Originally created 10/02/00

Book examines trends in speculation

"They have dreamed their dream, and awaking have found nothing in their hands." - Alexander Pope, on the South Sea Bubble of the mid-19th century.

This is not your father's stock-market book.

The first clue comes in the preface, where author Edward Chancellor declares his dependence on one particular piece of source material: Extraordinary Popular Delusions and the Madness of Crowds, the 1841 work on mass manias by Charles Mackay. It's Mr. Mackay's work that gives us phrases like "herd mentality" and "mob mentality."

In Mr. Chancellor's book Devil Take the Hindmost, he argues that the new-tech fever for Internet stocks echoes the railway boom of the 19th century. And futures trading goes all the way back to the Dutch "Tulipomania" - gambling on the products of tulip bulbs - in the 1630s.

As the first half of the book makes clear, Britain in the 19th century was subject to cyclical fits of "bubble economies" every 10 to 15 years. In these bubbles, stock market mania overvalued companies far beyond any possible real value, and credit was extended beyond any possibility of discharging debt until the entire economy popped like an overblown soap bubble.

Although those bubble economies were beset by frauds and cheats, there were some good impulses behind them.

Britain's famed railway system, for example, would never have connected the countryside if not for the Railway Bubble of the 1840s. Few people made money off railway stocks, but the country got a great technology out of the bubble.

Mr. Chancellor likens the Railway Bubble to the Internet and information technology mania of the last 10 to 15 years. Although little profit has come from virtual enterprises such as Yahoo!, the stocks continue to rise on the heat of investors' faith in the dominance of Internet technology.

Each chapter in the first half of the book has a coda that relates the bubbles of two centuries ago to the economic forces of contemporary history.

Throughout the first half of the book, Mr. Chancellor examines Britain's wrestling matches with the central question of speculative manias. When speculation goes bad, it has disastrous results for the economy overall, leading to big depressions.

There's a strong temptation toward government restriction or even banning of speculation. But speculation is defined as the assumption of risk, and risk is what drives the economy.

The settlement of colonies in the United States was the biggest risk of all, and the country was born and bred with a speculative temperament. Speculators even gambled on the Civil War. The bubble economy of the 1920s rose on the hot air of the "new era" and crashed spectacularly in 1929.

After the Great Depression chapter, Mr. Chancellor segues straight into modern finance, starting with the 1944 decision of the Allies to go off the gold standard in favor of a floating currency exchange rate.

The second half of the 20th century marked a change in the attitude toward speculation, Mr. Chancellor asserts: Investors stopped looking toward gambles on progress and began looking toward leaving their fortunes to posterity. Attacks on speculation have been common ever since.

The second half of the book also covers the rise of the trader in the 1970s and the Milken markets of the 1980s, with their subsequent collapse and retreat into (mostly psychological) depression; and the Savings and Loan scandals of the late '80s and early '90s. Chapter 9 is particularly important: the "Kamikaze Capitalism" of 1980s Japan, one of the biggest modern bubbles.

The book is, as its title claims, a history: it offers no solutions to the problem of speculative bubbles grown out of control. It does however, offer a useful lesson: There is nothing new under the sun. The millennial fever of this past year is an echo of the new era fever of the teens and '20s.

Listen well, and you can hear the echoes before you lay your money down.

Reach Suzanne R. Stone at (803) 279-6895 or scbureau@augustachronicle.com.