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Extraordinary Popular Delusions and the Madness of Crowds is still relevant 178 years after publication
Thursday 30 May 2019 Author: Ian Conway

Listed by the Financial Times as one of the 10 best books ever written on investment, Charles Mackay’s study of how manias start, develop and eventually pass is as relevant today as it was nearly 170 years ago.

In his own words, Extraordinary Popular Delusions and the Madness of Crowds is ‘a miscellany of delusions’, some financial, others social or moral.

It includes the history of alchemy, belief in relics, prophecies, astrology, devil worship, the burning of witches and even slow poisoning, which became strangely fashionable among well-to-do ladies in 17th century France.

However it is Mackay’s exploration of the role of crowd psychology in fuelling the great financial manias of the past for which the book is best known.


The first financial craze analysed by Mackay is ‘Tulipmania’. Introduced into Europe in the mid-1500s, by the early 1600s tulips were so sought-after that it was deemed ‘proof of bad taste in any man of fortune to be without a collection of them’.

Amsterdam became the centre of the tulip trade, and by 1636 jobbers on the stock exchange who were ‘ever alert for a new speculation’ had taken up trading bulbs instead of stocks.

Money poured into Holland from all directions and inflated the value of land, houses and even horses and carriages. Interest spread through Dutch society until ‘the rage to possess tulips was so great that the ordinary industry of the country was neglected and the population, even to its lowest dregs, embarked in the trade’.

Once prices began falling, confidence was destroyed and panic gripped the nation.  Mackay wrote: ‘Substantial merchants were reduced almost to beggary, and many a noble line saw the fortunes of their house ruined beyond redemption.’ A hundred years later the rarest tulip bulbs were worth less than 1% of their peak value.


The second great speculation involves financier John Law and the ‘Mississippi scheme’. Following the death of the extravagant King Louis XIV in 1715, France’s finances were in complete disorder. The Duke of Orleans assumed control and was convinced by Law to issue paper money backed by property and tax receipts.

Law set up a bank and made his notes payable in the coin which was current at the time they were issued, which meant there was no risk of devaluation. Law’s notes quickly traded at a premium to their face value, stoking demand and bolstering the Treasury’s coffers, while government bills traded at a hefty discount.


Given his success in stabilising the economy, Law was granted an exclusive trade licence with Louisiana, where there was alleged to be huge deposits of precious metals, as well as the East Indies and China, to continue financing the national debt.

Bonds in his Company of the Indies soared and, ‘induced by the golden dreams of the whole nation’, more and more new bonds were issued. Again money flooded in from abroad and ‘an illusory prosperity shone over the land’.

Inevitably confidence in the Mississippi scheme waned, investors fled and the company was stripped of its privileges. The national debt was no smaller than at the start of the exercise but people swept up in the speculation lost everything.

Opinion is divided as to whether or not Law was a crook: as Mackay reflects, he understood the principles of credit but ‘he did not calculate upon the avaricious frenzy of a whole nation; he did not see that confidence, like mistrust, could be increased almost ad infinitum’.


At the same time that Law was attempting to rescue France’s finances, the South Sea Company took on the British government’s debt in exchange for 6% annual interest and a monopoly on trade to the South Seas.

Legend had it that South America’s gold and silver mines were inexhaustible, and despite the fact that England and Spain were at war, the company – backed by the government – promoted itself as having free reign to trade with the Spanish territories of Mexico, Chile and Peru.

As ‘visions of ingots danced’ before investors’ eyes, the company’s stock rose unrelentingly and new shares were issued at higher and higher prices, spawning dozens of imitators.

Some were plausible, others less so such as the company set up to create a wheel of perpetual motion. The most absurd, ‘which showed more completely than any other the utter madness of the people’, was the pitch for an investment scheme during this bubble. It described the investment proposition as: “A company for carrying on an undertaking of great advantage, but nobody to know what it is”.

After raising the equivalent of £250,000 in a day, the proposer fled to the Continent and was never heard of again.

Within eight months the South Sea bubble had burst, causing a run on the Bank of England and sparking a Parliamentary enquiry which concluded that the scheme, which ‘had fixed the eyes and expectations of all Europe’, was founded on nothing more than ‘fraud, illusion, credulity and infatuation’.

We have two copies of Extraordinary Popular Delusions and the Madness of Crowds to give away.

Simply answer this question:

What was behind the dotcom bubble?

Email with ‘book competition’ in the subject line by 7 June 2019. We will pick two names at random and announce the winner in Shares on 13 June 2019.

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