BEYOND THE BUBBLES.

Devil Take the Hindmost 

A History of Financial Speculation

Edward Chancellor

Farrar, Straus, and Giroux, $25, 370 pp.

Earlier this spring, the stock of a new company called Priceline.com opened its first day of trading at $16 a share and quickly shot up to $85 before settling down to close out the day at $69. Multiplying the share price by the total number of shares outstanding produced a market value just shy of $10 billion, a remarkable sum considering that Priceline's previous year's revenues were only about $30 million, while its losses exceeded $100 million.

The current craze for Internet stocks has all the earmarks of the speculative bubbles that are the subject of Devil Take the Hindmost, although Edward Chancellor concedes that it is often difficult to tell the difference between "speculation" (bad) and "investment" (good). As one wag put it, it's like explaining the difference between passion and love to a teen-ager. "He perceives that they are different, but they don't seem quite different enough to clear up his problem."

Bubbles happen because a lot of people make a lot of money before they pop. Anyone who invested in companies like Yahoo! or America Online a few years ago would have seen her money multiply many times over, as did the folks who put up the early money for Priceline. Investors know that only a handful of the hundreds of internet companies will come out on top, but, who knows, maybe theirs will be one. A second characteristic is that the huge gains racked up by the professionals draw in legions of amateur plungers, who are usually the ones left holding the bag.

Chancellor is an English journalist and historian who once did a stint at the investment bank Lazard Freres. His book is squarely in the tradition of Matthew Josephson's The Robber Barons, a colorful and well-written romp through the excesses, the peculations, and the moral outrages perpetrated by princes of high finance throughout the ages.

The first half of the book is mostly an updating of Charles Mackay's famous Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841. There are some terrific stories here-the Dutch tulip mania of the early seventeenth century, John Law's Mississippi scheme that set Paris agog a century later, and London's South Sea Bubble, a Ponzi scheme promoted by British entrepreneurs envious of Law. Along the way, there are characters like His Highness, Gregor, the Cacique of Poynais, actually a Scotsman named Gregor McGregor who made a killing in 1821 selling Londoners the bonds of a make- believe country.

Like many of the more egregious bubbles, the South Sea scheme could operate only with the explicit cooperation of highly placed government officials. The company, which was nominally incorporated to develop South Sea trade, issued shares carrying a 5 percent dividend, with the proceeds devoted to buying out the British national debt. Since British bonds paid less than the shares, the scheme turned on selling the shares at a substantial premium over the value of the bonds, which was justified by pointing to the lucrative profits to be earned from the South Seas.

Ironically, the scheme might actually have worked if the promoters had not so tirelessly "bulled" their stock. But when South Sea share prices shot to more than fifteen times that of the bonds, the absurdity of the entire proposition was too patent even for a thoroughly bribed Parliament to ignore. And like bubblegum, when it popped, it left a sticky mess all over London. Isaac Newton could do the math, and he sold off his [pound]7,000 investment early in the game, but could not resist getting back in when prices kept rising, eventually taking a hit of more than [pound]20,000.

Reading Chancellor's book, however, gives the impression that gulling the unwary is what finance is all about. In fact, the fifteen or so episodes that fill out his book-from tulips through Michael Milken and the recent property bubble in Japan-account for most of the sensational material available for a book like this, which is not much to show for three hundred years of financial markets.

At the end of his account of the 1840s British railroad stock craze, for instance, Chancellor rather grudgingly concedes that beneath all the hoopla, the railroad promoters laid down some 8,000 miles of track and put a million men to work. The railroad "craze" was actually a key element in Great Britain's rise to industrial dominance. Similarly, while Jay Gould mercilessly fleeced his British investors, he also mediated the flow of billions of dollars into America and laid down the basic railroad system that still prevails today.

Chancellor's primary argument is that financial bubbles cause economic depressions, although his own history shows that that's usually not the case. His black picture of the market crashes of the 1870s fails to mention that they coincided with the fastest economic growth in the nation's history. He tries hard to demonstrate that the 1929 crash caused the Great Depression, although it was almost certainly a relatively minor event in a worldwide crisis, and he seems puzzled that the crash of 1987 didn't lead to a similar crisis. He dwells on the junk bond crash of 1989, omitting that over the past fifteen years or so, they have been among the best performing of all financial instruments. His snide comments on the mortgage-backed market ignore the fact that the packaging of mortgages on Wall Street saves homeowners billions in interest costs each year.

The internet bubble is only the visible froth on a profound technological revolution, one that has already vastly increased business efficiency. If it had been left to the established telephone companies, it would never have happened. It mostly still hasn't in countries without the freewheeling venture capital and stock markets that exist in America. By assembling little puddles of savings into great pools of capital, finance is the dynamo of an industrial economy. Chancellor's book is colorful and fun, but readers should be aware that he has left out most of the story.

Charles R. Morris's recent books include Computer Wars (1993), American Catholic (1997), and Money, Greed, and Risk (forthcoming), all from Times Books/Random House.