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Page last updated at 16:47 GMT, Friday, 3 October 2008 17:47 UK

Of bulbs and bubbles

Field of tulips
The tulip craze gives us an object lesson


Students of today's financial crisis would do well to look back at the bubbles and the economic innovation of the past, writes Lisa Jardine.

As banks topple and stock markets plunge, it is hardly surprising that voices are raised blaming the current financial troubles on the evils of borrowing and lending.

In an article in the Spectator, the Archbishop of Canterbury, Dr Rowan Williams, expressed the view that the current credit crisis had exposed the "basic unreality" of the long-standing global trade in debts, in which "almost unimaginable wealth has been generated by equally unimaginable levels of fiction, paper transactions with no concrete outcome beyond profit for traders".

Lisa Jardine

During the 15th Century, merchants and bankers developed a variety of new fiscal arrangements which increased liquidity and allowed money to circulate freely

Those who make millions out of the financial misfortunes of others have, he said, to recognise and take moral responsibility for what they are doing.

It is an old point of view, and one with which many of us are inclined to sympathise. Christianity, like many other religions, has always frowned upon usury - lending money with interest - on the grounds that making money multiply itself, without labour or effort, is against the laws of nature.

During the European Renaissance, it was, nevertheless, financial measures almost exactly like those used by banks and financial institutions today which freed up the flow of wealth to produce economic growth, and thence the great flowering of art and culture, creating the accumulation of glorious artistic treasures now housed in museums and galleries worldwide.

Lavish entertainment

In 1461, at the age of 17, Francesco Gonzaga was made a cardinal by Pope Pius II, as a political favour to his father Ludovico, the princely ruler of Mantua. Francesco had no particular aptitude as a churchman, but he did become a brilliant figure at the Papal Court, where he came to wield considerable power on behalf of his family.

Lorenzo de' Medici
The Medicis were pioneers of modern capitalism

The way he did this was by sheer ostentation - what in the period was referred to, with approval, as "magnificence". A contemporary account of his first arrival in Rome describes how the size of his retinue and sumptuousness of its trappings "lifted the beholder's heart".

He entertained lavishly, and spent unstintingly on luxury objects of all kinds, which he displayed on public occasions, to underscore his wealth and power. The inventory of his worldly goods, taken for probate at his death in 1483, included gems and intaglios, tapestries and hangings, damask "Turkish style" robes, velvet and brocade cushions, and silver and gold tableware.

Among Francesco Gonzaga's possessions, his collection of hundreds of antique cameos took pride of place. These were housed in a series of specially manufactured display trays, 20 of them of silver, embossed with the cardinal's coat of arms, two of jasper and one of green quartz. Widely admired by his contemporaries, the cameos also had the advantage of giving Cardinal Gonzaga access to a circle of other prominent collectors, including the Pope himself.

The catalogue of Cardinal Gonzaga's possessions, from his priceless gems to his exquisite manuscripts, makes breathtaking reading, but its opulent splendour is a dazzling illusion. To support his ostentatious lifestyle, the cardinal was in fact massively in debt, to the tune of something like 20,000 ducats - in today's terms a considerable fortune.

At the time of his death, the cameos and their trays were lodged in the vaults of the Medici bank as pledges against what he owed - pawned to raise a loan of 3,500 ducats.

In spite of lengthy negotiations following Francesco's death, these pawned treasures were never able to be redeemed. Their owner having technically defaulted on the loan, the cameos became the property of the cardinal's creditors.

When Cardinal Gonzaga's family tried to retrieve them they were told they would have to find close to 5,000 ducats, because that was the value the head of the banking family, Lorenzo de' Medici, placed upon them. In the end they stayed in Medici ownership, adding to that family's own growing magnificence.

Increased liquidity

During the 15th Century, merchants and bankers developed a variety of new fiscal arrangements which increased liquidity and allowed money to circulate freely. Bills of exchange became widespread - negotiable notes acknowledging receipts from the sale of goods abroad which could be cashed later at home in local currency at a profit.

On occasions in the past, the financial edifice of credit and debt erected on a base of the high value of the commodity being traded, has proved illusory

Bills of exchange could be endorsed by a third party, who took responsibility for the debt, and collected the added exchange value. In the 16th Century, merchants began discounting bills, selling them to a third party before maturity for a smaller sum.

All of these strategies for the useful circulation of money depended upon confidence - trust in the wealthy merchants and bankers conducting the financial transactions, and confidence that the objects used as security against borrowing would hold their value.

In the case of the cardinal's cameos, all the confidence-maintaining factors were well in place. The cardinal spent copiously on borrowed money, but the Medici bankers - soon to become princes on the strength of their immense wealth - were well-satisfied with the trays of cameos they acquired when he failed to repay his debts.

People are looking for historical explanation at the moment

But on other occasions in the past, the financial edifice of credit and debt erected on a base of the high value of the commodity being traded, has proved illusory. A notorious historical example is that of the Dutch tulip.

In the mid-1630s the Dutch went wild about tulips. For a short period, starting in the summer of 1636, prices for the bulbs of particularly highly prized varieties rose to enormous heights. Tulip bulbs are of their nature objects on which it is possible to speculate financially.

Those which promised to produce the most highly-sought-after, variegated red-and-yellow, purple-and-white or red-and-white flowers - because they had produced such blooms in the past, or were the offsets from bulbs that had - could be bought and sold for extremely large sums.

But the promise of the bloom lay resolutely in the future. What changed hands were a few brown bulbs the size of an onion. The purchaser had to pay upfront, and take the promise of a spectacular bloom on trust.

Extreme sums

In early 1637 the bottom fell out of the tulip market. Speculative sellers who had bought at high prices to sell at a profit found themselves with worthless goods on their hands.

Those who had purchased at the top of the market, and who would still see flowers as soon as the summer blooming season arrived, nevertheless refused to pay the balance on the exorbitant sums they had been foolish enough to agree to for their prize purchases in an overheated market.

Among those - from humble artisans to nobility - who had been caught up in the tulip craze, many were ruined, reduced to bankruptcy by investment beyond anything reasonable for a fashionable flower.

To serious-minded 17th Century men and women, the ephemeral bloom of the gorgeous tulip, and the high price attached to it, symbolised the moral dilemma of conspicuous spending. If one accumulated wealth by legitimate means, was one entitled to "squander" it on beautiful, useless rarities like tulips, or indeed paintings and gems?

Ought one not to dispense it more ethically, on good works, or invest it for the future? But the mistake the speculators had made was to overvalue their goods, and to "bank on" (as we still say) their holding their value over time.

Meanwhile, Dutch market gardeners had found a way to grow exotic tulips from seeds, instead of relying on the expert splitting of bulbs, bringing the price of these still-covetable blooms down sharply.

Living as we do in turbulent times, we are, as throughout history, denied the luxury of knowing how future generations will look back on the present financial crisis.

What we can be sure is that the growth of sophisticated financial systems will continue to play an important role in fashioning the changes in all of our lives, including funding (often speculatively) the technologies that have transformed our world already from an agricultural to an industrial economy, and are now perhaps shaping the first post-industrial information economy.

Along the way many of us have benefited individually, not least from the rise in personal home-ownership. So we all now have a stake in hoping that this present market correction we are living through turns out to have a gentle landing.

We have to hope that, in the final reckoning, the homes we own, and whose values we have seen artificially soar over the past 10 years or so, are like the cardinal's cameos and not a collection of perishable tulip bulbs.

Below is a selection of your comments.

You say we "have to hope" our homes have actual value. Fact is, their economic value is just their rental value, discounted to a reasonable interest rate. House prices will hit bottom when their price approximates their economic value, sans hopes for appreciation. I predict that will be when their residents can buy them for three to four times family annual income. We have a long way to go. The housing bubble is based on the "bigger fool" theory - I know I am a fool to pay so much, but there will be a bigger fool along presently. Today, the only fools left standing are the governments, who are going to buy up badly overpriced debt with our money. What they should do instead is be a source of reasonable loans to credit-worthy borrowers. That would unfreeze the credit markets in a hurry.
Greg Gibbons, San Carlos, CA, USA

The pursuit of greed can be a surprising slow affair. Fear, on the other hand, is much more powerful, which is why events like the financial crisis we are seeing now are so volatile. The examples given will be repeated in the future. We are to quick to blame others, the banks, the government or speculators. Where is the responsibility and accountability that should taken by the many individuals whom have borrowed money and failed to meet there obligations? How will we learn from our mistakes if we pass the buck and stick our heads in the sand? In every boom people believe it will be different this time, sadly the outcome is not.
Steve, Bristol

Basing the birth of the Renaissance on the flowering of a nascent free market is ridiculous. Freethinking, as the single most significant attribute, would be a more likely cause to that unique era in Western history. One does not need money to be free, so we should forever put to rest the equally silly argument that capitalism and democracy are ubiquitous.
John Richards, Christchurch, NZ

Tulipmania, which destroyed the economy of prosperous Holland, and the South Sea Bubble, which wrecked the French economy, are object lessons in historical economics which are taught in basic university courses. Each and every one of these Wall Street bankers and brokers had been taught about "manias" and "bubbles" while students. That they allowed the whole world to be caught up in THEIR mania speaks volumes for their legal culpability. Bailing them out and allowing them to escape criminal prosecution and civil lawsuits is an egregious violation of the rights of their victims to obtain justice. (On a personal note, I have seen paintings of the Semper Augustus tulip, the quest for which beggared many families; I fail to see what the fuss was about - it was hardly a spectacular flower.)
Christian Leopolds Shea, San Fernando Valley, California, USA

There is a book called On the Madness of Crowds which mentions not only tulip mania but other such hysterical behaviour in history. An excellent read if they do that anymore at the BBC. Your own George Orwell would have provided another example. When everyone is doing something alike, then something is wrong. When they buy tulips, you keep right on with apples, grapes, and lilacs. Show some independence of thought, don't follow leaders, "watch the parking meters" - Bob Dylan.
Boomer J Whipsnead, Cheyanne , Wyoming

A bubble is something that gives pain when it bursts. I find this definition generic enough. Across all times and places. But, hell, what fun while they seem forever inflatable.
Titos Christodoulou, London

I think one should remember that the basic problem is not so much the reality or irreality of what is being traded, but the fact that the economic system is based on non-sustainable and permanent growth. This state of affairs will have to be corrected; the planet is of finite size, and only so many people can live on it at once. This is the real long-term problem.
D Fear, Heidelberg, Germany

Islam, like Christianity and Judaism, forbids lending or borrowing money on interest. It further forbids buying or selling debt. This is to discourage use of money as a commodity. As long as we continue treating money as commodity and build a financial economy which is bottomless and would disperse like a bubble. There is enough statistical evidence to support the fact that use of money as commodity helps create a financial economy that does not have any link the real economy. The volume of FX market trades is one such example. Regarding the use of legitimately earned money, Islam forbids its use on immoral or wasteful activities and encourages spending it on welfare of poor and less fortunate. I hope the regulators/reformers would listen to the Archbishop of Canterbury and others while considering the measures to solve the current financial market crises. Unless the fundamental issues like use of money as commodity are addressed, the US bailout plan and many others by other central banks will not find a lasting cure of the disease.
Kamal Mian, Riyadh, Saudi Arabia



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