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 BOOM AND BUST

Why do stock and housing markets sometimes experience amazing booms

followed by massive busts and why is this happening more and more
frequently? In order to answer these questions, William Quinn and
John D. Turner take us on a riveting ride through the history of financial
bubbles, visiting, among other places, Paris and London in 1720, Latin
America in the 1820s, Melbourne in the 1880s, New York in the 1920s,
Tokyo in the 1980s, Silicon Valley in the 1990s and Shanghai in the 2000s.
As they do so, they help us understand why bubbles happen, and why some
have catastrophic economic, social and political consequences whilst
others have actually benefited society. They reveal that bubbles start
when investors and speculators react to new technology or political
initiatives, showing that our ability to predict future bubbles will
ultimately come down to being able to predict these sparks.

William Quinn is a Lecturer in Finance at Queen’s University Belfast,

where he conducts research on market manipulation, stock markets and,
above all, bubbles.
John D. Turner is a Professor of Finance and Financial History at Queen’s
University Belfast. He is a Fellow of the Academy of Social Sciences and an
editor of The Economic History Review. His book Banking in Crisis (2014) won
the Wadsworth Prize in 2015.
 University Printing House, Cambridge CB2 8BS, United Kingdom
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© Cambridge University Press 2020
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Names: Quinn, William, 1990– author. | Turner, John D., 1971– author.
Title: Boom and bust : a global history of financial bubbles / William Quinn, Queen’s
University Belfast, John D. Turner, Queen’s University Belfast.
Description: New York : Cambridge University Press, 2020. | Includes bibliographical
references and index.
Identifiers: LCCN 2019048274 (print) | LCCN 2019048275 (ebook) | ISBN
9781108421256 (hardback) | ISBN 9781108367677 (ebook)
Subjects: LCSH: Business cycles – History. | Financial crises – History. | Business
forecasting.
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accurate or appropriate.
 Contents

List of Figures page vi

List of Tables viii

1 The Bubble Triangle . . . . . . . . . . . . . . . . . . . . . . . 1

2 1720 and the Invention of the Bubble . . . . . . . . . . . . . 16
3 Marketability Revived: The First Emerging Market Bubble . 39
4 Democratising Speculation: The Great Railway Mania . . . . 58
5 Other People’s Money: The Australian Land Boom . . . . . 77
6 Wheeler-Dealers: The British Bicycle Mania . . . . . . . . . 98
7 The Roaring Twenties and the Wall Street Crash . . . . . . . 115
8 Blowing Bubbles for Political Purposes: Japan in the 1980s . 134
9 The Dot-Com Bubble . . . . . . . . . . . . . . . . . . . . . . 152
10 ‘No More Boom and Bust’: The Subprime Bubble . . . . . . 170
11 Casino Capitalism with Chinese Characteristics . . . . . . . 193
12 Predicting Bubbles . . . . . . . . . . . . . . . . . . . . . . . 210

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282

v
 Figures

1.1 The bubble triangle . . . . . . . . . . . . . . . . . . . . . . . . . . page 5

2.1 Mississippi Company share price (livres) and subscription dates . . . 21
2.2 South Sea Company share price (£) and subscription dates . . . . . . 27
2.3 Share prices (£) of the Bank of England, Royal Africa Company
and Old East India Company . . . . . . . . . . . . . . . . . . . . . . . 29
2.4 Share price index for the Netherlands . . . . . . . . . . . . . . . . . 30
3.1 Stock return indexes, 1824–6 . . . . . . . . . . . . . . . . . . . . . . . 45
4.1 Weekly stock indexes of British Railways and non-railway blue-chip
companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.2 Railway stock market index and weekly word count of railway
company promotion adverts . . . . . . . . . . . . . . . . . . . . . . . 64
4.3 Gross capital formation by UK railways as a percentage of GDP
and paid-up equity capital of UK railways . . . . . . . . . . . . . . . . 67
5.1 New company formations in Victoria . . . . . . . . . . . . . . . . . . 80
5.2 Melbourne House Price Index . . . . . . . . . . . . . . . . . . . . . . 82
5.3 Monthly index of land-boom company stocks on the Stock Exchange
of Melbourne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
6.1 Monthly general and cycle share indexes, 1890–1903 . . . . . . . . . 101
7.1 Number of new non-farm houses on which construction started
in the United States, 1917–34 (thousands) . . . . . . . . . . . . . . . 118
7.2 Dow Jones Industrial Average, 1918–32 . . . . . . . . . . . . . . . . . 121
8.1 Japanese land price index for six major cities, 1964–2010 . . . . . . . 139
8.2 TOPIX daily index of Japanese stocks, 1980–93 . . . . . . . . . . . . 141
9.1 US technology IPOs, 1980–2005 . . . . . . . . . . . . . . . . . . . . . 156
9.2 S&P 500 and NASDAQ indexes, 1990–2004 . . . . . . . . . . . . . . . 156
9.3 Global technology stock price indexes, 1995–2006 . . . . . . . . . . . 161

vi
 LIST OF FIGURES

10.1 Index of real house prices for the United States, 1890–2012 . . . . . 172
10.2 Indexes of real house prices for Ireland, Northern Ireland,
Spain and the United Kingdom, 1973–2012 . . . . . . . . . . . . . . 174
11.1 Number of listed companies on Shanghai and Shenzhen
stock exchanges, 1990–2016 . . . . . . . . . . . . . . . . . . . . . . . 196
11.2 Shanghai Stock Exchange Composite Index and Shenzhen
Stock Exchange Composite Index, 1990–2015 . . . . . . . . . . . . . 197
11.3 Average daily turnover value (RMB 100 million) on the Shanghai
and Shenzhen stock exchanges, 1991–2016 . . . . . . . . . . . . . . . 207

vii
 Tables

1.1 Major financial bubbles . . . . . . . . . . . . . . . . . . . . . . . . page 13

2.1 Comparing the first financial bubble across France, Britain
and the Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.1 Joint-stock companies formed in 1824 and 1825 . . . . . . . . . . . . 42
3.2 Major companies projected from February 1824 to January 1825 . . . 43
5.1 Australian GDP, GDP per capita and overseas borrowing . . . . . . . 79
5.2 The Stock Exchange of Melbourne and the land-boom companies . 84
5.3 The growing vulnerability of the Australian banking system . . . . . . 89
6.1 Capitalisation of cycle companies . . . . . . . . . . . . . . . . . . . . 102
6.2 Proportion of capital contributed by occupational groups . . . . . . 107
7.1 US corporate stock issues, 1921–34 . . . . . . . . . . . . . . . . . . . 122
10.1 Real house price changes in major US metropolitan areas . . . . . . 173
10.2 New housing completions (thousands), 1990–2012 . . . . . . . . . . 174
10.3 Post-bubble economic malaise in Ireland, Spain, United Kingdom
and United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
12.1 Bubble sparks and leverage . . . . . . . . . . . . . . . . . . . . . . . . 213

viii
 CHAPTER 1

The Bubble Triangle

The definition of a bubble we take to be an undertaking which is blown up into

an appearance of splendour and solidity, without any probability of perma-
nence, and the name, we take it, is derived from the specious products of
puffing and soapy water, with which the most of the ingenious youth of this
realm have been long familiar.1
Anon.

We have to turn the page on the bubble-and-bust mentality that created this
mess.2
President Barack Obama

W hat is the difference between the great composer

George Frideric Handel and Shane Filan, the lead singer of
Irish boyband Westlife? To those of a musical bent, the answer is obvious:
Handel is one of the most respected classical musicians of all time, having
composed several famous operas. Filan, on the other hand, largely spe-
cialised in saccharine cover versions of 1970’s pop songs. The difference
that interests us, however, is that while one lost all of their wealth in
a bubble, the other got out before a bubble burst, making a handsome
profit as a result.
By the time he was 30 years old, Handel’s musical compositions had
already made him a very wealthy man, and his patron, Queen Anne,
provided him with a considerable annual income. In 1715 he invested
some of his wealth in five shares of the South Sea Company, which
would have cost about £440. Handel sold his shares before the end of
June 1719 for a profit of about £145 – just before the huge bubble in
the company’s shares.3 By the time Shane Filan was 30, Westlife was

1
 BOOM AND BUST

one of the most successful pop groups of all time and the net worth of
the group’s four members was over £32 million. Along with his
brother, Filan decided to become a property developer in the midst
of the Irish housing bubble. In order to purchase as much housing as
possible, he supplemented his own funds by borrowing large sums of
money from banks. In 2012 he was declared bankrupt, owing his
creditors £18 million.
Shane Filan was not the only loser when the housing bubble col-
lapsed. In Northern Ireland, where we both live, house prices more
than trebled between 2002 and 2007; by 2012, they had collapsed to
less than half their peak.4 We thus observed at close quarters the
economic destruction that a bubble can wreak. Bubbles can encourage
overinvestment, overemployment and overbuilding, which ends up
being inefficient for both businesses and society.5 In other words,
bubbles waste resources, as clearly illustrated by the half-built houses
and ghost housing estates that stood across Ireland when the housing
bubble burst. Other inefficiencies are in the realm of labour markets,
as people train or retrain for a bubble industry. When the bubble
bursts, they become unemployed and part of their investment in
education has been wasted. After the collapse of the housing bubble,
many of our friends, neighbours and students who had trained as
architects, property developers, builders, plumbers and lawyers were
either unemployed, in a new industry, or travelling overseas to find
work.
The most severe economic effects usually occur when the bursting of
a bubble reduces the value of collateral backing bank loans. This,
coupled with the inability of bubble investors to repay loans, can result
in a banking crisis. The collapse in house prices after 2007 was followed
by the global financial crisis and we witnessed the downfall of American,
British, Irish and other European banks. This resulted in major long-
lasting damage to the economy. Financial crises are astonishingly
economically destructive: estimates of the losses in economic output for
post-1970 banking crises range from 15 to 25 per cent of annual GDP.6
These estimates, however, conceal the large costs that financial crises
have on psychological and human well-being.7 They also ignore the
human costs associated with the imposition of austerity measures once

2
 THE BUBBLE TRIANGLE

the crisis is over. We both experienced and witnessed cuts in real pay,
decreased levels of public service provision and cuts in welfare payments
to family members.
Not all bubbles, however, are as economically destructive as the
housing bubble of the 2000s, and some may even have positive social
consequences.8 There are at least three ways in which bubbles can be
useful. First, the bubble may facilitate innovation and encourage
more people to become entrepreneurs, which ultimately feeds into
future economic growth.9 Second, the new technology developed by
bubble companies may help stimulate future innovations, and bubble
companies may themselves use the technology developed during the
bubble to move into a different industry. Third, bubbles may provide
capital for technological projects that would not be financed to the
same extent in a fully efficient financial market. Many historical
bubbles have been associated with transformative technologies, such
as railways, bicycles, automobiles, fibre optics and the Internet.
William Janeway, who was a highly successful venture capitalist dur-
ing the Dot-Com Bubble, argues that several economically beneficial
technologies would not have been developed without the assistance
of bubbles.10
Why do we refer to a boom and bust in asset prices as a bubble? The
word ‘bubble’, in its present spelling, appears to have originated with
William Shakespeare at the beginning of the seventeenth century. In the
famous ‘All the world’s a stage’ speech from his comedy As You Like It, he
uses the word bubble as an adjective meaning fragile, empty or worthless,
just like a soap bubble. Over the following century, ‘bubble’ was widely
used as a verb, meaning ‘to deceive’. The application of the term to
financial markets began in 1719 with writers such as Daniel Defoe and
Jonathan Swift, who viewed many of the new companies being incorpo-
rated as not only worthless and empty, but deceptive.11 The bubble meta-
phor stuck, but over time its use has become somewhat less pejorative.
Nowadays the word ‘bubble’ is used by commentators and news media
to describe any instance in which the price of an asset appears to be
slightly too high. Among academic economists, however, using the word
at all can be deeply controversial. One school of thought sees a bubble as
a non-explanation of a financial phenomenon, a label applied only to

3
 BOOM AND BUST

episodes for which we have no better explanation.12 Eugene Fama, the

father of modern empirical finance, goes further than this, calling the
term ‘treacherous’ and complaining that ‘the word “bubble” drives me
nuts’.13 In Fama’s view the word ‘bubble’ is devoid of meaning, having
never been formally defined.14
In this book, we borrow the definition of Charles Kindleberger, the
MIT economic historian and bubble scholar, who describes a bubble as
an ‘upward price movement over an extended range that then implodes’.
In other words, a bubble is a steep increase in the price of an asset such as
a share over a period of time, followed by a steep decrease in its price.15
Others have suggested that, for an episode to constitute a bubble, prices
must have become disconnected from the ‘fundamental value’ of the
asset.16 However, this definition makes bubbles much more difficult to
identify with any certainty, which can lead to lengthy discussions about
whether a particular episode was a ‘real’ bubble or not. It is also divorced
from the historical usage of the term. The beauty of Kindleberger’s
definition for us is that, because the definition makes no claims about
the underlying causes of bubbles, we can investigate these causes for
ourselves. One implication of this definition is that a bubble can only
be identified with 100 per cent certainty after the event. However, this
does not mean that bubbles are wholly unpredictable and random
events. In this book, we propose a new metaphor and analytical frame-
work which describes their causes, explains what determines their con-
sequences, and – we hope – will help predict them in the future.

THE BUBBLE TRIANGLE

The starting point of our metaphor is to think of a financial bubble

as a fire: tangible and destructive, self-perpetuating and difficult to
control once it begins. While fires can cause serious damage, they
can also be useful in certain ecosystems, contributing, for example,
to the renewal of savannas, prairies and coniferous forests. The same
is true of bubbles. Taking this metaphor further, the formation of
a fire can be described in simple terms using the fire triangle, which
consists of oxygen, fuel and heat. Given sufficient levels of these
three components, a fire can be started by a simple spark. Once

4
 THE BUBBLE TRIANGLE

POLITICS AND/OR TECHNOLOGY

Figure 1.1 The bubble triangle

N

MA
IO

RK
AT
UL

ET
EC

AB
SP

ILI
TY

MONEY/CREDIT

the fire has begun, it can then be extinguished by the removal of any
one of the components. We propose that an analogous structure can
be used to describe how bubbles are formed: the bubble triangle,
summarised in Figure 1.1.
The first side of our bubble triangle, the oxygen for the boom, is
marketability: the ease with which an asset can be freely bought and
sold. Marketability has many dimensions. The legality of an asset funda-
mentally affects its marketability. Banning the trading of an asset does
not always make it wholly unmarketable, as demonstrated by the abun-
dance of black markets around the world. But it does usually make
buying and selling it more difficult, and bubbles are often preceded
by the legalisation of certain types of financial assets. Another factor is
divisibility: if it is possible to buy only a small proportion of the asset,
that makes it more marketable. Public companies, for example, are
more marketable than houses, because it is possible to trade tiny pro-
portions of the public company by buying and selling its shares. Bubbles
sometimes follow financial innovations, such as mortgage-backed secu-
rities, that make previously indivisible assets – in this case, mortgage
loans – divisible.
Another dimension of marketability is the ease of finding a buyer or
seller. One of the least marketable investment assets is art, for example,
because the pool of potential buyers is very small in comparison to assets
like gold and government bonds. Bubbles are often characterised by

5
 BOOM AND BUST

increased participation in the market for the bubble asset, expanding the
potential pool of buyers and sellers. Finally, it matters how easily the asset
can be transported. Assets which can be transferred digitally can now be
bought and sold multiple times a day without the buyer or seller leaving
home, whereas more tangible assets like cars or books need to be moved
to a new location. Some bubbles are made possible by financial innova-
tions that allow transportable assets to be used in lieu of immobile ones –
trading the deeds to a house, for example, instead of the house itself.
Like oxygen, marketability is always present to some extent, and is essen-
tial for an economy to function. However, just as one would not keep
oxygen tanks beside an open fire, there are times and places where too
much marketability can be dangerous.17
The fuel for the bubble is money and credit. A bubble can form only
when the public has sufficient capital to invest in the asset, and is there-
fore much more likely to occur when there is abundant money and credit
in the economy. Low interest rates and loose credit conditions stimulate
the growth of bubbles in two ways. First, the bubble assets themselves may
be purchased with borrowed money, driving up their prices. Because
banks are lending other people’s money and borrowers are borrowing
other people’s money, neither are fully on the hook for losses if an
investment in a bubble asset fails.18 The greater the expansion of bank
lending, the greater the amount of funds available to invest in the bubble,
and the higher the price of bubble assets will rise. When investors start
selling their bubble assets in order to repay loans, the price of these assets
is likely to collapse. Financial bubbles can thus be directly connected to
banking crises.19
Second, low interest rates on traditionally safe assets, such as govern-
ment debt or bank deposits, can push investors to ‘reach for yield’ by
investing in risky assets instead. As a result, funds flow into riskier
assets, where a bubble is much more likely to occur. The propensity
of investors to reach for yield has a long history. Walter Bagehot, the
famous editor of The Economist, observed in 1852 that ‘John Bull can
stand a great deal, but he cannot stand two per cent . . . Instead of that
dreadful event, they invest their careful savings in something impossi-
ble – a canal to Kamchatka, a railway to Watchet, a plan for animating
the Dead Sea.’20 In Bagehot’s experience, investors would often rather

6
 THE BUBBLE TRIANGLE

invest in something ridiculous than accept a low interest rate on a safe

asset.
The third side of our bubble triangle, analogous to heat, is specula-
tion. Speculation is the purchase (or sale) of an asset with a view to selling
(or repurchasing) the asset at a later date with the sole motivation of
generating a capital gain.21 Speculation is always present to an extent;
there are always some investors who buy assets in the expectation of
future price increases. However, during bubbles, large numbers of
novices become speculators, many of whom trade purely on momentum,
buying when prices are rising and selling when prices are falling. Just as
a fire produces its own heat once it starts, speculative investment is self-
perpetuating: early speculators make large profits, attracting more spec-
ulative money, which in turn results in further price increases and higher
returns to speculators. The amount of speculation required to start the
process is only a small fraction of that which occurs at its peak.
Once a bubble is under way, professional speculators may purchase an
asset they know to be overpriced, planning to re-sell the asset to ‘a greater
fool’ to make a capital gain.22 This practice is commonly referred to as
‘riding the bubble’.23 However, it is often difficult to distinguish investors
who rode the bubble from those who were lucky enough to sell at the
right time. Speculation is also much more widespread when many inves-
tors have limited exposure to downside risk. This may be the case when
defaulting on debts incurs few costs, when institutional investors are
faced with poorly designed incentive structures or when bank owners
have limited liability. In these circumstances, the prospect of buying
a risky asset in the hope of short-term gains is much more appealing.
Of course, investors can also speculate ‘for the fall’: selling assets in
the hope of buying them back later for a lower price. If the speculator
does not own the asset, they can speculate for the fall by short selling:
borrowing the asset, selling it, buying it back later for a lower price, then
returning it to the lender. The short seller is hoping that the asset’s price
will fall in the intervening period so that they can make a profit from the
trade. In practice, however, short selling is often much more difficult and
risky than simply buying an asset. When an investor buys a stock, the
potential losses are limited, but the potential gains are unlimited; when
an investor short sells a stock, the opposite is true. Short selling even the

7
 BOOM AND BUST

most clearly overvalued asset can thus completely ruin an investor if its
price continues to rise. Often there are legal or regulatory restrictions on
short selling, coupled with social opprobrium against short sellers. At
other times it can be extremely expensive to borrow the asset in the first
instance.24 In less regulated markets, short selling can leave investors
exposed to market manipulators who engineer corners on the short-sold
stock.25
What is the spark that sets the bubble fire ablaze? Economic
models of bubbles struggle to explain when and why bubbles start –
according to Vernon Smith, a Nobel Laureate, the sparks that initiate
bubbles are a mystery.26 In this book, we argue that the spark can
come from two sources: technological innovation, or government
policy.
Technological innovation can spark a bubble by generating abnormal
profits at firms that use the new technology, leading to large capital gains
in their shares. These capital gains then attract the attention of momen-
tum traders, who begin to buy shares in the firms because their price has
risen. At this stage, many new companies that use (or purport to use) the
new technology often go public to take advantage of the high valuations.
While valuations may appear unreasonably high to experienced obser-
vers, they often persist for two reasons. First, the technology is new, and
its economic impact is highly uncertain. This means that there is limited
information with which to value the shares accurately. Second, excite-
ment surrounding technology leads to high levels of media attention,
drawing in further investors. This is often accompanied by the emer-
gence of a ‘new era’ narrative, in which the world-changing magic of the
new technology renders old valuation metrics obsolete, justifying very
high prices.27
Alternatively, the spark can be provided by government policies that
cause asset prices to rise.28 Usually, but not always, the rise in asset prices
is engineered deliberately in the pursuit of a particular goal. This goal
could be the enrichment of a politically important group, or of politi-
cians themselves. It might be part of an attempt to reshape society in
a way that the government deems desirable – several housing bubbles, for
example, have been sparked by the desire of governments to increase
levels of homeownership. The first major financial bubbles, described in

8
 THE BUBBLE TRIANGLE

Chapter 2, were engineered as part of elaborate schemes to reduce the

public debt.
As well as creating the spark through their policy decisions, govern-
ments can pull other policy levers which affect one or more of the sides of
the bubble triangle. For example, governments can lower interest rates
or increase the money supply, thus ensuring that the public have suffi-
cient funds to invest in the bubble. They may pursue financial deregula-
tion, allowing banks to lend more money on less restrictive terms, thereby
increasing the amount of credit. An extension of credit can allow more
investors to buy into the bubble on leverage, encouraging them to
engage in more speculation. Financial deregulation may also make it
easier to buy and sell the assets involved in the bubble, increasing their
marketability.
Why do bubbles end? One obvious reason is that they run out of fuel.
There is a finite amount of money and credit to be invested in the bubble
asset, and increases in the market interest rate or central bank tightening
can cause the amount of credit to fall. This makes borrowing to invest in
an asset more difficult for speculators, which can in turn trigger a sell-off
in the bubble asset as investors look to raise capital. Alternatively, the
tightening of credit markets can make it impossible for those who
invested in the bubble with borrowed money to extend the duration of
their loans, forcing them to sell the asset.
The number of speculators is also finite, and can eventually reach an
upper limit. Speculators may be spooked and exit the market when new
information arrives which changes their expectations about future
prices. For example, a bubble might burst in response to news announce-
ments suggesting that the future cash flows associated with the bubble
assets will be lower than expected. Since speculative investors typically
buy an asset because its price is rising, even a slight reversal can drama-
tically reduce the asset’s appeal. The effect of momentum trading is
reversed: investors sell the asset because its price is falling, and the belief
that prices will continue to fall becomes self-fulfilling.
Why do some bubbles cause widespread economic damage, whereas
others have little effect on the macroeconomy? There are two important
variables: the size of the bubble and its centrality within the wider
economy. The most damaging bubbles are those where substantial

9
 BOOM AND BUST

wealth is invested in an asset that is deeply integrated with the rest of the
economy. This integration may be in the form of supply chains; for
example, the failure of a bubble company may also bankrupt its suppli-
ers, who in turn default on payments to another firm. However, a more
common route for the damage to spread is via the banking system. To
extend the fire metaphor, banks are the equivalent of a combustible oil
rig in the middle of a busy town. When banks fail, often as a result of the
bank or its borrowers holding too much of a bubble asset, it can set off
a chain of bankruptcies and defaults that destroys businesses, jobs and
livelihoods. In the worst-case scenario, the failure of one bank exposes
several others, with similarly devastating effects. Banks also tend to
service a wide array of customers, many of whom would otherwise
have no connection to the bubble. The exposure of banks to a crash
can thus cause a regional or industry-specific bust to develop into an
economy-wide recession.
In summary, our bubble triangle describes the necessary conditions
for a bubble – marketability, money and credit, and speculation. They
become sufficient conditions for a bubble only with the addition of
a suitable technological or political spark. We believe the bubble triangle
is a powerful framework for understanding why bubbles happen when
they do, as well as their severity or societal usefulness. Since it describes
the circumstances in which a bubble is likely to occur, it is also useful as
a predictive tool. However, since the various elements of the framework
cannot be reduced to a neat set of metrics, the application of the frame-
work for predictive purposes requires the use of judgement.
The most long-standing existing explanation for bubbles is irrationality
(or madness) on the part of individuals and concomitant mania on the part
of society. One of the earliest expressions of this explanation came from
Charles Mackay, a Scottish journalist and writer, who first published his
Memoirs of Extraordinary Popular Delusions and the Madness of Crowds in 1841.
This book has been so popular that it is still in print today. Mackay was
a great storyteller, and his theory was supported by a series of colourful
anecdotes that supposedly illustrated how insane societies could become.
His tales covered witches, relics, the Crusades, fortune telling, pseu-
doscience, alchemy, hairstyles and even facial hair. Having demonstrated
the near universality of madness, he then had chapters on the South Sea

10
 THE BUBBLE TRIANGLE

Bubble, the Mississippi Bubble, and the Dutch Tulipmania, all of which
argued that bubbles occur because of the psychological failings of investors.
Mackay was not the first to associate bubbles with madness and
irrationality. Sir Isaac Newton, one of the most brilliant and influen-
tial scientists in all of history, lost a fortune by investing in the South
Sea Bubble. When questioned about his losses, he is reputed to have
said ‘that he could not calculate the madness of the people’.29
This madness-of-crowds hypothesis has been refined and expanded by
the likes of Kindleberger, John Kenneth Galbraith and, most recently,
Nobel Laureate Robert Shiller.30 Shiller and other economists argue that
bubbles can largely be explained by behavioural economics, with cogni-
tive failings and psychological biases on the part of investors causing
prices to rise beyond their objective value.31 A subset of investors, for
example, may suffer from an overconfidence bias, whereby they over-
estimate the future performance of a company stock, or they may have
a representativeness bias, whereby they incorrectly extrapolate from
a series of good news announcements and overreact.32 Other investors
may simply follow or emulate this subset of investors simply because of
herd behaviour and naivety on their part.33
The view that bubbles are largely a product of irrationality has been
contradicted by economists who, like Nobel Laureate Eugene Fama,
believe investors to be rational and markets to be efficient.34 Much
recent research on the subject has thus focused on establishing whether
a particular bubble was ‘rational’ or not.35 This is unfortunate, because
the rational/irrational framework is almost useless for understanding
bubbles. Partly this is because the word ‘rational’ is so loosely defined
that many common investor behaviours can be classed as either
‘rational’ or ‘irrational’, depending on the preferences of the
economist.36 But more fundamentally, the framework is too reductive.
Asset prices in a bubble are determined by the actions of a wide range of
investors with different information, different worldviews and invest-
ment philosophies and different personalities. They often also face
different incentives. Simply dividing these investors into categories
labelled ‘rational’ and ‘irrational’ does not do justice to the complexity
of the phenomenon, and as a result, we try to avoid these terms
altogether.

11
 BOOM AND BUST

HISTORICAL BUBBLES

We approach the historical bubbles in this book as if we were fire scene

investigators, sifting through the ashes of historical bubbles in an effort to
understand their causes. We then attempt to use this knowledge to
become like fire-safety advisers, devising policies which may prevent
bubbles from happening or being socially destructive in the future.
First, however, we need to decide which fires to investigate. We have
two selection criteria. Consistent with our definition of a bubble, we are
interested only in bubbles where there was a large rise and then fall in
asset prices. How large is large? We require a rise in asset prices of at least
100 per cent over less than 3 years, followed by at least a 50 per cent
collapse in prices over a 3-year period or less.37 For stock market bubbles,
we do not require the entire market to have experienced a reversal;
rather, the reversal may have taken place in specific sectors or
industries.38 This set of criteria means that those bubbles included in
our catalogue are major ones. However, it also means that we may have
overlooked some bubbles simply because we or previous scholars have
been unable to find and collate price data.
The second criterion is that the asset price reversal must have been
accompanied by a promotional boom, with new companies or financial
securities being floated on financial markets. This ensures that the bub-
bles we select are those which had an impact on the economy beyond the
effects of the price reversal. One implication of this criterion is that we
exclude bubbles in commodities or collectables, such as comics, beany
babies and baseball cards. Real estate or property bubbles are excluded
unless they were accompanied by bubbles in stocks or facilitated by the
issuance of newly created financial securities.
Table 1.1 contains a list of the major historical bubbles which meet
these criteria, and which are studied in detail in this book. This list is by
no means exhaustive. However, there are at least five things about our
bubble catalogue which are of note. First, our selection of bubbles
extends from the birth of stock markets through to the present day.
Second, our catalogue is global in scope, covering four continents and
nine countries. Third, although Table 1.1 contains many famous bub-
bles, there are also some which are less well known: the first emerging

12
 THE BUBBLE TRIANGLE

table 1.1 Major financial bubbles

Post-bubble
Bubble Country Years Asset financial crisis

Mississippi Bubble France 1719–20 Mississippi Company No

stocks
South Sea Bubble UK 1719–20 Company stocks No
(including stocks of the
South Sea Company)
Windhandel Bubble Netherlands 1720 Company stocks No
First emerging market UK 1824–6 Company and mining Yes
bubble stocks
Railway Mania UK 1844–6 Railway stocks Yes
Australian Land Boom Australia 1886–93 Company stocks and real Yes
estate
Bicycle Mania UK 1895–8 Stocks of bicycle No
companies
Roaring Twenties USA 1920–31 Stocks of new technology Yes
companies
Japanese Bubble Japan 1985–92 Company stocks and real Yes
estate
Dot-Com Bubble USA 1995–2001 New technology stocks No
Subprime Bubble USA, UK, Ireland, 2003–10 Real estate and houses Yes
Spain,
Chinese bubbles China 2007, 2015 Stocks No

market bubble of 1824–6; the Australian Land Boom, which burst in the
1890s; the British Bicycle Mania of the 1890s; and the Chinese bubbles in
2007 and 2015. Fourth, six of our twelve bubbles were followed by
financial crises, and at least five were followed by severe economic down-
turns. Fifth, several of the bubbles listed in Table 1.1 were explicitly
connected to the development of new technology – railways in the
1840s, bicycles in the 1890s, automobiles, radio, aeroplanes and electri-
fication in the 1920s and the Internet and telecommunications in the
1990s.
Probably the most famous absentee from our study is the Dutch
Tulipmania of 1636–7, which witnessed the rapid price appreciation of
rare tulip bulbs in late 1636, followed by a 90 per cent depreciation in
bulb prices in February 1637.39 This is excluded for the simple reason
that the price reversal was exclusively confined to a thinly traded com-
modity, with no associated promotion boom and negligible economic

13
 BOOM AND BUST

impact.40 In other words, the Tulipmania was too unremarkable to merit

inclusion. Although the wild fluctuations in price are striking, they are
not unusual for markets in rare and unusual goods, particularly those
predominantly used to signal status.41 In the case of the Tulipmania these
fluctuations were compounded by legal ambiguity over the status of
futures contracts, suggesting that the price movements may have had
a somewhat mundane explanation.42
The infamy of the Tulipmania is largely the fault of Charles Mackay.43
Mackay painted the picture of a society overcome with collective insanity
on the subject of tulips, where the value of some bulbs exceeded the value
of luxury Amsterdam houses. He also stressed the universality of the
trade, with the general populace of Amsterdam ‘investing’ in tulip
bulbs at the various taverns dotted around the city. But Mackay’s work
is unreliable. His sources are based on second-hand accounts, which are
in turn based on contemporary pieces of propaganda criticising the trade
in tulips.44 Very few of the claims Mackay makes can be substantiated.
The popular narrative of the Tulipmania is thus largely fictional, ‘based
almost solely on propaganda, cited as if it were fact’.45 Indeed, for several
episodes in this book we can see a similar process of myth-making,
whereby bubble anecdotes that were originally satire or propaganda are
repeated years later as if they really happened.
Another notable set of absentees from our list are the property bub-
bles which occurred in Scandinavia in the 1980s and in South-East Asia in
the 1990s.46 In both cases major credit booms had their roots in financial
liberalisation, and in both cases the crash was followed by a banking crisis.
Capital account liberalisation exacerbated the credit boom in South-East
Asia, where substantial amounts of international capital flowed into the
region, resulting in twin banking and currency crises.47 However, the
only one of these housing bubbles that was accompanied by a major stock
market boom was in Thailand. The scale of the Thai stock market bubble
does not meet our criterion for inclusion, and there appears to have been
no promotional boom.48
Having chosen our fires, how do we go about investigating them?
A good place to start is usually the findings of previous investigators.
We thus make extensive use of existing literature, much of which comes
from fields far beyond history or economics.49 However, the memory of

14
 THE BUBBLE TRIANGLE

an event and the experience of an event are often very different, and we
also want to understand the thoughts and actions of those who were on
the scene at the time. We therefore also investigate the writings and
speeches of contemporary journalists, politicians and commentators
during each bubble. What were they saying while the fire was going on?
Were they calling the fire brigade or fanning the flames? We do not want
to focus exclusively on the powerful – we are also interested in so-called
ordinary people who were caught up in the fire. Who suffered, and who,
if anyone, benefited from it? Finally, as financial economists, we do not
want our analyses to be purely descriptive – we want to be able to quantify
the size of each fire and the scale of the damage it caused. For famous
bubbles this was straightforward, but for lesser-known bubbles it involved
painstakingly compiling our own data from old records in dusty archives.
The overall result, we hope, is a comprehensive overview of the subject
told over three centuries. Our story begins in 1720 with a seminal
moment in financial history: the invention of the bubble.

15
 CHAPTER 2

1720 and the Invention of the Bubble

The nation then too late will find,

Computing all their cost and trouble,
Directors’ promises but wind,
South Sea at best a mighty bubble.
Jonathan Swift1

F ew movies have been made about king carlos ii of

Spain. His life does not make for a satisfying story: he suffered
tremendously for 38 years, and in the end his death started a war. The
Habsburg family to which he belonged had almost exclusively married
other family members in order to consolidate its wealth and power. This
end was achieved, but at a severe physical and mental cost to Carlos, who
inherited a range of deformities as a consequence of five generations of
inbreeding. His bone structure made it difficult for him to eat, speak or
walk, and he suffered frequent seizures; his learning difficulties were so
severe that no attempt was ever made to educate him formally. He
ascended to the throne at the age of 3, but even in adulthood, ruling
the country in his own right was effectively impossible.2
Carlos was probably also infertile, and neither of his two marriages
produced any children. His death in 1700 thus sparked a succession
crisis. As his heir, Carlos had named a grandson of Louis XIV of
France, Philip, Duke of Anjou. As Carlos’s grand-nephew, Philip had
the strongest genealogical claim to the throne, but his accession would
have unified the French and Spanish empires. This threatened the
British, Dutch, Portuguese and Holy Roman empires, who instead pro-
posed Archduke Charles of Austria as king. By 1702 their attempts to
solve the crisis through diplomacy had failed, and Britain, the
Netherlands and Austria declared war on Spain.

16
 1720 AND THE INVENTION OF THE BUBBLE

The resulting conflict, the War of the Spanish Succession, lasted for 13
years and was resolved in 1715 by the Treaties of Utrecht and Rastatt. The
resolution was straightforward: Philip could remain king of Spain as long as
he renounced any claim to the French throne. The war, however, had been
extraordinarily expensive. In order to fund it, governments had relied on
a relatively new method of war finance: borrowing money from the general
public by issuing debt securities. This resulted in unprecedented levels of
French, British and Dutch public debt. In France the public debt in 1715
stood at over 2 billion livres: between 83 and 167 per cent of GDP, depend-
ing on the estimate used. In Britain the public debt rose from £5.4 million
pre-war to £40.3 million, around 44 to 52 per cent of GDP.3 Holland’s public
debt nearly doubled as a direct result of the war, and the cost of financing it
was just over two-thirds of Holland’s total fiscal revenue.4
These debt levels represented an existential threat, because if cred-
itors doubted a nation’s ability to repay its debts, it would struggle to
finance future wars. The French and British governments were both
acutely aware of this. After the death of Louis XIV in 1715, several of
the new French Regent’s counsellors proposed recalling the French
Parliament (the Estates General) to deal with the disastrous state of the
public finances. Britain was withdrawn from the war by a Tory govern-
ment that campaigned heavily for the reduction of the public debt.5 For
each country the challenge was reducing the debt in a way which mini-
mised both the risk of revolution and the cost of future borrowing. It was
therefore crucial to prevent the cost of additional taxation from landing
too heavily on those with political power. In addition, defaults, which
were normally only partial, must somehow be portrayed as justified and/
or unlikely to be repeated. Ideally, creditors would readily accept them.
France, where the problem was most acute, recycled numerous debt
reduction methods that it had used before. The new finance minister, the
Duc de Noailles, imposed a non-negotiable write-down on creditors, with
some short-term debt being unilaterally devalued by two-thirds.
Financiers were charged with profiteering, and around 110 million livres
were confiscated. The currency was repeatedly debased, with coins re-
stamped with a lower gold and silver content in 1701, 1704, 1715 and
1718. In combination with a substantial austerity programme, this meant
that, excluding interest payments, France had moved from a deficit of

17
Another Random Scribd Document
with Unrelated Content
 412 D. DUARTE ARRIVES AT COCHIM. more angry with liim
wlion lie learned that he had acted without the advice of his captains
; and he found himself much embarrassedj and said nothing about it
to anybody, but always accompanied the Viceroy a great deal, for he
never went out of his house without finding Silveira at the door,
accompanied by many people, for he kept a largo table, and so did
Dom Luis, where all the men of India used to meet, for so large a
number of people did not eat at the table of the Viceroy. The Viceroy
was much occupied with the preparation of the cargo, and refitting
the ships of the fleet and those which Hector da Silveira had
brought, and with the preparation of a flotilla, for he had determined
that as soon as he had dispatched the ships for the kingdom he
would go and destroy Calecut and all the coast of India, so that
tliero should not remain one Moor on land nor at sea; and with this
design, and on account of other thing* which he found in India
different from what he had expected, and on account of the affairs
of Dom Duarte, he at once ordered a ship to be got ready to sail
before the other ships with letters for the King, as soon as ho saw
Dom Duarte, who arrived at the bar of Cochym * *i of November,
and anchored at the bar in the galloon San Din Is, in which ho came,
with three other galloons, and other vessels which entered the river
with the sea-breeze. Dom Duarte having arrived thus, the Viceroy
sent Lopo Vaz de Sampayo, captain of Cochym, and with him Pero
Barreto, whom he had made auditor-general, because J oilo do
Soyro was ill, and sent word to Dom Duarte not to como ashore, and
at once to go over to the ship Gasfollo, which was beginning to take
in cargo, because he had to go to the kingdom a prisoner upon his
parole that he would not 1 A note in the Lisbon edition says the day
of tlie month is wanting in the original ; it seems that ien had been
written and afterwards beiatcLed out.
 BISAGUEEMENT BETWEEN GAMA AND 1). DUARTE. 413 fro
out of it except in Lisbon, upon a message from the King, and that
ho was to go and put himself on board the sliip, and in it give this
pledge signed by himself; and the Viceroy sent him a copy of a
section of his instructions which said this.' ' Barros says nothing of
the disputes which took place between Gama and I). Duarte de
IVIcncses, and only alludes to them in speaking of his illness, in
addition to which, he says, Gama suffered from the "vexation which
he felt on account of some matters of administration, and tlie
delivery of the government by D. Duarte." Barros, however,
describes Gama, who had begun to get ill before the arrival of D.
Duarte, as drawing up a deed which was sworn to and signed
by'Affonso Mexia, tlie overseer of the revenue, and other persons: by
this act Lopo Vaz de Sampayo was to serve as governor, in case of
Gama's decease, until the arrival of the person named by the King
for the succession. Barros adds that all this was done before D.
Duarte had arrived from Ormuz to deliver up the governorship,
which caused some gentlemen to have scruples with regard to this
proceeding without the government being handed over as was
customary. In justification of the course adopted by Gama, and his
assumption of the government without waiting for its being handed
over to him by D. Duarte, Barros gives the document of King John
appointing Gama as Viceroy, dated Evora, February 25, 1524. This
document, in the name of the King, makes known to D. Duarte de
Mencses, the captain-major and governor of India, that, as he had
been informed by another letter, the King was pleased that he
should return to the kingdom with this fleet, and deliver uji the
government to D. Vasco da Gama, the Viceroy : and he was not any
longer to make use of the governorship nor affairs of justice and
revenue, nor any other quality pertaining to that office. Therefore,
the said Viceroy was at once to be put in possession of all power,
etc., etc. Further we declare that during the time that you may be in
India before embarking, you may remain in Cochim or in Cananor,
whichever you please, and with respect to your servants, etc., etc.,
who went with you, and those of D. liuis your brother, etc., etc., the
said Count (Vasco da Gama) shall not have jurisdiction, etc., etc.,
over them. Reserving, however, that if you or the others should be
assigned, or cited, or sued, either in civil or criminal cases, by
persons, also by either our natives or merchants of tlie country, etc.,
who should not be coming in the fleet in which you are to come, you
or they may be sued before the said Count and auditor, who is to
remain with him, and the suit shall not be before you, in order to
fulfil justice. And if you should be out of India when the
 414 DISAGREEMENT BETWEEN These men went to the
galloon^ and Lopo Vaz gave the message to Dom Duarte, at which
he shewed himself much said Count arrives, in that case the Count
shall at once use all power, jurisdiction, etc., etc., as he would do if
he found you there and presented to you this letter for you to deliver
up the government, etc. And if by impediment of sickness you, the
said D. Duarte, cannot embark in this fleet, we are pleased that you
and your servants, and your brother, etc., etc., should betake
yourselves to the fortress of Cananor : and remain in it till your
departure from India: and yoii shall iise in it all the power,
jurisdiction, etc., which you have as captain-major and governor of
India, over them, and over the captain, alcaide, factor, and clerks, of
the factory and fortress : and you shall hear and judge all their civil
and criminal cases, without the said Count being able to use the
power of Viceroy over the above-mentioned. And we order the
captain, ^nd alcaide, and factor, and clerks, etc., etc., of Cananor to
obey you", etc. We are pleased that it should also be so understood
in case you should be out of India in our service, and should return
to it after the departure for these realms of the fleet which the
Viceroy takes with him for bringing spices, and in which you are to
return. Reserving, however, that the power, etc., which we give you
over the aforesaid is not to be understood with respect to anything
which touches our revenue and Indian trade ; because you are not
to deal with tliat, Avhieli remains with the Viceroy, etc. And of the
delivery of the government to the Viceroy, you will take a public
instrument, in which will be declared the ships and artillery, etc., and
the forts and artillery, etc., which you deliver to him, etc., for us to
be able to see it ; and after this delivery you are freed from all
obligation for the said government. Given in Evora. February 25.
Bartholomeu Fernandez wrote it. Year 1524.'" Barros also gives the
document by which D. ])uarte de Meneses received a public
acknowledgment of having delivered up the government. It is dated
Cochym, December fourth, 1524, and witnessed by Lopo Vaz de
Sampayo, Fernan Martins de Sousa, D. Pedro de Castellobraneo,
Affonso Mexia, overseer of the revenue, Pero Mascarenhas, the
Licentiate Joan do Souro, auditor general : Joan Nunes, public
writ(»r, wrote it by special order of the Viceroy, and signed it with his
public signature. Castanheda gives these] two documents : he says
D. Duarte called the auditor general a " bacharel." According to the
document given by Barros, Cama appears to have acted with more
harshness and less courtesy towards his predecessor than the King's
orders warranted ; but he is somewhat justified by the statements of
Correa, Castanheda, and San Roman, that D. Duarte de Meneses
delayed giving up the government in the expectation that Gama
would die, and that he would remain governor as before ; also
 OAMA ANT I). Kl'ARTE 1)K MKNESICS. 415 .'iiFrontcd^ and
said to Lopo Vaz: "You onglit not. to be the bearer of this message,
since that staff' of justice, whom it seems you liave brought to
execute nie, was sufficient and the fittino- i)crson for it : vou ou^'lit
to remember that my father made you a knight, and that you cannot
therefore be against his affiiirs." Lopo Vaz replied that in doing what
the King our sovei^eign commanded he would act against his own
father, whoso head he would cut off" if it was commanded him, and
that apart from the King's commands he would act as his honour
requii'ed of him ; therefore he entreated liiin to answer and obey
what the King our sovereign commanded, and what he said to him
on the King's behalf. To this Dom Duarte replied that he obeyed in
everything, only that with regard to the vessel that was assigned to
him, he had instructions in a contrary sense, which said that when
he departed for the kingdom, he might select for his embarkation
the ship which lie pleased out of as many as there might be; and he
said that as the King had not abrogated this instruction, the Viceroy
ought to observe it, and not aggravate it, and that in the ship in
which he embarked he would give the pledge which the King
ordered. With this he dismissed them, and they returned on shore to
give the message to the Viceroy ; and D. Duarte got into a boat and
went to look at all the ships which were taking in cargo, and was
satisfied with the ship San Jorrje, in which he at once remained, and
sent to the that D. Luis tie Menescs, whilst appearing to occupy
himself with preparations for his brother's journey, was looking out
for an opportunity to place the government in the hands of his
brother ; and that by the enforced embarcation of D. Luiz, the
rumours which began to spread were suppressed. Scnhor Basto, the
keeper of the Archives of the Torre do Tonibo, has informed me that
these two documents given by Barros are not to be found in those
Archives. The recognition by Vasco da Gama of the delivery of the
government, etc., by ]). Duarte de Mencses, would be kept by him,
though a copy might be preserved in the Archives of India.
 41 G ANGER OF GAMA WITH D. DUAUTE. galloon for his
baggage, and took up bis quarters in that ship. Lopo Yaz gave the
answer of D. Duarte to the Viceroy, at which he was much enraged,
and as it was already late, he waited till next day to give orders for
what was to be done ; but as later it was told him that D. Duarte
had gone and established himself with his baggage in the Sayi
Jorge, at this he lost his patience, and at once next day in the
morning he sent the auditor to tell D. Duarte not to get himself into
more trouble than what he was in already, that the instruction with
regard to his embarkation would be good if he had been at liberty,
but that since he was going under arrest, he was not to go except in
the ship Gastcllo, which he assigned to him as a prison, and in no
other ship ; therefore he was at once to go and put himself on board
that ship, and there give the pledge, and if he did not obey the
King's commands, he would then take such measures as he thougfht
fit. To this Dom Duarte sent an answer that he might do as he
pleased, and since he intended to use absolute power, he was well
able to do so, for he had the knife and the cheese. The Viceroy, on
hearing this answer, was much irritated, and said : " Dom Duarte
has bad advice in the course he is following with me, and is placing
himself in a position in which his misfortunes may become greater ;
for even though I were unreasonable, he would be acting with
sagacity in obeying; and since he wishes to follow out his fancy, he
will hear of me." He then at once sent orders to the superintendent
of the building yard to get ready two galloons, which were without
yardarms and almost stripped of their rigging, which at night were
equipped with artillery and gunners, and which had to go out of the
river next morning, as they did go out; and in them the Viceroy sent
the chief constable and the auditor-general, and he ordered them to
anchor on both sides of the ship near the stern, and the auditor
accompanied
 GAMA ORDERS THE ARREST OP D. DUARTE. 41 7 by two
notaries, was to go in a boat alongside the ship, and from outside of
it was to require Dom Duarto on the part of the King to come out at
once, and go and place himself on board the ship Castello ; and if he
did not obey that, the notary was to draw up an act with a protest
signed by witnesses ; and he was then to repeat the requisition to
him three times, and if he did not obey they were to shout to the
ship's crew to come out, because they were going to sink it, and
then having done this, they were to return to the galloons, and with
the artillery send the ship to the bottom. He administered an oath to
the auditor and chief constable to carry this out, and gave them his
warrant for it. This having been told to Dom Luiz, he went to the
Viceroy and entreated him much as a favour not to conduct himself
so rigorously with his brother, since he had not sold any of the King's
fortresses ; and the things ordered with such wrath, rather
resembled hatred than any other good reason that there might be
for it. The Viceroy answered him with much courtesy, which he
always used towards him, and said : " Senhor Dom Luiz, if your
brother had sold fortresses, he would not have got his head where it
now is, for I would have ordered it to be cut off, and you should not
have uttered that speech to me ; neither did your brother ever
annoy me, for me to feel hatred towards him, and do to him that
which I ought not, neither should your worship say to me such
mistaken words, for, so God give me health, if I commit any error, it
is in not doing all that I am obliged to do, and I act thus because I
am your servant, and the King our sovereign is your friend. With
respect to your brother, I was going to advise him, and to you as to
a brother I also give the advice, that for the future he pay great
obedience to the commands of the King, since up to this time he has
observed them so ill in the governance of India that he is the
scandaP of Portugal ; and by obeying with gentleness • O luino,
literally, the fire.
 418 D. LUIS TAKES THE PART OP D. DUARTE. what the
King commands, all will go well, because what I command is
commanded by the King, and if he gives me some good answer on
his behalf, perhaps I will do what is more for his interests, than what
he could do for himself: and I tell you the truth, not in order that
you should thank me for it, that for affection for you I am going
much beyond what the King has ordered me, and I would show it
you if I could/' To this Dom Luis replied, but not with as much
gentleness as the Viceroy desired: in the course of this they
wrangled so much, that the Viceroy rose up and went to the door of
the chamber, saying: "Senhor Dom Luis, go in peace, for I have
already told you for my part many truths, and you little believe me,
and think that you have all the reason on your side, and that I am
the one who is mistaken ; by which you are unthankful for what I
could do, and which I do not do because I see you stand in my way/'
Dom Luiz wished to speak, but the Viceroy took off his barret-cap,
saying ; " Sir, do me the favour to let there be no more for to-day ; "
and he turned his back upon him, at which Dom Luiz was enraged,
and said : " You do not choose to hear me. I trust in God that a time
will come in which I also shall not choose to hear you. I will go to
my brother, and whatever happens to him shall happen to me." Dom
Luis went down the hall as he said this, and many heard him, and he
went to his abode, accompanied by many people who used to eat
with him. These words which D. Luiz spoke were repeated to the
Viceroy, at which he was greatly enraged, and ordei-ed the captain
of the fortress, Lopo Vaz de Sampayo, at once to order Dom Luiz to
embark, and not to remain another moment on shore, and not to
allow any one to go with him, and he (the Viceroy) would remain at
the window until ho saw him put on board. Upon which Lopo Vaz de
Sampayo went to the house of D. Luiz, who was sitting down to
table to dine with the numerous persons who ate with him. He,
 ARREST OF D. LUIS. 419 seeing Lopo Vazj waited to see
what he would say, and he, from the door, without coming inside,
said to him : " Senhor Dom Luiz, the lord Viceroy commands that
you should go with me to embark at once, and he remains at the
window waiting until you go on board." Dom Luiz with passion
laughed, and said : " I am amazed that he did not send hiliguins^ to
carry me off: all that he commands shall be done." Then asking for
his cloak, he said : *^ Gentlemen, if they do not let you dine, I have
ordered the dinner to be taken away, that it may not be lost ; and do
you remain with the peace of God, since they take us away from
eating this farewell dinner ;'' and this he said with tears in his eyes.
The gentlemen rose from the table to accompany him, which Lopo
Yaz did not permit, and ordered on the part of the Viceroy that no
one should leave the house. This they all obeyed. D. Luiz alone, with
two servants, went to the beach and got into a vessel {tone) which
he found, and he went off to the ships, saying to Lopo Vaz : " Sir,
say to the Viceroy that this kingdom is his, and later it will belong to
another." Dom Luiz, as he was very discreet, had never gone to see
his brother since he had arrived, that the Viceroy might not think
that the two took counsel together ; and on arriving at the ship he
found the auditor at the ship^s side delivering the Viceroy's
message to his brother, and D. Luiz said to him : '' Sir auditor, in
order that you may not cause the loss of this ship which belongs to
the King, wait, and I will deliver him up to you bound in irons, if you
command it, and I will do everything to serve the lord Viceroy." He
then entered the ship, and at the side the two embraced with many
tears, D. Luiz saying to him : " My brother, I entreat you as a favour
to submit to this turn of fortune, since such is so certain amidst the
pleasures of this life ; ^ Bailiffs: Biliguira or Belleguim is an inferior
officer of justice. This word has been in the Portuguese language
since ancient times.
 420 D. DUARTE PRESERVES HIS MONEY and at once let us
go to the ship Castello, and this excommunication will not touch you,
which the auditor is publishing against you, for the Viceroy is going
beyond all bounds." Dom Duarte was a man not inclined to anger,
and he answered him : " My brother, I feel more grief at your
irritation than at the thunders of the Viceroy. Let us go to Portugal,
and if God takes ps there, what He pleases will happen." Upon which
they went to the ship Castdlo, and D, Duarte said to the auditor : "
Go in peace, and say to him who sent you here, that his will is done,
and shall be done in this country, which is now his empire." The next
day the Viceroy sent Afonso Mexia, the overseer of the treasury, to
Dom Duarte, with a minute requiring him to deliver up so many
thousand pardaos belonging to the King, which he had received in
such a place, and so many others in such another, and in such other,
which made a great sum. D. Duarte replied to this, saying that the
King had given him this factory in which he had received those so
many thousand pardaos, and that he would go and give an account
of them to His Highness. D. Duarte was afraid that the Viceroy would
make some search in order to take away his money ; on which
account, as soon as he had arrived, he had put it in security, for it
was a small sum, as the greater part he held in precious stones, in a
casket full of rich gold stuffs, pearls, and jewellery, which were
worth a large price. The whole was put inside a chest, and he
secretly entrusted it to Bastiuo Pires, the vicar-general, who was his
great friend and in his seci-ets ; and along with him an old tutor,
who had brought him up, who went at night in a boat of black
Malabar men, and landed on the beach outside of the town ; and
the boat went away, and they two took the chest, and with an iron
shovel, which they bi'ought for the purpose, they made a hole in the
sand, into which they put the chest, and on the top of the sand they
placed a skull of an ox, and they took
 FROM CONFISCATION BY GAMA. 421 the bearings by the
monastery of Saint Antony, but not very exactly, as it was night, and
they went away to sleep without anyone having seen them. The
next day, after vespers, the vicar went for a walk on the beach, and
saw very well where the skull was, for there was no other on the
beach, and he took the bearings exactly with the wall of the
monastery ; and walking there with other clergy to amuse
themselves, he struck with a javelin against the wall, and the others
flung it also, so that there remained good marks upon the wall, and
the priest intended to come at night with a spit, with which he would
probe and feel for it, and find the chest. It appears probable that
some one who passed by kicked the skull, so as to change its
position from where it was, for when the priest came at night and
put in the spit where the skull was, he did not find the chest ; and
he passed a great part of the night searching with the spit in all
directions ; and as neither he nor the tutor, who also searched with
a spit, could find it, they underwent much labour in seeking for it
every night ; and the tutor, by daylight, walking about alone,
searched Math a javelin, which he stuck into the sand in all parts,
taking the bearings of the monastery. After many days had passed,
they fell in with it, when they were already despairing of finding it ;
for God did not choose that so great a treasure should be lost. This I
heard related by the vicar-general himself. The Viceroy prepared
ships to cruise along the coast as a fleet, and as he did not find
artillery in the magazines, he ordered proclamation to be made as in
Goa, that any man who had any of the King's artillery should deliver
it up freely to the magazine, under pain of death if he did not deliver
it up, and it was found in his possession ; and if any man should
have bought it, and had proofs of it, he would order it to be paid for,
and his money returned to hira. By this means a large quantity of
artillery was col 
 422 ILLNESS OF VASCO DA OAMA. lected, which the
traders gave up, because they knew that their vessels would not be
able to navigate, for there were many in Cochym which were drawn
up on the beach, and rotted, and were lost, because D. Anrique do
Meneses, who was governor after Dom Vasco, in this and in many
things followed his own course, as I will relate further on. As
information was given to the Viceroy that in the division of the prize
ship, Fernan Martins Avangelho, the factor of the fleet, had gone
shares with the factor and clerks of the factory in that matter, he
ordered them all to be brought prisoners to Cochym, with good bail ;
and he had very full inquiry made upon all the officials, saying that
he would learn by what devices they enriched themselves ; and he
went on examining diligently into other evils, so that without any
doubt he put India into a very straight road for the good of the
King's service, and for the good of the people, and, above all, very
strict justice, which had become much perverted. For some days the
Viceroy had been suff'ering from great pains in the neck, which had
got awry, and some boils came to the surface at the nape of the
neck, but very hard, and they would not ripen for all the remedies
that were applied, for nothing availed, and they gave him such great
torment that they did not allow him to turn his face in any direction.
At this the Viceroy was subject to great fits of irritation, with the
heavy cares which he felt on account of the many things which he
had got to do, so that his illness was doubled, and went on getting
worse until he altogether took to his bed, and from thence gave all
the necessary orders, with great travail of spirit, which caused him
to be overtaken by mortal illness, with such pains as deprived him of
speech. In this affliction he sent Lopo Vaz the captain, and the
Doctor Pero Nunes, and Afonso Mexia, and the auditor, with Vicente
Pegado the secretary, to go to Dom Duarte with a deed of
acknowledgment, made out by the secretary.
 MEASURES TAKEN AGAINST D. DUARTE. 423 of how he
had received India from him, and that he had delivered it up. These
persons vi^ent to Dom Duarte and told him thisj but he, who knew
already in what state the Viceroy was, and was of opinion that if the
Viceroy died he should remain in his government, as it was in his
possession and no one had taken him out of it, with these thoughts
replied that it was not the custom for governors to deliver up their
governorship and accounts at sea, as he was, but, on the contrary,
at the gate of the fortress ; that he was ready to go and deliver it up
at once, but that he was not going to do it in any other manner.
They sent word to the Viceroy of this message, and he replied by a
letter which he sent to Doctor Pero Nunes, that ho was to toll Dom
Duarte that ho was a prisoner, and would not leave that ship except
by order of the King in Portugal, and therefore he was not going to
come on shore ; and that they were to give him the
acknowledgment of the delivery of India, if he chose to take it,
because the Viceroy looked upon India as having been delivered up
by him ; and although he should not deliver it up, yet not on that
account would things turn out as he imagined, for this message
would undeceive hira, and his expectation would become vain ; after
that the messengers were to return on shore, and they did return.
The Viceroy commanded that a public act should be drawn up
concerning all this by the secretary, in which all attested this which
had passed between them and D. Duarte, ^ and the Viceroy kept it.
> Correa relates the voyage home of D. Duarte and of his brother D.
Luis, who went in another ship, and kept great watch over D.
Duarte, as he feared that he might go to Castile or to France ; on
arriving at Mozambique, they obtained news by the ships from
Portugal that D. Duarte's affairs were not in so bad a state as he
feared ; they left Mozambique together, and passing the Cape D.
Duarte said he would take in water at Saldanha, and that D. Luis
should wait for him at the island of St. Helena. D. Luis went on, and
it was sui)poscd he was
 424 MEASURES TAKEN BY GAMA CHAPTER V. Of the death
of the Viceroy, and of what he did and ordered before his death, and
how he was buried. The Viceroy, feeling that lie was ill, spoke
secretly at night to the guardian of St. Antony, who was his
confessor, with whom he consulted ; and at this conjuncture there
arrived at Cochym the ships and vessel from Ceylon with the
cinnamon, which was transferred from them into the ships bound for
the kingdom, which were now almost laden, and the Viceroy hurried
this on. He despatched at once the vessel to the kingdom with his
letters ; Francisco de Mendon^a went as captain of it, and he sailed
on the first of December. Fernan Gomes de Lemos, who had been
captain there (in lost in a storm in wliich D. Duarte also was nearly
wrecked. But in the year 1536 Diogo da Silveira captured a French
pirate, the brother of a pirate who had taken D. Luis' ship, and he
confessed that they had killed D. Luis and the crew of his ship,
which was near foundering, and had plundered the ship and set fire
to it with its crew. D. Diogo then cut off the hands of the pirate's
crew and burned them in their ship ; for which afterwards the
French pirates committed great cruelties on the Portuguese. D.
Duarte made the coast of Algarve, and anchored at Farao, and
buried his money safely ; he then would not go to Lisbon, but went
to Cezimbra and landed with his goods, and ordered the ship to
return to Lisbon ; but a storm came and drove the ship on shore
with the cables broken, or, as some said, cut at night in order that it
might be supposed D. Duarte's money was lost there. The King was
much enraged at the loss of the ship, and D. Duarte was put in
prison at Torres Vedras for many years. The King tried in vain to find
his money at Farao, and at length, through the intercession of Count
Castanheira, D. Duarte was set at liberty and restored to his
captaincy of Tangiers : and they never found his money for which he
had suffered so much. This Correa wrote from hearsay as related by
those who came from the kingdom, and (he says) all may be lies,
like all things in this world except to love the Lord God.
 I5EF0KE HIS DEATH. 425 Ceylon), came in the cinnamon
ship. The Viceroy had information of him that he was an evil liver,
quarrelsome, and fond of divisions, reckless in doing evil. He had
committed iniquities in Ceylon, and a man named Ganchinho by
nickname had demanded justice of him from the Viceroy, for ho had
cut off his arm at the elbow, and he was maimed. So when the ship
reached the bar he sent thither the auditor general to take from him
a pledge signed to the effect that ho would not leave the ship
without his commands ; and if he would not give such a pledge, the
auditor was to bring him as a prisoner, and shut him up in irons in
the fortress, and collect the depositions which came from Ceylon :
and this was done. The Viceroy, feeling his death approaching,
passed from the fortress to the houses of Diogo Pereira, which were
close by in the court of the church. There he summoned Lopo Vaz
de Sampayo, and Afonso Mexia, the overseer of the revenue, with
the secretary, from whom he took their parole under an oath to fulfil
entirely what ho should command them, until the governor who
might succeed him commanded the contrary. The secretary drew up
an act of this promise, which they signed. The Viceroy then
dismissed them, and made a minute by which he ordered them not
to stir nor undo anything of what he had done, but rather that both
of them should do everything, and despatch everything both in
matters of justice and revenue, and at his death, when the
succession was opened, they were to deliver up everything into the
hands of the governor whom they should find named therein, with a
box of papers belonging to the King, which his son Dom Estevan
would deliver to them. In these minutes^ he gave all the regulations
for what they had to do until they gave way to the governor who
might succeed. * Probably this was the document stolen from the
grandfather of the present Marquis of Niza. See Introduction.
 426 DEATH OF QAMA. Having done this, he did not attend
to anything else, but only confessed and took the holy sacrament,
with much perfection as a Catholic Christian ; and he made his
testament, by which he -ordered his sons to return in those ships to
the kingdom, and to take away all his goods, and sell nothing, and
to take away all his servants ; and those who wished to remain, they
were to pay them all their pay due from the King for the services
which they had rendered ; and they were to give all his clothes and
household furniture of silk to the churches and hospital ; and he sent
to the women whom he had ordered to be flogged at Goa, a
hundred thousand reis for each one, which were to be given them
with much secrecy, and if they should not choose to accept them,
this sum was to be doubled, and given to the house of Holy Mercy.
These women, with this money, found good- husbands, and were
married, and became honest women. He set his affairs in order like
a good Christian, with all the sacraments of the Church, and ordered
that his bones should be conveyed to the kingdom, as they were
conveyed later ; ^ and speaking always with his full understanding,
he fulfilled his days when he delivered up his soul in the night of
Christmas of the holy birth of Christ, at three o'clock after midnight,
on the twenty-fourth day of December of this present year of
1524.^ God be praised. His death was kept silent, without weeping
and lamentations, and the doors were closed all the day till the hour
of Ave Maria, when everything was ready. Then his sons and
servants gave the signal of his death with very great lamentations;
upon which many gentlemen, his relations and ' Vasco da Gallia's
remains were removed to Portugal in 1538 (not 1528, as the Univers
Pitioresque has it), and buried in his tomb in the town of Vidigueira,
of which he was Count. 2 Castanheda, Barros, and San Roman agree
in the date of Gam.i's death, eve of Christmas 152-4.
 BURIAL OF GAMA. 427 friends, came in to assist them ;
and soon after all the people of the city came together in the court
of the church, and each one shewed what he felt. The body, dressed
in silk clothes, and over them a mantle of the Order of Christ, with a
sword and gilded belt, and gilt spurs fixed upon dark buskins^ and
on its head a dark round barret-cap, was placed in the hall, in the
bier of the brotherhood of Mercy, uncovered ; and the gentlemen,
clothed in the mantles of their order, bore it on their shoulders, with
many tapers, and followed by all the people. It was carried to the
monastery of St. Antony,^, and buried in the principal chapel ; and
upon the tomb was a square grating surrounding the grave, of the
height of a span, lined with black velvet, and a black and white
fringe, placed upon a velvet cloth, which covered all the grave.
There the next day a great service was performed, and all the
gentlemen were present, and his sons were placed amongst the
friars, and at night they betook themselves to the monastery and
made their lamentations, as was reasonable on losing so honoured a
father, and of such great desert in the kingdom of Portugal. For it
pleased the Lord to give this man so strong a spirit, that without any
human fear he passed through so many perils of death during the
discovery of India, as is related in his history ; all for the love of the
Lord, for the great increase of his Catholic faith, and for the great
honour and glory and ennobling of Portugal, which God increased by
His holy mercy to the state in which it now is ; and in order to have
some merit from the Lord, for the salvation of the soul of the
Viceroy, for the good desires with which he laboured in the affairs of
the ' So also Kays Pedro Barrcto de Roscnde; Barros and San Roman
call it the monastery of St. Francis ; Castanheda says the cathedral
of (Jochym. An article of the Boletim do Governo, Goa, December
21, IHoB, on the subject of Gama's tomVj, says he was buried in the
principal chapel of the_chiuchj)f the
Franci8£aojnonasteix.o£CQehym.
 428 GAMA^S SONS RETURN TO LISBON. wonderful
discovery of India, which it pleased the Lord should be done by him
; where now are dedicated to His holy praise so many monasteries
and churches, and where there are so many new Christian
communities of so many souls which have been turned to the true
knowledsre of the salvation by our holy faith, as we see at the
present day, and every day will be with greater increase, by His holy
goodness and mercy. The sons of the Viceroy, Dom Estevan and
Dom Paulo, collected together his servants, and fulfilled entirely their
father's commands, and both went to the kingdom in the ship of a
merchant, and were received with great honour by the King, who
shewed much grief for the death of their father, for the great loss
which he sustained by the death of of so good a vassal, from whom
he hoped to receive such good services. ^ The cathedral in which
Vasco da Gama was buried no longer exists : it was destroyed in the
manner described in the following extract from the private journal of
Mr. Chisholm Anstey, who visited Cochim, November 9, 1857. "The
harbour of Cochim exceeds my expectation.... If it were not for the
bar of shifting sand it would be one of the finest in the known world
: as it is, even, it will be hard to match it in India. The deepest water
is inside, just where the wonderful chain of inland navigation called
the ' backwater' finds one of its outlets to the sea. By means of that
chain Cochim has not only smooth and safe access to the Ghats
eastward and to the Carnatic, but northward to the Goa territories,
and southward through Travancore to Cape Comorin....I was
agreeably surprised with the appearance of the town. It is not that
the destruction was less complete than the Vandals of Leadenhall
Street designed. On the contrary, it is hard to imagine a more
faithful and exact performance of the will of a superior than was
rendered here in 1806 by the Company's Proconsuls to their
intelligent and honourable masters. The stupendous quays,
shattered into enormous masses by the Company's mines of
gunpowder, still encumber the anchorages, and make embarkation
and disembarkation difficult.^ Not a vestige remains of most of the
public btuldings. The magnificent warehouses of the Dutch East
India Company, which won admiration from the rest of the world,
and envy from our own Company, were the first to be sprung into
the air. There
 COCHIM CATHEDRAL DESTROYED 1806. 429 is a solitixry
tower left — the ' Flagstaff ' they call it now — to tell where stood
the cathedral of Cochim, and where the body of Vasco da Gama was
buried. His grave has been defiled by us, and its very place is now
forgotten. ' You are within fifty yards of it, but on which side I
cannot say' — was the only indication which a well-read and careful
investigator of local antiquities — himself a resident here for some
years past — could give me of the whereabouts of him who opened
the Indian Ocean to our commerce — to all commerce. One church
— diverted from the Portuguese to the Dutch worship, and from the
latter to the English Protestant establishment — is the only one
which the Company's Guy Fauxes were pleased to spare. That too is
the only building left us whereby to justify our faith in the chronicles
which record the ancient wealth and splendour of Cochim." The
journal then goes on to state that Cochim came into British hands in
1796, the British being the allies of the Stadtholder ; and in 1806 it
was feared that the ministry of Charles James Fox might restore
Cochim and other Dutch colonies to Holland^ and so the only port
south of Bombay where large ships could be built would be
withdrawn from the East India Company. " So in that year the British
authorities gave the word to blow up with gunpowder the
fortifications, public buildings, etc., etc., and great was the Company
of Guy Faux : great also the success. The Company's gazetteers are
still able to record that not only war and trade and government were
made impossible, but animal life itself. ' Scarcely a private house,' we
are told, ' of any size or value remained standing :' all who could do
so 'left the place;' 'all who could not,' it is coolly added, 'sunk into
abject beggary, though some formerly possessed titles, and held
high rank and station. '...Really it cheers one to think that there is a
complaisance which can chronicle such things, and not be ashamed!
Still, ixi itsruius it is inviting enough : were it not for the misery of
the indigent, which its now renascent trade will in time extinguish.
One can trace out the ruins for a mile square from the sea, even
beneath the forest growth and herbage.... Now that free trade and
liberty of the press have wrested (1851), tardily enough, from
Leadenhall Street the bare permission to those who will to go out
and live at Cochim, and trade there if they can, there are signs of life
even amongst these ruins.... In this wretched fishing village, for in
1851 it was no better, there are already now in 1857 seventeen
thriving mercantile establishments ; amongst them all they exported
last year from Cochim not less than £600,000 sterling worth of
Cochim and Travancore produce.... The Company has suffered the
backwater navigation to fall into ruin. But all is of a piece with the
policy which sprung the mines of 1806 upon the wharves and
magazines of the same commerce. I could not help reflecting thus as
to-day I saw the Persian^ a ship of more than 700 tons, lying off
one of the ruined quays to which .she was moored, and which, albeit
in ruins, was
 430 DESTRUCTION OF COCHIM CATHEDRAL. still so useful
that the cargo could be carried on board along a footplank without
the need of a boat. And lastly, the Cochim policy of the Company is
of a piece with their Carnatic policy. Where are the 52,000
stupendous tanks which once irrigated the then fertile but now
faminestricken Carnatic, so near a neighbour to this place ? All
ruined, dry, choked up ! And it has become the necessary work of a
small body of philanthropists to commence an agitation in England,
to persuade or compel the Madras government not to deprive the
people of the means of restoring those lost irrigation works, or
replacing them upon as grand a scale from Cavery, Godavery, and
other rivers now neglected, and alike useless to the carrier as to the
husbandman.'" Thornton, McCuUoch, and the French Geog. Diet, of
Guibert agree in stating that this destruction took place in 1806, but
no trace of it is to be found in the India Office or Admiralty Indexes.
Thornton's Gazetteer contains most information on the subject, and
refers to Edye's Description of the Seaports of Malabar^ a book
which I have been unable to find. It is not surprising after the
destruction above described that, two years later in 1808, when " it
was reported that a French force would land on the coast of Malabar
in the course of January, in anticipation of this event, the Dewan (or
minister of the Raja of Cochim) urged the Raja of Cochim to prepare
to unite himself with the Travancorians and French for the purpose
of expelling the English from the country." Thornton, Hist, of India,
vol. iv, p. 119. THE END.
 APPENDIX. PORTUGUESE DOCUMENTS. [Excepting the
first, these documents have not before been published ; some of
them are printed with abbreviations and line for line as they stood in
the original manuscript.]
 APPEND rx. Statement by Dom Manuel oe services renderrd
by Vasoo da Gama and donations gkanted to him. [This document
has been taken from tlic Appendix after p. 1G5 of the Roteiro da
Viagem de Vasco da Gama por A. Uerculano e o BarCio do Castello
de Paiva. Lisbon, 18G1]. DoM Manuel por graca de Deus Rey de
purtugal e dos algarves daquem e dalem maar em afFrica Senhor de
guinee e da comquista iiavega^ilo comercio detyopia arabya persya
o da imdia. A quamtos esta nosa carta virem fazemos saber que
semdo pello yfante dom ami-rique meu tyo comec;ado o
descobrymento da terra de g^*' (guinee) Na era de my] iiij'^xxxiij
com tenca e desejo de pella costa da dita terra de guynee se aver de
descobryr e achar a Imdia a qual atee os tempos dagora numca per
ella foy sabida, nom somente a preposyto de a estes Reynos se
seguyr grande fama e proveyto das muytas Riquezas que nella ha,
as quaes sempre Pellos mouros forara poseydas, mas Por que a fee
de noso seilor por mais partes fosse espalhada e seu nome
conliescido E despois el Rey dom afonso meu tio e el Rey dom Joam
seu fillio queremdo com os mesmos desejos proseguyr a dita obra
com asaz mortes e despesas em seu tempo ate ho Ryo do Ifante foy
descuberto no ano do iiij'lxxxij^ q^ sam mil viii'ixxxv ligoas dhomde
primeiro so come^ou a descobryr E nos com o mesmo desejo
queremdo conseguyr a obra que ho dito Ifante e Rex nossos
amtecessores tynham comeQada, comfy amdo que V*^" da gama
lidallguo de nosa casa era tal que por o que compre a noso servigo e
em comprimento de noso mandado pospoerya todo 1 It is stated in
a note in the Roteiro that this date is erroneous and that it is so
written in all the copies.
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