallen when the six months
were expired, so that a root could be purchased for 800 florins,
the nobleman then paid to the merchant 200 florins, which he
received as so much gain; but if the price continued the same,
that is 1,000 florins, neither party gained or lost. In all these
circumstances, however, no one ever thought of delivering the
roots or of receiving them. [Ed., in other words, one of the first
examples of a futures market.] Henry Munting, in 1636, sold to
a merchant at Alkmaar, a tulip-root for 7,000 florins, to be
delivered in six months; but as the price during that time had
fallen, the merchant paid, according to agreement, only ten
percent. ‘So that my father,’ says the son, ‘received 700 florins
for nothing; but he would much rather have delivered the root
itself for 7,000.’ .The only difference between the tulip-trade
and stock-jobbing is at present .that at the end of the contract
the price in the latter is determined by the Stock-exchange;
whereas in the former it was determined by that at which most
bargains were made. High- and low-priced kinds of tulips were
procured, in order that both the rich and the poor might gamble
with them .Whoever is surprised that such a traffic should
become general, needs only to reflect upon what is done where
lotteries are established, by which trades are often neglected, and
even abandoned, because a speedier mode of getting fortunes is
pointed out to the lower classes. In short, the tulip-trade may
very well serve to explain stock-jobbing, of which so much is
written in gazettes, and of which so many talk in company
without understanding it .

“At length, however, this trade fell all of a sudden. Among such
a number of contracts many were broken; many had engaged to
pay more than they were able; the whole stock of the adventurers
was consumed by the extravagance of the winners; new
adventurers no more engaged in it; and many, becoming sensible
of the odious traffic in which they had been concerned, returned
to their former occupations. By these means, as the value of
tulips still fell, and never rose, the sellers wished to deliver the
roots ‘in natura’ to the purchasers at the prices agreed on; but as
the latter had no desire for tulips at even such a low rate, they
refused to take them or to pay for them. To end this dispute, the
tulip-dealers of Alkmaar sent in the year 1637 deputies to
Amsterdam; and a resolution was passed on the 24th of February,
that all contracts made prior to the last of November 1636 should
be null and void; and that, in those made after that date,
purchasers should be freed on paying ten percent to the vendor.”

What a mess. But does the above remind you of something?
Like the issues in today’s derivatives markets and counterparty
risk? It does to me.

Finally, Johann Beckmann had this tale of the time.

“When John Balthasar Schuppe was in Holland, a merchant gave
a herring to a sailor who had brought him some goods. The
sailor, seeing some valuable tulip-roots lying about, which he
considered as of little consequence, thinking them to be onions,
took some of them unperceived, and ate them with his herring.
Through this mistake the sailor’s breakfast cost the merchant a
much greater sum than if he had treated the prince of Orange.
No less laughable is the anecdote of an Englishman who traveled
with Matthews. Being in a Dutchman’s garden, he pulled a
couple of tulips, on which he wished to make some botanical
observations, and put them in his pocket; but he was
apprehended as a thief, and obliged to pay a considerable sum
before he could obtain his liberty.”

J’accuse!

Wall Street History returns next week.

Brian Trumbore

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