With the rising economy and seemingly endless profit opportunities in the international commerce, life in Netherlands around 1630 was good. One of the status symbols was the tulip, which stood proudly among other flowers with vivid colors and charm.
Although ordinary tulips were sold by the pound, rare bulb prices soared with every new type of fancier tulip. Professional tulip traders sought out flower lovers and speculators to invest their life's savings, who then happily agreed lured by tales of incredible profits. Since demand for tulips increased dramatically, the prices rose steadily.
However the supply of bulbs did not follow. The reason is biological, because of the pure fact that it takes five to ten years to grow a single tulip from seed, and it's only possible to produce two or three clones annually. Another interesting fact is that Amsterdam Stock Exchange avoided tulips market, even though it was quite developed for that period.
The situation in which demand increases, supply is stable and slow rising, lots of money available must ultimately lead to greed and speculation. And Netherlands witnessed a true crisis over a beautiful flower.
The tulip trading market
Tulips bloom in April and May for only for a week, and the secondary buds appear shortly afterwards. The tulip bulbs can be uprooted and moved about from June to September, and therefore actual purchases were made in that period. However, because of the developed financial instruments and knowledge, people were able to buy and sell tulips the entire year with mostly private contracts which were in essence futures contracts.
Florists, speculators, traders and in the later stages common folk, usually signed contracts before a public notary to purchase tulips at the end of the season. The product of such practice was attractive market for durable tulip bulbs. Short selling was banned by an edict of 1610 although short sellers were not prosecuted rather their contracts were deemed unenforceable. During the years that followed tulip price was stable or growing steadily.
The speculation bubble grows
As the merchants brought newfound wealth from their voyages, flowers such as tulip grew in popularity as well as in demand. In result professional growers paid higher and higher prices for special variety bulbs. By 1634 foreign investors and speculators started entering the tulip market. In the planting season of 1635, prices began to rise more rapidly, and there was a fundamental change in the way bulbs were traded.
They were sold by weight while still in the ground, with only a promissory note to indicate details of the bulb, including its weight at planting and when it would be lifted. The delivery of the bulbs was months away and they were not sold, the object of trade were actually these paper promises. Weight was measured in aasen, an very small unit equal to approximately one-twentieth of a gram, or less than .0017 ounces. Paying by weight was a more fair way to assess price, an immature bulb costing less than a more mature one, but it also increased the price of the heavier bulbs.
This is where biology gave a foundation for speculation. Because a bulb planted in September or October, it shall likely weight greatly more when lifted (after blooming) the following June or July, thus having greater value. It's quite logical, as well as a perfect reason for speculation. Even if the price per weight did not change, the price of the bulb could increase 300-500% over these nine months, depending upon actual weight.
Heavier bulbs also tended to flower earlier and have several smaller clones attached to the mother bulb which increased their value even more. In 1636, speculation grew stronger on stories of common people making fortunes in the tulip market so the Dutch created a type of formal futures markets where contracts to buy bulbs at the end of the season were traded. Traders with contracts met at taverns and buyers were required to pay a 2.5% "wine money" fee, up to a maximum of three florins, per trade.
Also the trade was centered in Haarlem during the height of a bubonic plague epidemic, making people more inclined to risk-taking. All contracts were with the individual counter-parties rather than with the exchange. The contract price of rare bulbs continued to rise throughout 1636. That November, the contract price of common bulbs also began to rise in value. The Dutch described contract trading as windhandel (literally meaning "wind trade"), due to the fact no tulip bulbs were actually changing hands. Market collapse in February 1637 made sure that no deliveries were ever made to fulfill these contracts.