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Tuesday, May 10, 2016

“The Secret History of the South Sea Bubble: The World’s First Great Financial Scandal”, by Malcolm Balen

256 pages, Harper, ISBN-13: 978-0007161775

People throughout the ages have always taken great delight in the folly of our fellow men, and nothing illustrates that folly more vividly than the bursting of great financial bubbles that occur and reoccur with unrelenting regularity throughout the ages, most recently with the meltdown of 2008 which ushered in our current woes. In his book The Secret History of the South Sea Bubble: The World’s First Great Financial Scandal, Malcolm Balen retells one such grand financial catastrophe, the South Sea bubble story, weaving into it the simultaneous, but rather different, story of the John Law bubble in Paris of the same year (Law was a Scottish gambler, early Keynesian economist, fatal dueler and, for a while, financial ruler of Louis XV's France). They are Rattling Good Yarns, and Balen spins them with all the mastery of the seasoned news man that he is.

First, some background: the South Sea Company was not just some random IPO-type promotion for a purpose to be disclosed later, which first flew and then crashed; it was a major national institution founded in 1711 and then again in its bubble role in 1720 by the British government with approval by parliament and the involvement of heads of government, at first the Tory Robert Harley and later the Whig Robert Walpole. From there it systematically bought and bribed the sovereign, the court, the ministers, and enough members of the House of Lords and the House of Commons to assure the support it needed. It was the vehicle and expression of a corruption that permeated English government from top to bottom, sucking in and, in many cases, ruining most of the country’s aristocracy (dukes seem to have been particularly susceptible to its blandishments) as well as its leading intellectual lights, including Sir Isaac Newton (who sold out in good time and then, despite his office as Master of the Mint, fatally bought back in at the wrong moment), Jonathan Swift, and Alexander Pope.

The origin of the scandal lay in the conjunction of two forces: a national debt following the War of the Spanish Succession (that would be Queen Anne’s War to us Yankees and Canucks) from 1702 to 1713 that terrified successive governments, especially the Tories when they finally wrested power from the Whigs under Queen Anne in 1710; and a common swindler, John Blunt, with uncommon gifts of energy, self-confidence and financial cunning. Ministers’ needs and Blunt’s schemes combined over a decade to dream up an astonishing succession of scams and wheezes, including a national lottery, for enriching Blunt and bringing cash into the exchequer at the expense of a naive public and, in the longer term, the taxpayer. The South Sea bubble was merely the last and grossest of these, whereby the South Sea company was to “buy” (i.e., take over from the government) the burden of the national debt on the basis that it would then convert the debt into shares in the company. To persuade the holders of government debt to exchange their guaranteed stream of income from the Treasury for an equity stake in an enterprise which had no business and therefore no profits, and whose only “asset” was the economy’s largest liability would have taxed the skills of many a more recent fraudster. Blunt knew that so long as he could persuade his contemporaries that the share price would rise, cash would pour into the company in limitless amounts in exchange for new shares and the holders of government debt would convert their incomes into worthless paper. The national debt, or much of it, was thus first “equitized” and then, when the crash came, effectively liquidated. But before that he used the flood of cash to buy (and to finance other grateful dupes to buy) the company’s shares thus, sustaining for a while what he constantly reminded his associates was the essence of the business, namely, to keep the share price rising at any cost.

Balen does not offer us any general theory of bubbles, of why they work and why they burst. He is content, like a good reporter, to tell the tale. But one thirsts for a deep diagnosis of the recurrence of this pattern in human affairs despite the fact that, at least after the first time, everyone knows it is madness. Hope springs eternal, and however rough the last disillusionment sooner rather than later greed stirs again. Greed breeds credulity in those who want to believe, and credulity invites the cunning of those who would separate fools from their money. Wiser men, too, are separated from their money, subscribing in battalions to the fallacy that they, individually, will get out before the smash comes. Meanwhile, a form of group mania seizes whole societies, the subject of which can be anything from land to antiques, from stamps to tulips, from lottery prizes to – the purest form – shares.

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