One winter morning in early 1637, a sailor presented himself at the counting-house of a wealthy Dutch merchant and was offered a hearty breakfast of fine red herring. The sailor noticed an onion lying on the counter.
“Thinking it, no doubt, very much out of its place among silks and velvets, he slily seized an opportunity and slipped it into his pocket, as a relish for his herring,” according to a Scottish writer telling the tale two centuries later. “He got clear off with his prize and proceeded to the quay to eat his breakfast.”
The Scottish writer was Charles Mackay and the story is recounted in his book, Extraordinary Popular Delusions and the Madness of Crowds. It’s one of very few works of economic history to have been an enduring bestseller, from its first publication in 1841 through to the 21st century, thanks, largely, to its vivid storytelling. Mackay debunked everything from alchemy and crusades to haunted houses and religious cults. But it was the three chapters on economic bubbles that made him the enduring guru of the phenomenon, cited to this day. In the book, Mackay went on to explain that the sailor, seeking zest for his fish, unwittingly pilfered not an onion, but a rare tulip bulb. Which was a problem because, in 1637, one of the strangest of all financial booms was taking place: the tulip mania, during which the choicest bulbs went for astonishing sums.
“Hardly was his back turned when the merchant missed his valuable Semper Augustus, worth three thousand florins, or about 280 pounds sterling,” wrote Mackay. Relative to the wages of the time, that is well over a million dollars today. For a brief moment of tulip mania, a Semper Augustus tulip bulb was worth far more than its weight in gold.
And it is thanks to Mackay that tulip mania is so famous. I’ve long been fascinated by Mackay’s stories, especially today, as we seem surrounded by things which might or might not be bubbles — NFTs, meme stocks, a precarious stock market — and full-blown financial face plants such as the collapse of the FTX cryptocurrency exchange. A lot of it seems to make no sense, just as the world Mackay described, in which you might accidentally eat a million dollars as garnish, made no sense. And I wondered: could I understand the crazy financial markets of today, by following Charles Mackay as a guide into the past? I learnt much more than I could have hoped, but not the lessons that Mackay had intended to teach me.
Let’s start with the obvious. That delightful story about the hungry sailor? It’s not true. It can’t be true. Who leaves a treasure casually lying around on a shop counter, or anywhere else? Indeed, the first thing I learnt as I explored the tulip bubble is that Mackay was wrong about most of it. Anne Goldgar, a historian, explains that Mackay’s account is plagiarised from an earlier source, which, in turn, relied on moralising pamphlets, written to discredit financial speculators. The picture Mackay paints, writes Goldgar, is “based almost solely on propaganda, cited as if it were fact”.
Nobody is denying that the Dutch became very excited about tulips in the 1630s. Over the preceding decades, a thrilling range of new plants arrived in Europe, such as potatoes, peppers, tomatoes, Jerusalem artichokes, French beans, runner beans and, of course, tulips. Tulip bulbs were sufficiently unfamiliar to be mistaken for vegetables. On at least one occasion, someone roasted some bulbs with oil and vinegar, which is the germ of truth in Mackay’s preposterous tale.
But tulips, of course, are much nicer to look at than to eat. And some, infected by a virus, changed from simple bold-coloured petals to exquisitely varied patterns. Newly wealthy Dutch merchants began to do what wealthy classes of people often do: they paid a lot of money for rare and beautiful things they could show off to their friends. They were no different from today’s influencers brandishing Birkin handbags or Bored Ape NFT digital artwork, except they splashed the cash on rare tulips. And the more that rich Dutch merchants tried to get the rarest blooms, the more expensive they became.
One fabulously wealthy Dutch politician built a garden filled with artfully positioned mirrors so that a few rare tulips were mirror-multiplied into a multitude. The choicest blooms were so costly, even he couldn’t afford to fill his garden. It didn’t last. Of course it didn’t. In February 1637, bulb wholesalers gathered in Haarlem, a day’s walk west of Amsterdam, to find that nobody wished to buy. Within a few days, Dutch tulip prices had fallen tenfold.
For Mackay, the moral of the tulip mania and his other tales is that, whether we’re talking about a financial bubble or a cult, people go mad in crowds. One doesn’t need hindsight to see it: if you can think calmly and independently, it’s obvious. But Mackay was writing with hindsight, some 200 years after the fact. And he seemed much more interested in cartoonish exaggeration than in accurate history.
It’s not just the fake story about the sailor and his expensive breakfast; it’s the idea that the mania was all-consuming, the Dutch economy destroyed in the flames of the burning desire for tulips. “The rage among the Dutch to possess them was so great,” sniffed Mackay, “that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.” But, for her 2007 book Tulipmania, Goldgar couldn’t find a single bankruptcy attributable to the tulip episode.
Two economic historians, William Quinn and John Turner, agree. The tulip mania isn’t even in Boom and Bust, their global history of financial bubbles, published in 2020. It had “negligible economic impact”, they explain. It “was too unremarkable to merit inclusion”. Which raises a question: if Mackay was wrong about the tulip mania, what else was he wrong about?
Charles Mackay was born in 1814, in Perth, Scotland, and he lived a remarkable life. In his time, he was best known as a poet and a hugely popular lyricist — imagine a cross between Robert Frost and Paul McCartney. He wrote a rousing celebration of colonial pioneers, “Cheer Boys Cheer”, which, counterintuitively from a Scotsman, cheers for “Mother England”. His firebrand poem, No Enemies, concludes that if you have no enemies, “You’ve never turned the wrong to right / You’ve been a coward in the fight.”
His admirers included Upton Sinclair, who appreciated Mackay’s demand for revolutionary zeal over diplomatic centrism, and his enemies included poet laureate William Wordsworth, with whom he publicly beefed. To this day, it is unclear whether the popular novelist Marie Corelli was Mackay’s adopted daughter or his illegitimate child. Mackay’s string of prominent jobs in journalism included a stint as a correspondent covering the American civil war for The Times of London.
But Mackay isn’t famous for any of that. Today, his fame rests entirely on his writing about historical manias such as the tulip bubble and the South Sea Bubble, a disastrous early example of financial engineering alongside the Atlantic slave trade. He was just 27 when the first edition of Extraordinary Popular Delusions emerged and promptly became a bestseller.
In the mid-1840s, Mackay was the editor of a small but influential newspaper, the Glasgow Argus. The British investment scene of his time was dominated by a fast-emerging technology: the railway. The first inter-city railway was the Liverpool and Manchester line, opened in 1830, and, for more than a decade after, private companies had been raising money and laying track.
By the mid-1840s a dramatic expansion seemed inevitable. The bullish consensus was that Great Britain would go from 2,000 miles of track to 20,000 by decade’s end. Promoters scrambled to register their schemes with authorities, while would-be investors, some prosperous, others not, scrambled to hand over their money to those promoters.
The boom in railway stocks was beaten only by the boom in advertising for new railway schemes. Over the past few years, it’s seemed impossible to read anything without bumping into someone selling crypto-something. In 1845, it was impossible to pick up a newspaper without seeing a solicitation for investors in a brand new railway. The Railway Times had a huge circulation. It printed three supplements a week to carry all those advertisements. There were more than a dozen weekly journals specialising in railways, most less than a year old. There was a daily railway paper, the Iron Times. Even The Economist introduced a special section covering railways. The draw of ad money from railway promoters was simply irresistible.
The Victorians were spared Elon Musk boosting crypto. But the great and the good of the era enthusiastically plunged into railway stocks. Charles Babbage, Charles Darwin, John Stuart Mill and William Makepeace Thackeray all invested in railways, either directly or through their families. So did three future prime ministers. So did the actual prime minister, Robert Peel.
Emily and Anne Brontë were big fans of railway shares and hurried to invest in the York and Midland line. Their sister Charlotte wasn’t so sure. “I have been most anxious for us to sell our shares ere it will be too late,” she wrote to a friend. “I cannot, however, persuade my sisters to regard the affair precisely from my point of view.”
Indeed, Charlotte Brontë was in the minority. The country was going mad for the railways. The price of railway stocks doubled in two years, but that understates what was really going on. Many investors would pay just a 5 per cent downpayment to obtain a toehold in a share — it was called “scrip”. But if you’d paid £1 for scrip in a £20 share and then the £20 share doubled in price, well, you’d just made £20 on an initial payment of just £1. No wonder people got excited.
Speculators enthusiastically traded scrip, feeling like financial wizards as prices rose and flipping their initial investment for a profit. Not too many people seem to have thought about the fact that they had paid £1 — a week’s wages — for a £20 share, and they were still on the hook for the other £19. Even fewer thought about what would happen if share prices stopped rising or fell.
There were some sceptics. The most prominent was The Times of London newspaper, which asked sharp questions: would that dramatic growth in railway mileage really happen? If it did, could it ever be profitable? Plenty of people were willing to pay to travel between prosperous, bustling Liverpool and Manchester, but would rural lines be so lucrative? Were railways really as cheap to build and to run as promoters claimed? And when railway companies ran parallel lines in competition with each other, what would happen to fares?
The wise listened to Mackay, the nation’s foremost scholar of investment bubbles, for insight into the debate. So what did the great historian think of the railway boom? Had another mania broken out, right in front of his perceptive eyes? Absolutely not, ruled Mackay. In 1845, he penned an editorial explaining, “We think that those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger.”
Mackay explicitly referred to some of the historical manias he so famously described in Extraordinary Popular Delusions and slapped down those who drew any parallels. “It may appear wise to the careless or to the ignorant to trace resemblances,” he wrote. “Those, however, who look more deeply into the matter and think for themselves cannot discover sufficient resemblance of cause to anticipate a similarity of effect.”
He had a point. The tulip mania was a silly fuss about flowers. The railways were iron and flame, speed and progress. They were different. “So much difference,” opined Mackay, “as to lead to the very opposite conclusion from that reached by the alarmists.”
Mackay, to his credit, warned his readers to watch out for fraudsters and opportunists. But he insisted that the fundamentals of the railways, both as a transformative technology and as a profitable investment, were sound. It wasn’t like the tulips and other delusions of crowds at all. “With railways, the foundation is broad and secure,” he explained. “They are a necessity of the age. They are a property real and tangible in themselves, and they must of necessity increase and lead to still further and more beneficial developments.”
Mackay was aware of the sceptics and sometimes published sceptical pieces by others. But this bullish essay on railways as an investment opportunity was no outlier. Mackay wrote several times on the topic, and, according to historian Andrew Odlyzko, “he appears never to have wavered in his belief that there would be abundant profits”. Odlyzko has carried out an exhaustive study of everything Mackay wrote — and commissioned others to write — in the Argus in 1844, 1845 and 1846, the peak years of the railway boom.
“We think the alarmists are in error,” Mackay concluded, “and that there is no reason whatever to fear for any legitimate railway speculation.”
Mackay’s argument seems plausible enough at first sight. Mackay’s investment maxim was: look for a broad, secure foundation, based on a necessity of the age. Don’t be distracted by fads and fashions.
There’s only one problem: this investment advice doesn’t work. The modern equivalent of the railways was the world wide web. It was like the railways, “a necessity of the age” and would, like the railways, “of necessity increase and lead to still further and more beneficial developments”. But that doesn’t change the fact that if you’d put money into almost any dotcom company in 1999, you’d have lost most of it over the next two years.
Nor are fripperies such as tulips necessarily bubbles. Compare and contrast the difference between the rare tulip bulb and the Birkin handbag, a capacious but painfully expensive offering from Hermès, named after the actor Jane Birkin. (She bumped into the fashion house’s boss on a plane in 1984, and complained about the dearth of suitable bags.) Both rare tulips and Birkin bags are quintessential examples of conspicuous consumption by the wealthiest of “collectors”. Both the rarest tulip bulbs and the rarest Birkin bags cost as much as a house. The difference is that the bottom quite quickly fell out of the market for rare tulips, and it hasn’t for Birkins. Not yet. Perhaps it will. But as far as I can figure out, the price has been rising for long enough that it is perfectly possible to have spent most of your working life building up a pension entirely based on investing in Birkins.
Then there are the ambiguous investments. Is gold a frivolous investment or a necessity of the age? Gold produces no stream of income. It has some industrial and ornamental uses, but it is chiefly valued because people expect that they will be able to find someone to take it off their hands, quite likely at a profit. That is almost a textbook definition of a bubble, but if gold is in a bubble it has been in a bubble for several thousand years.
As for cryptocurrencies, Dogecoin is absurd by design. But the blockchain, the clever decentralised spreadsheet that underpins cryptocurrencies, may just be revolutionary. Or not. Are we looking at tulips or railways? And if we really knew, would that help? With his outrageous stories about tulip madness, Mackay made it seem easy to spot a financial bubble. But perhaps it wasn’t as easy as he thought — because shortly after Mackay published his enthusiastic editorial, the railway bubble burst.
Charles Mackay was championing the railways at the very peak of the railway mania, late in 1845. Within a matter of weeks, shares in railways fell by one-fifth. That’s a problem if you own a full share. But it’s a catastrophe if you’ve just bought some scrip to flip for a profit. You’ve spent £1, a week’s wages, and on paper you’ve already lost four times that amount. Nobody is going to take the scrip off your hands, so you’re legally obliged to pay another £19 to complete the purchase. That’s money which you don’t have and which the share won’t be worth when you’ve paid it.
At the close of 1849, Charlotte Brontë lamented, “My shares are in the York and North Midland railway . . . The original price of shares in this railway was £50. At one time they rose to 120 . . . they are now down at 20, and it is doubtful whether any dividend will be declared.”
Ah, yes. The York and North Midland railway. It was run by George Hudson, a flamboyant politician and entrepreneur nicknamed The Railway King. Sam Bankman-Fried, currently awaiting trial for fraud and money laundering after the collapse of his FTX cryptocurrency exchange, has a similar sobriquet, The Crypto King. No doubt that is pure coincidence, but the York and North Midland turned out to be a massive accounting scandal and a disaster for investors, so the coincidence is eerie.
But even the honestly run railway companies suffered from an economic downturn, rising interest rates, too many duplicate lines and, fundamentally, impossibly optimistic expectations. Within a few years, railway shares had fallen from their peak by two-thirds. Odlyzko estimates the total railway investor losses at about £80mn across the late 1840s. Relative to the size of the British economy, that would be the equivalent of one-third of a trillion pounds in today’s terms.
It was the sheer scale of investment in the railways that made the slump in prices so catastrophic. In the peak year, the amount spent on railways by private investors nearly matched the entire budget of the British government which was, at the time, in the process of maintaining an empire and waging a series of expensive wars. The cost of building all the approved railways would have been almost twice the country’s entire annual output. Historians say there is simply no parallel. No investment scheme has ever sucked in so much of a leading economy’s output. It was as though the entire industrial and financial base of Britain had shifted to mobilise for an all-out war, except that the generals were railway engineers and the enemies were the canal boat and the horse-drawn coach.
When so much money was at stake, the slump was ruinous. Vast sums had been invested and vast sums lost. Charlotte Brontë’s Jane Eyre had become a bestseller, so she was cushioned from the disaster. But she was quite aware that others were not so lucky: “This business is certainly very bad — worse than I thought, and much worse than my father has any idea of,” she wrote. “I ought perhaps to be rather thankful than dissatisfied. When I look at my own case, and compare it with that of thousands besides — I scarcely see room for a murmur. Many — very many are — by the late strange Railway System deprived almost of their daily bread.”
That phrase — the late strange Railway System — speaks vividly of the bewilderment investors felt. They could scarcely comprehend what had happened to them and their money. Writing two years later, the contemporary chronicler John Francis vividly told the tale: “No other panic was ever so fatal to the middle class. It reached every hearth, saddened every heart in the metropolis. Entire families were ruined. There was scarcely an important town in England but what beheld some wretched suicide.”
In Boom and Bust, Quinn and Turner argue that a bubble needs three elements to inflate, just as a fire needs three elements — fuel, heat and oxygen — to keep burning. For a financial bubble, it’s marketability, speculation and cheap money. Marketability means that you can easily buy and sell assets, such as that cheap scrip. Marketability sets the stage for speculation. Speculative investors don’t buy with an eye on the fundamentals, but in the hope of quickly reselling at a profit. Speculation can create a self-fulfilling spiral. Just as a burning fire creates its own heat, hopeful speculators cause rising prices, and rising prices draw in new hopeful speculators. Finally, there’s cheap money. If people are able to borrow easily at low interest rates, they can take bets with borrowed money. When prices rise, they feel like geniuses. When prices fall, they lose it all.
The railway mania had all of those elements. But then, so have most modern financial markets for the past 30 years or more. And they’re not all bubbles. Just as, when you have fuel, heat and oxygen, you still need something else to start a fire: a spark. Why do some investments find a spark, like Bored Apes and Dogecoin and Birkin bags, while others don’t? I don’t know. How do you tell if some new investment craze will fizzle out as quickly as Dutch tulips, or keep its value for as long as Birkin bags and gold? I don’t know.
By following Mackay as a guide, I haven’t learnt to make sense of today’s financial markets. But I have learnt one thing: when Mackay said you don’t need hindsight to see a bubble — that it’s obvious, if you think calmly and independently — he was wrong.
Mackay must have been aghast at the collapse of the railway boom. Most railway bulls anticipated 20,000 miles of railway by 1850. That figure was eventually reached, but not until the 1900s. Mackay predicted that there would eventually be 100,000 miles of railway line in Britain. We never got close. Mackay wasn’t wrong to argue that people can suffer from collective delusions, but his account lacks a crucial element: humility. Mackay’s caricatures made it seem so easy to spot bubbles, but it’s not so easy to see a bubble when it’s all around you.
Bubble historian Odlyzko described the railway mania of the 1840s as “by many measures the greatest technology mania in history, and its collapse was one of the greatest financial crashes”. Mackay stood right in the middle of it, looking around at it, debating it and pondering his own work on financial manias. And he utterly misperceived what he was witnessing.
Those who forecast great things for the railways weren’t wrong. The lines built in the 1840s still form the backbone of the country’s rail system in the 21st century. Those who forecast great things for the internet in 1999 weren’t wrong, either. Perhaps the prophets of crypto will turn out to be right too. But none of this justified investment optimism. The railways were a disaster for their investors, and the railway bubble caused vastly more hardship than the tulip mania ever could.
Don’t feel too sorry for Mackay. His reputation appeared untarnished by his spectacular error. In 1850, when Wordsworth died, Mackay was said to be in the running to replace him as poet laureate. Instead, he became the editor of the most-read newspaper in the country, the Illustrated London News. Mackay even found time to revise his bestselling Extraordinary Popular Delusions. He didn’t have much to say about the railway bubble.
In the 1852 edition there is a footnote which comes at the question sideways, by alluding to the notorious South Sea Bubble. “The South-Sea project remained until 1845 the greatest example in British history of the infatuation of the people for commercial gambling.” The railway mania was even bigger than the South Sea Bubble, and Mackay obviously knew it. But he couldn’t quite bring himself to say so directly. Instead, he added: “The first edition of these volumes was published some time before the outbreak of the Great Railway Mania of that and the following year.”
A meagre footnote is his only acknowledgment that railway mania even existed. The most famous historian of bubbles had a front-row seat for the largest speculative bubble in British history. And he had absolutely nothing to say about it.
Written for and first published in the Financial Times on 26 January 2023.
My first children’s book, The Truth Detective is out on 15 March (not US or Canada yet – sorry).