Philip M Halperin

Donkey carrying booksBookshelf     MacKay-Madness of Crowds-Cover

Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds, 1852

This book is the classic in the history of financial folly, and is probably an excellent book to buy in hardcover and display prominently. Doing so would enhance the aura of knowledge, expertise and culture that attaches to possession of a venerable tome. It might even be useful to read the book, as well. Especially some of the chapters of mass psychosis that are not as obviously relevant to financial matters.

The first three chapters of the book concern themselves with three of the classical episodes of financial folly:
  • The Tulipomania
  • John Law and the Mississipi Scheme
  • The South Sea Bubble
  • (I would include 1929 and 1998 as well)

    The Tulipomania occurred in Holland in the 1630s. MacKay chronicles the introduction of tulips from Turkey to Holland, the buildup of speculative frenzy that followed, and the inevitable sudden depreciation in their value, enlivening the tale with anecdotes from the period, such as the foreign sailor who ate a bulb worth 4000 florins, thinking it an onion, and ruining his host in the process. "A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever,...The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland.". A useful cautionary tale of price speculation in perhaps its purest form.

    Another classic incident of financial mania was the 1720s scheme of John Law, a Scotsman in Paris, to establish a national bank to issue paper money redeemable in specie, backed by (potential) revenues of the Mississippi Company. The Parisians caught a speculative fever both for the bank-notes and the shares of Mississippi stock, which ultimately ended in disaster. The story is told with greater coherence and concision elsewhere, but the wealth of descriptive detail in MacKay makes compelling reading. "The price of shares sometimes rose ten or twenty per cent in the course of a few hours, and many persons in the humbler walks of life, who had risen poor in the morning, went to bed in affluence." Ultimately it turned out that the Mississippi and India Companies never earned any revenues, and as their value fell dramatically, the people found the paper money to be worthless as well. The resulting run on the bank are chronicled: "All the population of Paris hastened to the bank to get coin for their small notes..the concourse of people was so tremendous that fifteen persons were squeezed to death at the doors of the bank." Ths story has many of the ingredients of modern financial dramas: currency crisis, the allure of developing countries, leverage.

    The last financial mania related by MacKay is that of the contemporaneous South-Sea Company bubble in England, established similarly with the hope of New World revenues, leveraging government interest payments on the national debt which it assumed in essentially a debt-for-equity swap. Again speculative groundswell, frenzy, crash. The chief delight of this tale is MacKays nineteenth-century prose analysis: "Enterprise, like Icarus, had soard too high and melted the wax of her wings; like Icarus, she had fallen into a sea...knavery gathered a rich harvest from cupidity, but both suffered when the day of reckoning came.". It is a curious testament to the power of financial insanity that the appearance the first edition of this work was followed almost immediately in Britain by the Great Railway Mania of 1845-6, a fact noted by MacKay in his 1852 edition.

    Now, the episodes of mass financial insanity that MacKay relates with such colour can be found with better and more inciteful analysis elsewhere, such as the work of Kindleberger and Galbraith. The extra value in this book is that these incidents are presented in juxtaposition with descriptions of other episodes of mass lunacy, such as the Witch Mania, the Crusades, and the Alchymists.

    On the one hand, this choice of material implicitly demonstrates the true domain of financial speculative crazes, and the astonishing propensity of humanity to mass insanity. When we are currently undergoing such an episode in the financial markets, we tend to be surprised that such a thing is happening in our modern, enlightened era. But to quote the British historian Trevor-Roper, "...beneath the surface of an ever more sophisticated society what dark passions andinflammable credulities do we find, sometimes accidentally released, sometimes deliberately mobilised!" (The European Witch Craze).

    On the other hand, in our own era we have seen the parallels: The witch-mania appears in more deadly form in Stalinism, the Crusades find expression (still!) in the curious fear of Islam in the West, and, in our field, we have Alchymy --- the search for quantitative risk management solely by quasi-mechanical means, as though the "correct" combination of VAR technique and stress-testing could constitute a philosopher's touchstone to contain risk. As though financial risk were purely a quantitative science, independent of the psychology and psychosis of men, mobs, and markets.

    Regarding the phenomenon of mass financial psychosis, one of the loveliest quotes I have read is contained in Bernard Baruch's 1932 foreword to a reprinting (hardcover, below) of Extraordinary Popular Delusions and the Madness of Crowds:

    Although there be no scientific cure, yet, as in all primitive, unknown (and therefore diabolic) spells, there may be potent incantations. I have always thought that if, in the lamentable era of the "New Economics," culminating in 1929, even in the very presence of dizzily spiralling prices, we had all continuously repeated, "two and two still make four," much of the evil might have been averted. Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: "They always did."

    These words are as applicable to the "new paradigm" as they were to the "new economics"; they are as valid in 1998 as they were in 1932.

    Links to buy Extraordinary Popular Delusions and the Madness of Crowds in the UK: hardcover  paperback in the US: hardcover
    (Note: The paperback link is to AlphabetStreet Booksellers; the hardcover link is in Association with; the US link is to Barnes and Noble)

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