Every dog has its day. And the Dutch Republic — precursor to today’s Netherlands — had its day in the mid-17th century. It broke away from the Spanish Empire in 1579 and became the richest place in the world with a far-flung empire of its own.
It was not only free trade that brought the Dutch wealth. Freedom of religion and freedom of movement also contributed. Jews from Spain and Portugal, Protestants from France, thinkers and tinkers from all over Europe found freedom in the Dutch Republic. Descartes, Bayle, Locke, Spinoza — all took refuge in Holland. And the new immigrants brought fresh ideas ... and capital.
New products came in too. In the 17th century, Europeans were expanding their trade routes into Africa, Asia and the Americas. They brought back tobacco, tomatoes, potatoes and many other products never before available in Europe. But none of the arrivals had the effect of a plant that came from the Ottoman Empire — the tulip. It caught the eye not only of gardeners, but of investors.
One of the innovations made by the Dutch was futures markets. They could bet on the future, using markets not only to set current prices, but also the prices that people expected tomorrow.
Typically, the tulips flowered in the springtime, and then the bulb was dug up and stored. For the autumn and the winter, the bulb stayed where it was. It was the ‘underlying’ asset on which trades were made on paper, as buyers began to see they could get rich just by trading things they would never see.
Until, in February 1637, an auction was held. This time, there were no buyers. Word quickly got around that there may be no one willing to buy the bulbs. Prices collapsed. Promises went unfulfilled. Loans went unpaid. Contracts were torn up. The bulbs were still there, but the 'paper' wealth had disappeared.
The bitcoin of the 17th century had come to a sudden end, but to this day Wilma can still be heard singing about "Tulpen aus Amsterdam".
