Thread by @antonhowes

As we embark on the 2020s, here's a thread looking at the Scheming 1720s.

It was the age of the South Sea Bubble - an event you might have heard of, but which is widely misunderstood.

In the late 1710s, a Scottish banker, John Law, oversaw an extraordinarily ambitious financial scheme.

Law ran a French bank, but was also director of the Mississippi Company, with a monopoly on French trade with North America.

Over the course of the late 1710s, the company acquired many of the other monopolies on French intercontinental trade. By 1719, it had swelled into a Company of the Indies and had purchased the right to collect French taxes, taking its own cut.

Why did the government allow this?

Law's plan was for the new super-monopoly to buy up the French government's accumulated debts, allowing repayment on more generous terms.

By allowing the state to borrow more cheaply, it would more easily be able to wage war. It was a plan to boost French military might.

The scheme worried British politicians, so they put a rival scheme in motion. If France had the Mississippi Company, Britain would use the South Sea Company, which had a monopoly on trade with South America (including the contract to supply Spanish colonies with African slaves).

In 1720, the South Sea Company began to buy up the British government's debt, persuading the people who held that debt to exchange it for company shares. With political support, it engineered a lot of hype around its stock and the value of the shares rose dramatically.

But both schemes came crashing down that summer.

Law's scheme relied on printing a paper currency using his bank, with which he encouraged people to buy shares in the Company of the Indies -the only company left to buy shares in, following the mergers.

But he printed too much.

When Law noticed he had over-printed, he very prudently tried to engineer a devaluation of the company's shares to match the quantity of paper notes. But the devaluation spun out of control and the entire scheme collapsed. Understandably, he fled the country.

As for the South Sea Company, it's not entirely clear why it collapsed when it did. The company actually survived the crash - its stock just returned to pre-bubble levels. It even got involved in whaling off Greenland for a while.

But the event had long-lasting implications.

On a cultural level, the South Sea debacle led to widespread distrust of schemes. Stock-jobbers and projectors were widely vilified. Having once just meant entrepreneur, the word projector increasingly implied fraud, corruption, and incompetence.

But that wasn't the worst of it.

The worst of it was the famous "Bubble Act" of 1720. This legislation is widely believed to be the result of the crash -an effort to prevent such an event ever happening again.

But this is simply incorrect. It was actually the result of lobbying by the South Sea Company itself.

The Bubble Act prevented the formation of any new joint-stock companies with transferable shares, unless specially incorporated by act of Parliament or by royal charter. It was designed to prevent the company having any competitors for funds while it boosted its own shares.

But despite those short-lived aims, the Bubble Act persisted for well over 100 years. It meant that basic advantages of incorporation that we take for granted today - including things like limited liability, lots of shareholders, and transferable shares, could not occur.

It explains the role of special acts of Parliament in the development of British infrastructure. The ban on joint-stock companies had to be lifted to be able to privately fund and build canals, roads, and railways.

But the overall, astonishing result of the Bubble Act was this:

Many of the most capital-intensive phenomena of the Industrial Revolution - the rise of factories, mechanisation, and the spread of the steam engine - took place despite a ban on companies' basic abilities to form and raise funds.

See more here: antonhowes.substack.com/p/age-of-inven…