What Babylon Revisited teaches you about stockmarket crashes

published 18 May 2018

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.

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".

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.

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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).

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri