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January 10, 1997updated 05 Sep 2016 12:55pm

EXTRAORDINARY DELUSIONS AND THE MADNESS OF THE INTERNET

By CBR Staff Writer

By Gary Flood

In 1720 a great fever of speculation seized the imagination of both high and low-born in that nation of shop keepers, Great Britain. Their imperial and cultural rivals across the Channel in France had, in their turn, just passed through a national frenzy concerning the soon to be exploited resources in their possessions in North America, on the west bank of the Mississippi. Ironically enough the chief architect of that scheme was a handsome (albeit Smallpox-scarred) Scotsman, John Law. In the case of Perfidious Albion the instigators were a group of merchants, who in 1711 had taken on the Crown’s debts. The Government of George I agreed to offer some 6% interest on this sum, to be provided by the monopoly of trade with Spanish America.

Splendid larder

Unfortunately, there was no such trade to enjoy a monopoly of: Philip V of Spain was about as likely to invite the Brits into this splendid larder as Bill Gates is to offer Windows NT to the Open Group. While negotiations dragged – then ended as England and Spain found themselves on the opposite sides of yet another Continental power struggle – alarm grew in London at the parlous state of national credit. The problem – as serious in its day as the current debate in the US over the state of the Social Security trust fund – seemed resolvable by one of two routes. Parliament had to decide which of the two largest commercial bodies in the Kingdom – the merchant bloc, now named the South- Sea Company, or the relatively new Bank of England – should be allowed to raise sufficient capital to stabilize the system. In the end the South-Sea Company won the day, and found itself with the task of assimilating the national debt of some 31m sterling (and in 1720, 31m sterling was 31m sterling). But the directors (including many respected Members of Parliament) were far from dismayed. For their stock valuation was going through the roof. Down in the City of London’s Exchange Alley South-Sea Company stock was hotter than Netscape paper on its Initial Public Offering; it had risen from a hundred and thirty to three hundred just as the Bill was debated. The drug of profit, pure capitalistic greed, was overpowering. British statesman Walpole was one of the few who forecast disaster. Denouncing the dangerous practice of stock-jobbing which would divert the genius of the nation from trade and industry, he warned that it would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labor for a prospect of imaginary wealth. To no avail. Exchange Alley was too packed with crowds to enter; an 18th century version of a gridlock (with carriages) rendered Cornhill impassable. As a contemporary ballad put it, The greatest ladies thither came/And plied in chariots daily/Or pawned their jewels for a sum/To venture in the Alley. While South-Sea stock remained a sure-fire investment there were many, many similar get-rich schemes (soon popularly known as Bubbles). There were nearly a hundred such projects for the investor to evaluate. There was a company that sought 3m pounds backing to build new houses throughout England. There was another that needed money for paving the streets of London (capital, 2m pounds). Yet a third sought money for erecting loan-offices for the assistance and encouragement of the industrious. Others would import Flemish lace, Swedish iron, American pitch and tar, Virginian walnut trees, German lumber. One would be a Company for carrying on a trade in the river Oronooko, and so forth. But our particular favorite was the scheme launched by some sadly unknown financial genius, whose prospectus was entitled A company for carrying on an undertaking of great advantage, but no-one to know what it is. For which he generously invited the speculating public to buy half a million shares, in batches of five thousand, at 100 pounds each. For this trifling investment one could confidently expect an annual dividend of 100 pounds a year in perpetuity. All you had to do was pop down a de

posit of 2 pounds, and wait the month it would take for all particulars to be revealed. At nine o’clock one morning soon after he opened a rented office in Cornhill. By the time he shut it for good at three that afternoon a thousand shares had been sold, and after five hours work, he himself was richer by 20,000 pounds. By nightfall he had set off for the European mainland, never to be seen or heard from again. In the end, of course, what had always been too good to be true was proven so. Credit was stretched far beyond the capacity of all the gold, silver and copper in the nation to cover it. The Bubbles all burst, led by the biggest one of all, the South-Sea Company’s, whose stock had peaked at a thousand; and soon fell to a hundred and thirty-five. In the crash many lost their fortunes, reputations, offices, and estates. The grandfather of historian Edward Gibbon, a director of the Company, was fined 96,000 pounds out of his entire wealth of 106,000 pounds, and similar penalties were faced by many others. Though public credit was eventually restored, so cataclysmic was the impact on British society that the South-Sea Bubble episode is still a feature of its children’s schoolbooks. Poets like Swift (Subscribers here by thousands float) and Pope (Britain was sunk in lucre’s sordid charms) recorded the aftermath. Lesser crazes stuck again, in 1825, and in 1836: later came a mania over Railways. The news that the Dow Jones on Monday passed the 6,600 mark for the first time in its history presents us with too important a milestone for us not to note that booms are invariably followed by a bust.

Soaring high

In October 1929 the Dow Jones reached the soaring high of 381; three Depression years later it was 41. If 1997 is to be a year that we see what is euphemized as a correction, will financial historians look to Internet-driven stock-jobbing as one of the prime causes? As John Malone licks his wounds over at Tele- Communications Inc, as General Instrument Corp’s share price craters as demand for all those Information Highway set-top boxes puffs away like mist at noon, and as Wired Corp uncoils across the landscape, we say: Never say never. Or as Charles Mackay, author of the excellent 1841 Extraordinary Popular Delusions And The Madness Of Crowds, from which this history lesson is drawn, noted: Popular imitativeness will always, in a trading nation, seize hold of… successes, and drag a community too anxious for profits into an abyss from which extrication is difficult. Is the Web to be the greatest Bubble of them all?

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