Money Madness


The early success of the bank led the regent to the lamentable conclusion that “if five hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage.” Law almost certainly knew better, but “with a weakness most culpable,” he did not resist.

In 1717 the grateful regent gave Law permission to establish a company that would have the exclusive privilege of trading to the lower Mississippi Valley. To this privilege was added, in 1719, the exclusive privilege of trading to China, the East Indies, the South Seas, and all the possessions of the French East India Company.

Law’s Mississippi scheme turned into the Mississippi Bubble when the public, stirred by Law’s promise of spectacular dividends, lashed itself into a bidding frenzy in response to an offer of shares in the venture. Infatuation and folly are the dominant words in Mackay’s account of this process.

In one of the most striking passages in his book, Mackay compares the financial edifice that Law created, resting on its twin pillars of worthless currency and wild speculation, to the “gorgeous palace” erected by the Russian prince Potemkin to impress his mistress: “huge blocks of ice were piled one upon another; Ionic pillars of chastest workmanship, in ice, formed a noble portico....but there came one warm breeze from the south, and the stately building dissolved away....So with Law and his paper system. No sooner did the breath of popular mistrust blow steadily upon it, than it fell to ruins, and none could raise it up again.”

Law fled from France with the clothes on his back and one diamond, “the sole remnant of his vast wealth.” He died in Venice in 1729. Noting that Law invested none of his fortune outside France when he might easily have done so, with the result that he left the country “almost a beggar,” Mackay comments, “This fact alone ought to rescue his memory from the charge of knavery...”

“Men, it has been well said, go mad in herds, while they only recover their senses slowly, and one by one.”

No one has wished to rescue the memory of the perpetrators of the South Sea Bubble, which was a straightforward swindle inspired partly by the wish to slow the flow of capital from Britain to Paris in the days before Law’s Mississippi scheme collapsed.

Formed in 1711, the South Sea Company was granted a monopoly on South Sea trade in 1720 in return for assuming three-fifths of Britain’s national debt. The plan was passed over the opposition of the Whig leader Robert Walpole, who warned that its advocates intended “to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose.”

In the speculative binge that followed, “every fool aspired to be a knave,” but many remained fools. The trade in shares of the South Sea Company could not quench the “thirst of gain” that burned in every throat. Hundreds of joint-stock ventures were formed to take advantage of a public that thought stock prices must rise forever.

These ventures included one for “trading in hair” and one for “extracting silver from lead.” One million pounds were subscribed for a perpetual-motion machine. Best of all was “a company for carrying on an undertaking of great advantage, but nobody to know what it is.” One thousand subscribers paid two pounds each as a deposit for shares in this venture, whose originator pocketed the money and promptly absconded for the Continent.

Some of these enterprises ran through their life cycles in a fortnight or less, and so they came to be called bubbles. When at last confidence collapsed, the public turned furiously—and with good reason—against the directors of the South Sea Company, one of whom was the grandfather of the great historian Edward Gibbon. “Nobody blamed the credulity and avarice of the people...or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors.”

In his preface to the edition of Extraordinary Popular Delusions published in 1852, Mackay squeezed his book into a single sentence: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” Both the buying spree that pushed the Dow Jones Average over twenty-seven hundred in 1987 and the selling panic that pulled it down 508 points in a single terrifying day seem classic instances of “going mad in herds.” If, as I write this, we appear to have recovered our wits, we can be confident that we have not recovered them for good. That’s a point to keep in mind the next time your broker calls with a hot tip on tulip futures.