Money Madness


Just imagine that you have a chance to buy for twenty-five dollars a stock whose potential earnings seem to you to justify a price of thirty dollars. Should you buy? It appears irrational not to. But wait. Suppose you also believe that the market is full of morons who will not recognize the value of your stock when you offer it for sale. “It is not sensible,” John Maynard Keynes writes, “to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe the market will value it at 20” when you decide to sell.

Keynes, as I mentioned in my last column, was not merely one of the most influential economists of the twentieth century but also a fabulously successful investor. While breakfasting in bed, he devoted half an hour each morning to the stock market—earning a fortune for himself and increasing by 1,000 percent the market value of the endowment of his college, whose investment portfolio he managed.

Keynes is associated with an approach to investing that emphasizes psychological factors—an approach memorably expressed in his statement that “nothing is more suicidal than a rational investment policy in an irrational world.” The trouble with Keynes, I thought, as I counted my losses last October 19, is that he never explains how an average member of the crowd can follow his advice, which is to “guess better than the crowd how the crowd will behave.” If you try to guess what I will do, and I try to guess what you’ve guessed, and you try to guess what I’ve guessed, and so on, it’s obvious we’re destined to exhaust one another without gaining any edge. Keynes may get rich picking stocks while he sips tea in bed, but you and I probably will have to keep on working.

One reason it’s so hard to outguess the crowd is that the crowd goes crazy now and then. When that happens, investors reach for Mylanta, and business journalists reach for Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.


Mackay, a British journalist and poet, published the book that keeps his name alive in 1841, at the age of twenty-seven. For readers interested in financial panics, only the first hundred pages of the big book matter. Here Mackay offers detailed accounts of three of history’s most glorious speculative bubbles. The last six hundred pages furnish a miscellaneous collection of chapters in “the great and awful book of human folly": “The Alchymists,” “Modern Prophecies,” “Fortune-Telling,” “The Magnetisers,” “The Witch Mania,” “Haunted Houses,” “Relics,” and so on.

Unquestionably the most memorable chapter in Extraordinary Popular Delusions is Mackay’s account of the tulip mania that hit Holland in the 1630s.

At the height of the madness, Mackay reports, a single root of the rare species viceroy was traded for two loads of wheat, four loads of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tuns of butter, one thousand pounds of cheese, a complete bed, a suit of clothes, and a silver drinking cup—the whole valued at twenty-five hundred florins. An even rarer root was purchased for forty-six hundred florins, two gray horses, a complete set of harness, and a new carriage.

Some unfortunate mishaps occurred. Once a grateful merchant treated a sailor who had just returned from a long voyage to a fine red herring for breakfast. Seeing a bulb that resembled an onion near him, the sailor ate it with his herring, only to learn that “he had been eating a breakfast whose cost might have regaled a whole ship’s crew for a twelvemonth.” No longer grateful, the merchant filed charges that sent the sailor to jail for months.

The bubble swelled. Prices kept rising, propelled by the fatal optimism that fuels all manias. Few people were immune. “Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart.”

At last the bubble burst. As a fever of greed had swept through the crowd, now a fever of doubt swept through it. Prices plunged. Families were ruined. “The cry of distress resounded every where, and each man accused his neighbour.” Holland spun into a depression that lasted for years.

Mackay tells the story of “The Tulipomania” in nine vivid pages. He also offers longer, less memorable accounts of two linked manias that occurred nearly a century later—the Mississippi and South Sea bubbles of 1720.

The Mississippi Bubble is worth remembering’if only because it introduces us to one of those extraordinary minor figures who make history so much fun for the general reader. Born in Scotland in 1671, John Law fled to the Continent at twenty-six after killing a man in a duel over a woman. There followed a long period of restless roaming, during which Law supported himself by gambling and won a reputation as “one better skilled in the intricacies of chance than any other man of the day.”

Law learned much about trade and became convinced that paper currency is the key to national prosperity. In France, after the death of Louis XIV in 1715, Law persuaded the duke of Orléans, who ruled as regent, that he should be allowed to establish a bank authorized to issue paper money.