What Babylon Revisited teaches you about stockmarket crashes

Matthew Partridge looks at the financial wisdom investors can take from F Scott Fitzgerald's short story, Babylon Revisited.

896-F-Scott-Fitzgerald
F Scott Fitzgerald

Babylon Revisited is a short story by the American author F Scott Fitzgerald (most famous for The Great Gatsby). Set in the early 1930s, it tells the story of Charlie Wales, an expatriate American businessman who returns to Paris to reclaim his daughter whom he gave up for adoption after the death of his wife and his hospitalisation for alcoholism from his sister-in-law Marion and her husband. Initially it looks like they will allow her to return to live with him. However, after some of Charlie's old friends turn up at Marion's house and insist that he dines with them, she changes her mind.

The key moment

Much of the story is taken up by Charlie's reminiscences about his extravagant lifestyle, funded by the stockmarket boom leading up to the Wall Street Crash. He and his companions made enough money from speculation to allow them to throw away "thousand-franc notes given to an orchestra for playing a single number" and "hundred-franc notes tossed to a doorman for calling a cab". When the market crashed he was "cleaned out" while many of his friends "lost everything, maybe not in the first crash, but then in the second".

The lesson for investors

During stockmarket booms it may seem that markets can only go one way upwards. The economist Irving Fisher had earned himself lasting notoriety in the autumn of 1929 by insisting, even after stocks started to decline, that they were "on a permanently higher plateau". Of course, he was proved wrong stocks would fall 90% between September 1929 and June 1932. Over the next decade investors would experience a huge amount of volatility with a series of rallies followed by dramatic falls. The worst of these was the 45% decline between March 1937 and April 1938.

Other financial wisdom

Extravagant behaviour by investors is a key indicator that the market has got out of control. Charlie's friends were clearly not the only people to throw their money around, since he notes that even the barman of their local haunt made enough in tips to afford a custom-made car. Another sign that the market has reached its top is people giving up well-paying full-time jobs to trade the market full time instead, as Charlie did (though by the time of the story he has rebuilt his business career).

Most Popular

How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020