Book: Devil Take the Hindmost

"Devil Take the Hindmost" by Edward Chancellor

I. Overview:

This book excerpt provides a historical overview of financial speculation, tracing its roots from ancient Rome to the late 20th century. It explores the psychology of speculators, the dynamics of market bubbles, and the social and economic consequences of speculative booms and busts. Chancellor uses historical examples to illustrate recurring patterns of irrational exuberance, fraud, and the inevitable "day of reckoning" that follows speculative excess. He suggests that the "devil take the hindmost" mentality—where only the last one out loses—is a driving force behind speculative behavior.

II. Key Themes and Ideas:

• The Enduring Nature of Speculation: Speculation is not a modern phenomenon, but has been present in various forms throughout history. The author starts by identifying examples in Ancient Rome. "In Latin, the word speculator describes a sentry whose job it was to 'look out' (speculare) for trouble. The financial speculator in ancient Rome, however, was called quaestor, which means a seeker."
• The Psychology of Speculation: The book delves into the psychological factors that drive speculative behavior, including greed, fear, herd mentality, and the tendency towards manic-depressive swings in market sentiment. Joseph Penso de la Vega's description of the Amsterdam stock market as a "madhouse, full of strange superstitions, peculiar practices, and compulsive attractions" highlights the irrationality that can grip markets. Chancellor connects this to manic-depressive behavior, explaining how individuals and markets become "lifted up to the top of mad joy with success, or plunged to the bottom of despair by misfortune; always in extremes, always in a storm."
• The Anatomy of a Bubble: The excerpts analyze the typical stages of a speculative bubble, including:
• Innovation and Optimism: Bubbles often arise around new technologies or industries where potential gains are overestimated. "The Austrian economist J. A. Schumpeter observed that speculative manias commonly occur at the inception of a new industry or technology when people overestimate the potential gains and too much capital is attracted to new ventures."
• Leverage and Credit Expansion: Easy access to credit and the use of leverage amplify speculative gains and losses, fueling the bubble. The author mentions speculators in Amsterdam taking "out loans on shares at up to four-fifths of their market value (what Americans later called 'margin loans')."
• Irrational Exuberance and Herd Behavior: As prices rise, more and more people are drawn into the market, driven by the fear of missing out, rather than fundamental value. "People bought when prices were at their highest, because 'the upper influences so blind the natural reason with affections or desires.'"
• Fraud and Manipulation: Bubbles often involve fraudulent schemes, insider trading, and market manipulation that artificially inflate asset prices. The author makes note of Le Maire and a case of "insider trading".
• The Inevitable Burst: Eventually, the bubble bursts, leading to a sharp decline in prices, financial ruin for many, and economic disruption.
• Recurring Patterns and "This Time It's Different" Thinking: The book suggests that speculative bubbles follow recurring patterns throughout history, and that people often fall victim to the fallacy of believing that "this time it's different." The author cites Sir John Templeton: "The four most expensive words in the English language are 'this time it's different.'"
• Social and Economic Consequences: Speculative booms and busts can have profound social and economic consequences, including wealth inequality, social unrest, and economic crises. During the Tulip Mania, it was said "each [speculator] was a bigger master than the other." The mania raised some to riches while reducing others to poverty, unsettling social relations.
• Role of Financial Innovation: Financial innovation, while potentially beneficial, can also create new avenues for speculation and exacerbate market instability. The development of futures contracts, stock options, and margin loans in the early Amsterdam market are early examples.
• The Moral Dimension: The excerpts touch on the moral dimension of speculation, with figures like Daniel Drew seemingly able to reconcile religious faith with morally questionable market practices. "One paper said of Drew that 'when he has been unusually lucky in his trade of fleecing other men, he settles accounts with his conscience by subscribing towards a new chapel or attending a prayer meeting.'"

III. Specific Examples and Case Studies:

• Tulip Mania (1630s): A classic example of speculative frenzy, where tulip bulb prices soared to unsustainable levels before collapsing. The tulip became the symbol of folly in the sense anticipated by Visscher s emblem, its ephemeral beauty seen as a seductive illusion to the unwary."
• South Sea Bubble (1720): An elaborate scheme involving the South Sea Company and the British national debt that led to widespread speculation and a market crash. The author notes the use of promotional tactics by company directors: "'Twas his avow'd Maxim, a thousand times repeated, That the advancing by all means of the price of stock, was the only way to promote the good of the company.'"
• Railway Mania (1840s): A period of intense speculation in railway stocks in Britain, fueled by technological optimism and easy credit.
• The Crash of 1929: Highlights the dangers of excessive leverage, irrational exuberance, and the belief that the stock market had reached a "permanently high plateau," as claimed by Irving Fisher.
• Japanese Bubble Economy (1980s): Examines the unique factors that contributed to Japan's asset bubble, including cultural attitudes, government policies, and the rise of "economic yakuza."

IV. Notable Figures:

• Joseph Penso de la Vega: Author of "Confusion de Confusiones," which provides insights into the psychology of speculators in the early Amsterdam market.
• John Law: Theorist and policy maker behind the Mississippi Bubble.
• George Hudson: "The Railway King" who masterminded the expansion of the British railway system during the Railway Mania.
• Daniel Drew: A notorious stock market operator known for his unscrupulous tactics.
• Jay Gould and James Fisk: Key figures in the Erie Railroad scandal and the "Black Friday" gold market crisis.
• Irving Fisher: Economist whose optimistic pronouncements about the stock market in 1929 proved disastrously wrong.
• Michael Milken: Central figure in the junk bond market of the 1980s.
• Susumu Ishii: Yakuza boss who played a significant role in the Japanese bubble economy.
• George Soros: Financier who famously bet against the British pound in 1992.

V. Conclusion:

"Devil Take the Hindmost" offers a cautionary tale about the dangers of financial speculation. By examining historical examples, Chancellor reveals the recurring patterns of boom and bust and highlights the psychological and social factors that drive speculative behavior. The book underscores the importance of understanding market history, avoiding irrational exuberance, and maintaining a healthy skepticism toward claims that "this time it's different."

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