the madness of the people................

 

Not everyone was convinced by the rise in the South Sea share price. . . . Sir Isaac Newton, the Master of the Mint, began selling his £7,000 holding of South Sea shares (when asked about the direction of the market, he is reported to have replied, "I can calculate the motions of the heavenly bodies, but not the madness of the people").

-Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation

anti-excitement..........................

 

Investing isn’t supposed to excite you every day. In fact, the more exciting it feels, the more likely it is that you’re not actually investing but just speculating, with a fancier vocabulary.

-Vishal Khandelwal

   via

On speculation..........

 You must learn not to overwork a dollar any more that you would a horse.  Three per cent is a small load for it to draw; six, a safe one; when it pulls in ten for you it's likely working out West and you've got to watch to see that it doesn't buck; when it makes twenty you own a blame good critter or a mighty foolish one, and you want to make dead sure which; but if it draws a hundred it's playing the races or something just as hard on horses and dollars, and the first thing you know you won't have even a carcass to haul to the glue factory.

-George H. Lorimer, Letters from a Self-Made Merchant to His Son

Acceptance............................

 One is acceptance that an insane market doesn’t mean a broken market. Crazy is normal; beyond the point of crazy is normal. Every few years there seems to be a declaration that markets don’t work anymore – that they’re all speculation or detached from fundamentals. But it’s always been that way. People haven’t lost their minds; they’re just searching for the boundaries of what other investors are willing to believe.

-Morgan Housel, from this blog post

Getting money right is hard...............

      Those deliberations unfolded against a backdrop of America's long and often unsuccessful effort to maintain equilibrium between the demand for money and its supply, an effort that extended back to the controversy unleashed by Hamilton's First Bank of the United States, designed to give the economy sufficient liquidity, maintain currency stability, and ensure economic efficiency.   Jefferson and his Republican allies attacked the bank as a dangerous concentration of financial power, and its charter lapsed in 1811.  But the War of 1812 revealed the need for a central banking authority.  State banks in the Northeast, where the war was unpopular, hoarded the country's meager reserves of specie (gold and silver), forcing banks in the other regions to rely on printed money.  The result was a menacing wave of inflation and considerable economic dislocation.  Thus the Second Bank of the United States was established in 1816—and immediately slipped into corruption as its officials speculated in the bank's stock and fostered venal practices by its branch members.  When new bank leaders sought to clean up the mess by foreclosing on overdue mortgages and redeeming overextended notes from state banks, they triggered the Panic of 1819.  Banks failed, prices collapsed, unemployment soared.
     President Andrew Jackson, a sound-money man who hated all concentrations of power, killed the national bank with a series of bold and highly controversial political maneuvers in the 1830s.  But the state banks he fostered couldn't always  maintain the needed balance between money demand and money supply, and that proved disastrous when the Panic or 1837 ravaged the U. S. economy for nearly seven years.  An anguished call rose up for rescinding Jackson's last executive action, his Specie Circular, designed to curb a dangerous inflationary wave sweeping the country in conjunction with wild land speculations in the West.  Jackson's answer was to require purchases of government property to be transacted in gold or silver.
      But when the threat of inflation suddenly gave way to the threat of falling prices, or deflation, Jackson's protege and chosen successor, New York's Martin Van Buren, couldn't see that the Specie Circular was precisely the wrong medicine when the country desperately needed liquidity.  In the name of a sound currency, he clung to Jackson's old policy even as it deepened the Panic and destroyed his presidency in the 1840 elections.

-Robert W. Merry, from his book, President McKinley:  Architect of the American Century

The context for this passage is framing the silver-versus-gold debate in the lead-up to the 1896 Republican National Convention's nomination of  William McKinley for president.

Recommended............................

Speculation, like most human characteristics, appears to be a mixed bag.  It has its positive benefits and it has its dark side.  Any economic system that involves freedom will experience speculation.  There is no use rooting for government to control it, as the evidence is ample that by the time speculation turns to a manic bubble, legislators and regulators are fully engaged in helping the bubble grow.
       If the world of finance and investing interests you, Chancellor's well-written book is a must read.  Only two regrets about the book.  The first is that he wrote it in 1998.   I would have loved to read his take on the great mortgage bubble years of 2004-2007.  The second is highlighted by this page 271 excerpt:



          At some point principled laissez-faire gives way to a
         widespread acceptance of short-cuts in the pursuit of
         self-interest, and from there it is but a short step to
         outright dishonesty.



It is pretty clear from his research and writing that when speculation turns to mania, fraud and other criminal behaviors have taken over the bubble.  It is no longer "speculation."

Infected...................................

     Periods of speculation had always fostered dishonesty, but in the nineteenth-century American stock market this tendency was even more pronounced.  The corruption of speculation was not limited to company promoters and stock operators; it infected the entire political class of the 1860s.

............................................

     Having burnt their fingers at direct speculation, the New York legislators reverted to the more certain profits of bribery. ... Gould subsequently travelled to Albany with half a million dollars in cash - needless to say, the money technically belonged to Erie shareholders - in order to bribe the legislators to validate retrospectively the new issue of shares.   Vanderbilt played the same game but was defeated by Gould at (what Adams called) the "legislative broker's board, where votes are daily counted."  The total expenditure on bribes in Albany during the summer of 1868 was estimated to exceed a million dollars.

-Edward Chancellor,   Devil Take The Hindmost:  A History Of Financial Speculation

a Utopian yearning............

     The spirit of speculation is anarchic, irreverent, and antihierarchic.  It loves freedom, detests cant, and abhors restrictions.  From the tulip Colleges of the seventeenth century to the Internet investment clubs of the late twentieth century, speculation has established itself as the most demotic of economic activities.  Although profoundly secular, speculation is not simply about greed.  The essence of speculation remains a Utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth.  Throughout its many manifestations, the speculative mania has always been, and remains to this day, the Carnival of Capitalism, a "Feast of Fools."

-Edward Chancellor, Devil Take The Hindmost:  A History Of Financial Speculation

Tulip mania.........................

Sounds like fun..............................

     No actual delivery of tulips took place during the height of the boom in late 1636 and early 1637 as the bulbs remained snug in the ground.  A market in tulip futures appeared, known as the windhandel (the wind trade):  sellers promised to deliver a bulb of a certain type and weight the following spring, buyers took the right to delivery - in the meantime, cash settlement could be made for any difference in market price.  Most transactions were expedited with personal credit notes which also fell due in the spring when the bulbs would be dug up and delivered.  Gaergoedt boasts of having made 60,000 guilders from his tulip speculations but admits that he has only received "other people's writing."  By the later stages of the mania the fusion of the windhandel with paper credit created a perfect symmetry of insubstantiality:  most transactions were for tulip bulbs that could never be delivered because they didn't exist and were paid for with credit notes that could never be honoured because the  money wasn't there.

Edward Chancellor,  Devil Take The Hindmost:  A History Of Financial Speculation

Opening paragraphs.........................

     The propensity to barter and exchange is an innate human characteristic.  An inclination to divine the future is another deeply ingrained trait.   Together they comprise the act of financial speculation.   "All life is speculation," declared the celebrated nineteenth-century American trader James R. Keene, "the spirit of speculation is born with men."  For the earliest known historical cases of speculation we must turn to ancient Rome during the Republic of the second century B.C.  By this date, the Roman financial system had developed many of the characteristics of modern capitalism:  markets flourished because Roman law allowed the free transfer of property, money was lent out at interest, money changers dealt in foreign currencies, and payments across the Roman territories could be made by bankers' draft.  Capital concentrated in Rome, as it later did in Amsterdam, London, and New York.  The idea of credit had also developed, along with a primitive form of insurance for ships and other forms of property.  The people of Rome exhibited a passion for the accumulation of wealth, matched by an extravagance in its display and consumption.  Gaming was common.

-Edward Chancellor,  Devil Take The Hindmost:  A History Of Financial Speculation