In the 1630s the tulip trade started to change. And one change led to another, until eventually the whole thing had become unsustainable and the entire tulip trade would eventually collapse. So let’s look at how this started.
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So at this point, in 1634, people had slips of paper stating the ownership of a tulip bulb. Remember how I said earlier that traders would only buy and sell tulips while they are in bloom, so they can assess the quality? Well, with a slip of paper you could much more easily trade tulip bulbs. You no longer needed to wait until a flower bloomed, you could now sell it at any time you wanted. And this is the second major change in the tulip trade. Before, tulip trading was highly seasonal. People would come in, they would look at the tulip, and then the flower would be sold. But now, you could trade it at any time you wanted. So if a particular brand of tulips generally looks good, then you’d pay whatever the price of that particular brand of tulip is at that moment. This makes sense. If a particular breed was worth 10 Guilders at the time, you could buy that breed knowing that this flower was probably around 10 Guilders anyway as breeds don’t vary that much. That makes sense. We do the same now when we buy online. We don’t go to the warehouse to check if the smartphone you want to buy is really as good as we’ve been told, we simply trust that a smartphone is a certain quality and it is worth a certain amount of money. Simple… well, not really… But before we delve further into the pit of financial collapse, let’s have some trivia to break up this video.
Tulips would often be named after the owner or city, with words added to suggest high quality such as general or admiral. And as the price for tulips increased, so did the extravagance of naming them. In order to make their bulb sound ever more impressive, there were tulips such as general of generals of Gouda... because one general wasn't good enough... apparently. As someone working in marketing, I can respect this type of naming system.
Okay, so people are now trading slips of paper stating ownership of a bulb. And as a result, people were trading more and more. Prices were soaring at this point. And this led to the third major change. When people heard of the insane amount of profits tulip traders were making, they wanted in on the action. So many new traders entering the tulip market changed everything about the tulip trade. And as prices grew, more and more people who knew nothing about tulips wanted to get into the profitable tulip trade. So people who knew little about tulips started buying tulips with the idea they could then sell it for a profit in the future, without ever wanting to own a tulip themselves or plan to make profit on them that was sustainable. They weren't interested in tulips, they were interested in profits. And these new traders changed the tulip trade. It was no longer about a single bulb or a particular breed of tulip. No. From now on traders were far more interested in buying large amounts of tulips in order to make the most profit. now, not all tulips were equal and each breed had its own price. But it was no longer about the quality for each individual tulip bulb. Futures Contracts which previously told you, you owned a single bulb, now turned into futures stating you owned 10 or 50 bulbs. And so, with people who knew almost nothing about tulips, buying large sums of tulips while being told that the price can only go up...! If you remember my example of bitcoin in the last episode, you may have already guessed where this is going.
Prices grew faster and faster. They began to skyrocket by the end of 1636, a few months before the collapse of the tulip prices. Within three months individual bulbs were sold dozens of times, and increasing in price more than ten-fold. And the prices for cheaper bulbs increased as much as twenty-fold. All in the space of three months. Even the most common bulbs, the ones nobody really cared about before, were now sold for large sums. By this point, a single bulb was able to purchase a large house. Or if you got a really valuable one, you could buy an entire villa. This was the height of Tulipmania, the prices were now so high that you could buy an entire street for only a couple of tulip bulbs.