This is an audio transcript of the Behind the Money podcast episode: ‘What we can learn from 300-year-old bubbles’

[CLASSICAL MUSIC PLAYING]

Michela Tindera
Recently, I took a trip to the New York Public Library in the centre of Manhattan. Inside and up the main stairs, there’s these rows of prints on the walls. They’re all part of an exhibit meant to shine a light on what was happening in Europe about 300 years ago, when the world of finance was undergoing some pretty big changes. Some of these prints hanging up feature characters from Greek and Roman mythology.

Meredith Martin
So you have like the figure of Fortuna. You have mythological gods and goddesses like the figure of Atlas.

Michela Tindera
That’s Meredith Martin talking there. She’s an art history professor at New York University, and she helped curate this collection that she’s showing to me.

Meredith Martin
There’s also the figure of Icarus, you know, who becomes a perennial figure of financial fallout.

Michela Tindera
Now, this exhibit captures moments from a pivotal time in history. It’s when the term millionaire first entered the lexicon and when parts of Europe became engulfed in not one but two economic bubbles in the same year. At a quick glance across the walls and glass cases in this library hallway, you can recognise some of the tell-tale signs of a bubble. For example, there’s the promise of vast wealth just waiting to be acquired. On one wall another curator of the exhibit, Nina Dubin, shows me an 18th-century map drawn by the French government showing off its colonial land that’s now in the modern-day United States.

Nina Dubin
Maps like these were selling the New World, selling the idea that, for instance, this one by the French artist Guillaume Delisle is spreading the notion that it was just a matter of time before gold would be struck. And so this map is filled with inscriptions that are beckoning with the lure of mineral wealth.

Michela Tindera
You can see the frenzied need to buy up as many shares as you can before they’re gone. A sort of Fomo or, you know, fear of missing out. But this time with powdered wigs and tri-cornered hats. As I move through the hall, Nina shows me one print that’s illustrating just a horde of people. Some are whispering into each other’s ears, and others are literally at each other’s throats in a fist-fight.

Nina Dubin
We also see here, and there’s a reference here to the Devil blowing bubbles to Fame, the figure of Fame, who’s spreading rumours about different stock opportunities . . .

Michela Tindera
Now, all this stuff is from around the year 1720, but a lot of it sounds familiar, doesn’t it?

News clip 1
The ongoing crypto crash . . . 

News clip 2
Dow down, S&P down, Nasdaq down . . .

News clip 3
Biggest point drop in history . . .

News clip 4
 . . . ending another week in the red.

News clip 5
Value of cryptocurrency has been dropping . . .

News clip 6
Stocks are cratering, too.

Michela Tindera
Stock mania, Fomo, speculative frenzy, the 1720s and the 2020s, suddenly, they don’t sound so different.

[MUSIC PLAYING]

I’m Michela Tindera from the Financial Times. We’re living in an era where bubbles and finance and the global economy may seem like they’re bursting left and right. So on today’s episode of Behind the Money, we’re going to go back in time to see what we can learn from two important bubbles that popped 300 years ago.

We can begin this story of these 300-year-old bubbles with an 18th-century British business called the South Sea Company.

John Shovlin
It was a large corporation that possessed rights to trade in Spanish America.

Michela Tindera
That’s John Shovlin talking there. He is a professor at New York University where he studies 17th- and 18th-century commerce and finance.

John Shovlin
But when it was set up in 1711, its principal function was to absorb or convert unfunded government debt to take it off the market, to turn it into shares in the company.

Michela Tindera
And then in return . . . 

John Shovlin
The government promised to pay a 6 per cent interest on whatever debt was converted, and shareholders could hope to get profits from the company’s trade in the Americas as well.

Michela Tindera
So in more simple terms, the South Sea Company was basically offering its investors a debt-for-equity swap. And theoretically, if this trade in the Americas booms, which I should point out that much of this trade centred around the buying and selling of slaves, well, that meant it would be good for investors, too. Now, around this time, the Bank of England is also in its early years. And while both of these things are getting going in Great Britain, there’s someone else who’s paying attention from afar. And that man is called John Law.

John Shovlin
John Law was a Scottish financier, gambler and theorist of money and credit. He’s regarded by historians as one of the most astute writers on the topic of money in the early 18th century.

Michela Tindera
Law sees what’s happening in Great Britain with the bank and the South Sea Company, this financial revolution. And, well, it’s a bit more complicated than this, but in essence, John Law says, “Wow, that’s really cool. Now, I’m going to go and try and pitch this to France, except my plans are going to be bigger, and it’s going to be better.” So Law moves to France, where he meets with the regent, who’s in charge of the country at the time because the king, Louis XV, is just a little kid. And apparently, Law’s quite persuasive because over the course of just a few years, he convinces the regent to basically let him overhaul the country’s financial system. That also ends up putting the country on the path to setting up one very big bubble. But Law doesn’t know that yet. And so he gets to work setting up three important things in France. One, he starts what becomes a state bank for France. Two, he introduces a new system of paper money for the country. And three, he establishes what’s called the Mississippi Company in France.

John Shovlin
This was a company that had a monopoly on all French trade beyond Europe.

Michela Tindera
So that includes areas like the French colony in North America. But this company’s operations also go well beyond just trade.

John Shovlin
And it also possessed really valuable assets at home in France, including the right to collect most forms of taxation in the kingdom.

Michela Tindera
Now, all of that alone is a pretty big deal. But there’s another significant difference between Law’s Mississippi Company and the British South Sea Company.

John Shovlin
Law’s big coup, his really big coup in 1719, he proposed, partially in imitation at the South Sea Company but on a far grander scale, he proposed to convert the whole French national debt, which was enormous after 25 years of warfare, to convert the whole French national debt into shares in the Mississippi Company. And it’s, it is that action that really unleashes the bubble environment that we describe as the Mississippi bubble.

Michela Tindera
Now, while the idea of consolidating a king’s debt as stock in a company actually wasn’t unheard of.

John Shovlin
That’s what the Bank of England did. That’s what the East India Company did. And that’s, of course, what the South Sea Company was all about. The idea of consolidating the whole of a country’s debt as the stock of a corporation that was new and grandiose.

Michela Tindera
For a brief amount of time, things are looking pretty good. And things are looking especially good for John Law. He becomes very wealthy and even buys up some chateaus around France. But things are also getting quite complicated. This system that Law created, the bank, the Mississippi Company, the paper money, they’re all intertwined. And the common thread is this one guy, John Law. And then the British government and its South Sea Company gets wind of what’s happening in France and decide that now they want to copy Law’s plan.

John Shovlin
The South Sea Company in 1720 basically imitates Law and says, look, you know, we can, we can do the same. We can roll the whole British national debt into South Sea shares and essentially convert the whole thing into stock.

Michela Tindera
It doesn’t take long for things to go off the rails. And that’s not just for one bubble, but two — the Mississippi bubble and the South Sea bubble.

John Shovlin
Both companies manipulate the market with the goal of increasing the value of their shares. The Mississippi Company, for example, it buys enormous numbers of its own shares to shore up the price, depending on unlimited credit from the bank, which Law also controls, you also see the South Sea Company intervening in the market to boost the price of its own shares. So they’re, they’re creating conditions in which they’re forcing the value of the stock up.

Michela Tindera
But soon enough, it’s all going to come crashing down.

John Shovlin
So the Mississippi bubble began to burst at the end of May 1720, and that collapse was precipitated by Law’s own measures, which were intended to sort of cool off overheated financial markets, to reduce speculation and to curb inflation. Inflation was becoming a problem because of huge issues of paper money. The bank is lending money to the company so that the company can buy its own stock. And so there’s a massive increase in the quantity of paper currency in circulation. So Law’s is intervening, and there’s sharp public opposition to those measures.

Michela Tindera
In this immediate aftermath, there were riots on the streets of Paris. And Law spent the summer of 1720 trying to fix his system, but ultimately, he just couldn’t do it. Meanwhile, over in Great Britain, things begin to fall apart for the South Sea Company for a different reason.

John Shovlin
It really unravels in August of 1720, and it does so really for ironic reasons, but the actual timing of it has to do with the first prosecutions in Britain under what was known as the Bubble Act. And the Bubble Act was a piece of legislation brought in in 1720 to protect the South Sea scheme by shutting down a plethora of new public companies that were founded in 1720 in the speculative atmosphere of that year and which were drawing capital away from the South Sea Company’s scheme. But when the first prosecutions came under the Bubble Act in August and pulled down the value of shares in the bubble companies, investors were forced to sell their other holdings, including South Sea stock, in order to cover their obligations. So that caused a collapse in the value of the South Sea stock. And that’s, that was really the precipitating factor in puncturing the bubble.

Michela Tindera
Now, the South Sea Company wasn’t irreparably damaged from this. It continued operations into the 19th century. However, John Law and his French system, well, they’re done for. By the end of 1720, John Law leaves France a disgraced man, and he dies less than a decade later in Venice. For his era, John Law seems to have cast this image as a larger-than-life figure. And you can see that in some prints that were created of him during this time. Back at the library, one of the curators, Meredith Martin, shows me a print of John Law, where he’s looking quite regal.

Meredith Martin
And it’s meant to kind of represent him as this, you know, very fashionable, but also very authoritative figure standing in a royal garden that looks like Versailles, holding this piece of paper that says, “Know, I speak my words to the King”, highlighting his connection to France’s ruling regent and it’s meant to show his connection to the Crown and to the fact that the monarchy gave him the authority to enact this scheme. And as the prince, you know, as, as the volume sort of moves on, you see John Law increasingly become a kind of object of ridicule.

Michela Tindera
Some of the prints she’s talking about are from this book called The Great Mirror of Folly. It’s a Dutch book published in 1720. Though it reminds me more of something like a scrapbook of satire rather than a book. It’s filled with prints, but also copies of plays and poems and playing cards, capturing the mania of this bubble environment. And like Meredith says, the longer it goes on, Law looks less and less regal.

Meredith Martin
There’s, here, he’s riding on a donkey, kind of like Don Quixote. And you have stock shares being expelled from the donkey’s ass. You know, you have him here as this figure of Atlas with Cupid, who’s about to hurl his bowling ball and knock everyone down. Here he is with a window on his head.

Michela Tindera
Now, we don’t know who created many of the prints published in The Great Mirror of Folly. This book was published in the Netherlands, which had more progressive laws around censorship. But still, some of the artists may have wanted to avoid retribution elsewhere.

Meredith Martin
In many of these, they’re using their drawing upon sometimes also satirical prints attacking Louis XIV, but then they’re changing the character. So Louis XIV gets reimagined as John Law.

Michela Tindera
Many of these images get at this idea of a world turned upside down and the unprecedented speed at which you could build a fortune and then lose it all in what feels like the snap (sound of fingers snapping) of your fingers. Meredith also shows me these satirical medals that were circulating around the time of the bubbles. They look like the sort of commemorative coins that you might buy as a souvenir at a theme park today.

Meredith Martin
And then there’s this wonderful, this other medal that is narrating the kind of breakneck pace at which some, someone could become a millionaire. And a millionaire is a new word that’s coined around the time of the, of these 1720 bubbles. You buy shares. You become a millionaire. You get your carriage. And then over the course of like, by Thursday and by Friday, you begin to lose it all. And then Saturday you go to the hospital (people chuckle). That’s, you know, and that parallels the kind of rise and fall narrative. So starting from, you know, John Law as this authoritative figure to ultimately this is object of ridicule.

[MUSIC PLAYING]

Michela Tindera
Now, maybe this sounds familiar because it definitely does to the FT’s US markets editor Jennifer Hughes. She’s covered markets for the better part of the last two decades. And she’s seen this boom and bust play out many, many times. When Jen first started out at the FT, it was in the middle of the dot.com boom.

Jennifer Hughes
Those first few months, it was normal to see Nasdaq and the S&P 500 rocket up 3 or 4 per cent a day, with some crazy new IPO of a company that had no hope of making money if you were being realistic. So I came into that, and then a few months later it crashed or began to crash horribly. And that taught me a lot about the way people can convince themselves of almost anything.

Michela Tindera
This idea carried over into the global financial crisis in 2008, too.

Jennifer Hughes
Everyone wanted to believe that we had genuinely found a way of spreading risk through securitising loans so low-income families could have access to the sort of credit that the middle class has always had. They could buy homes. Subprime borrowers, in other words. So we said, Well, we found a new whizzy way of spreading the risk here so we can do this and extend this. Politicians loved this stuff. Everyone did. It sounds great. Nothing could possibly go wrong here. And then, of course, it does. And it’s always really, really sudden when it does.

Michela Tindera
Jumping across bubbles, Jen says, there are these common threads. And one is that there’s this idea of Fomo.

Jennifer Hughes
So you go, “Oh yeah, I bought South Sea shares at £100 a share, and now they’re worth £200.” And your friends go, “I need to get into this game, too.” And so it starts to grow from there, and it kind of then takes on a life of its own because everyone who got in early feels super smug, and some of them would have been smart enough to get out at a profit. And you kind of get to that point where someone will be buying in on what we call the greater fool theory, the idea that there’s some bigger idiot than you that will pay more for it, and you will still get out in time.

Michela Tindera
And sometimes you have that persuasive salesperson like John Law.

[CLASSICAL MUSIC PLAYING]

Jennifer Hughes
I mean, he introduced paper money to France as part of this, obviously it went a bit wrong. But at the same time, he wasn’t wrong about the principle that paper money can increase the amount of credit in circulation.

Michela Tindera
And then there’s also just something that’s inherently human about all of these things.

Jennifer Hughes
I would say the main thing is a kind of a willing suspension of disbelief. People can convince themselves that this time it’s different. You know, there’s the brave new world sort of where someone’s promising something different, a brand new technology or literally a new world as it was for the South Sea bubble and the Mississippi bubble. This idea, this is brand new, unconquered continent full of riches, untold riches. So you could easily turn around to people and say, “Oh, you haven’t been there. You don’t know how amazing it is.”

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and Mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. One note about today’s show: did you happen to notice the classical music playing in the background of this episode? That music is called The Overture Suite in B-flat Major, later known as La Bourse or The Stock Exchange. It was written by the composer Georg Philipp Telemann, who lived above the Frankfurt Stock Exchange in Germany. And the piece was composed in, yup, you guessed it, 1720. This music’s also a part of the New York Public Library exhibit that I visited. It’s called “Fortune and Folly in 1720”. And if you’re interested in seeing it for yourself or learning more, check out our show notes. And a special thanks to the curators of the exhibit Nina Dubin, Meredith Martin and Madeleine Viljoen. See you next week, everybody.

Copyright The Financial Times Limited 2023. All rights reserved.
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