Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, did you know I went to Amsterdam this summer. I think I recall seeing some instagrams that look pretty awesome. Okay, well, yes, the instagrams were awesome because it's a really gorgeous city. Um, but I gotta say they take flowers pretty seriously there.
I'm pretty sure that's one of the things too that I remember from your instagram, Like, and that's sort of like they're sort of famous for that, like just gorgeous, gorgeous horticulture, horticulture of all types. Yeah, but two lips is clearly a big part of that in Amsterdam. In Holland is famous for growing varieties of tulips and an amster um. They even have a tulip museum that I
actually went to. I kind of think I know where we're going with this, because we're still part of our our Bubble series of episodes where we look at famous bubbles throughout history, and of course you're talking about Amsterdam tulips. That's right, And we actually already teased this one in
some of our previous episodes. I think I actually called it the quintessential financial bubble, which isn't entirely correct, I have to say, because although tulip Mania has a reputation as one of the first ever financial asset bubbles, there are a lot of people that take issue with that description and actually say it wasn't a bubble at all.
It was a rational investing behavior for the time. Yeah, it's very controversial because, first of all, it is in in this sort of pop culture since probably the quintessential bubble. Whenever you talk about another bubble, you always hear people say, oh, this is Tulips all over again. So I when you know, when we talked about the beanie baby bubble on an episode long time ago, like oh, this is the new uh tulips whatever it is, people would just sort of
no tulips. But it is a very controversial episode throughout history. Obviously it was prior to a lot of the financial press, so there's still a lot of examination of what really happened. Yeah, and um, let me just lay the scene, I guess before we dig into it. So in the sixteen hundreds,
tulips became this massive thing in Holland. As we all know, and there are these famous statistics about a single rare bulb trading for the price of a whole house in Amsterdam, or one bulb being worth twelve acres of land, that sort of thing. Um, And when we look at it retrospectively, we think, why in the world where people paying that kind of money for what was basically an ephemeral thing. Right,
you have the tulip. It lasts for a little while, but then eventually the flower dies and unless you grow some more tulips out of it, it's this thing. It just passes by really quickly. That's absolutely right. But you know, like it's funny because obviously supposedly people paid all this price for tulip bulbs. But they are really beautiful, so
sometimes I wonder if he is worth it. I mean, they're really nice, and you have to figure, like most things didn't look very good back then, you know, everything sort of grimy and life was dirty, like maybe it was worth it. That's the romantic in YouTube. All right, So we're actually going to look at the tulip bubble today, but we're going to look at it from a slightly
different angle. Um. Never let it be said that we don't bring you something, uh, something unique on the All Thoughts podcast today, we're actually going to be looking at the Tulip bubble from a sort of Austrian school of economics theory. This should be good. So we're taking one of the most sort of controversial bubbles and we're going to look at it through the lens of perhaps one of the most polarizing schools of economics. So I feel like that should be a that's a win combination and
right there. Yeah, And can I just say the Austrian school of economics is the only one that my dad, who is my barometer for all things sort of mainstream America, has ever asked me about. He never asked me about canes or monetarism or anything like that. Only the Austrian school economics. I suspect to like this episode. Then, yeah, all right with us to discuss the Tulip bubble is Doug French. He is the author of a book called Early Speculative Bubbles and Increases in the Money Supply. So
you can sense the Austrian school right there in the title. Doug, thanks so much for joining us today. It's my pleasure. Joe and Tracy. Let's start with you know, we were describing the tulip bubble as the sort of classical market bubble. Walk us through some of the mainstream theories behind mind
why it actually happened. Well, the mainstream theory is typically a gentleman by the name of the Gerber, who has done a lot of work on to Lokmania, and his view is that the rarer bulbs tended to trade higher than the more common bulbs, and therefore, you know, it was very rational that people would you know, trade up to a very high price these more rare bubbles. Her
these more rare bulbs, I should say. He also would throw in the idea that there was a plague and that essentially this was it was kness, animal spirits in a way that people were just throwing caution to the wind. We're all going to die from the plague anyway, so let's let's trade in trade in tulips. So that was kind of Gerber's view. Another view is a woman by
the name of Van Bulgar. She wrote a book to let Mania there's fairly recent two thousand and seven, and she said this is very limited and there were only really about four hundred families who were trading involves and it was an extension of their art collections. Essentially, she believed that it was really no big deal. A few people were trading in these bulbs and no one was hurt by it. There was no big financial crash that we saw someone to say two thousand and two thousand nine,
and in the United States after the housing bubbles. So um, those are generally the it's it's viewed as a curiosity. UM. In fact, Charles kenner Barger, who who wrote on manias and crashes, um, he he refers to the two let Mania is really the first uh Mania, first speckled Mania. But he said that it lacked the the financial framework
that you normally would have. And of course that's when when I did my work onto let Mania, looking at it through the Austrian lens, as you put it, UM, I found out that there was a financial aspect to this and um, and that's where the Austrians picked this up. So, Doug, I want to ask you, of course, what you see as the seeds of to Lippmania. But before I do that, for our listeners who are perhaps unfamiliar, give us the sort of nineties second characterization of what what Austrian economics
is all about. So that when we talk about examining to Lipmania from the Austrian perspective, what are the key ideas and tools that you use to examine this historical episode. Well, the key idea that I used from the Austrian school was the Austrian business cycle. And that's what the Austrian school is is most known for. That's what fa Hiak
shared the Nobel Prize for nine four UM. He extended Ludwig von Mesus work on the on the business cycle, and that is that business cycles aren't something that just come and go as most people think. They're like like nature, like the seasons, things like that. It has to do with the government intervention um in the money supply, and when in the modern debut of this, the Federal Reserve lowers interest rates, expands the money supply, and uh malinvestments
are created. In other words, entrepreneurs are fooled by the low interest rates. They believe that there's a lot of savings out there. They believe that there's tremendous need for what the Austrians would call higher end UH investments, say land, say housing subdivisions, say casinos, things like that, and therefore you you get money rolling into uh uh those sorts of investments and uh eventually the demand that the entrepreneurs
thought collectively was there ends up not being there. And we see this, just this mass number of errors all at once. You wouldn't see this in capitalism. You see bankruptcies all the time when um, when entrepreneurs are not are not good at what they're doing. But in a boom and a bust, booms telling elevate those that aren't very good um at at development, and it exposes them when the crash comes. That's uh, I think what the
Austrian school is most most known for. And just as a note, the book I wrote, the book that we referred to earlier, I wrote under the direction of Murray Rothbard, who was a student of Ludwig van Mesas. So I'm just carrying on um very long and u and famous tradition. So walk us through. So that was a great overview, but walk us through how that framework informs your thinking
about the tulip bubble. Well, as I looked at as I looked at tulip mania UM, and I looked at obviously everyone's work, and you kind of start with a book that a lot of people have heard of extraordinar are any popular delusions and the Madness of crowds. It's an eight book by Charles Mackay, and people have been reading this for, you know, for decades, and uh it has a few pages in it about to LITMANI and
that's generally where people start. And the idea is that suddenly people were trading into la bulbs, whether they be chimney sweeps or whether they be government officials or whatever they may be. And it just you start thinking, well, is this is this uh animal spirits in the Keynesian view, is it doesn't make sense? In the rational expectations view of a of a Gerber who is essentially g it made perfect sense. Uh, supply and demand. There were less
supply of the of the bulbs that were rare. They are more supplied other boats, and and those prices didn't go up. But I looked for another cause. And it turns out that the money supply in Amsterdam during Tolmania exploded and exploded for a good reason. It was the Bank of Amsterdam was created, and not that it created
money out of nowhere like modern central banks do. It actually offered something called free coinage and free coinage was all money from Europe was flooding into Amsterdam because of gold and silver discoveries in the New World. UH pirates were collecting booty on the high seas. There were coins that had been debauched by various kings throughout Europe and they were all flooding into Amsterdam because the Bank of
Amsterdam would in them for little or no fee. And that was essentially a that was essentially what created a huge boom and the money supply. And when I say a huge boom, I mean increase in the supply of money right before UH to Lootmania occurred the Dutch economy. Obviously Amsterdam's very well located to Seaport, there was much commerce going on there. It began to boom in one
and thirty two. And with all this money UH flowing into the economy, it created a a ripe environment for speculation UH from all types of people, whether they be the gold guards, Mennonite art collectors, or whether they I'm not sure there were necessarily chimneys, sweets that we're buying balls, but all sorts of people UH as they want to do when when things are going good, they want to
speculate and trade and make a profit. So, Doug, here is a question that I have and I've had this thought in regards to sort of Austrian theories of bubbles even more even more in the contemporary setting. So you draw the line between the central Bank or in that case, the Bank of Amsterdam creating some sort of ultra loose monetary conditions that brings in the conditions where people want
to speculate. But what I don't fully understand is why does it go to these activities that appear so bubbly. So it's one thing to say, Okay, that's going to create a lot of activity, but why couldn't it theoretically go to um more conventional enterprises like opening up you know, building new uh building new ships or sort of traditional channels.
Why does it go towards uh, you know, flipping these assets, very speculative vehicles because more people can participate UM in trading tula bolts, whereas it would have been more difficult too. And I'm sure there was more money was funneled into
into shipping, but not not a lot of people. Could you know, flip clipper ships, uh if you will at the time, but you know, if you could get get a hold of a tulip here there, Um you might be able to um, you might be able to flip it by the next the more popular tulip and trade from there. These uh, these traits took place in taverns. They were called colleges. Interestingly enough, um, the Dutch were already very astute in futures markets, in the grains and
so on, So futures market took hold very quickly. And as you can imagine, they weren't trading flowers. They were trading the bulbs, and the bulbs were in the ground, so before ever anybody ever saw the flower, it was being bought and sold many different times. And so I think when when people think of Tulamania, they think, oh, you know, they were trading these flowers that we're only going to be in bloom for a week or whatever.
But no, they were trading the bulbs that were that were in the ground, uh, you know, months before before they would see them. And that's why it was a fairly short short term. Episode went from essentially six thirty four to February of thirty seven. But at the end you had this huge blow off top where the wet wheat crew and bulb went up thirty five times in the space of a month and then crashed, you know,
in one single day. But that's an answer to your question. Uh, you know, the more people could participate um in a trading instrument like a tulip bulb. Also two loops were fairly new to Amsterdam, although you know, um, as Tracy said, the town is is certainly known for it now. Um. And you see pictures in the fields of tulips are extraordinary, but they were actually shipped in from from Turkey, in the Middle East and other places, so they're a fairly
new phenomenon um to to Amsterdam at the time. Yes, and one thing I learned from the Amsterdam Tulip Museum is that the tulips were highly associated with Orientalism at the time, probably because they were coming through the Middle East. So c Joe, I did learn something, Um, I've never doubted that something, Uh, Doug, I wanted to ask you or just press you on the association between the tulip
mania and the money supply because you know. One other thing I also learned was that the Dutch at the time they kind of described this tulip trading as wind handle, which means wind trade in Dutch, because no bulbs or not many bulbs were actually changing hands. People were just kind of trading the futures contracts. So I'm just wondering if you're if you're trading this thing, but you're not actually trading the underlying what's the association with the money supply?
Does it track like one for one? No, I don't think a track x one for one, but um, it does um give people the confidence to um trade in in a speculative fashion because there's more money runs into uh into an economy. Um, and people see their neighbors getting rich and certainly uh they want to as well. Uh, they're more apt to get involved in this sort of
sort of speculation. I mean, when you create money, um, there's no telling where it would go and um so um whether it goes into goods and services or where there goes into speculation. But then the next step in this is that then leverages created people want to essentially borrow. And as you point out, these bulls were changing hands without really changing hands, just the paper was was changing hands, and that was essentially that's essentially the leverage that was involved,
and that happens in all all speculative bubbles. Um, the interest rates went down. When you look at the history of interest rates by Homer and Encilla, Um, the Dutch interest rates declined sharply. Um. There were a number of bankruptcies after this. Uh. In my book, UM, you know, if it was if people were just trading a few evolves and and uh G it didn't work out and they all went on about their business, then why did the number of bankruptcies in Amsterdam double from nine six
to sixteen thirty seven. So clearly people were putting a lot of resources into speculating in these uh in these bubbles, and it had a It had a huge effect on the economy. And I will say your timing is excellent. I don't know if you know this, but there is
a movie coming out called The Two Little Fever. I would just going to say, I've actually seen that movie because I saw a a screening for reviewers and I have a review out actually, and so I wanted to ask you something about the film, and you talked about half of it, but to me was one of the most interesting things in there. So as you mentioned, uh, and this was depicted in the film. The trading took place in taverns, the trading of these essentially tulip bulb futures.
These were a lot of you know, sort of drunken people are very you know, they're they're taverns. However, the actual bulbs themselves, and this is according to the film, So if I'm wrong on this, please call me out. The bulbs themselves were actually uh maintained by nuns in an abbey. And so you really have this dichotomy between where the finance takes place, which is this sort of like dirty, debaucherous tavern, but then the actual product, essentially
in this house of God. It really showing the h the secret and the profane meeting together in this trade. Well, I think the uh, either the movie make or or MS Mogash took a little bit of license there, uh where the with where the bulls were stored. I'm but I have no uh direct knowledge to refute that. So possibly it's true, It's just but it is it is a guest. But I've read the book. It's a wonderful book, and Steven Spielberg had actually bought bought the rights back
in ninety nine before the book even came out out. Um, and then I think it's changed hands similar to the changing hands of a of a tula bulb, if you will. And tulip Tulip fever has at a hard time getting off the ground, if you will. But it has a wonderful cast. And um, but I think what it depicts, I hope it depicts. And and Joe, maybe you can
confirm this since you've seen the movie. But this artist who has an extraordinary talent, and of course his subject is the love of his life and um, and of course that creates tensions since she's married to an old evil guy. Um, but he drops his trade to trade in tulips. He thinks they're going to get rich and live happily ever after trading tulips. And that's what happens during booms and bus uh. And I'm sure it happened
during Tulamania. We saw this in Vegas when houses boomed in the Men two thousand's, people who had perfectly reasonable jobs suddenly became realtors or house flippers, were um door or became mortgage agents. And that's what happens, uh in all boons. That not only there's not only the trading of the bulbs or the trading of the instrument. Uh. But but people whose talents are best left for, um, other things, they become involved in this boom. And I
think it portrays that. That's a great point that was portrayed in the film, and that didn't click to me at the time. But of course, as we've seen through many bubbles in history, it does seem to be a common phenomenon, whether it's day trading in the late nineties, house flipping prior to the two thousand and eight financial crisis, whatever it is, there are always stories of people leaving their jobs essentially real resources, human resources being sucked out
of where the most to engage in speculation. And that is indeed one of the points in the film. So I'm glad you brought that up, because that specific facet hadn't clicked. A misallocation of human and financial capital. Absolutely, they're both malinvestments. You had a malinvestment of of probably too many two loops were planted, um too many two loops were cultivated, and then you had the talent of individuals being siphoned off into this spacoidive area. And as
Joe said, the same thing happens in all booms. Now, before we go One of the common themes things that we see with bubbles is that, you know, they can be based on sound fundamentals and they often several years later, can justify themselves. So obviously, you know the internet bubble of the late nineties, we know the internet did in
fact turn out to be a big deal. The housing bubble did create a large housing stock, and as trace you mentioned in the introduction, Amsterdam today, you know it's still you know, there's a flow, a thriving, beautiful flower market still in Amsterdam. So what is the aftermath? Okay, then the bubble eventually crashed. You mentioned the bankruptcies. How did things eventually stabilize? Well, uh, Amsterdam obviously was a
city that would eventually continue to thrive. The Bank of Amsterdam, however, changed. It had a very hard money policy. As I mentioned, free coinage. People would put their money in the bank, um, and so it was a hundred percent in bank, to which saw Austrians we we like that sort of thing rather than fractionalized banking that we have today. Um. But eventually the Bank of Amsterdam would begin to loan out their deposits and engage age in fractionalized banking and Uh.
That Uh, that gave an idea to a gentleman by the name of John Law who would create a hundred years later, or about a hundred years later, the Mississippi Bubble that didn't spawned the south Sea Bubble. Uh. And I'm not sure you've gotten to those episodes yet, but uh, actually TULIPMANI in the Bank of Amsterdam is somewhat of a genesis for a gentleman named John Law. Well, I think that is a perfect way to end it. And Tracy, I think we have definitely have an episode that we
have to do now. Yeah, so many bubbles, so little time. Doug French uh, the author of early speculative bubbles and increases in the money supply, thank you so much for joining us. Well, thank you, it's been a real pleasure. So Joe, I thought that was really fascinating. And I thought, you know, even though the Austrian school gets a lot of bad press, it's clearly had, you know, something of a revival or many people think it was vindicated after
the two tho financial crisis. So I think it's really important to kind of consider some past bubbles, especially a bubble as important as the Tulip Mania through that framework. No, I totally agree. I I really enjoyed that. And it's interesting, Like, I think there's no question that in sort of mainstream economic discourse, Austrianism is considered to be crankish and all that, But it does seem to be to me that there's like a I would call it a soft Austrianism that
is fairly common. I mean, if you go back to our episode two weeks ago with Scott Nations, he specifically identified low interest rates as being um something that was characteristic of all of the major US stock market bubbles and stock market crashes. And I don't think there are many people. I think a lot of people who would consider themselves mainstream would identify easy financial conditions as being
an important factor in the rise of many bubbles. Yeah, there's a little bit of Austrianism in in all of us, um,
but especially me because I am actually half Austrian. UM. But in all honesty, I think that there's an emotional allure to the theory, right, Like it kind of touches on something that we've spoken about before, which is that when you have a bubble, you have this period of time where you can make a great fortune very quickly, or you can lose a lot of fortune very quickly, And that kind of touches on this idea that it's sort of all being controlled by expanding or diminishing money supplies.
So you can see how people would make that connection. Totally one of my issues with it, and maybe I should have brought up with Doug when he was here, because I don't want to criticize the theory that giving him a chance to respond. I've often found that there's a bit of um when all you have is a hammer. So you know, it's like there's this very distinct view that the sort of the errors and the male investments
in any economy are caused by easy monetary policy. And so then there's like I've always thought there's perhaps a bit of a you know, going back and sort of always finding why it's a monetary policy phenomenon because that's where your worldview is based, which you know, and so everything sort of gets shoved into that. Nonetheless, I did think his perspective is interesting, and either way, the tulip
bubble is a fun one to discuss. Yeah, and now we're well, you've seen it already, but everyone else is going to have to go and watch the movie, right, Yeah, people should watch it. Look, it's the tulip Mania, it's Is it the most amazing film? No? But I'll put it this way, if you're an Odd Lots listener, you'll probably enjoy it. That's a good way to put it. All right, Uh, this is been another edition of the
Odd Looughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't All? You can follow me on Twitter at the Stalwart And you can follow our producer Sarah Patterson on Twitter at Sarah pett With two teas. Thanks for listening.