Many of the experts on TV who talk about the current economic downturn argue that the financial devices that led to our downfall, like credit default swaps, were too new for people to understand and that rapid progression in the way we conduct commerce led to the downturn.
I’m not interested in arguing whether or not that is true, but I would like to point out our tendency to allow our economy to be decimated by investment schemes has been going strong for some time.
It seems the original idea of investment was to give money to someone who you thought would be more effective than you in making something useful with those funds.
You give some of your money to the kid who used to conduct science experiments in his backyard, and hope he invents something with it that you couldn’t think up yourself.
Over time that idea has become secondary, as investment has become more of a glorified version of gambling where people bet on outcomes, good or bad, in the global marketplace.
While reading an old English Literature anthology from one of my college courses recently, I stumbled upon a section that hadn’t been assigned to my class to read.
This section included multiple perspectives on an incident in the early 1700s known as the South Sea Bubble, which I think provides ample evidence that our boom-and-bust economic tendencies and our inability to learn from them, are much older than you would think.
The textbook, written in 2003, set the stage for this incident by explaining, “The wars Britain fought during William III’s and Anne’s reigns had a lingering effect. In order to finance expensive military ventures on the Continent, the British relied on a complex system of annuities, lotteries, and loans.”
The book pointed out annuitants to the government received guaranteed interest from 7 to 9 percent for all of their lives and their children’s on the money they loaned to Britain.
In 1719 the South Sea Company, a Pacific trading monopoly, proposed to take over the government’s debt, receiving an interest rate of 5 percent until 1727, when it would fall to 4 percent.
The company also agreed to pay 15 percent of the debt outright, up front to get this deal.
The company tried to convince annuitants to trade in their deals with the government for stock in the company.
The company couldn’t make more money for them than they were already getting (see the numbers above), but many agreed to the deal. They thought that enough people who didn’t have annuities with the government would also invest in the company to make the stock worth more than their deal, so they could sell it at that point.
As far as I can tell this was the first version of “insider trading.”
The annuitants knew the company’s deal with the government was worse than the deal they already had, but they figured if enough of them got the company’s stock, it would drive the price up, fooling less intelligent investors into buying in and allowing the original annuitants to get more money than their original deal allowed, selling at the high point and essentially tricking the less intelligent investors out of their funds.
In this way people who could afford to loan the government money, the already wealthy, became richer by tricking the poor and less savvy into trying to back what they thought was a solid company, but was in fact a company that served only the purpose of booming, making the insiders rich, and busting.
Around the same time a similar scheme in France went belly up. Despite this fact, the book went on to explain, “the rise of the South Sea stock touched off an investment mania.”
“Companies came into being overnight, often with little more than a name and a crazy idea to recommend them, and were bought into by investors hungry to reap the seemingly endless profit promised by speculating.”
It also pointed out, “The government attempted (with little success) to limit the more scandalous of these companies.”
If all of that doesn’t sound familiar enough, then how about, “Fortunes on paper disappeared overnight, and people suffered disastrous losses. Popular resentment threatened to overthrow the government, proposing a series of measures to restore public credit and stabilize the financing of the national debt.”
Or maybe, “Many of the South Sea directors had their assets seized, but several of the worst malefactors, including Secretary of State Charles Spencer, Third Earl of Sunderland, were screened from retribution.”
Even the political discourse had similarities.
In the Historical Register for the year 1720, the 18th-century equivalent of C-SPAN, a member of the House of Commons was quoted arguing, “that in all public bargains, it is a duty incumbent on them who are entrusted with the administration, to take care that the same be more advantageous to the state than to private persons; but that a quite contrary method seemed to have been followed in the contract made with the South Sea Company.”
On the other side of the argument another House of Commons man said, “It was but reasonable that the South Sea Company should enjoy the profits procured to it by the wise management and industry of its directors.”
Shortly thereafter, an editorial in the paper, The Craftsman, opined, “[T]here are a peculiar sort called stock-jobbers,” who “grow rich very unaccountable, not by traffic, not by arts, or science, or industry, or labor, or mechanics, or navigation, or warfare, or any other business of use or advantage to mankind.
“Their commerce is lying, political lying; and though each man knows the other to deal in this commodity, yet no one day passes, in which some of these strange fellows do not grow rich, and others are undone, as they out-lie one another, or as the lie of the one gains more credit than that of another.”
What conclusions you draw from these quotes depends upon who you are; my point is simply we shouldn’t assume that living through a downturn means we have all learned anything, because we’ve been there before over and over again and unless we try something different we will be there in the future as well.