Speculations and bubbles

speculationWhat is the secret of speedy wealth?  The Tanchuma (Mishpatim 5) advises buying low and selling high: “When merchandise is held in low esteem, at rock bottom prices, go and buy it up, go and buy it, for in the end its price will rise.” Of course, to guess when a product or stock is rock bottom or top of the curve takes business acumen and mazal. Therefore, the Gemara advises setting up a safety net against ruin: “A man should divide his money into three parts: a third in land, a third in merchandise, and a third in reserve” (Bava Metzia 42a).

As the Maharsha explains, “Each of the parts has an advantage over the other… The third in land is permanent, because other property may be destroyed in a moment by robbers and armies… the third in merchandise has an advantage that there is more profit in it… and the third in his hand has an advantage that it is ready for emergencies.”

Men Think in Herds
Impulsive speculation is something else. Two hundred years ago, the English journalist, William Cobbett, already warned against “the destructive thing which has been honored by the name of ‘speculation,’ but which ought to be called gambling.” The nineteenth century book Memoirs of Extraordinary Popular Delusions describes at length how millions of people become simultaneously overwhelmed by a speculation and race after it until it bursts, only to later direct their attention to some new foolishness more attractive than the first. The author’s explanation of this riddle is similar to the Rambam’s rule that man is influenced by the society in which he lives. People have a herd mentality, the author explains: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

The earliest examples of mass speculation mania are relatively recent and probably due to modern shifts in economic and social structure. The first was based on a flower. Some time after the tulip arrived into Europe from Asia in the sixteenth century it developed into a status symbol. People vied to possess the rarest and costliest flowers, and by the 1630s, tulip mania was at an insane pitch. A book of the times records that the outlay for just one root of a rare species of Tulip named the Viceroy included the following:

Two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns [containers] of beer, two tons of butter, one thousand pounds of cheese, a complete bed, a suit of clothes, and a silver drinking cup.

Visitors to Holland were well advised to be aware of the tulip’s VIP status. At the time, a sailor from overseas carried some goods to a wealthy merchant’s home and noticed a small “onion,” which he purloined to enjoy with his salted herring. Little did he know that it was a Semper Augustus tulip bulb worth 280 pounds sterling! After ransacking his house in search of the missing bulb, the merchant’s servants thought of tracking down the sailor and found him comfortably ensconced on a pile of ropes just finishing off the last traces of an ill flavored onion whose value could have fed his whole ship’s crew for a year. In expiation of his crime, the unfortunate miscreant spent the next few months in jail.

For a while people thought the bonanza would last forever and bring untold riches to Holland’s shores. The first cracks appeared when people ceased buying tulips for gardening purposes, but only to resell at a higher price, the same problem that afflicts multi-level markets in our time. Realizing a crash was imminent, people desperately offloaded their bulbs and precipitated a ninety percent crash. Almost a hundred years were to pass before two great booms erupted simultaneously.

The Mississippi Scheme
The first one was the Mississippi Scheme of France that flickered between 5479/1719 to 5480/1720. Architect of the scheme was master banker John Law of Edinburgh who persuaded the French government that the road to saving France’s shaky economy from ruin was to establish the Mississippi Company. It would possess exclusive trading rights in the Mississippi River area and the province of Louisiana, in addition to exclusive trading rights with the East Indies, China, and the South Seas. People loved the idea. Such crowds converged onto Rue de Quincampoix, where the company’s shares were sold, that a humpback, it is said, earned huge sums renting out his back as a writing desk to speculators. At night, it was often necessary to send soldiers to clear the street. People’s most coveted goal was to make special deals with John Law himself. One lady drove up and down his street for three days in the hope of spotting him and when he finally appeared, she urged her coachman to drive her carriage into a post and capsize her to the ground. Lifting up the “casualty,” Law hurried her into his private sanctum where she confessed her stratagem and took the opportunity to buy some India stock.

As stocks shot up ten or twenty percent within hours, paupers rose from rags to riches. Law’s own coachman soon raised enough money to buy a coach of his own and came to Law with two prospective coachmen, telling him that he should choose one and he would take the other. Meanwhile, the government was printing millions of new bank notes to oil the prosperity.

Trouble began when a Prince de Conti decided to cash in his investments at the bank for three wagonloads of banknotes. This opened floodgates of terror. Realizing that everything that goes up must come down, investors began a run on the banks so intense that people were crushed to death at the doors. Another boom had turned to bust.

The South Sea Bubble
The South Sea Bubble started when the South Sea Company offered to take upon itself about half of England’s giant national debt of 30,981,712 pounds, hoping that England’s creditors would happily convert their government securities for shares in a company that was promising people the moon. The moment the agreement was struck, the company’s stock leapt from 130 pounds to 300 in one day and continued rising with dramatic speed.

Exchange Alley, the stock exchange’s location, was blocked by surging crowds. James Swift (author of Gulliver’s Travels) compared the scene to a raging gulf in the South Seas:

“Subscribers here by thousands fl oat, And jostle one another down, Each paddling in his leaky boat, And here they fi sh for gold, and drown”. At the same time, innumerable stock companies, Bubbles as they were called, sprouted everywhere. Most infamous of all was the “company for carrying on an undertaking of great advantage, but nobody to know what it is.” Its prospectus stated that required capital was half a million pounds in a thousand shares of 100 pounds each. Each subscriber would be entitled to 100 pounds per annum per share, that is, a full 100% return on the capital every year!

The next day between 9 in the morning and 3 in the afternoon, the proprietor sold a thousand shares, receiving deposits of 100,000 pounds. Needless to say, that same evening he set of for Europe never to be heard from again. The Bubbles caused so much loss and anguish that a special order of the Lord’s Justices of the twelfth of July, 5480/1720 declared them illegal and abolished. Besides the “company for carrying on an undertaking of great advantage, but nobody to know what it is,” the blacklist included the company for furnishing funerals to any part of Great Britain, the company for a wheel for perpetual motion – capital one million, and the company for the transmutation of quicksilver [mercury] into a malleable fine metal.

Meanwhile, the South Sea stocks rose one thousand percent and the bubble was ready to burst. Inevitably, public confidence plummeted and thousands were brought to the brink of ruin. “And thus,” the Parliamentary History of England records, “were seen, in the space of eight months, the rise, progress, and fall of that mighty fabric, which, being wound up by mysterious springs to a wonderful height, had fixed the eyes and expectations of all Europe, but whose foundation, being fraud, illusion, credulity, and infatuation, fell to the ground as soon as the artful management of its directors was discovered.”

Florida Boom
The Wall Street Crash was preceded by the lesser-known Florida real estate boom of 5685/1925, when the whole of Miami became a frenzied stock exchange. During that summer and autumn, an alleged 2,000 real estates and 25,000 agents busied themselves promoting binders and options, water frontages and hundred-thousand dollar profits. Fortunes were made, like the case of one old lady who sold land for $150,000 that she bought for $25 a quarter century earlier.

Nine out of ten people bought with no idea of ever paying. Their plan was to resell with a neat profit before even the first thirty-day payment fell due. By springtime, buyers were thinning out and unable to get rid of their hot potatoes, people were defaulting right and left. Three years later in 4588/1928, The Nation newspaper described the sorry state of a boom gone sour:

“Dead subdivisions line the highway, their pompous names half obliterate on crumbling stucco gates. Lonely whiteway lights stand guard over miles of cement sidewalks where grass and palmetto take the place of homes that were to be… Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death.”

As the saying goes, “When speculation has done its worst, two and two still equal four.” Notwithstanding people’s losses, Florida still had its unbeatable climate and clawed its way to recovery. In the ten years between 5680/1920 and 5690/1930, the state’s population jumped by 50% and Miami’s population quadrupled.

The Wall Street Crash of 5689/1929 and more recent busts indicate that people are slow in learning the truth of Mark Twain’s maxim: “October. This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

(Sources: Mackay, Charles. Memoirs of Extraordinary Popular Delusions. 1840. Allen, Frederick Lewis. Only Yesterday. New York: Bantam Books, 1959.)

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