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tulips
This page offers context by considering some past booms,
bubbles and crashes.
It covers -
introduction
The pre-1840s bubbles have been criticised as festivals
of excess that left nothing behind except tears, bad law
and anecdotes - in contrast to the railway bubbles that
littered European and North American landscapes with rolling
stock, telegraph lines and railway cuttings, much subsequently
put to good use.
tulip time
Dutch 'Tulipmania' has attracted attention as the classic
example of speculative excess, with absurd prices paid
for derivatives and a consequent crash that supposedly
devastated a flourishing economy.
Clarence Mackay's much-quoted but very impressionistic
1841 Extraordinary Popular Delusions & the Madness
of Crowds claimed that
In
1634 the rage among the Dutch to possess tulip bulbs
was so great that the ordinary industry of the country
was neglected ... the population, even to its lowest
dregs, embarked in the tulip trade
so
that by early 1637 one bulb was reportedly
sold for 6,700 guilders.
That was supposedly forty times greater than the average
income and equivalent to the price of "a house on
Amsterdam's smartest canal, including coach and garden".
Mackay attributed the economic and political decline of
the Netherlands to tulipmania.
In reality the situation was more complicated. Many people
did not participate in the speculation, others did some
momentarily and on a small scale. The Dutch Republic was
not shattered by the crash: it survived and for some time
surpassed its peers in terms of technological and economic
development.
Peter Garber's crisp Famous First Bubbles: The Fundamentals
of Early Manias (Cambridge: MIT Press 2000) and Anne
Goldgar's Tulipmania: Money, Honor, and Knowledge
in the Dutch Golden Age (Chicago: Uni of Chicago
Press 2007) are useful correctives to some of the more
lurid accounts, including Simon Schama's The Embarrassment
of Riches: An Interpretation of Dutch Culture in the Golden
Age of Riches (London: Routledge 1987), Mike Dash's
Tulipmania (London: Gollancz 1999), Anna Pavord's
The Tulip (London: Cape 1999) and Trevor Syke's
engaging 2003 Tulips From Amsterdam (PDF).
Garber's work has been extended in Earl Thompson &
Jonathan Treussard's 2002 The Tulipmania: Fact or
Artifact? (PDF).
For an earlier panic see Reinhold Mueller's The Venetian
Money Market: Banks, Panics, and the Public Debt
(Baltimore: John Hopkins Uni Press 1997).
the Mississippi System
Financier John Law's Mississippi System has been characterised
as "the greatest economic experiment prior to the
Russian revolution of 1917". Unfortunately it was
an experiment that went wrong.
Law's Mississippi Company merged with the Louisiana Company,
which laid claim to one-third of what later became the
US.
A single corporate entity thus encompassed ownership of
the national debt and revenues from the state monopoly
on tobacco and other substances, operation of what served
as the French central bank, and expectations about development
in the land of opportunity.
the South Sea bubble
The origins of the UK South Sea Bubble date from 1698,
when the East India Company - an entity that generated
meaningful revenue and formed the basis of Britain's empire
in India - was persuaded to lend the government some £2m
at a rate of 8% (the standard rate for government borrowing
was 14%) in return for an extension of trading privileges.
The South Sea Company was established in 1711 to exploit
a monopoly of British trade with South America and the
Pacific Islands, expected to be lucrative once war with
Spain finished. the Company's operation was deeply politicised,
with opposition from factions associated with the Bank
of England (at that time a private rather than public
sector body).
The Treaty of Asiento effectively ended the war in 1713,
with mixed effects for the South Sea Company. News of
the treaty raised expectations and boosted share prices
but the agreement in fact reduced the company's trading
opportunities because it confirmed Spain's dominion over
much of Latin America. (The Pacific Islands, contrary
to claims of beaches rich in gold dust and diamonds, produced
no revenue.)
The Company was thus reliant on development of the slave
trade (shipping labour from Africa to Latin America),
interest on the loan to the government and trade with
the Spain's colonies. Its first trade voyage to the South
Seas did not take place until 1717, just in time for major
friction between Britain and Spain. The Company's promoters
hyped its prospects, reflected in advancing £2 million
to the government in 1717.
Two years later the Company offered to further take over
financing the national debt. The government agreed, amid
criticisms such that of Daniel Defoe in The Anatomy
of Exchange-Alley (1719), which alleged stock manipulations
-
Tis
a compleat system of knavery; that 'tis a trade founded
in fraud, born of deceit, and nourished by trick, cheat,
wheedle, forgeries, falsehoods, and all sorts of delusions.
Through incompetence or corruption the Company's directors
talked up the price of their shares, fuelling a speculative
bubble that featured claims about the discovery of new
technologies (including perpetual motion machines). In
January 1720 the price of a share of South Sea stock was
£128, climbing to £175 in February, £330
in March and £550 in May. It soared to £1,050
in June amid wild tales of South Sea riches and forecasts
that prices would continue to climb.
The collapse came in September, an event that ruined many
speculators and financial institutions. Sir Isaac Newton
sold his £7,000 of stock for a 100% profit but reentered
the market at the top, losing £20,000 and lamenting
"I can calculate the motions of the heavenly bodies
but not the madness of people". George I lost £56,000.
Bishop of Peterborough and historian White Kennett commented
Enthusiasm
in different shapes returns often upon this poor nation;
we have had religious enthusiasm, political enthusiasm,
and this was merely secular enthusiasm.
The Bishop of Norwich more polemically wrote that the
collapse was divine judgment on
the
universal inclination of all ranks of men and women
too to excessive gaming which led to the occasion of
bringing such a curse and blast upon us, as never was
felt before by this Nation; by which we have been all
of a sudden strangely impoverished in the midst of plenty,
our riches having made themselves wings, and flying
away nobody knows whither, and more families and single
persons have been undone and ruined than hardly ever
were known to have been so, by the most tedious and
lingering war.
In
1721 formal investigations exposed large-scale corruption
and stupidity, with political infighting being reflected
in the prosecution of government officials and business
figures. The Company's cashier fled overseas with details
of bribes to politicians. Director Francis Hawes, who
had acquired a major art collection and two country estates
using his profits, was initially allowed to keep only
£31 from declared assets of over £40,000 (in
fact lower than the real value of £165,587). Colleague
James Fellowes retained £10,000 from a fortune of
£243,000. Confiscated wealth of course went to the
state, rather than to victims.
Chancellor of the Exchequer John Aislabie was initially
expelled from Parliament and sent to the Tower of London
after being found guilty of the "most notorious,
dangerous and infamous corruption" but once passions
died down - and 'sweeteners' were distributed' - was allowed
to retire to his Studley Royal estate and retain all property
acquired before he became Chancellor.
Perceptions of fraud were reflected in Swift's comment
in Gulliver's Travels (1726) that the Lilliputians
look
upon fraud as a greater crime than theft, and therefore
seldom fail to punish it with death; for they allege
that care and vigilance, with a very common understanding,
may preserve a man's goods from thieves, but honesty
has no defence against superior cunning; and since it
is necessary that there should be a perpetual intercourse
of buying and selling, and dealing upon credit, where
fraud is permitted and connived at, or has no law to
punish it, the honest dealer is always undone, and the
knave gets the advantage.
The so-called Bubble Act of 1720 (not repealed
until 1825) banned all joint-stock corporations
without parliamentary or royal authority and is claimed
to have stifled economic development for years. The company
survived until 1750 and its annuities were traded until
1853.
studies
The UK South Sea Bubble and French Mississippi Company
Bubble have both attracted academic and popular studies.
These include John Carswell's The South Sea Bubble
(London: Cresset 1960), Virginia Cowles' The Great
Swindle: The Story of the South Sea Bubble (London:
Collins 1960) and Malcolm Balen's A Very English Deceit:
The Secret History of the South Sea Bubble and the First
Great Financial Scandal (London: Fourth Estate 2003).
Larry Neal's superb The Rise of Financial Capitalism:
International Capital Markets in the Age of Reason
(Cambridge: Cambridge Uni Press 1990) and PGM Dickson's
The Financial Revolution in England: A Study in the
Development of Public Credit 1688-1756 (London: Macmillan
1967) are strongly recommended. The three-volume Great
Bubbles: Reactions to the South Sea Bubble, the Mississippi
Scheme & the Tulip Mania Affair (London: Pickering
& Chatto ) edited by Ross Emmett collects contemporary
responses. For a more recent view see Richard Dale's The
First Crash: Lessons from the South Sea Bubble (Princeton:
Princeton Uni Press 2004).
The UK (and thereby its neighbours) have been affected
by a succession of Latin American bubbles. One work of
particular value is Frank Dawson's The First Latin
American Debt Crisis: The City of London and the 1822-25
Loan Bubble (New Haven: Yale Uni Press 1990).
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