Extraordinary Popular Delusions and the Madness of Crowds
Charles Mackay, 1841
Why do clever people pay money for a tulip bulb or for shares in a company whose purpose nobody knows? Charles Mackay gathered the loudest manias of the past: the paper fever in France, the South Sea Company bubble, the Dutch tulip trade and the witch hunts. You will see how a mania grows out of a real success, why warnings get laughed at, and what actually brings people back to their senses.
Who it is for
For those who watch friends rush into the latest fashionable investment all at once, and want to understand where sober calculation ends and collective fever begins. And for anyone curious why sensible people lose their heads together.
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.
Two philosophers at the garden gate
In the months when all of Paris was buying shares in the Mississippi Company, two learned men of letters, La Motte and the abbé Terrasson, congratulated each other: as people of a philosophical turn, they stood above this fever. A few days later the abbé was leaving the garden of the Hôtel de Soissons, where the shares were then being traded, and met La Motte at the gate. “What, you here too?” Both had come to buy. Meeting again afterwards, they talked about philosophy and science, but for a long time did not dare to say the word “Mississippi.” At last they agreed that one should never swear off anything: there is no folly that even a wise man is not capable of.
This story is told by the Scottish journalist Charles Mackay in his book of 1841. He gathered under one cover money manias, the hunt for witches, the fear of the end of the world and the fashion for miraculous healers. He described three stories about money in the most detail: the paper fever in France, the bubble of an English trading company and the Dutch tulip trade.
Mackay's main idea fits into his preface: people think in herds, they go mad in herds too, and they come to their senses slowly and one by one. In each of his stories you will find everyone: servants and dukes, shopkeepers and philosophers.
This is a book by a moralising historian of the nineteenth century, not a guide to investments, and some of its details are disputed by historians today. Where the talk turns to what to do today, it will be an application of his stories, not his advice. Ahead lie paper that enriched the country and ruined it, a company whose purpose nobody was supposed to know, and wooden sticks that cured no worse than steel ones.
Paper, and far too much of it
John Law, a Scot, a gambler and an expert on money, came to France when the treasury was empty after the long reign of Louis XIV. In 1716 the regent, who ruled for the child king, allowed him to open a bank. Law set a strict rule: a banknote could be exchanged for coin on any day, and a banker who issues paper without backing, in his words, deserves death. Merchants believed him. Banknotes were valued above coin, trade came alive, and taxes began to be paid more regularly.
Then Law founded the Mississippi Company with the right to all trade with the colony of Louisiana, where gold and silver were supposedly lying. The promised dividends lured buyers, and for fifty thousand new shares there came three hundred thousand applications. Dukes waited for hours in the street outside Law's house. A craftsman's daily wage quadrupled, and houses were being built all over Paris. Mackay calls this phantom prosperity: it dazzled the country so much that nobody saw the cloud on the horizon.
Mackay sees the error in a simple piece of reasoning by the regent: if five hundred million livres in paper brought so much good, another five hundred million would bring even more. The bank became royal, and there was far more paper than the coin that stood behind it. Mackay compares this system to the ice palace which, he says, Potemkin built for the empress: it sparkled in the sun until a warm wind blew.
The wind blew at the beginning of 1720. Prince Conti, offended at being refused new shares, demanded coin from the bank, and it was carted out in three wagons. Cautious players quietly swapped paper for gold and sent it abroad. Then the authorities banned keeping more than five hundred livres in coin at home, then announced that banknotes would lose half their value, a week later cancelled that decision, and the bank stopped paying. At its doors fifteen people died in the crush. Law left the country almost penniless: he had put everything he earned into French land, and it was confiscated.
Mackay thinks Law was more deceived than deceiver: he did not reckon with the greed of a whole nation. This is the author's opinion, but the question from this story is useful today. When the price of something rises fast, ask what stands behind it, apart from the faith of the next buyer. If the answer keeps moving away, you are standing in an ice palace.
About the author
Charles Mackay (1814-1889) was a Scottish journalist, poet and editor. The book came out in 1841 and is still considered a classic on financial bubbles and crowd psychology.
All books by this author: Charles Mackay
Terms from the book
- Louis
- acres
- Mississippi
- House of Commons
- Franklin
- Louisiana
- dividends
- South Sea Company
- Perkins
- rheumatism
- sabbath
- La Motte: Antoine Houdar de La Motte (1672-1731), a French poet and playwright, a member of the French Academy.
- Terrasson: Jean Terrasson (1670-1750), a French abbé, translator and writer, a member of the French Academy.
- Soissons: The Hôtel de Soissons, a Paris palace that John Law bought. In 1720 shares were allowed to be traded only in its garden, where about five hundred tents stood for the brokers.
- John Law: John Law (1671-1729), a Scottish financier and gambler, founder of the French bank and the Mississippi Company, Controller General of Finances of France in 1720.
- regent: Philippe d'Orléans (1674-1723), who governed France in 1715-1723 while the child king Louis XV was a boy.
- banknote: A paper money note issued by a bank. At Law's bank it could be exchanged for coin at any moment.
- livres: The monetary unit of France until the end of the eighteenth century.
- Potemkin: Grigory Potemkin (1739-1791), favourite and associate of Catherine II. The famous ice palace was in fact built in 1740 under Empress Anna Ioannovna, and Mackay attributed it to Potemkin.
- Conti: Louis Armand de Bourbon, Prince of Conti (1695-1727), a French aristocrat who grew rich on Law's shares.
- par value: The price printed on a share when it is issued. The market price can be far above or below it.
- Blunt: John Blunt (1665-1733), chairman of the South Sea Company, who was considered the main author of its plan.
- John Gay: John Gay (1685-1732), an English poet and playwright, author of The Beggar's Opera.
- Haarlem: A town in Holland near Amsterdam, one of the centres of the tulip trade.
- Beckmann: Johann Beckmann (1739-1811), a German scholar, author of A History of Inventions.
- florins: A Dutch silver coin, the guilder.
- Place Vendôme: The Place Vendôme, a grand square in the centre of Paris, where share trading moved in 1720.
- Villars: Claude Louis Hector de Villars (1653-1734), Marshal of France, one of the best-known generals of Louis XIV.
- Walpole: Robert Walpole (1676-1745), an English statesman, later the first Prime Minister of Great Britain.
- crusade: A military campaign of Europeans to the Middle East in the late eleventh century and later, declared to free Jerusalem.
- chronicler: A writer of chronicles. Here it is the French abbé Guibert de Nogent, an eyewitness to the gathering for the first crusade.
- Molesworth: Robert Molesworth (1656-1725), an English and Irish politician, a member of the House of Lords.
- Gibbon: Edward Gibbon (1737-1794), an English historian, author of The History of the Decline and Fall of the Roman Empire. His grandfather was one of the directors of the South Sea Company.
- gout: A disease of the joints in which salts of uric acid deposit in them and cause attacks of severe pain.
- Quakers: A Protestant religious society known in England for its charity; in English, the Society of Friends.
- Bath: A spa town in south-west England, known for its hot springs.
- Haygarth: John Haygarth (1740-1827), an English physician who in 1799 tested the “tractors” with wooden imitations.
- animal magnetism: Mesmer's doctrine of an invisible fluid that supposedly fills the world and heals disease. The commission of 1784 found no such force.
- Mesmer: Franz Anton Mesmer (1734-1815), a German physician who treated patients in Vienna and Paris with “animal magnetism”.
- passes: Slow movements of the hands over or along the patient's body, by which magnetisers supposedly passed on their force.
- Brunswick: A Duke of Brunswick, a German prince of the seventeenth century. Mackay does not say which of the dukes arranged this experiment.
- Jesuits: Members of the Catholic religious order, the Society of Jesus.
- Spee: Friedrich Spee (1591-1635), a German Jesuit and poet, author of A Warning to Judges (1631) against torture in witch trials.
- Cock Lane: A street in London where in 1762 a “ghost” answered questions by knocking. A court found it was a fraud by the householder and his family.
All terms
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