Savvy Nickel
by Charles Mackay
Charles Mackay's 1841 classic chronicles the tulip mania, South Sea Bubble, Mississippi Scheme, and other mass manias. The original study of crowd psychology and speculative excess — still the most entertaining and insightful account of how rational individuals become irrational mobs.
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Charles Mackay was a Scottish journalist who in 1841 compiled the most ambitious catalogue of human folly ever attempted. Extraordinary Popular Delusions covers financial manias (tulip mania, South Sea Bubble, Mississippi Scheme), religious crusades, alchemists, witch trials, haunted houses, and more. The financial sections remain the most widely read and most directly applicable. Bernard Baruch famously said he read Mackay before every major investment decision. Nearly 180 years after publication, it remains the foundational text on why crowds lose their minds.
| Attribute | Details |
|---|---|
| Title | Extraordinary Popular Delusions and the Madness of Crowds |
| Author | Charles Mackay |
| First Published | 1841 |
| Pages | 752 (full edition) |
| Reading Level | Intermediate |
| Amazon Rating | 4.5/5 stars |
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Charles Mackay (1814-1889) was a Scottish poet, journalist, and author who worked for The Illustrated London News. He wrote Extraordinary Popular Delusions at the age of 27, drawing on historical records, contemporary accounts, and his own keen eye for human absurdity. The book was largely ignored on publication and only became widely known decades later as its relevance became increasingly obvious with each new financial mania.
Mackay's tulip mania chapter is the most famous financial history account ever written — and the most debated.
The tulip was introduced to Western Europe from the Ottoman Empire in the mid-16th century. By the early 17th century, it had become a status symbol among the Dutch wealthy. Tulip bulbs that produced unusual color patterns (caused by a virus that was not then understood) were particularly prized.
The futures market:
By 1634, a futures market had developed. Speculators traded contracts for bulbs not yet in existence — future delivery of bulbs whose tulips would bloom the following spring. These contracts changed hands many times before the delivery date.
The price spiral:
| Bulb Variety | 1624 Price | 1637 Peak Price |
|---|---|---|
| Semper Augustus | 1,000 guilders | 6,000 guilders |
| Viceroy | 3 guilders | 900 guilders |
| Common bulbs | 0.1 guilder | 0.6 guilder |
At peak mania, a single Semper Augustus bulb reportedly sold for enough to buy a grand Amsterdam house. Workers reportedly sold their tools and instruments to fund tulip speculation.
In February 1637, at a routine bulb auction in Haarlem, no buyers appeared at the expected prices. Word spread that the market had broken. Within days, prices collapsed across all varieties. Contracts became worthless; fortunes evaporated.
Mackay's key observation:
"The more we see of the extravagances of mankind, the more cause have we to wonder that men of sense can be found to participate in them."
The modern revision:
Subsequent research by Anne Goldgar has found that Mackay substantially exaggerated the tulip mania — actual prices were lower than reported, fewer people were involved, and fewer fortunes were actually destroyed. The mania was real; Mackay's colorful details were partly invented.
The investment lesson that survives the revision:
Even a smaller tulip mania is a powerful demonstration that futures markets for purely speculative assets can sustain prices far above any fundamental value, and that the collapse can be as sudden as the rise. The specific numbers matter less than the pattern.
John Law was perhaps the most creative financial engineer in history — and the man who simultaneously inflated the largest financial bubble France had ever seen and pioneered the concepts of paper money and central banking.
France in 1719 was effectively bankrupt from Louis XIV's wars. Law proposed a solution: convert the government's debt into shares of the Mississippi Company, which held a trading monopoly with France's North American territories.
The mechanism:
The price spiral:
| Date | Mississippi Company Share Price |
|---|---|
| January 1719 | 500 livres |
| December 1719 | 10,000 livres |
| January 1720 | 20,000 livres (peak) |
In 13 months, shares rose 40x. Law was appointed Controller-General of Finance — the most powerful financial official in France.
Investors who had made paper fortunes tried to convert them into gold and silver. But Law had been printing paper money to fund the share price — there was far more paper than gold. The bank suspended convertibility.
Confidence collapsed. Shares fell as fast as they had risen. By September 1720 the share price was back near its starting point. Law fled France in disgrace, dying in Venice nine years later.
Mackay's most quoted passage from this chapter:
"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."
The permanent contributions of John Law's experiment:
Despite the disaster, Law's innovations were adopted:
The lesson: financial innovations that fail in their first iteration often succeed in their second or third.
The South Sea Bubble ran almost exactly parallel to Law's Mississippi Scheme — an extraordinary coincidence that suggests the speculative mania of 1719-1720 was as much a pan-European phenomenon as a specific company story.
The South Sea Company was granted a monopoly on British trade with South America in 1711. The monopoly was largely theoretical — Spain controlled South America and had no intention of granting access to British traders. The real business was financial: converting British government debt into South Sea Company shares.
The stock promotion machine:
The company used every available technique to inflate its share price:
The price:
| Date | South Sea Company Share Price |
|---|---|
| January 1720 | £128 |
| May 1720 | £550 |
| June 1720 | £890 |
| July 1720 (peak) | £1,050 |
| December 1720 | £150 |
During the South Sea mania, hundreds of bubble companies formed to take advantage of the speculative appetite:
| Company Description | Capital Sought |
|---|---|
| "For carrying on an undertaking of great advantage, but nobody to know what it is" | £500,000 |
| "For a wheel of perpetual motion" | £1,000,000 |
| "For importing jackasses from Spain" | £3,000,000 |
Mackay notes that the anonymous "undertaking of great advantage" company raised £2,000 in one morning — subscribers put money in without knowing what they were buying. The promoter disappeared with the money the same afternoon.
Mackay's observation:
"Every fool aspired to be a knave."
Mackay's chapters on the financial manias lead to broader observations about crowd psychology that anticipate modern behavioral economics by 150 years:
Based on Mackay's accounts, a consistent psychological pattern emerges:
| Stage | Characteristics |
|---|---|
| 1. Novelty | A new investment opportunity appears; early adopters benefit |
| 2. Public notice | Successes become widely known; more people investigate |
| 3. Enthusiasm | Media coverage intensifies; new participants flood in |
| 4. Greed | Rational analysis is suspended; price is justified by further price rises |
| 5. Peak | Late arrivals exhaust the supply of greater fools; distribution begins |
| 6. Panic | Early sellers have exited; remaining holders panic; prices collapse |
This pattern repeats in every bubble Mackay documents — and in every subsequent bubble documented by Chancellor, Kindleberger, and Shiller.
Mackay was one of the first to analyze how ideas spread through populations — what we now call social contagion. His observation: financial manias spread not through logic but through imitation.
Neighbors seeing neighbors prosper from speculation create a social pressure to participate. This is not greed alone — it is the fear of being left out (what behavioral economists now call FOMO: fear of missing out).
The modern formalization:
Robert Shiller's narrative economics (described in Irrational Exuberance) builds directly on Mackay's insight. Economic trends are driven by stories that spread virally through populations. The stories determine sentiment; sentiment determines prices; prices create new stories.
Mackay documents that during each mania, the leading intellectuals and financial authorities of the era endorsed the speculation:
The Newton lesson:
Newton reportedly said: "I can calculate the motions of heavenly bodies, but not the madness of people." Even the greatest scientific mind of his era could not maintain rationality against the social pressure of a financial mania.
The investment principle:
Expert consensus during a mania is not evidence that the mania is justified. It is evidence that experts are as susceptible to crowd psychology as anyone else. The most dangerous period of any bubble is when smart, respected people are providing intellectual justification for it.
Before investing in any strongly promoted asset, apply Mackay's pattern recognition test:
| Question | Red Flag Answer |
|---|---|
| Is the investment opportunity widely discussed in mainstream media? | Yes — broadly known opportunities are usually fully priced |
| Are ordinary people (non-investors) excited about it? | Yes — peak retail enthusiasm marks tops |
| Are smart people providing reasons why old valuation rules don't apply? | Yes — "this time is different" precedes every crash |
| Has the price risen dramatically in a short period? | Yes — rapid price appreciation attracts crowd psychology |
| Are people borrowing to invest? | Yes — leverage amplifies both gains and losses |
| Is the asset generating futures and derivatives markets? | Yes — leverage instruments multiply speculative position sizes |
Mackay's work has one clear investment lesson: when you observe the pattern of mass mania, move in the opposite direction of the crowd.
This is psychologically difficult — as Mackay documents, the social pressure to participate during manias is enormous. The person who does not participate in a rising market feels foolish and left out. The person who sells early is ridiculed for "leaving money on the table."
The contrarian is vindicated only after the collapse — by which time everyone has forgotten who said what before the peak.
Rating: 4.5/5
Extraordinary Popular Delusions is the original text on financial manias and crowd psychology. Its tulip, Mississippi, and South Sea chapters are irreplaceable primary sources. Despite some factual embellishment, Mackay's core observations about crowd psychology, contagion, and expert capitulation during manias are as valid today as in 1841.
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by Edward Chancellor
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