OK, I need to be honest with you here; tulips didn’t out the free market alone.  They had a lot of help over the years but we’ve always seemed to fail to get it.  A lot of misery might have been avoided over the past couple of hundred years if we humans only possessed one particular quality we sorely lack, the ability to collectively learn from our past.  George Santayana told us, “Those who don’t learn from history are doomed to repeat it.”  He couldn’t have been more right.

But let’s get back tulips and what they tried to tell us about economics.  In 1592, tulips, native to Turkey, were introduced to Western Europe when a fellow in Ausburg was sent some bulbs by a friend in Constantinople.  The history here is a little murky but it seems that they then were brought to the Netherlands either by Charles de l’Écluse, a Frenchman who had been in the employ of Rudolph II but was fired when the Emperor dismissed all the Protestants in his Court, or by Conrad Gesner, a Swiss Naturalist.  Be that as it may, because of their novelty tulips soon became immensely popular among the wealthy and in no time they were “in” thing, everybody wanted them.

As is always the case with fads, demand very quickly outpaced supply and prices started to rise dramatically.  Then, fate intervened to fan the flames.  Dutch tulips, which at the time existed in only solid colors, mostly red with a few hybrids of blue and yellow, were afflicted by a non-lethal virus that caused them bloom in a variety of colors with vivid flames and lines.  Now everyone began to deal in tulips; bulbomania had begun.  As demand for tulips exploded, professional growers started paying higher and higher prices for bulbs, particularly those with the virus. By 1634, demand for the flowers expanded into other European countries and speculators entered the market.  Within a year a futures market had developed and Dutch citizens poured their equivalent of millions of dollars into bulbs, futures, even investment certificates. They invested their savings, sold their homes and even their land.  All was well in the place of windmills and wooden shoes until  February, 1637, when a seller in Haarlem opened bidding on his lot at 1250 guilders but found no takers and had to settle for 1000.  For the first time, bulbs sold below the asking price and a terrible realization soon settled over the land, bulb prices could not increase forever. The market crashed; panic set in.  Within days, the price of bulbs dropped by 95 percent and thousands of investors, from those who had risen from near penury to sudden riches to  previously wealthy merchants and nobles, were ruined in a moment of rare egalitarian hardship.

At the time, taking disputes of the sort this crisis generated to court wasn’t allowed in Holland, at least partially because the transactions were considered gambling debts and not enforceable under Dutch law.  Consequently, disagreements over pending contracts had to be settled among the parties involved.  It very quickly became clear that this method wasn’t going to be successful and  ad hoc arbitration bodies were formed.  They also failed to settle the disputes and various towns turned to the government for help.  After a good deal of dithering, an agreement was finally reached that buyers could settle their obligations by paying a small portion, usually about 3 or 4 percent, of the original price.  Those who had already realized a profit were allowed to keep it; those who hadn’t were out of luck.

If any lessons were learned from the tulip fiasco it appears that they were quickly forgotten. We were, however, soon to be given two new opportunities for fiscal enlightenment.  Those could have been serendipitous events were to occur so closely in time as to be nearly concurrent and were almost identical in concept.

In England, in 1711, possibly emboldened by the success of the East India Company , among other reasons, and under the auspices of Robert Harley, Earl of Oxford, a group of business associates were granted £10,000,000.00 credit with which they purchased the trading rights to the south seas, that’s right, the whole south seas. The cabal quickly formed a company with the completely predictable name of The South Sea Company and began issuing stock.

The primary concept behind the SSC was the belief that there was a whole new consumer market stretching from Mexico to the tip of South America anxious to buy wool, fleece and other English goods with gold, silver and precious jewels.  The SSC had great appeal on two fronts, it seemed to offer endless wealth and its stock, unlike the East India Company which, at the time, had limited itself to just a little over four hundred investors, was available to everyone,.  As was the case with the Tulip craze, the word of this new road to riches spread like the proverbial wildfire and before long sales of stock in the SSC soared.  Stocks sold as fast as they were issued and were repeatedly reissued and sold.

In the midst of this frenzy, investors conveniently overlooked three salient facts.  First, the market from which they hoped to realize wealth beyond their dreams didn’t really exist.  Secondly, the men behind the venture had no experience in running a business of this sort and finally, and perhaps most importantly, the countries they hoped to exploit had already been spoken for by Spain.  Still, since what Charles MacKay characterized as that “inordinate thirst of gain” numbs most senses, investors were discouraged by neither a totally unfavorable concession to Philip V of Spain for the rights to conduct business in that part of the new world or by frequent rumors of mismanagement.  Undeterred, they continued to throw money at the SSC and the other similar schemes it engender.  As MacKay described it, “Wise in their own conceit, they imagined they could . . . carry on their schemes for ever, and stretch the cord of credit to its extremest tension, without causing it to snap asunder.”

April, 1720, after some crafty connivance between SSC management and certain government officials, stock  in a company that had more or less muddled along for nine years was offered to the public at £300 per share.  Urged on to a large part by what they saw happening (or at least what they thought they saw happening) in France, investors couldn’t buy fast enough.  By late June the share price had climbed to £1050.  Then, as investors began to convert their paper profit to real money, free fall descended on the SSC stock and by September, the value of a share of stock having fallen by 75 percent, the company folded.  The SSC was finished but its legacy wasn’t.  So intoxicating was its appeal that the SSC spawned a number of knock-off ventures, each it seems more zany the last, during its brilliant but brief life.  There was a company formed to build a perpetual motion wheel (capitalized at £1,000,000.00 and one to improve the “glebe and church lands” but the hands down winner was a imaginative fellow who sold a considerable amount of stock in, “a company for carrying on an undertaking of great advantage but nobody to know what it is.”  The company sold out and the entrepreneur promptly hightailed it the Continent.  I’m not making that up.

In France, at about the same time, John Law, a Scottish financier and inveterate gambler who had, a few years earlier, fled England after being sentenced to hang following a murder conviction resulting from a duel  (the sentence was later reduced to a fine because the offence was deemed to be only manslaughter but Law had been rearrested when the sentenced was appealed.  He escaped from the gaol under what many thought to be pretty questionable circumstances) was busy selling the Gauls on a comparable idea, Le Compagnie d’Occident, more commonly known as the Mississippi Company.  In August 1717, the French government gave the control of trade between France and its Louisiana and Canadian colonies to Law’s company, the plan being that the company would trade in beaver skins from Canada and in the precious metals the French mistakenly thought were to be found in the Louisiana Colony in great abundance.

Now, the French are entitled to a little slack here because Law, sort of the French Alan Greenspan, actually had a pretty good track record.  A year before forming the Mississippi Company he, through his friendship with the Duke of Orleans, Regent to the five year old Louis the XV (who became Le Roi after the somewhat untimely demise of his Great Grandfather, Louis, XIV from  gangrene) had convinced the French government to allow him to open a bank. He would call the Bank Generale.  By offering paper money that Law promised to fully back by keeping an equal amount of gold in reserve he removed the banking system from the gold standard, dramatically increased the amount of money in circulation and largely, single-handedly restored confidence in the French economy.  So committed to the idea of real collateralization was Law that he once said publically that a banker deserved death if he issued stock or paper money without having sufficient security to answer all demands, an observation that he and subsequent bankers would have done well to remember.

By 1719, Law had purchased the to right to mint French coins and collect taxes and had secured rights to import tobacco from Africa.  He also controlled all French trade with China and the East Indies. In recognition of the expanded scope of the Mississippi Company he renamed it Le Compagnie des Indes and as Law’s empire grew so did demand for its stock.  Demand grew so strong, and the crowds clamoring for it became so large and unruly that it was often necessary to use the army to clear the streets around his brokerage house.  In short order Law opened branches in Lyons, Rochelle, Tours, Amiens, and Orleans.  He began selling shares to the public in January, 1719, at 500 livres tournois, the French monetary unit at the time.  By December 1719, share prices had reached 10,000 livres.  From chimney sweeps to nobles, everyone was hopping on the happy train; everyone was going to be rich.

There was, unhappily, a flaw in Law’s scheme that the buying public failed to appreciate.  Stock in Le  Compagnie des Indes could be purchased with bank notes issued by Law’s bank and, in response to the demand, Law was quite was happy to issue more and more notes.  In  January, 1720, disaster struck.  Some investors decided the time was right to turn their capital gains into gold and started selling their shares.  Despite Law’s best efforts to stop the run on his stock the price continued to drop until September, 1721, when it again reached 500 livres.  The ride was over

These three cautionary tales weren’t the only object lessons history afforded us.  There would be many more.  In the United States our specific and significant opportunities to profit from experience would start perhaps with the Florida land boom of the 1920s, peak with the Great Depression, continue with the Savings and Loan crisis in the 1980s-1990 and the dot-com bubble in the late 1990s and conclude, for the time being, with near Second Great Depression of 2008. All these, each with its own failings and in its own way, should have stood as stark warning of the vagaries of an unregulated market and unwavering faith in the goodness of man and his inventions, in the unfounded and lunatic belief that when faced with risk reason will prevail and the market will correct itself.  They should have all clearly apprised us that boom times can’t last forever and that avarice and excess have their limits and their penalties, at least for those not in charge of the avarice and excess.  Sadly, they haven’t.

A while back I asked an acquaintance, a UC Santa Barbara professor, why we seem to have so much trouble making the connection between climate change and extreme weather.  His answer was that, as a species, we are imbued with only a generational group memory so we have to revisit a great many of our institutional mistakes pretty much every twenty years.  Maybe that’s why we used to fight large scale wars every two decades or so until the prospect of another one became so completely, horrifyingly unthinkable that now we only fight little, local ones and perhaps that’s why every few years we seem content, even anxious, to let the hucksters and the snake oil salesmen and their bought politicians recklessly destroy the hard earned protections in our laws and run our economy into the ground, all for the immense profit of a few.  Maybe that’s why we are so often so susceptible to the siren song of Radical Capitalism and its hypocritical homage to laissez faire politics  and a free market economy that’s only free in their minds when it’s free for them to pillage.

Note: The information in this diary has been gleaned from a number of sources but I owe a special nod to these four works:

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds  (Pub. 1841)

Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (Pub. 1999)

David Kennedy, Freedom From Fear, the American People In Depression and War, 1929-1945 (Pub.  2001)

Robert Reich, Tales of a New America (Pub. 1987)

 

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