11/22/2015 01:20 pm ET Updated Dec 06, 2017

Keep the Change: The Beads that Bought Manhattan

"One man's trash is another man's treasure."

In the Age of Exploration--which could just as easily have been known as the Age of Exploitation--Europe was expanding its knowledge of the world. And it was doing so through unapolo­getic conquest. What began as a simple race to India's and Asia's gem and spice markets rapidly evolved into a competition to own the world.

The Portuguese employed brute force to lay claim to new land, and the Spanish Conquistadors declared that they were divinely chosen to rule new worlds. The British felt no need to explain their conquests at all. But the Dutch, perhaps the strangest exploiters of all, liked to shop for countries. And in 1626, a Dutch­man named Peter Minuit bought the island of Manhattan from the Lenape Indians, an eastern branch of the Delaware Nation, for the bargain price of twenty-four dollars' worth of glass beads and trinkets.

The story of the purchase of Manhattan is one of the most contentious and oft-disputed stories in American history. That modest sale has gone down in history as the biggest swindle ever perpetrated. The fabled exchange has been dissected and reex­amined with the weak hope of proving it a myth. Some people just dismiss the event out of hand, claiming it's apocryphal--that the infamous exchange never took place at all. The deal seems so unfair, some parties have even suggested that the island be returned to the "original" owners.

But what may be the most surprising fact about the whole transaction is that in 1626, and for a long time afterward, both parties were very happy with it.

Hello Paleface

When Minuit approached a group of inhabitants on New Amsterdam, what we now call Manhattan Island, he did so with every intention of purchasing the land for a fair price, or at least one that was agreed upon as fair by any and all of the inhabitants he found living there.

And yet on May 4, 1626, the island of Manhattan was sold to the VOC by "the local inhabitants thereof" for sixty guilders' (famously calculated at about twenty-four dollars') worth of beads, buttons, and trinkets.

Crazy, right? Somebody clearly got worked.

Or did they? According to Native American authority Pro­fessor Raymond Fogelson of the University of Chicago, the deal definitely went down and most certainly involved beads. But the Lenape Indians with whom Minuit negotiated were most likely under the impression that they were just selling the right to live on the island, or use its resources, as they themselves did--not the right to own the land itself forever, much less the right to prevent other people from using it. When he and I spoke on this subject, he agreed that at the time the sale was made, the Lenape certainly knew they were making a sale, and more important, were perfectly satisfied with the price.

This leaves us with the lingering and disconcerting ques­tion: Why would the Lenape Indians, being of sound mind and equal intelligence, have sold anything, even the use of an island, for some glass beads and buttons?

There are many possible answers, but the most obvious is also the simplest: Value is relative. If Minuit had presented the Lenape Indians with a sack full of diamonds, no one would question the merit of the transaction. Because glass beads are even less valu­able to us than they were to the Dutch, we assume the Indians got taken. But overabundance always breeds contempt--and if it weren't for their value on an international scale, locals in Myan­mar today might dismiss their own abundant rubies the same way we do glass beads.

Gemstones are, in fact, just colorful gravel. They're just rocks that we've given special names. True jewels are things that are beautiful and scarce. We want them because few others can pos­sess them. We want them even more if they are from some very faraway, exotic place. Their value is, and always has been, 90 per­cent imaginary.

The Economics of Desire

Imaginary value is a tricky thing; it has a very real way of becoming very real. Anyone familiar with the tulipomania of the 1630s knows that a little hype goes a long way, and can easily turn a pretty bauble into an economic bubble.

Tulipomania is the name given to a strange phenomenon that took the Netherlands by storm in the 1630s and destroyed the entire Dutch economy within a single week. And the blowback it caused was in no way imaginary.

Although tulips are deeply associated with Holland (for reasons about to become apparent), the flowers aren't indigenous to Europe. Tulips come from the sexy and exotic Near East-- Turkey to be exact. They weren't even introduced to Europe until 1559. For about a decade, a grassroots interest in the flowers spread very slowly. But their popularity gradually increased, especially among the wealthy and competitive, and the market for tulip bulbs expanded, the way markets for novel and beautiful things tend to do.

Tulips made their way across all of Western Europe by 1600, arriving in England for the first time that year. For the next thirty years, the popularity of tulips grew rapidly. But in the three months between February and May 1637, the phenomenon hit a tipping point, and tulips created the first recorded economic bubble in history.

By 1630, all wealthy people had tulip collections. It was the thing to own. In 1630 a wealthy Dutch person without at least a modest tulip garden would likely be socially shunned. As the value of tulips increased, the necessity of owning tulips to maintain your social standing also increased. Prices skyrocketed, and bulbs were traded for staggering sums. In the final several years leading up to 1637, the mania for tulips had spread to the middle classes, even though within a few years a single bulb cost more than a modest house. Owning at least one tulip plant--like the diamonds of today--was evidence that you belonged to the right class, even if you really couldn't afford one. By late 1636, at the height of the frenzy, the middle and lower classes were selling their homes and farmland to buy a single bulb. Like contemporary house flippers, they believed the bulb's value was real, and that it could only continue to go up.

The most expensive tulip bulb ever sold was a Semper Augustus, a pretty red and white flower, for twelve acres of prime building land. Ultimately, by the fevered peak of February 1636, tulip bulbs were exchanged at such dementedly inflated rates that a few people got rich, but most were leveraged up to their eyeballs in the tulip frenzy and had no idea that they were about to lose everything.

That same month, something shocking happened: People failed to show up at a small, invitation-only tulip auction in Haarlem. The very exclusive event was probably a bust because there was a simultaneous outbreak of the bubonic plague in the very same neighborhood as the auction.

Nevertheless, people panicked--about the tulips, not the Black Death. When that one auction failed to produce the expected crowds, everyone else began to doubt the desirability (and thus the monetary value) of the bulbs. That failed auction was the tiny catalyst that began the equivalent of a tulip stockmarket crash.

People stopped buying and began to default on tulip contracts. Investors of every class were left homeless, holding nothing but suddenly worthless onionlike bulbs. People begged the Dutch government and the courts for help, but the situation was such a Ponzi mess, so complicated, that even The Hague was at a loss. Ultimately, the government declared tulip sales gambling debts and refused to be involved.

Within two months, half of Holland was destitute and indifferent to the exorbitantly priced bulbs spread across Europe. A few professional bulb traders tried to revive the demand, but it was useless. There was no resuscitating the tulip market; it was as dead as a flower in winter.

This is the scarcity effect and imaginary value at its most sinister.

Value works like an economic syllogism: Everyone has to have it because everyone has to have it. The more other people want it, the more you'll pay to have it. And the more you'll pay to have it, the more convinced other people become that it must be valuable, and therefore the more they, in turn, will pay for the same thing. This is the absurd and imaginary way in which the value of rare, coveted things just explodes.

An interesting quirk of the scarcity effect is that it doesn't require actual scarcity.

The fact that one failed auction was the dart that popped the tulip bubble isn't as surprising as it sounds. The value of those coveted bulbs, like the value of diamonds and gems, was not only based on beauty or exoticism. Nor was their record-breaking value determined entirely by dearth--it was determined by other people's competitive desire to possess the same item. When it comes to a limited good, the mere perception of scarcity is adequate to send your brain into a tailspin.

You Should Have Your Head Examined

In an experiment on the neurological effect of supply and demand,* a group of subjects were given two different kinds of cookies (to keep it simple, we'll call them red and blue) and asked to rate their appeal. The fewer there were of one color, the more appealing that color cookie became to the test subjects. OK--no surprise there, this is an obvious result of scarcity and the way scarcity affects our perception of value.

The second half of the experiment was more interesting. The researchers started with the same number of red and blue cook­ies, but over the course of the experiment, the researchers took away some of the red cookies and added more blue cookies--all without the test subjects' knowledge.

If one type of cookie remained scarce throughout the entire experiment, that cookie was perceived as valuable. If the same type of cookie remained abundant throughout the entire experi­ment, it was perceived as not so valuable. But here's the fascinat­ing part: Researchers found that the cookies that became super valuable were the ones that started out abundant, and then gradu­ally began to disappear.

The test subjects' belief that their fellow participants wanted, and were selecting, the red cookies was enough to make every test subject believe red must be the most valuable cookie, for no reason at all except that they were witness to the dwindling supply.

Apparently the only thing more devastating to your brain than thinking you can't have something is the knowledge that someone else can. It may sound petty, but neurology almost always is.

Another researcher went even further and concluded that the effect of perceived scarcity on our brain "hinders our ability to think . . . When we watch something we want become less avail­able . . . a physical agitation sets in . . . blood pressure goes up, the focus narrows . . . the cognitive and rational sides retreat . . . [and] cognitive processes are suppressed. Thoughtful analysis of the situation becomes less available and brain clouding arousal ensues . . ."* It's not just desire that makes us stupid, but jealousy-- the belief that the object of our desire may be desired by those around us. It physically preps our fight-or-flight response. Desire, and particularly the desire for a limited good, real or imagined, physically affects us. It makes us act without thinking. And then our reaction inspires a similar reaction in the people around us. It's a behavioral feedback loop in which the madness of one per­son feeds that of the next, and vice versa.

Paradoxically, another group of researchers found that even as you become physically agitated and confused, your percep­tion of scarcity could actually cause you to pay closer attention to the object in question: "The presence of a restriction operates to activate a cognitive resource that is used in rendering a judg­ment regarding the favorableness of the offering." If I offer you a whole pile of something, you may or may not register the details; but if I offer you only the last one or two of something, your brain will pay much, much closer attention, simply because you per­ceive that the item is in short supply.

The long and the short of it is this: Desire makes you stupid. Physically. Chemically. It inhibits your ability to make rational decisions even as it creates a heightened state of concentration and intensity. It's like jamming one foot on the gas and one on the brake. At the same time that your brain is in overdrive, chugging like a little engine, trying to make the best rational choice pos­sible, it has been greatly diminished in its capacity to do so.

When something is scarce, you just have to have it. It's a bio­logical compulsion.

Real Estate Prices in Manhattan

Manhattan wasn't always the most coveted address in the world. In fact, the island currently known as Manhattan wasn't the first choice of the Dutch for New Amsterdam. Even the Lenape didn't live there. Manhattan comes from Manahachta­nienk, meaning roughly "place where we all got drunk,"* so-called because of an early encounter with the Dutch. In general, they only visited occasionally to fish or pick up oysters. No one actually wanted the future island of Manhattan.

If you strip away what's been built on the island since that period--the banking and financial and commercial industries, the arts, and everything else we emotionally associate with New York--that little 23 square miles of land isn't great real estate. OK, it has a bay, but such an extensive one with such weak, soft shoals that for the last three hundred years Manhattan has had to be shored up by trash. Quite literally. No less than 15 percent of its landmass, including large parts of the financial district, is made of centuries of deliberate landfill.

The island is also full of granite deposits left by the glaciers receding at the end of the last Ice Age. The huge boulders you see in Central Park are just the tip of the proverbial iceberg. Those granite deposits are ubiquitous, they go all the way down, and they make the land completely unfarmable. Manhattan is freez­ing in the winter, blistering in the summer. It's subject to hur­ricanes and flooding. It's tiny and surrounded by frigid, choppy water. There weren't even many natural resources except a little tiny bit of wood.

And yet for a while, New York was the capital of our country. When it surpassed London as the largest city in the world in 1925, it became the unofficial capital of the world. Ironically, it's now among the most desired real estate on the planet.

So what makes it so valuable now?

Manhattan real estate prices obey the basic principles of the scarcity effect. In other cities, you can keep building outward. Manhattan's an island. In Manhattan, you can only build up. There is very little of the island left to develop. Prices have been determined almost solely by the scarcity of the square footage.

Limited good is a powerful thing.

Sometimes less is more, and in the case of Manhattan, the key to its value is its size. New York is like a jewel in and of itself. It would seem the scarcity effect is effective whether your commod­ity is carats of diamond or acres of bedrock.

Space only really became prized in Manhattan when it began running out. Before all the construction and capitalism--before Wall Street and the financial district--Manhattan wasn't worth much as far as land goes, especially in an expansive continent rich in space and natural resources.

Given this picture, a sack of rare, exotic "jewels" in exchange for a swampy, intemperate island doesn't sound like such a bad trade after all.

Strange Currency

So how did they determine a fair price for Manhattan? And why use beads? Why not gems, or tulips, or anything else for that matter?

The fact that the Dutch paid for New Amsterdam in beads is not surprising or even unique. Venetians had used trade beads as currency in Africa and Indonesia for a very long time before any­one ever ventured to the New World. In fact, many of the bead makers in Holland were Venetians. Glass beads were not only lovely, but glass was a rare commodity outside of Europe.

In fact, in the sixteenth and seventeenth centuries, beads were valuable and accepted pretty much as universal currency. They were actually created for that purpose and used kind of like Renaissance-era traveler's checks. It was just as difficult to trade using unrecognizable foreign currency back then as it is now. And, sure, gold and jewels are welcome everywhere, but the jew­els were mostly coming from those distant lands in the first place, making them ubiquitous and far less valuable to their original sellers than to their European counterparts. And though every­body values gold, it's heavy, difficult to transport in quantity, and easily stolen.

Glass beads, on the other hand, were easy to transport, easy to standardize for value, and most important, they were rare-- and therefore valued--everywhere but in Western Europe. There's a distinct advantage to trading something more valuable to your customer than it is to you. Glass beads were particularly valuable, one might even say invaluable, rare, and exotic, in the New World, where glassmaking technology didn't exist and no one had ever seen anything like them.

People hate the idea that Manhattan was sold to Native Amer­icans for beads, because modern people think beads are basically worthless. But there's really nothing scandalous about a sale involving beads. The presumption that the natives who accepted the beads as money were foolish comes from the person hearing this story and not from the story itself. It's informed not only by cultural guilt but by our own modern sense of what objects are worth. If we accept that beads are valueless, if we believe that the native population sold its land for worthless trinkets, then it logi­cally follows that we must malign the intelligence and integrity of the Native Americans who lived there.

The cheapness of beads is a postindustrial perception. We've established that an item's value plummets as that thing becomes common and ubiquitous. The fate of buttons and beads, once moderate luxury items, was one and the same: As the production of the items was aided by factories and machines, the volume of buttons and beads that a seller could produce exploded. Before the Industrial Revolution, a bead or button maker might produce a hundred beads in a month; afterward, he might produce ten thou­sand. That success, paradoxically, became the industry's undoing; ultimately, the bead and button market became saturated. That lack of scarcity made the items seem less valuable, and so in time they were less valuable.

As the demand for beautiful beads and buttons fell, prices dropped, and manufacturers started using cheaper materials in order to keep prices down. That, combined with constant indus­trial innovations in machinery, made them easier and easier to produce in the millions. The irony is that as soon as the process had been streamlined and perfected for mass production, the masses no longer wanted them . . . for just that reason.


The problem with the story of "the beads that bought Man­hattan" isn't that no one has calculated the interest on twenty-four dollars--way too many clever people have tried that. It's that no one thought to calculate the interest on beads. That, right there, is the essence of the scarcity effect: Beads nowadays are ubiquitous, cheap, and disposable. Anyone can have them, so they must be worth nothing.

The story of the beads that bought Manhattan is the story of the very real imaginary value of gems. If desire is tantamount to brain damage, and if excitement about a pretty foreign flower was enough to topple the economy of a country in two months, then a stunning new gem--a new but not unrecognizable form of currency--was surely enough to buy an island that no one wanted.

Excerpted from Stoned: Jewelry, Obsession, and How Desire Shapes the World by Aja Raden courtesy of Ecco, an imprint of HarperCollins Publishers, copyright 2015