Extraordinary Popular Delusions and the Madness of Crowds

Mackay published this in 1841 as a survey of collective delusions, covering financial manias, witch trials, alchemy, prophecies, crusades, poisoning panics, relics and fashions in hair and beards. Modern editions frequently reprint only the three financial chapters, which is what most investors read.

Those chapters cover the Mississippi Scheme, in which John Law's Banque Royale issued paper money against speculative colonial assets and produced hyperinflation and collapse in France between 1716 and 1720; the South Sea Bubble in England in the same period, including the company's assumption of national debt and the imitation companies that appeared during it; and tulip mania in the Dutch Republic in the 1630s.

Mackay's argument is that people go mad in herds and recover their senses slowly and one by one. He documents the pattern of a plausible initial premise, an expansion of credit, the entry of people with no knowledge of the asset, the appearance of imitators and frauds, and the collapse.

The scholarship is unreliable. Peter Garber and other economic historians have shown that Mackay's account of tulip mania is substantially wrong, that the price data comes from partisan pamphlets, that the trade was limited to a small group and that the economic consequences were minor. The South Sea and Mississippi accounts are better but still second-hand. Mackay wrote as a journalist compiling earlier sources rather than as a historian, and he wrote a hundred years after the events. Read it for the description of the psychological pattern, which is accurate, and not for the historical facts, several of which are not.