A lively and authoritative look at speculation from early modern times to the present.
Focusing on speculation as it developed in the world's leading stock markets, Edward Chancellor's story starts with the tulipomania in seventeenth-century Holland, then moves to Britain with accounts of speculative manias such as the South Sea Bubble and the Railway Mania. From the mid-nineteenth century, the narrative turns to the United States, with chapters on the Gilded Age, the Roaring Twenties, and the revival of speculation since the early 1970s, then portrays the disastrous Bubble Economy of Japan in the 1980s. Chancellor shows that the impulses that have shaped speculative behavior are at odds with the orthodox theory of efficient markets. His comprehensive history is interspersed with trenchant commentary on speculation in the 1990s, including such current issues as emerging markets, Internet and foreign-currency speculation, rogue traders, the great U.S. bull market, and our current financial predicament.
"I daily hear such reports of advantages to be gaind by one project or other in the Stocks, that my Spirit is Up with double Zeal, in the desire of our trying to enrich ourselves."
Sound familiar? It should, given the zealous high spirits of those enriched by "the Stocks" of Wall Street over the past few years. But the author of the above sentiment was Alexander Pope, the British poet, and he was writing about a different bull market -- that of South Sea Company stock in 1720. As Edward Chancellor points out in his fascinating and frightening new book, Devil Take the Hindmost, all of London was caught up in the mania for South Sea stock, which was appreciating at a rate even early holders of Amazon.com would envy. Pope's contemporary Jonathan Swift probably described the era best: "I have enquired of some that have come from London, what is the religion there? they tell me it is South Sea stock."
Widespread market obsession, though, is only one of many ominous parallels Chancellor finds between the current boom and those of the past. After first tracing the history of financial speculation back as far as ancient Rome (unsavory operators sold shares on the Forum, near the Temple of Castor), he outlines the stunningly similar progress of various "speculative bubbles" throughout history -- the Tulip Mania of 1637, the South-Sea Bubble of 1720, the Railway Mania of 1845, the bull markets of the 1920s and the 1980s, and the Japanese Bubble Economy of the late 1980s. In each case, the signs of excess and imminent disaster should have been obvious to all but were lost in the euphoria of the quick and easy buck (or pound or yen). Why? Because each time the public allowed itself to believe what, according to Sir John Templeton, are the four most expensive words in the English language: This Time It's Different.
Arguing that speculative manias partake of a good bit of irrationality, Chancellor rebuts proponents of the so-called Efficient Market Hypothesis, who believe that stock prices by their very nature reflect intrinsic value (in other words, that stock in DutchTulip.com really is worth 4,000 times current earnings, because DutchTulip.com is the future). This faith in the surpassing wisdom of the markets, he contends, is what allows speculative bubbles to develop, aided by the ever more arcane and dangerous financial instruments that thrive in an era of laissez-faire economics.
Casting a critical eye on the current environment (where even George Soros complains that he doesn't understand how certain derivatives function), Chancellor implies that those who believe the current market to be rationally priced may be living in a dream world. "As an anarchic force, speculation invites government restrictions," he concludes, "yet it is only a matter of time before it slips its chains and runs amok."
One warning: Devil Take the Hindmost, while timely and enlightening, is not an easy read. Without an MBA and experience on Wall Street, you may find much of Chancellor's analysis heavy sledding. (If you do, try John Kenneth Galbraith's briefer, more accessible -- and delightfully condescending -- A Short History of Financial Euphoria.) But you don't have to know the difference between a hedge and a hedge fund to understand Chancellor's basic premise. And if you're like me, you'll have two overwhelming reactions: first, to marvel that the more things change, the more they stay the same; and second, to conclude that it may be time to redeem those mutual funds and stick the proceeds under a nice, safe mattress.