Bulls and Bears. It’s all about predicting when that upturn or that downswing in the market is going to take place and when you need to sell or buy that stock to hit the jackpot and make the millions. People have been doing it for centuries and that doesn’t look like it is going to stop right now. There have been dozens of financial crises over the centuries and each of them has had an effect on the lives of people to varying degrees.
Here’s the low down on what the biggest and the worst, the bad, grizzly bears that have affected our lives and shaped the way that we deal with the next one (if we learn from our mistakes that is!). The best of the bunch of world stock-market crashes from the 17th and 18th centuries are as follows. But, they might be old, they might be gone, but you’ll be surprised that we haven’t learnt a lot from our past mistakes. We did surprisingly crazy things and we are still doing some of the very same things today. Let’s take a peek into the past and see what was and what wasn’t the thing to do!
1. Kipper and Wipper
1623
In German, known as the Kipper und Wipperzeit, or the ‘Tipper and See-saw’. It is the first real financial crises and downturn in the economy and it took place at the start of the Thirty Years’ War (1618-1648). There was no effective taxation to finance the war and so the Holy Roman Emperor started to debase currency to raise revenue. The name of the crisis stems from the scales that were used to identify coins that had not been debased. They were removed from circulation and then melted down. Mixing them with baser metals (copper, lead or tin) meant that they could be reissued with a lower value of currency. Modern Quantitative Easing methods before QE had even been invented! Abenomics in the 17th century! We think that we invented everything, don’t we just?
Trouble was: the currency became so devalued that nobody wanted it anymore. Riots occurred, soldiers refused to work if they weren’t paid in real, non-debased money and even the state came a cropper, when it started getting the money back after collecting taxes. The coins became absolutely worthless and were nothing more than tidily-winks for kids in the streets. Is this what is in store for us?
2. Mississippi Company Bubble
1720
Bubbles usually burst and the Mississippi Company was no exception.
However, the Mississippi Bubble wasn’t technically a bubble at all. It was inflationary pressure fueled by excessive money supply and failure of policies implemented to control money supplies.
The Mississippi Company was a business corporation that had a monopoly over the French colonies in the Americas. John Law set up the ‘Banque Générale Privée’ (or the ‘General Private Bank’) in 1716 and developed the circulation of paper notes as a means of payment. Law was a Scot that believed that money did not constitute wealth at all and that it was merely a means of exchange between companies and individuals.
He was avant-garde in that he believed that the wealth of a nation was dependent on trade between countries. He was appointed Controller of General Finances for Louis XV. The bank that Law set up was the first central bank of France and its capital was made up of government bills. The bank issued more notes than it should have done and it didn’t have enough coinage to represent the sums that were being printed.
Law was a notorious alcoholic, so maybe he was drunk half the time. He was also a gambler. He believed that coins should be gotten rid of and that we should only use paper money. He also believed that shares were a form of money, even the most superior form of money that existed, since they generated dividends. The printing of money for Law’s French bank resulted in economic inflation. The value of the paper currency ended up getting halved. Law was an excellent modern-day marketing man too. He made everyone believe (via gross-exaggeration) that Louisiana was much wealthier than it actually was. Smooth-talker, obviously.
The notes issued by the bank were used to pay dividends to shareholders that were investing in the Mississippi Company. Except, the French had to admit after a while that they didn’t have the coinage to back it all up. Sounds like the UK Financial Rock (amongst many others that could be mentioned) meltdown in 2007 when people started queuing outside the banks to withdraw their money en masse. That bank run was the first that took place in Britain for 150 years! Maybe, they should have heeded Law’s warning and got rid of the coins in circulation altogether.
Things came to a head for the Mississippi Company in 1720 when the bubble burst in Law’s face. People rushed to try to convert their paper notes to coins and the bank foreclosed on payment. Bank notes had increased by 186% just in one year. Inflation was rampant and prices were doubling. Shares increased in price, but not so much through demand as the result of inflation. Law had to devalue the Banque Générale’s notes by 50% to deal with the inflationary pressure. Shares plummeted from 10, 000 livres to 1, 000 livres per share in 1720. By 1721, they were only worth 500 livres. The result was that investors lost millions. France plunged into economic depression, and brought half of Europe with it. It also laid the foundations, as usual, for social upheaval, revolution and struggle. The French Revolution was built on this.
Louis XV got rid of Law. He was exiled, poverty-stricken to Venice where he died in 1729, penniless. Luckily he believed that money wasn’t wealth, just a means of exchange. But, isn’t that the way. Choose the scapegoat, exile them and then carry on regardless. We are still doing it.
3. South Sea Company
1720
The South Sea Company was a joint-stock company that was founded just a decade before it went broke bringing with it the economy of the UK. However, its intention was to reduce British national debt originally. The founders were found guilty of insider trading and they brought about the collapse of the shares of the company and ruined the national economy even further. They knew when the debt was going to be consolidated, and so they bought that debt in advance to make huge profits. It was bribes galore as the MPs were given back-handers to make sure Acts of Parliament went through to support their scheming. A modern-day insider trading scandal.
We are still doing it today. Preet Bharara, New York US Attorney, has charged 72 people over the past three years with insider trading. Some of the most famous cases to date are the Enron, Jeffrey Skilling case, for instance. Skilling (former President of Enron) was convicted in 2006 of insider trading (as well as 18 other charges). He ended up getting sentenced to 24 years behind bars and fined the hefty sum of $45 million. He appealed to the Supreme Court in 2010 and it went back to the appeals court for review. Or, in May 2011, Raj Rajaratnam was convicted of having tried to use insider information concerning the Galleon Group. It could have brought in the tidy sum of $20 million had he not been arrested, causing the subsequent falling apart of the group.
The South Sea Company saw the value of its shares rise rapidly over a very short period of time, mainly due to rumors, once again. In January 1720 the price rose to £128. A month later, it was worth £175 per share. By March, it stood at £330. By the end of the year a share was worth more than £1, 000. People were scrambling to get hold of the shares and make money, believing that the price would rise endlessly. Politicians were in cahoots with the founders of the company. They were ‘sold’ shares (that they never actually paid for) and then they waited until the price increased and ‘sold’ them back for a profit.
The company benefited from the legitimacy of the prestigious names that were investing in the company. It was all about image, even back then. The bubble came to an end as people became aware of what was taking place. The stocks fell to £150 and ruined thousands. It was put forward in the House of Commons that the bankers should be tied up in sacks with snakes and thrown into the Thames. It never happened (obviously), but the estates of the founders were confiscated and used to pay for relief funds of the victims. Ministers were prosecuted and the Chancellor of the Exchequer of Great Britain (John Aislabie) ended up in prison.
4. Bengal Bubble
1769
The Great East Indian Crash took place in 1769 as a result of overvaluation of stock of the East India Company. This happened over a twelve year period between 1757 and 1769 due to attacks on the company’s holdings in Bengal, India and the famine of 1770. All of this was coupled with the collapse of the textile industry in the province of Bengal.
As a result stocks of the British East India Company fell from £276 in December 1768 to £122 in 1784. That’s a fall of 55% in the value of the stocks. There is even a Facebook page you can like (if the fancy takes you). It turns out there are pages to like most things these days, even events that turned out to be catastrophic for those that invested in them in the 18th century.
Back then the answer of the British government was to bail out the East India Company, but that just acted as a catalyst to the company’s demise and subsequent disappearance as people lost confidence. Makes you think if today’s bail-out techniques will do the same.
5. Panic of 1796-1797
1796
This was a series of downswings in the credit markets that caused recessions in the UK and the United States. There was a land-speculation bubble that exploded in the faces of the investors and the banking system in 1796 and as a result the Bank of England refused to maintain specie payments (the redemption of US paper money in coinage (usually gold)). The Bank of England was afraid that they were going to go bust and have insolvency problems when there were too many demands by account holders to withdraw cash deposits. The knock-on effect for the US and the UK was disflationary repercussions on the financial markets.
The Panic of 1796-1797 revealed just how much the United States of America was dependent on Europe for trade. It pointed to just how much interconnectedness there was, even before globalization was thought up. Things haven’t changed much. It was thanks to this panic that the Bankruptcy Act of 800 was established to form a framework whereby debtors and creditors should reach a settlement for their common good. There’s always something positive that comes out of the panics and bubble bursts, some might say.
These are just a few of the bubbles that burst in the 17th and the 18th centuries. They are telling in that they reveal that we haven’t actually moved a long way from where we were back then. We are still haunted by modern-day insider-dealing scandals; we still exile the ones to ‘blame’ in the hope that getting rid of them will erase the page so that we can start again and the dirty deeds that made people rich in the high echelons of the company will be soon forgotten. We still over-market and exaggerate, oversell and inflate prices. Then suddenly, the prices drop as people pull out and the government tries to shore up the bleeding wound with Elastoplast and first-aid bandages. But when the blood is pumping out and there’s a hemorrhage, sometimes, that doesn’t do anything at all. Or, at least nothing in the long term.
In the next installment, we’ll take a look at the historical bubbles that burst in the 19th century.
Originally posted Stock Market Crashes Through the Ages - Part 1 [20]
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