Very few incidents in the history of worldwide trade are so curious (and sadly more bizarre) as the 17th century Nutmeg Crisis. When spices have been more than culinary accents, nutmeg was among the most precious goods on the planet. Superstition, speculation and plain financial greed drove European powers to grab this tiny seed as the key to unprecedented wealth. In some way it did – for a while at least.

This is the tale of exactly how nutmeg – a spice we rarely think of apart from holiday treats – was really worth its weight in gold. It decided the fates of nations, brought bloody conflicts and even brought about the well known trade of Manhattan for a tiny island. Manhattan back then was very different to Manhattan today. Nowadays economists will shake their heads at the misplaced priorities, but the Nutmeg Crisis provides insights into economic behavior that resonate today in contemporary markets. We can laugh at the absurdity of these events, but we must listen. Human behaviour around scarcity, value and speculation has not changed a lot through the centuries.

Nutmeg Craze: The Spice That Launched a Thousand Ships.

Nutmeg was more than a spice for foods during the early 1600s. It was considered a cure-all, thought to prevent disease like plague and help digestion among many other miraculous (and untested) health benefits. This placed nutmeg amongst the most precious foods in Europe. But there was a catch: it grew best on the remote Banda Islands in modern day Indonesia.

This scarcity and massive demand sparked the type of economic frenzy associated with gold rushes or modern day tech stocks. Nutmeg soon fetched more than its weight in gold, with prices skyrocketing. European powers like the Dutch and the British recognized an opportunity and started competing for possession of the Banda Islands where nutmeg grew as fresh fruit on trees.

The result? Naval battles, sieges and brutal colonial competition. It is fun to pause and consider how absurd it is sending warships halfway around the world to battle over a spice. Not oil, not gold – simply a seed we now sprinkle in our eggnog.

Manhattan for a Nutmeg Island: One of History’s Most Lopsided Trades.

The nutmeg story culminated in 1667, as the Dutch and the British negotiated the Treaty of Breda. Both powers ruled regions of the world in those days and were involved in fights over trade routes and colonies. In territorial exchanges, the British wanted just a little island off Southeast Asia and the Dutch would part with something more strategically important: Manhattan.

That is right – Manhattan – currently home to the world’s biggest financial institutions – was sold to the British for Run (a small island in the Banda archipelago where nutmeg was developed). This looked like a great deal at the time. After all, who’d choose a obscure strip of land in the New World over a monopoly of the nutmeg market? Manhattan was to the Dutch a mere trading post and Run was the key to their spice market control.

We know now how this trade came down. Manhattan turned into a metropolis along with the crown jewel of the British colonies, while Run produced nutmeg that was helpful for a while because there was a fanaticism about it due to its supposed magical properties. Retrospectively, the Dutch might have underestimated the spice’s long term economic prospects.

The Economic Madness Behind the Nutmeg Craze.

What makes the nutmeg crisis intriguing from an economic standpoint is it demonstrates several economic principles which still drive markets these days.

1. Scarcity & value; Nutmeg had been high in Value because of its scarcity. Growing in just one region of the world it became costly. This is a classic supply / demand problem: Nutmeg supply was slim and demand was virtually insatiable. Europeans wanted it for taste, for curative purposes and also because of its status symbol – having nutmeg in your kitchen was like owning luxury goods today.

2. Monopoly power: the Dutch understood monopoly. Control of the Banda Islands and ensuring nobody else could get nutmeg kept prices artificially high. The world’s very first multinational company, the Dutch East India Company, employed brutal techniques to keep the control. They killed the locals of the Banda Islands and instituted a system of control to keep nutmeg in Dutch hands only.

3. Speculative Bubbles like Bitcoin or tulip bulbs (another Dutch invention), nutmeg was a product of speculation. And this wasn’t because nutmeg was uncommon; people were paying high prices. They had been paying high prices simply because they wished its value will continue increasing. It is a classic speculative bubble: Prices not based on intrinsic worth of commodity but by expectation that others would pay more down the road. When the market for nutmeg collapsed, fortunes were lost – but not on the scale of the more contemporary bubbles, for example the housing bubble in the US of 2006 that led to the financial crisis of 2008.

4. Opportunity cost. Probably the most powerful lesson is opportunity cost. In trading Manhattan for Run, the Dutch made a decision which appeared entirely reasonable at the time. However the long-term opportunity cost of giving up the future site of New York City for an island represents a massive opportunity cost. Retrospectively, the Dutch gave up a possible financial powerhouse for a temporary advantage in the spice trade.

Contemporary Parallels: Nutmeg & the Bitcoin Boom.

If there is a modern parallel to the Nutmeg Crisis, it might be the ongoing Bitcoin saga. Two main characteristics shared by both nutmeg and Bitcoin are: They are rare, highly speculative, and have seen sharp, often 

volatile price rises well beyond their immediate practical use or fundamental value.

As with nutmeg in the 17th century, people who see Bitcoin as a potentially transformative asset can still be drawn to it today. Like traders once saw nutmeg as the key to unprecedented riches, Bitcoin enthusiasts see it as the foundation of the digital economy. Both have seen a bubble of speculative activity, and the scarcity has created a gold rush mentality that some say has overridden

 sustainable valuations.

And like the nutmeg trade which collapsed, Bitcoin and other speculative assets will potentially correct. Markets change but human behavior doesn’t. The fundamental economic concepts driving the Nutmeg Crisis – scarcity, speculativeness, and opportunity cost – continue to exist today.

Conclusion: Lessons from the Nutmeg Crisis: Spicy Lessons.

The Nutmeg Crisis is an absurd historical footnote, but it teaches lessons about the economics of scarcity, monopolies and speculative bubbles. From the violent strategies of the Dutch East India Company to the odd choice to exchange Manhattan for a nutmeg island, the story is a celebration of just how man’s greed and miscalculation can make history.

These days, we are able to laugh at the possibility of nations fighting over a spice, but the fundamental reasons for that conflict – influence, continual growth and overvalued limited resources – are as new as they ever were. Whether it is nutmeg from the 1600s or Bitcoin from the 21st century, the lesson is simple: Stick to it. Markets will rise and fall though the fundamental economic forces are the same.

For all those serious about economics, the Nutmeg Crisis is an instructive and colourful reminder that the most seemingly innocuous commodity is able to change global industry, drive political choices, and alter history forever.