Editor's Note: Charles Mackay in his Extraordinary
Popular Delusions and Madness of Crowds, written in 1841,
unwittingly provides us one of the better studies of modern market
behavior. I doubt Mackay would have guessed that his book would
be read, digested and taken as revelation by readers in the 21st
century. At the same time, he probably would have not been surprised
that the pull of the same dark gravity that caused people to
throw their fortunes at tulip bulbs in Holland, or land they
never had a hope of seeing in the New World, would be omnipresent
in the age of computers, instantaneous communication, and the
nearly infinite availability of market analysis. The highly successful speculator and
gold investor Bernard Baruch put his blessing on this book as
one of the secrets to his success on Wall Street.
"Have you ever seen in
some wood, on a sunny quiet day, a cloud of flying midges --
thousands of them -- hovering, apparently motionless, in a sunbeam?
...Yes? ...Well, did you ever see the whole flight -- each mite
apparently preserving its distance from all others -- suddenly
move, say three feet, to one side or the other? Well, what made
them do that? A breeze? I said a quiet day. But try to recall
-- did you ever see them move directly back again in the same
unison? Well, what made them do that? Great human mass movements
are slower of inception but much more effective."
So we bring you Charles Mackay
and his Extraordinary Popular Delusions with our own sense
of mission. If the rising generations now receiving their education,
or even their more jaded elders, find application in their own
investment philosophy, then the purpose of this Gilded Opinion
entry has been served. Complicated and timelessly revealing,
here you will find examples of herd behavior, delusion, mania,
craftiness, and financial loss and gain. Solomon taught us that
there are no new things under the sun. Mackay teaches us how
we might recognize the signs and that the crowd gone mad is a
matter to be reckoned with in almost every era.
This book's relevance to gold is simple and straightforward:
Gold is the talisman in the portfolio which protects against
these occasional bouts of social madness. There is an historical
example which illustrates the point. Early 18th century French
finance minister, John Law, who perpetrated perhaps the most
notorious mania covered by Mackay, ruined the French currency
and, with it, the French economy. Needless to say, the citizenry
did whatever they could to shelter themselves from the rapidly
depreciating paper scrip. Law in one of his final acts before
fleeing the country abolished gold and silver coin as a medium
of exchange, made gold ownership illegal and closed down the
borders to anyone hoping to escape with hard assets.
Needless to say, both Law and the public understood the value
of gold under such circumstances. Those who converted their paper
early in the process preserved their assets; those who didn't
were left penniless.
With that we welcome you to the extraordinary world of Charles
-- Michael J. Kosares
Author's Preface: In reading the history of nations,
we find that, like individuals, they have their whims and their
peculiarities; their seasons of excitement and recklessness, when
they care not what they do. We find that whole communities suddenly
fix their minds upon one object, and go mad in its pursuit; that
millions of people become simultaneously impressed with one delusion,
and run after it, till their attention is caught by some new folly
more captivating than the first. We see one nation suddenly seized,
from its highest to its lowest members, with a fierce desire of
military glory; another as suddenly becoming crazed upon a religious
scruple, and neither of them recovering its senses until it has
shed rivers of blood and sowed a harvest of groans and tears,
to be reaped by its posterity...
Money, again, has often been a cause of the delusion of multitudes.
Sober nations have all at once become desperate gamblers, and
risked almost their existence upon the turn of a piece of paper.
To trace the history of the most prominent of these delusions
is the object of the present pages. 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.
In the present state of civilization,
society has often shown itself very prone to run a career of folly
from the last-mentioned cases. This infatuation has seized upon
whole nations in a most extraordinary manner. France, with her
Mississippi madness, set the first great example, and was very
soon imitated by England with her South Sea Bubble. At an earlier
period, Holland made herself still more ridiculous in the eyes
of the world, by the frenzy which came over her people for the
love of Tulips. Melancholy as all these delusions were in their
ultimate results, their history is most amusing. A more ludicrous
and yet painful spectacle, than that which Holland presented in
the years 1635 and 1636, or France in 1719 and 1720, can hardly
be imagined. Taking them in the order of their importance, we
shall commence our history with John Law and the famous Mississippi
scheme of the years above mentioned.
- Charles Mackay