The Economist 15-Jun-96
The copper price dives and zillionaire George Soros is said to be laughing all the
way to the bank. Another financial myth in the making?
LEGENDS are the stuff of money markets. They thrive because of the particular nature of stock, bond and currency trading, which is driven by rumour and by the visceral emotions of greed and fear. Some legends are parables about gullibility, dishonesty and wildly inflated market valuations. Others are linked to changes in the financial markets. Most are satirical and provide admonition against future folly.
Among the earliest financial legends are those about the tulip mania of 1635-36. During this period the bulbs of rare and exotic tulips sold for the price of a fine town house in Amsterdam. One story tells of a merchant giving a herring to a sailor who had brought him some goods from abroad.
The sailor, seeing some valuable tulip-roots lying about, which he considered as of little consequence, thinking them to be onions, took some of them unperceived and ate them with his herring. Through this mistake the sailor's breakfast cost the merchant a much greater sum than if he had treated the Prince of Orange.
The most famous legend of the mania is the story which inspired Alexandre Dumas's novel, 'The Black Tulip':
A syndicate of Haarlem florists, hearing that a cobbler at The Hague had succeeded in growing a black tulip, visited him and after some haggling purchased the bulb for fifteen hundred florins. No sooner was it in their possession than they threw it on the ground and trampled it underfoot. 'Idiot!' cried one of them when the astonished cobbler began to protest; 'we have a black tulip, too, and chance will never favour you again. We would have given you ten thousand florins if you had asked for it.' The wretched cobbler, inconsolable at the thought of the wealth which might have been his, took to his bed and promptly expired.
Although the black tulip never existed, the tale survived - not least because it was reinforced by lots of contemporary satirical prints designed to remind the Dutch people of the folly of the speculation and the disruptive dishonesty which it generated.
Credulity of investors is a theme in the legends of the South Sea Bubble, a financial crisis that ruined thousands in England in 1720. Although speculation centred on the shares of the South Sea Company, which had a monopoly of trade with South America, several smaller projects, or 'bubble companies', were also inspired by the feverish speculation. Some, such as the future Sun Insurance Company, were bona fide enterprises; others were fraudulent, but the 'bubble companies' best remembered today never, in fact, came to the market. They include the projects 'For better curing Venereal Disease', 'For a Wheel of Perpetual Motion' and, most famously, 'A Company for carrying on an undertaking of great advantage, but nobody to know what it is.'
Alongside credulity and dishonesty there has always been a suspicion that speculation in the financial markets distracts people from honest labour. This is exemplified by a story thrown up by the Mississippi Bubble, also of 1720:
M. Chirac, principal physician to the Regent, on his way to visit a female patient, having been informed that the price of actions was falling, was so affected by that piece of news that he could think of nothing else; and accordingly, while holding the lady's pulse, kept exclaiming, O good God, it falls, it falls. The invalid, naturally alarmed, began to ring the bell with all her force, crying out that she was a dead woman, and had almost expired with apprehension, till the doctor assured her that her pulse was in a very good state, but that his mind ran so much upon the actions, that he came to utter the expressions that terrified her, in reference to the fall of their value.
Greed, panic and fear of financial loss are the source of the legends of suicide during the Great Crash of October 1929 on Wall Street. Wild rumours swept unchecked through the stockmarkets after a storm in the mid-west brought down many of the telephone lines connecting New York to the rest of the country on Wednesday, October 23rd. As shares fell the following day, 'Black Thursday', the ticker tape, reporting the latest share prices, ran late and telephone lines were jammed with inquiries.
Eleven speculators were said to have committed suicide and troops were reported to be guarding the New York Stock Exchange from an angry mob. Later it was said that the top hats of drowned speculators could be seen floating down the East river. Two speculators had jumped holding hands from a high window in the Ritz because they shared a joint account. Those checking into downtown hotels were asked whether they intended to sleep or jump.
In fact, as John Kenneth Galbraith, the great authority on the episode, has shown, although there were two authenticated cases of suicide (that of JJ Riordan, the president of the County Trust Company, and, three years later, that of the Swedish match king, Ivar Kreuger), the number of suicides during and immediately after the Great Crash was within the average for New York at that time.
The propensity of stockbrokers to gull their clients is part of a legend about the crash on the world's stockmarkets on October 19th 1987. An elderly gentleman has come to his broker's office to sign a 'hold harmless' letter taking responsibility for losses on his own account. For weeks he has said he wants to take his profits, but his broker has dissuaded him. Now, in the midst of the crash, he sits opposite his broker who has turned away the Quotron screen on his desk. As Tim Metz retells the story in 'Black Monday' (1988):
The customer has said little during the brief, post-lunch huddle. But now he asks the killer question: 'How are the markets doing today?' The broker doesn't reply, but he slowly turns the Quotron machine until his customer is looking straight at the screen. The customer says nothing, either. He bolts to his feet, a gurgling noise rising from deep in his throat, then falls to the floor, unconscious.
It isn't a heart attack. The customer has simply fainted, and he will recover quickly once the ambulance gets him to the emergency room of a nearby hospital. However, nobody yet knows that there will be a happy ending. As the stricken investor is carried away on a stretcher, the sales manager approaches his broker and fixes him with a panicky stare. 'Don't worry', the broker tells him. 'He's signed already.'
The Roaring Eighties - the decade when Ivan Boesky, a spiv bound for jail, announced to the students of Berkeley's business school: 'Greed is all right, by the way ..You can be greedy and still feel good about yourself' - have spawned a crop of financial legends. As exchange rates floated and capital markets were deregulated, the role of the trader was mythologised, because he took risks with great nerve and was fabulously rewarded.
Perhaps the best known 'trader's tale' is related by Michael Lewis in 'Liar's Poker' (1989). He claims that in early 1986 John Gutfreund, then chief executive of Salomon Brothers, challenged that New York investment bank's chief trader, John Merriwether, to a game of liar's poker (a game of bluff played over the serial numbers of dollar bills): 'One hand, one million dollars, no tears.' Merriwether is said to have replied 'No John ..if we're going to play for those kind of numbers, I'd rather play for real money. Ten million dollars. No tears.' The trouble with this story is that it seems to be apocryphal: both principal participants adamantly deny it and Mr Lewis himself attributes it to an eavesdropping trader.
Another feature of the 1980s was the rise of Japan, with its vast trade surpluses and high domestic savings. Japanese investors financed America's federal budget deficits during the decade, while their companies started buying American firms. As Tokyo property prices soared it was calculated that the value of the Imperial Palace exceeded the real-estate value of the entire state of California.
Books such as Daniel Burstein's 'Yen! Japan's New Financial Empire and its Threat to America' (1989) and later Michael Crichton's 'Rising Sun' (1992), expressed fears that America's economic supremacy was being eclipsed. At the end of the decade, when Mitsubishi Estate bought the Rockefeller Centre, the fears grew and inspired legends with an alarmist story line: Japan is taking over America. The most far-fetched concerns the sale in 1986 of the Exxon Building in New York to Mitsui Real Estate. Though the purchaser paid $ 610m for the building, Exxon's asking price was said to be only $ 375m. When asked why the Japanese property company was prepared to pay such a large premium, an officer for Mitsui is purported to have replied: 'Our president has read that the current record price for a single building, as listed in the Guinness Book of World Records, is $ 600m. He wants to beat the record.' If you cannot imagine anybody believing such a tall story, you don't know anything about the financial markets.