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

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021