What caused the bubble?
Tulips were introduced to the Netherlands in the late 1500s and steadily grew in popularity, becoming regarded as a status symbol amongst the Dutch middle classes.
Some bulbs became infected with a virus which resulted in beautiful multi-coloured petals. These patterns were highly coveted and, with so many different varieties, the flowers were classified according to their rarity and value.
Demand increased dramatically in the 1630s and prices soared. People saw others become rich through trading tulips and wanted to do the same. In many cases, formal contracts were drawn up to purchase bulbs in the future, usually at the end of the season.
Prices rose so high that people were trading everything from land to livestock, just to get hold of some bulbs. The hope was that they would then be able to sell the bulbs on to foreigners (or anyone who would buy them) at a much higher What are value stocks? A value company is a company that app... More. The situation was unsustainable.
Why did the market collapse?
Prices peaked towards the end of 1636 when the bulbs became so overpriced that many people decided to sell them in What is a trade order? In trading, an order can be defined... More to lock in profits.
By February 1637, sellers flooded the What are value stocks? A value company is a company that app... More which caused the What is price? The price is the measure of the value of good... More of tulips to plummet. Panic inevitably ensued and many of those who had agreed contracts for the future delivery of tulips now refused to pay, because the value of the bulbs had fallen so much. Some speculators had to face the fact that they traded everything they owned for something which was now relatively worthless.
The Dutch government did attempt to intervene to aid recovery, but that only made the situation worse. The tulip crash had widespread financial consequences and caused a depression which made the Dutch wary of such investments for many years to come.
They are, however, still fond of tulips.