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Pushkin. This episode of Cautionary Tales is all about speculation, scrambles for shares and spring flowers. And it was recorded in front of a live audience at the Bristol Festival of Economics. If you'd like to explore these ideas in print, I'm writing about them in a cover story for the Financial Times magazine. That's available in the UK in print on the 28th of January or online at ft.com. Now, the stage is set.
Enjoy a special live episode of Cautionary Tales. One frosty winter morning at the start of 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. At least he thought it was an onion.
Here's what happened next, according to a Scottish writer telling the tale two centuries later. Thinking it no doubt very much out of its place among silks and velvets, he slyly seized an opportunity and slipped it into his pocket as a relish for his herring. He got clear off with his prize and proceeded to the quay to eat his breakfast.
The Scottish writer was named Charles Mackay, and the story is 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 goes on to explain that the sailor had made a mistake.
Seeking a zesty accompaniment to his fish, the sailor had unwittingly pilfered not an onion, but a rare tulip bulb. Which was a problem, because this was one of the strangest of all financial booms, the tulip mania, during which the choicest bulbs went for astonishing sums.
including the one the sailor had just grabbed for his breakfast. Hardly was his back turned when the merchant missed his valuable Semper Augustus, worth 3,000 florins, or about 280 pounds sterling. Relative to the wages of the time, that's 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. I've long been fascinated by the stories of Charles Mackay, especially today as we seem surrounded by things which might or might not be financial bubbles, cryptocurrencies and NFTs, meme stocks, or even just a precarious stock market. A lot of it seems to make no sense.
Just as the world Charles Mackay described, where you might accidentally eat a million dollars as a breakfast garnish, seems to make no sense either. And I wondered, could I understand the crazy financial markets of today by following Charles Mackay as a guide into the past? Maybe I could. And I learned much more than I could have hoped. But they weren't the lessons that Mackay had intended to teach me.
I'm Tim Harford and you're listening to Cautionary Tales, recording live at the Bristol Festival of Economics. Let's start with the obvious. That delightful story about the hungry sailor who accidentally ate a million dollars as a side dish for his herring? It's not true. It can't be true.
Who leaves a million-dollar treasure lying around on a shop counter or anywhere else? Indeed, the first thing I learned as I explored the tulip bubble is that Mackay was wrong about most of it. Ann Goldgar, a historian of the tulip mania, explains that Mackay's account is plagiarized from an earlier source, which in turn relied on moralizing pamphlets designed to discredit financial speculators.
The picture Mackay paints, says Goldgar, is based almost solely on propaganda, cited as if it were fact. Nobody's denying that the Dutch became very excited about tulips in the 1630s. Over the preceding decades, a thrilling range of new plants had been arriving in Europe, such as potatoes, peppers, tomatoes, Jerusalem artichokes, French beans, runner beans...
and of course, the tulips themselves. 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 Charles 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. And what happened? The newly wealthy Dutch merchant class began to do what wealthy classes of people often do. They paid a lot of money for rare and beautiful things that they could show off to their friends.
Today's influencers brandish Birkin handbags or Bored Ape Yacht Club NFTs. Please don't make me try to explain them. It's a crypto thing. It's a digital status symbol. Paris Hilton's involved. The Dutch fashionistas were no different, except they splashed the cash on rare tulips. And the more 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 surrounding a few rare tulips. Mirror multiplied into a multitude. The choicest blooms were so costly even he couldn't afford to fill his garden. The philosopher Justus Lipsius wasn't impressed by the tulip collectors.
What should I call this but a kind of merry madness? They do vaingloriously hunt after strange herbs and flowers, which having gotten, they preserve and cherish more carefully than any mother doth her child. But it didn't last. Of course it didn't. In February, 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. What today should we make of it? For Charles Mackay, the moral of the tulip mania and his other tales is that, whether we're talking about a financial bubble or a religious 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, 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 tulip 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 that the ordinary industry of the country was neglected and the population, even to its lowest dregs, embarked in the tulip trade.
But the historian Anne Goldegar couldn't find a single bankruptcy attributable to the tulip mania. 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. It had negligible economic impact, they explain. It was too unremarkable to merit inclusion. But on my quest to understand how bubbles work...
That 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. Today, his fame rests entirely on his writing about historical manias such as the tulip bubble and the South Sea bubble. He was just 27 when the first edition of Extraordinary Popular Delusions emerged and promptly became a bestseller.
However, in his time, he was even better known as a poet and a hugely popular lyricist. Imagine a cross between Robert Frost and Paul McCartney. Mackay was also a prominent journalist. And in the mid-1840s, he was editor of a small but influential newspaper, the Glasgow Argus.
Given Mackay's interest in investment bubbles, his reputation as perhaps the leading historian of manias, and his editor's pulpit at the Glasgow Argus, it's fascinating to see what he made of the British investment scene in the 1840s. That investment scene was dominated by a fast-emerging technology, the railway.
Let's try to picture the early days of the railway by telling a tale as vivid and exciting as anything in Charles Mackay's book. And a tale which happens to be verifiably true. The place? Parkside. A railway station halfway between Liverpool and Manchester in the northwest of England. The year? 1830. The occasion? 1850.
The grand opening of the world's first intercity railway. A host of dignitaries is in attendance, including the Prime Minister, Napoleon's conqueror, the Duke of Wellington himself, the local Member of Parliament, William Huskisson, is also there, a little tender as he recovers from surgery.
Huskisson's doctor has told him to stay home and rest, but he could hardly miss the big day. The great railway engineer George Stevenson is there with his famous locomotive, Rocket.
Seven other locomotives are travelling in a procession, each pulling short trains bedecked with diverse flags and carrying hundreds of distinguished passengers between them. The locomotive Northumbrian leads the procession. Let's let the Manchester Guardian take up the story. Nothing could exceed the grandeur of its starting, the brilliancy of the cortege, the novelty of the sight.
Considerations of the almost boundless advantages of the stupendous power about to be put into operation gave the spectacle an interest unparalleled, called forth sublime conceptions of the mind and energies of man. Some of the trains stop at Parkside Station to refuel. William Huskisson is one of several gentlemen who gets out for a stroll. When he sees the Duke of Wellington, he goes to greet him.
While in the act of shaking hands, Herald Sound announced the approach of the rocket engine on the opposite rail. Several voices exclaimed, "Come in! Take care, Mr Huskisson!" Famously accident-prone and walking awkwardly after his surgery, Huskisson dithers, thinking first to get out of the way of the approaching locomotive by walking away from the Duke of Wellington's stationary train.
Then turning back to stand between the two railway lines, pressing himself close to the Duke's train. Then fearing that there wasn't enough room and deciding to climb on board the Duke's train. The unfortunate gentleman became flurried and rapidly caught hold of the door. But unhappily in endeavouring to ascend, he missed his footing and either fell or was thrown down by the door.
The rocket coming up at the instant went over his leg and thigh and fractured them in a most dreadful manner. The entire was the work of a moment. An instant previous he was in the full possession of health and spirit. He now lay bleeding and mangled before his friends. To portray the scene that followed would be impossible. Mrs. Huskisson uttered a scream of horror and sank apparently under her affliction.
William Huskisson, MP, is remembered today as the first victim of a fatal railway accident. Still, for an exciting new industry, there is no such thing as bad publicity. George Stevenson may have sensed that as he rushed the dying Huskisson to hospital. How else? On a locomotive. Cautionary Tales will return after the break.
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The unfortunate death of William Huskisson ensured the whole world knew about this new technology. The Liverpool to Manchester railway was soon being heavily used and the railway shareholders were making fat profits. Then the Liverpool and Manchester line was surely just the start. The railways promised fast, convenient transport of both passengers and cargo across the land once a few health and safety issues had been resolved.
Over the next few years, the railway age gathered steam. Small private companies popped up to raise finance for various lines connecting other cities. They promised rich rewards for investors. And 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 the decade's end.
Promoters scrambled to register their new schemes with authorities, while people 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. Recently, it seemed impossible to read anything without bumping into someone selling crypto-something.
By 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 specializing in the railways. Most of these titles freshly launched in 1845.
There was a daily railway paper, the Iron Times. Even The Economist introduced a special section covering the railways. The ability to draw in advertising money from railway promoters was simply irresistible. At least the Victorians were spared Elon Musk boosting Dogecoin. Dogecoin.
A cryptocurrency initially created as a satire of cryptocurrencies. One Dogecoin boomed from a tiny fraction of a cent to nearly a dollar and then slumped back to a few cents again. Such tulip. Very mania. Wow.
But the great and the good of the Victorian age enthusiastically plunged into railway stocks. Charles Babbage, Charles Darwin, John Stuart Mill and William Makepeace Thackeray all invested in the railways, either directly or through their families. So did three future prime ministers. Come to think of it, so did the actual prime minister, Robert Peel.
Emily and Anne Bronte were big fans of railway shares and hurried to invest in the York and North Midland line. Their sister Charlotte wasn't so sure, as she explained in a letter to a friend. I'm very glad to be able to answer your kind inquiries by an assurance that our small capital is, as yet, undiminished. The York and Midland is, as you say, a very good line, but
Yet I have been most anxious for us to sell our shares ere it will be too late. I cannot, however, persuade my sisters to regard the affair precisely from my point of view. Indeed, Charlotte Bronte was in a 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% down payment to obtain a toehold in a share. It was called "scrip." But if you'd paid £1 for scrip in a £20 share, then the £20 share doubled in price, well, then you'd just made £20 on an initial payment of just £1. No wonder people got excited.
Speculators enthusiastically traded the 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'd paid £1 a week's wages for a £20 share, and they were still on the hook for the other £19. And even fewer thought about what would happen if share prices stopped rising.
and started to fall. There were some sceptics. The most prominent was the Times newspaper, and the sceptics had some 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 their promoters claimed? And when railway companies ran parallel lines in competition with each other, what would happen to fares? For insight into the debate, wise heads listened to Charles Mackay, the nation's foremost scholar of investment bubbles.
The historian Andrew Odlizko has carried out an exhaustive study of everything Mackay wrote and commissioned others to write in the Glasgow Argus in 1844, 1845 and 1846, the peak years of the railway investment boom. So what did the great bubble historian think of the railway boom? Had another mania broken out right in front of his perceptive eyes?
Absolutely not, said Mackay. We think that those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger. That was written late in 1845 and
Mackay explicitly refers to some of the historical manias he so famously described in Extraordinary Popular Delusions, and slaps down those who drew any parallels. It may appear wise to the careless or to the ignorant to trace resemblances,
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 has a point. The tulip mania was a silly fuss about flowers.
The railways are iron and flame, speed and progress. They're different. So much difference 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 the inevitable fraudsters and opportunists. But he insisted that the fundamentals of the railways, both as a transformative technology and as a profitable investment...
were absolutely sound. It wasn't like the tulips and all those other silly old delusions of crowds. Not at all. And an expert like Mackay...
could tell the difference. "With railways, the foundation is broad and secure. 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 skeptics, and he sometimes published skeptical pieces by others.
But this bullish essay on railways as an investment opportunity was no outlier.
Mackay wrote several times on the topic and, says Andrew Odlisco, he appears never to have wavered in his belief that there would be abundant profits. We think the alarmists are in error and that there is no reason whatever to fear for any legitimate railway speculation. Mackay's argument seems plausible enough at first sight. Tulips are silly.
Railways are important. A necessity of the age. A property real and tangible in themselves. If you want to invest without being caught up in a bubble, then just follow Mackay's maxim. 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 put money into almost any dot-com 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. They're both 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's 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's chiefly valued because people expect that they'll be able to find someone to take it off their hands, quite likely at a profit. That's almost a textbook definition of a bubble. But if gold is in a bubble, it's been in a bubble for several thousand years.
As for cryptocurrencies, Dogecoin is absurd by design. But the blockchain, the clever decentralized spreadsheet that underpins cryptocurrencies, that 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, Charles 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 was about to burst in a catastrophic fashion. Cautionary Tales will return in a moment. APPLAUSE
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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 a fifth. That's a problem if you own a full share. But it's a catastrophe if you've just bought some script to flip it for a profit. You've spent a pound, a week's wages.
And on paper, you've already lost four times that amount. Nobody's going to take the script off your hands. And 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 Bronte lamented, My shares are in the York and North Midland Railway.
The original price of the 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, about the York and North Midland Railway. Sorry Charlotte. But it was run by George Hudson, a flamboyant politician and entrepreneur nicknamed the Railway King.
It turned out to be the Enron of the age. A massive accounting scandal and a disaster for investors. Surely such a thing could never happen today. But even the honestly run railway companies were suffering 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. 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's 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 had been lost.
Charlotte Bronte herself had just seen Jane Eyre become a bestseller. So 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.
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 to 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. The economic historians William Quinn and John Turner argue that a bubble needs three elements to inflate, just as a fire needs three elements to keep burning. For a fire, those elements are fuel, heat,
For a financial bubble, it's marketability, speculation, and cheap money. Yes, I know that's not quite as catchy. Marketability means that you can easily buy and sell assets, such as that cheap script. 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. And 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 everything. The railway mania had all of those elements. But then, so have most modern financial markets for the last 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 just as quickly as Dutch tulips? Or keep its value for as long as Birkin bags? Or gold? I don't know. By following Charles Mackay as a guide, I haven't learned to make sense of today's financial markets. But I have learned 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.
Charles Mackay must have been aghast at the collapse of the railway boom. He wasn't just bullish about the railways, he was right at the extreme of the enthusiasts. 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. Charles Mackay wasn't wrong to argue that people can suffer from collective delusions, but his account lacks a crucial element, humility. Mackay's exaggerated 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 Andrew Odlisco 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. Charles 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. 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 himself. His reputation appeared untarnished by his spectacular error. In 1850, when the poet laureate William Wordsworth died, Mackay was said to be in the running to replace him. Instead, he became the editor of the most read newspaper in the country, the Illustrated London News.
and later, foreign correspondent for the Times of London covering the American Civil War. Of course, Charles Mackay found time to revise his best-selling book, Extraordinary Popular Delusions. So, what did he have to say about the railway bubble? Not much. In the 1852 edition, there is a footnote:
which reads: "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 knows that, but he can't quite bring himself to say so directly. Instead,
He adds: "The first edition of these volumes was published some time before the outbreak of the great railway mania of that and the following year." And that footnote is the only acknowledgement that the railway mania even existed. The most famous historian of bubbles had a front row seat for the largest speculative bubble in British history. Afterwards, he had absolutely nothing to say about it. His silence
speaks loud and clear. A central source for this episode was Andrew Oblisco's research paper, Charles Mackay's own extraordinary popular delusions and the railway mania. For a full list of our sources, visit timharford.com.
This live edition of Portrait Tales was written by me, Tim Harford, with Andrew Wright. It featured the voice talents of Stella Harford and Stuart McLaughlin. It was produced by Ryan Dilley. The original music is the work of Pascal Wise. Our sound engineer was Harvey Idles. We're thanks to Zoe Stedman-Milne and the team of the Bristol Festival of Economics.
Cautionary Tales is a production of Pushkin Industries. If you like the show, please remember to rate, share and review. If you want to hear the show ad-free and listen to exclusive Cautionary Tales shorts, sign up for Pushkin Plus on the show page and Apple Podcasts or at pushkin.fm slash plus.
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So I have some big news for vegans and vegetarians everywhere. It's Hellman's plant-based mayo spread and dressing. Made for people with a plant-based diet or anyone really who wants to enjoy the great taste of Hellman's real without the eggs. Hellman's plant-based is perfect for sandwiches, salads, veggie burgers, or any of your family favorites.
To celebrate, Hellman's is sharing some easy, delicious plant-based recipes at hellmans.com. Hellman's Plant-Based Mayo Spread and Dressing. Same great taste, plant-based.
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