Extraordinary Popular Delusions and the Madness of Crowds | Charles Mackay

Summary of: Extraordinary Popular Delusions and the Madness of Crowds
By: Charles Mackay

Introduction

Dive into the world of financial manias and delusions as you explore Charles Mackay’s ‘Extraordinary Popular Delusions and the Madness of Crowds’. This book summary lets you delve into the minds of people who were swept away by the financial frenzies of the past, featuring historical events such as the Mississippi bubble, the South Sea bubble, and the tulip mania that gripped 17th-century Holland. By reflecting on these episodes of investor hysteria and the wisdom offered by stakeholders and market participants, you’ll not only learn about the power of human psychology in shaping financial markets but also be enlightened with timeless investment principles that remain relevant even today.

France’s Financial Folly

In the 1700s, Scottish banker John Law convinced the Duke of Orléans to replace France’s metal money with paper currency, creating a paper money frenzy that led to widespread speculation and economic ruin. Law’s company, the Mississippi Company, monopolized French trade and gained popularity among investors, but as paper currency flooded the country, crime rates and prices skyrocketed, and commerce grinded to a halt. Eventually, the country became so short of precious metals that citizens were prohibited from owning gold and silver. In 1720, the Company of the Indies collapsed, and Law fled the country in disgrace, leaving all his wealth behind.

The South-Sea Bubble

The South-Sea Company was created in 1711 by English businessmen, with the aim of making money trading with South America. Despite Spain’s denial of South-Sea entry to its South American ports and difficulty getting ships to South America, the public’s enthusiasm for shares of the company boomed. Shares doubled and tripled in price every day, and speculation in the company’s shares became a lucrative occupation. The seeming success of the South-Sea venture gave rise to a number of other “joint-stock companies” with the name of Bubbles, many of which were outright scams. The government’s plan to exchange public debt for shares in the South-Sea Company turned government bond investors into holders of company stock and caused share prices to soar. However, doubts about the integrity of company directors eventually led to a government inquiry, which uncovered malfeasance and stock fraud. The bubble popped in September 1720, causing the stock to drop to 135 and leading to the arrest and prosecution of company executives and government bureaucrats.

Tulipomania

In the 17th century, the tulip became a symbol of wealth and status, drawing people from all walks of life into the “tulip trade.” The more the flowers themselves became fragile, the more their perceived value increased. As the market for tulips grew, so did the extravagance of their prices. The “tulipomania” bubble eventually burst when astute investors began selling, leaving many investors with nearly worthless tulips for future delivery.

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