Monetary policy announcements have never been more personal. There I was, on February 10, looking longingly at the pot of tulips in my garden. It had been a good 10 days and there was just no sign of vegetation. “Tulip bulbs require cool weather for best results,” the packaging pompously stated. One of my gardening friends had told me to plant the bulbs and then put the pot in the refrigerator. ‘He wants to be in Holland!’, he said in a false Angrez accent.
Do the Dutch really talk like that? she had thought irritably. In January, I ceremoniously planted the tulip bulbs (you have to have a ceremony, they are very expensive) and then I created space in the Netherlands from an already full refrigerator. The family followed the whole thing in total disbelief. ‘Errr, are you sure you can bear to be next to the humble Indian baingan kaa bhartaa?’ the husband joked.
I just gritted my teeth and sang a Beatles number, hoping the Dutch wouldn’t mind the British. I also decided to water it with ice cubes, which led the family to nickname the unblooming tulips ‘ice cube tulips’.
After struggling valiantly for 20 days, the pot was finally brought out to the garden, where it was hoped that the Pune weather would remind it of mild spring. Nothing. Day 10 and still nothing, when suddenly my tulip musings were interrupted by all the business channels talking about tulips!
In the first monetary policy statement after the Union budget, the RBI governor has taken a strong stance against cryptocurrencies, saying they lacked the underlying value of even a tulip. I bristled Not even a tulip? If you ask me, the tulip has a very high value in India: the cost of the bulbs, the slow-release fertilizer, the cost of electricity to store it in the refrigerator, nothing to say about the imputed cost of enduring the scathing insults of family, music and anxiety! But of course what the RBI governor was referring to was the Tulip Mania episode (1634-37).
In the 17th century, Amsterdam was the world’s leading commercial center. Several new financial products (shares, insurance, forward contracts) and institutions (the world’s first stock exchange and market) heralded the financial revolution in the Netherlands. This was led by the keen and keen acumen of the merchants of the Dutch East India Company, which is the world’s first formally listed public company.
These merchants made voyages to the East with profit rates of up to 400 percent! On one of these trips, the tulip is believed to have been brought home from Turkey. These deep colors, unknown to Europeans, sparked a lifestyle fad in an economy that boasted very high GDP rates. To his delight, the exotic flower adapted very well to the climatic conditions in the Netherlands.
Initially a rarity, tulips quickly became a fashion and status symbol. The bulbs were commercialized between June and September in the ‘spot’ market and the prices offered by the producers rose with each season. This was driven by demand for tulips from other European countries, so growers were able to offset high input costs through export earnings.
By 1635, the price of a single light bulb was more than the annual salary of a skilled worker in the Netherlands! Some growers now began to buy to sell at even higher prices later: growers became merchants. It was impossible for Dutch merchants, with their appetite for financial products, not to become speculators. Speculators got into futures, deciding the price today for delivery at the end of the season. There were no physical deliveries involved and bulb prices in spot and futures markets soared, led by tulip prices, which soared but have now stabilized.
In 1637, the spot market collapsed as no producer was willing to buy the bulbs at such inflated prices. Traders were left with light bulbs that were now trading at a fraction of the price at which they had been purchased. Buyers defaulted on futures contracts. The bubble burst and tulipomania came to an end.
In the world of finance, the mention of the tulip triggers a reference to an asset bubble backed by something inherently exotic but unstable. Crypto is now a super tulip as it has characteristics of an asset bubble but nothing underlying it: not even a tulip. The RBI will do well to support the Government in terms of presenting a regulation policy in this space.
Meanwhile, my personal mania for tulips continues, under the Solarium February, I hope to see some of the promised Etherealerr, ethereal beauty sprouting Little bit-by- Little bit from the pot. After all, it has an underlying tulip.
The writer is a brave economist who tries to laugh against all odds.
February 16, 2022