The futures contracts were binding on both parties. Option contracts were binding only on the holder. The Dutch guild of florists announced that holders of tulip bulb futures could break their contract at a greatly reduced value. How did this futures market in tulips begin in 17th century Holland?
The Carolus Clusius Leiden Garden in Holland
If a flower was ever a status symbol in history, the tulip was just that for the Dutch. Tulipmania in 17th century Holland is said to have occurred with Carolus Clusius (Charles de l'Écluse, L'Escluse, Carolus Clusius, or Carlos Clusius). Clusius was born in Arras (Dutch: Atrecht) , North France on February 19, 1526. He first studied law but switched to the study of botany. In 1593, he became prefect of the University of Leiden's horticulture department.
In the fall of 1593, Clusius started planting teaching gardens in Leiden. A well traveled man, the gardens cultivated a variety of plants from around the world. This would include the tulip bulbs given to him by Ogier Ghiselin de Busbecq, the 16th century Flemish herbalist, writer, and diplomat. Busbecq was the Austrian ambassador to the Ottoman Empire. Before coming to Holland to teach at Leiden, Clusius had previously served under the appointment of the Austrian emperor Maximilian II. He was head of the Austrian royal medicinal garden and the Austrian royal court's physician.
Speculation in the Futures and Options Market for the New Dutch Tulip
No Dutch person had viewed a tulip prior to Clusius's introduction of the bulb at Leiden. Its beauty and rarity captured the venturesome nation's heart and mind. Tulip stocks were reported by early commentators as having been stolen from Clusius' Leiden garden when he refused to sell to the Dutch aristocracy.
Carolus Clusius died in 1609 in Leiden. By the 1620s, the Dutch Republic rose to global power as a result of its colonial expansionism and African slave trading activities. The resulting increase in the money supply in Holland led to an increase in speculative transactions.
The Dutch Futures Market for Rare Tulip Bulbs
The Dutch aristocracy was very wealthy. While the average Dutch worker in the 1600s made about 150 florins annually, a rare tulip bulb could easily be sold in 17th century Holland for 1,000 florins. Tulips were worth more than gold. The famed Semper Augustsus bulb is said to have sold for 6,000 florins.
In Amsterdam, the number of insolvencies resulted in bankruptcy filings doubling between 1635 and 1637. During this same time the unregulated futures market or derivatives market for tulip bulbs had skyrocketed. Tulip bulbs were being sold from one party to another - many times over - before it was ultimately delivered. Payment for bulbs were not due until they were actually dug from the ground in the summertime. This was termed by the Dutch as windhandel, or "wind trade." By the time the Dutch government began to regulate the tulip market the speculation had become too great.
By February 1637, the tulip market had abruptly collapsed in Holland. On April 27, 1637, the Dutch government canceled all tulip futures contracts. It was decreed that futures in tulips could no longer be traded as an investment, but only as an actual product in the marketplace. Holders of option contracts walked away and the value of tulips crashed.
The tulip is the Dutch national flower. Tulip bulb farms are reported to produce approximately $3 million annually, with two-thirds of the market for export. Though the guild of florists no longer operates in the futures market in the Netherlands, the florist merchants along the Dutch canals of downtown Amsterdam are alive and well in the direct sales market.
References:
- "Risky Business: Popular Images and Reality of Capital Markets Handling Risk - From the Tulip Craze to the Decade of Greed," by Christian C. Day, Syracuse University - College of Law (September 2007)
- "The Fascinating Book of History," by Armchair Digest, Publication International, Ltd. (2009)
General Disclaimer: This article is for informational purposes only and should not be used as a substitute for legal or tax advice.
Vanessa Cross - Vanessa Cross is a freelance writer who writes about international trade, business law and small business development issues.
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