The Tulips of Haarlem and the Apat of Seoul

In the classic book Extraordinary Popular Delusions and the Madness of Crowds (1841) by the 19th century Scottish journalist Charles Mackay (1814-1889), there is an interesting episode set in the Dutch city of Haarlem, a centre for flower growing and trade, in the 1630s. A Dutch merchant offered a sailor a breakfast of red herring, after the sailor had given him good news about the merchant’s business. When the merchant stepped out of the room, the sailor noticed something that looked like an onion lying on the counter. He liked onions very much, so he ate it as a relish for his herring. When the merchant came back, the sailor was stunned to learn that the ‘onion’ was actually the bulb of a Semper Augustus tulip, which was extremely expensive! The merchant sued the sailor, who was thrown into jail for months for eating a tulip root instead of an onion. According to Mackay, a single Semper Augustus tulip bulb sold for 5500 florins (Dutch guilders) in 1633. By 1636, it had become difficult to obtain one in exchange for 12 acres of land. At that time, the cost of one ox was 120 florins and a swine was 30 florins.

The rare Semper Augustus

The Semper Augustus is the rarest variety of tulips with red stripes that look like flames licking the stark white petals. Yet no matter how beautiful it is, it is still just a flower. How could the bulb have been so expensive? In the Netherlands in the 1630s, the prices of the bulbs of not only the Semper Augustus but also most other tulips, especially those rare varieties with stripes, soared to extraordinarily high levels. Why? Tulips were not introduced in Europe until the mid 1500s. After their arrival from the Ottoman Empire (1299-1923) the flower became very popular withy thye Dutch nobility and the merchant class, who were enjoying the Dutch Golden Age. The Netherlands was the economic and cultural leader in Europe and the tulip was one of the luxuries in which the wealthy indulged.
At first, tulip bulb prices rose due to the popularity of the flower and its rarity. Prices increased even more when people who were not even interested in the flowers began snapping them up with the expectation that prices would rise further, leaving them a hefty profit. According to Mackay, most Dutch people, rich or poor, even chimney sweepers, eventually rushed into the tulip market. In February 1637, however, tulip traders could no longer find new buyers to pay such high prices for the flower bulbs and prices suddenly tumbled.
This ‘tulip mania’ was repeatedly referenced as the historical precedent for speculative bubbles when the dot-com bubble—and later, real estate bubble, including the sub-prime mortgage crisis in the United States that triggered the global financial crisis in 2008—burst. When people purchase something without sufficient information or without deliberating about its fundamental value, because they expect that prices will rise further after they have risen once, it is commonly called speculation. When many people participate in speculative activity so that prices become artificially inflated, that swell is known as a bubble.
It was through Mackay’s book that ‘tulip mania’ became known. Some economic historians of our day say that his accounts of tulip mania are exaggerated. They say that tulip speculation was not as widespread as Mackay suggests and that only some merchants were involved. Perhaps it is true but, in any way, were all of the tulip speculators fools? Mackay proposed that even wise, rational individuals tend to do irrational and absurd things when they are part of a group. He offered ‘tulip mania’ as the primary example of this, along with a fever for alchemy, witch hunts and more. Tulip traders in the 1630s, caught up in the ‘tulip mania’ gripping the nation, forgot that tulip prices would eventually decline, he wrote. Probably it was true, but I believe some people decided to participate anyway, knowing that flower prices would eventually go down.

Wagon of Fools (1637) by Hendrick Gerritsz Pot
Oil on panel, 61 x 83 cm
Frans Hals Museum, Haarlem, The Netherlands

A good representation of the ‘tulip mania’ that overcame the Dutch city of Haarlem can be found in the satirical paint Wagon of Fools (1637) by the Dutch painter Hendrick Gerritsz Pot (1580-1657), depicting the aftermath of the collapsed tulip bubble in 1637. In the painting, the wagon of fools runs down a stretch of beach with the wind filling its sail. On the wagon’s high throne sits Flora, the Roman goddess of flowers, under a flag adorned with tulips. She holds a bunch of valuable striped tulips, which were regarded by wealthy Dutch people as a must-have luxury item. In the front of the wagon is a woman with two faces, the personification of vain hope, the vain hope that tulip bulb prices would continue their mercurial ascent, because at that point, the purchase and resale of a single tulip bulb was highly profitable.
Behind the ‘Dame Vain Hope,’ are three men wearing fools’ caps with tulips on their heads. The one who is gulping down a long glass of beer symbolizes gluttony, while the old man holding a bag of money represents avarice and the man on the edge of the wagon symbolizes loose talk. Vain hope, avarice and empty tales are the driving forces behind the ‘tulip mania’ depicted in this painting. In particular, Mr. ‘Loose Talk’, who seems to be telling tales about people who have profited from the tulip trade, extends a hand toward a throng of people who, tempted by his words, follow the wagon. The people are weavers from the city of Haarlem who have abandoned their work to walk behind the wagon.
Why did the Haarlem weavers participate in tulip speculation? Although their incomes must have been relatively good, given that the Netherlands was the centre of international trade and textile manufacturing in Europe at the time, they were certainly not members of the wealthy upper class, which could afford to indulge in the tulip trade. The sudden rise in tulip prices must have led the weavers to believe they could become rich overnight. In particular, the prices of the bulbs surged by hundreds of florins overnight in late 1636 when the bubble was starting to peak. It is said that skilled labourers of the time, such as carpenters and tailors, earned 150 to 300 florins a year. When they heard that their income could be doubled or tripled just by buying and selling tulip bulbs, they must have lost their minds. This is what must have enticed people of various vocations to jump into the tulip trade, building the foundation for tulip exchanges in Haarlem and other Dutch cities.
It is not easy to think that all tulip speculators expected tulip prices to rise forever. Many of them, upon seeing their neighbours enter the tulip trade, must have thought to themselves, “Prices will rise for a while. I will buy one and sell it before prices begin to fall.” None of them could have known when the bubble would burst. That is how speculation can be like a game of hot potato. In January 1637, tulip prices soared madly like a fire’s last flames. But the following month, the day when Pot’s ‘wagon of fools’ was lost in the sea finally came. Several people put their tulip bulbs up for sale but nobody was willing to buy them because of the high prices. The tulip bulb owners, feeling anxious, tried to sell the bulbs at lower prices. But their anxiety immediately spread amid their peers and everybody started to unload their bulbs. Tulip bulb prices tumbled by 95 percent in just two days.
As a result, many people went bankrupt. As consumption declined, production shrank, with the damage eventually spreading to people who had never even participated in the tulip trade. For a long while afterward, the Dutch economy suffered the effects of its ‘tulip mania’. This shows how the collapse of economic bubbles batters the whole economy and why bubbles are such a serious issue.

The apat (아파트)

Is the tulip bubble just an event that occurred in a distant country long ago? No. Korea has seen controversy in recent years over whether there are bubbles in the property market, the so called apat (아파트). Unlike tulips, houses and land are basically necessities, so the increase in their prices cannot simply be explained by an increase in demand from speculation and bubbles. However, a recent report by the Japanese Nomura Securities (野村證券株式会社, Nomura Shōken Kabushiki-gaisha), warns that Korea’s economic situation is similar to that of Japan in the 1980s, when real estate bubbles formed in that country. In the 1980s, Japan’s interest rates had remained low, but property prices had been rising steadily since 1955. This led Japanese people to secure loans from banks and other financial institutions to purchase property, based on the firm belief that real estate prices would continue to rise. As a result, the average land price in Japan’s six major cities including Tokyo surged 3.7 times.
Then Japan’s central bank raised its key rate to curb the real estate bubbles. Finally, Japanese debtors, battered by the heavy interest rates, resold their homes and other properties, bringing about a 60 percent drop in housing prices between 1991 and 2000. That caused Japan to sink into the 10-year economic slump that is now referred to as the ‘lost decade’.
Korea’s household debt reached its highest point at the end of the 2010, according to the Bank of Korea (한국은행, Hanguk Unhaeng). And the financial watchdog has already tightened regulations on banks’ mortgage lending. But although not every aspect of Korea’s rising housing prices resembles Japan’s bubble, Koreans should better not neglect the warning signs. They would do well to heed the lessons from the Pot’s Wagon of Fools.

Giorgio Olivotto
Photo by Chong Myo-hwa
Seoul, Korea
February 20, 2011