Alan Greenspan may say it is “very difficult to definitively identify a bubble until after the fact” but the study of bubbles is far older than he is. This year is the 150th anniversary of the classic text on manias, financial or otherwise: Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.
Mackay’s study of the South Sea Bubble of 1720 is particularly relevant to central bankers. During that mania, Mackay writes, “visions of boundless wealth floated before the eyes of the people”, and half the nation turned stockjobbers. Exchange Alley, the lane near Lombard Street in the City of London where stockjobbers gathered, was at one point so full of citizens mad for South Sea Company shares that the price at one end of the lane was 10% higher than at the other.
Numerous unscrupulous schemes cashed in on investor credulity – one man, who would surely be a dot com entrepreneur were he alive today, set up a joint-stock company “for carrying on an undertaking of great advantage, but nobody to know what it is”. Despite this slender prospectus, the man was able to sell 1,000 shares in five hours, making £2,000. He then packed up shop and disappeared.
When the bubble burst, a vengeful indignation seized the public. Robert Walpole, then chancellor of the exchequer, was the Eliot Spitzer of the day. He declared that the stockjobbing fever was “an evil of first-rate magnitude” because it “raise[d] artificially the value of the stock, by exciting and keeping up a general infatuation”.
The investigation discovered that the same members of parliament who had authorized the scheme also directly profited from it – including the chancellor, John Aislabie, who held almost £1 million in South Sea shares. He ended up imprisoned in the Tower of London. Indeed, so obvious was the influence of Exchange Alley’s stockjobbers on the House of Commons that Walpole complained: “From the Alley to the House is like a path of ants.” Nothing like today, of course…
