Extraordinary Popular Delusions and the Madness of Crowds

FOREWORD TO THE 1980 EDITION

I was doing a term paper on chain letters (of all things) at the Harvard Business School. My faculty adviser — right off the top of his head — suggested I seek out a volume called Popular Delusions and the Madness of Krauts — published,he said, in 1841. My God, I was impressed. What esoterica! (I was also astonished by the title and surprised to learn that Germans, even back in 1841, were called Krauts — or that anyone would have called them that on a book jacket.) I subsequently learned that any business professor worth his salt would have had this book at tongue’s tip; and that it had to do with the madness of crowds. But for each of us there has to be that first time we learn of this book, that first reading of it. Perhaps this is yours.

If so, you will read of alchemists and crusaders, of witches and haunted houses, of stock speculations and fortune-tellers and, to my mind most wonderfully of all, of tulips. Tulips, in the fourth decade of the seventeenth century in Holland, became the object of such insane and unreasoning desire that a single bulb — about the size and shape of an onion — could fetch a small fortune on any of the several exchanges that had sprung up to trade them. (Not entirely unlike the mania for certain tiny perforated squares of printed paper with stickum on their backs that exists today.) Not to be missed is Mackay’s account of the unfortunate Dutch sailor who, having been sent down to a rich man’s kitchen for breakfast, and having a particular taste for onions, actually consumed one of the priceless bulbs in error.

As with any true classic, once it is read it is hard to imagine not having known of it — and there is the compulsion to recommend it to others. Thus did financier Bernard Baruch, who claimed his study of this book saved him millions, recommend it in his charming foreword of October 1932.

“‘Have you ever seen,’” Baruch quoted an unnamed contemporary, “‘in some wood, on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam?…Yes?…Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.’”

Suddenly, as I write this, everyone in New York and California, with the rest of the country perhaps to follow, is on roller skates. I certainly would not call this a form of madness, having just purchased two pairs myself — nor, at least as of this writing, a “great human mass movement.” But all of a sudden there they all are — on roller skates.

Baruch quotes Schiller: “‘Anyone taken as an individual is tolerably sensible and reasonable — as a member of a crowd, he at once becomes a blockhead.’” There are lynch mobs. and there are crusades; there are runs on banks and there are fires where, if only people hadn’t panicked, they would all have escaped with their lives. There was “the hustle,” not so long ago, where large groups of young people learned to dance in lemminglike unison. (I have never actually seen a lemming, but I suspect that when I do, I will see more than one.) And there was the mass suicide at Jonestown.

The month Baruch wrote his foreword, perhaps not coincidentally, marked the absolute bottom of the stock market crash that had begun three years earlier, in 1929. Wild speculation had driven the Dow Jones Industrial Average to 381 in October of 1929 on the wings of what had been a panic of greed. Three years later it had fallen not to 300 or 250 or 200 or 150 or even 75 but to 41. Unreasoning greed had turned inside out. It had become unreasoning fear.

“I have always thought,” Baruch reflected on this sorry state of affairs, “that if… even in the very presence of dizzily spiralling [stock] prices, we had all continuously repeated, two and two still make four,’ much of the evil might have been averted. Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: ‘They always did.’”

In the late 1960s, stock prices again began to spiral dizzily. Market mania. Synergy was the new magic word, and what it meant, in essence, as various corporate presidents and stock promoters explained over and over, was that two and two could, under astute management, equal five. It was alchemy of a sort and enough to drive at least one stock, in two years, from $6 a share to $140. The talk of the town. Not much later it sold for $1.

By late 1974, stocks generally had fallen, slumped, slid, and otherwise eroded in value to depression levels. The crowd had not just left the party — it was stoning the host. Yet had you had the courage, in December of 1974, to buck the crowd — which in a way is what this book is all about — gains of 500 and 1,000 percent over the ensuing three to four years would have been common in your portfolio.

Not that you must be a stock-trader to benefit from the perspective this book provides. Should the government balance its budget? Should the Fed loosen or tighten credit? Read in the very first chapter a tale of money printing and speculation in early eighteenth-century France that should give any deficit spender, any easy-money advocate, severe pause. (Read, too, of the hunchback who supposedly profited handily renting out his hump as a writing table, so frenzied had the speculation become.) Mackay describes Frenchmen “ruining themselves with frantic eagerness.” And then in the second chapter the lunacy spreads to sober England, where, Mackay says, “every fool aspired to be a knave.” If you read no more of this book than the first hundred pages–on money mania–it will be worth many times its purchase. [It is these 100 pages that are included here, on this website in their entirety.]

But back to chain letters. Perhaps awaiting the invention of the photocopier, or at least carbon paper, they do not seem to have been big in Mackay’s time. They are missing from his pages. But, oh, how they would fit.

In 1935, in Denver, nearly a century after Mackay wrote Popular Delusions (and just a short time after, having nothing to fear but fear itself, the nation panicked and mobbed the banks, forcing many to collapse), someone composed a “send-a-dime” chain letter that promised to make participants rich. Just where all this free money was to come from was not explained. It never is. Nonetheless, in Denver alone, postal volume swelled by some 160,000 pieces of mail a day. The craze spread across the country (and across the Atlantic), jumping in many places from a dime to five dollars and more. The Associated Press reported that Springfield, Missouri, had been turned into “a money-mad maelstrom.” To get in on the action, “society women, waitresses, college students, taxi drivers and hundreds of others jammed downtown streets. Women shoved each other roughly in a bargain-counter rush on the numerous chain headquarters [that had been established] in drugstores and corridors, anywhere there was space.” To skirt postal regulations, and save time, the letters were being passed face to face. By the following evening, AP reported, “sad-faced men and women walked around in a daze . . . seeking vainly for someone to buy their chain letters.” Everybody by now had a letter to sell; no one was left to buy.

Chain letters reappear periodically. Just last year one rose to national prominence — only this time at $100 a crack. At the end of twelve days, the letter asserted, if you sold your letter to two people who sold it to four who sold it to eight, and so on, you would surely have more than $100,000. If everyone participated, everyone would be rich. Where was all this free money to come from? And yet against all logic (not to mention several laws), the “Circle of Gold Memorandum,” as it was called, went whipping through the media/arts communities of Los Angeles, New York, Toronto, and points beyond. Virtually everyone lost his money. It had to be so; it will always be so. And if it is not one madness, it will be another.

Once upon a time there was an emperor with no clothes. For the longest time no one noticed. As you will read in this marvelous book, there have been many naked emperors since. There will doubtless be many more.

Andrew Tobias
November 1979
NEW YORK CITY