Proposal preview

The Pan-European Crises of 1719-1720: New Perspectives on the Nature of Financial Behaviour

This session proposes to bring together papers that present new evidence and fresh thinking on a crucial moment in the unfolding of financial capitalism: the crises of 1719 and 1720.
Economists have long disputed whether the 1719/1720 bubbles that emerged from the British South Sea, French Mississippi and Dutch ‘Wind-trade’ schemes were ‘rational’ bubbles based on fundamentals. Yet, behavioural economists have shown that rationality cannot adequately explain the market. It is time to develop more nuanced, historically grounded, approaches to early financial markets over and above rationality. How can we explore subjective biases and historically specific expectations and practices that informed market behaviour? How did local traditions, global circumstances and imperial competition shape expectations? How can we factor in these issues when studying price movements? How was the value of credit expressed and maintained? How did negotiations between the state, financiers and the public shape markets? These are the larger questions that this panel will explore through case studies of the crises that unfolded between 1719 and 1720.
We will not confine ourselves to any one nation alone, but to extend our perspective outwards to include not only Britain and the Netherlands, but also France, and crucially a larger number of European states and principalities that came to join the speculative boom during this period. Agreed papers will cover the extent of the crises, investors’ experience and their behavioural biases, questions of innovation, speculation and their diffusion, and the contested conceptualisation of crises and their aftermaths. We will welcome additional papers that cast new light on investing networks involving centres of speculation such as London, Paris, Amsterdam and smaller venues such as Dublin, Hamburg and Bern and papers that study experience of investors in such dynamic settings.
The concluding discussion will unpack methodological and theoretical implications for understanding more recent crises.

Organizer(s)

  • Koji Yamamoto University of Tokyo koji4649@gmail.com Japan
  • Anne Murphy University of Hertfordshire a.l.murphy@herts.ac.uk UK
  • Inger Leemans Vrije Universiteit Amsterdam i.b.leemans@vu.nl The Netherlands

Session members

  • William Deringer, Massachusetts Institute of Technology
  • Patrik Winton, Uppsala University
  • Peter Ericsson, Uppsala University
  • Malick W Ghachem, MIT

Discussant(s)

  • Karel Davids Vrije Universiteit Amsterdam c.a.davids@vu.nl

Papers

Panel abstract

This session brings together papers that present new evidence and fresh thinking on a crucial moment in the unfolding of financial capitalism: the crises of 1719 and 1720. Scholars have long disputed whether the 1719/1720 bubbles were 'rational' ones based on fundamentals. Yet, economists now mostly agree that rationality alone cannot adequately explain the market. It is time to develop more nuanced, historically grounded, approaches. How can we explore subjective biases and historically specific practices that informed market behaviour? How did local traditions, global circumstances and imperial competition shape expectations? How was the value of credit expressed and maintained? How did negotiations between the state, financiers and the public shape markets? These are the larger questions that individual papers will explore. The concluding discussion will unpack methodological and theoretical implications for understanding more recent crises.

1st half

Intrinsick Values: Calculation, Valuation, and Civic Epistemology during the South Sea Bubble

William Deringer

“In the late revolution in the Alley,” wrote John Trenchard and Thomas Gordon in December 1720, “figures and demonstrations would have told them… that it was phrenzy; that they were pursuing gilded clouds.” For Trenchard and Gordon, one of the great frustrations of the fateful “Bubble Year” was that much of the mayhem could have been avoided if people had simply listened to mathematical warnings—“figures and demonstrations”—about the dangers of the South Sea Company’s mysterious refinancing scheme. This paper, taken from a new book on quantitative thinking and “civic epistemology” in post-1688 Britain, examines the role mathematical calculations played in how the British public reckoned with the crisis of 1720. It focuses specifically on the calculations of the ornery MP Archibald Hutcheson. Though Hutcheson has attracted considerable attention in recent Bubble scholarship, scholars have failed to contextualize his calculative efforts within the political and financial thinking of his time. Suspicious...

“In the late revolution in the Alley,” wrote John Trenchard and Thomas Gordon in December 1720, “figures and demonstrations would have told them… that it was phrenzy; that they were pursuing gilded clouds.” For Trenchard and Gordon, one of the great frustrations of the fateful “Bubble Year” was that much of the mayhem could have been avoided if people had simply listened to mathematical warnings—“figures and demonstrations”—about the dangers of the South Sea Company’s mysterious refinancing scheme. This paper, taken from a new book on quantitative thinking and “civic epistemology” in post-1688 Britain, examines the role mathematical calculations played in how the British public reckoned with the crisis of 1720. It focuses specifically on the calculations of the ornery MP Archibald Hutcheson. Though Hutcheson has attracted considerable attention in recent Bubble scholarship, scholars have failed to contextualize his calculative efforts within the political and financial thinking of his time. Suspicious of the political motivations behind the scheme, Hutcheson crafted sophisticated quantitative pamphlets to dispute the soaring prices Britons were willing to pay for South Sea stock and to demand transparency from company leadership. In doing so, he formulated a novel, quantitative conception of the “intrinsick value” of stocks. Hutcheson’s approach to valuation drew upon distinctly early-modern attitudes about information, secrecy, and political virtue; but his mathematically-intensive methods, like the “discounting” of expected future profits, would become foundational to modern financial practice. Once the Bubble burst, Hutcheson’s calculations found a powerful new purpose, used to prove that the Company’s leaders had knowingly deceived the public. For the people who lived through it, the 1720 Bubble was more than a fable about the dangers of avarice and the limits of reason. It also offered a powerful, if costly, testament to the virtues of one specific form of reason: mathematical calculation.

Behavioural foundations of the 1720 South Sea Bubble

Koji Yamamoto

One key question over the South Sea Bubble of 1720 has been whether or not it was a ‘rational’ bubble as economists would now define it. The underlying analytic dichotomy between 'rational' and 'irrational' bubble seems to have hit a point of diminishing return, however. We need fresh studies that combine different sources and methods. This paper contributes to this larger task by focusing on one of the largest investors during the Bubble period: James Brydges the Duke of Chandos (1674-1744). The case is unique in that we have both financial accounts and the letters he sent to his friends and financial partners in 1720. Combining these sources, the paper reports the duke's investment strategies, and reveals how he was able to coordinate a large-scale speculation without risking his reputation and respectability. Strikingly, however, while pursuing a rational strategy to 'ride the bubble', Brydges viewed other actors to be driven...

One key question over the South Sea Bubble of 1720 has been whether or not it was a ‘rational’ bubble as economists would now define it. The underlying analytic dichotomy between 'rational' and 'irrational' bubble seems to have hit a point of diminishing return, however. We need fresh studies that combine different sources and methods. This paper contributes to this larger task by focusing on one of the largest investors during the Bubble period: James Brydges the Duke of Chandos (1674-1744). The case is unique in that we have both financial accounts and the letters he sent to his friends and financial partners in 1720. Combining these sources, the paper reports the duke's investment strategies, and reveals how he was able to coordinate a large-scale speculation without risking his reputation and respectability. Strikingly, however, while pursuing a rational strategy to 'ride the bubble', Brydges viewed other actors to be driven by folly, greed and irrationality. This, combined with other strategies, enabled him to maintain an impression of social distance from the very act of speculation. It will be shown that sophisticated market speculation - characteristic of modern financial market - was undertaken in ways that were consistent with the early modern moral economy.

A Crisis Misunderstood: The Political Economy of the Government Debt Market in Sweden, 1715–1720

Peter Ericsson, Patrik Winton

From 1715 to 1718 there was an unparalleled expansion of liquidity in Sweden. Behind the new financial system stood the absolute king Charles XII, who needed resources to continue Swedish participation in the Great Northern War (1700–21). Heading the administration of the system was Baron Georg Heinrich von Görtz from the Duchy of Holstein. The French experiments with paper money as well as John Law’s monetary ideas were clear inspirations for Görtz, and he actually met the Scot in Paris in 1716. The Swedish financial system entailed the issuing of bonds and salary notes, but above all token coins and bills. The great volume of coins reached all parts of the country and all social classes, and the coins largely retained their value. They were, however, fundamentally associated with Charles XII and with the death of the king in late 1718, confidence in the coins and bills were lost. The...

From 1715 to 1718 there was an unparalleled expansion of liquidity in Sweden. Behind the new financial system stood the absolute king Charles XII, who needed resources to continue Swedish participation in the Great Northern War (1700–21). Heading the administration of the system was Baron Georg Heinrich von Görtz from the Duchy of Holstein. The French experiments with paper money as well as John Law’s monetary ideas were clear inspirations for Görtz, and he actually met the Scot in Paris in 1716. The Swedish financial system entailed the issuing of bonds and salary notes, but above all token coins and bills. The great volume of coins reached all parts of the country and all social classes, and the coins largely retained their value. They were, however, fundamentally associated with Charles XII and with the death of the king in late 1718, confidence in the coins and bills were lost. The new parliamentary regime decided to dismantle the system and to commit a partial default. All holders of the token money had to exchange them for so-called insurance bills that circulated on a secondary market. This development has been unknown to international research and in Swedish historiography it has been interpreted as a last attempt of an autocratic regime, depleted of resources, to continue a futile war. This paper will explore the political economy of the market for government debt that emerged as a result of the process, and demonstrate that both the expansion and the retraction of liquidity were results of rational political decisions along the lines of the policies of the major European powers.

2nd half

The Mississippi Bubble in Haiti

Malick W. Ghachem

Much as historians of the late eighteenth century have re-centered the Age of Revolution around Haiti (Saint-Domingue) in recent years, we are due for a similar reorientation in our understanding of the Mississippi Bubble era towards a greater Caribbean center of gravity. The crisis of 1719-1720 delivered a profound shock to the emerging plantation society of Saint-Domingue, triggering a rebellion against John Law’s Indies Company that ultimately brought the sugar barons and private slave traders to a position of unquestioned dominance in the French colonial order. Whereas scholarship on the Bubble is still dominated by images of bamboozled metropolitan investors taking to the streets of London and Paris to demand recovery of their assets, we are learning more about the reliance of Law’s “System” on the mercantilist exploitation of west African slave labor. The viability of the Indies Company experiment had always depended crucially on the ability to draw revenues...

Much as historians of the late eighteenth century have re-centered the Age of Revolution around Haiti (Saint-Domingue) in recent years, we are due for a similar reorientation in our understanding of the Mississippi Bubble era towards a greater Caribbean center of gravity. The crisis of 1719-1720 delivered a profound shock to the emerging plantation society of Saint-Domingue, triggering a rebellion against John Law’s Indies Company that ultimately brought the sugar barons and private slave traders to a position of unquestioned dominance in the French colonial order. Whereas scholarship on the Bubble is still dominated by images of bamboozled metropolitan investors taking to the streets of London and Paris to demand recovery of their assets, we are learning more about the reliance of Law’s “System” on the mercantilist exploitation of west African slave labor. The viability of the Indies Company experiment had always depended crucially on the ability to draw revenues from the French colonies in Haiti and Louisiana. It was here, above all in Haiti, that the war on monopoly trading companies reached a crescendo. In late 1722, colonists led by women and vagrant men assaulted the Indies Company’s representatives and destroyed its assets to protest the enforcement of the Company’s slave trading monopoly, which the planters feared would dramatically raise the price of already scarce west African captives and threaten their ability to transact using Spanish silver money. The rebellion in Haiti, which lasted nearly two years before it was finally suppressed in early 1724, forced the opening of the French slave trade to all comers by 1725 and path cleared for the vertiginous rise of the large-scale sugar plantation industry in subsequent years. A greater Caribbean reading of the Bubble allows us to connect Haiti’s transformation into the world’s most productive plantation colony with the drama of the first great financial crises of the North Atlantic states and with the founding of New Orleans.

Negotiating Power and Protest in the Financial Marketplace

Anne L. Murphy

The early modern marketplace was a site of power and protest. This phenomenon has been studied extensively by historians as it relates to the retail marketplace but has not been considered with regard to the financial marketplace. Focusing particularly on the protests which followed the collapse of the South Sea Scheme in 1720, this paper will explore the ways in which eighteenth-century public creditors used protest to assert their rights. The fallout from the South Sea Bubble led to petitions and notes of protest being lodged with the Treasury and the Bank of England. Lawsuits against the Company were also mooted. Protestors also gathered to take action. On 3 August 1721, for example, a large crowd of petitioners marched on Parliament. Public creditors seldom took to the streets but they did often use the expedient of petitions and public meetings to express their dissatisfaction. Many of the tactics used after...

The early modern marketplace was a site of power and protest. This phenomenon has been studied extensively by historians as it relates to the retail marketplace but has not been considered with regard to the financial marketplace. Focusing particularly on the protests which followed the collapse of the South Sea Scheme in 1720, this paper will explore the ways in which eighteenth-century public creditors used protest to assert their rights. The fallout from the South Sea Bubble led to petitions and notes of protest being lodged with the Treasury and the Bank of England. Lawsuits against the Company were also mooted. Protestors also gathered to take action. On 3 August 1721, for example, a large crowd of petitioners marched on Parliament. Public creditors seldom took to the streets but they did often use the expedient of petitions and public meetings to express their dissatisfaction. Many of the tactics used after 1720 had been honed during the mid-1690s when funds to pay dividends and annuities on the newly-established public debt were in deficit. What is particularly clear from these examples is the extent to which a ‘community’ of public creditors was developing at this time. That community pooled its resources and its discontent to influence the state to protect public credit. Like the protestors who acted to regulate the supply of food, although economic concerns were arguably at the heart of what was being argued, appeals to the greater good were made. Notably protestors reminded Parliament of the contract between state and public creditors and argued that the ‘Credit and Honour of the Nation’ was at risk if payments were not maintained. It is equally clear that these protests did not fall on deaf ears. The eighteenth-century state, which was highly dependent on the financial market to supply the funds needed for defence of the nation, was powerfully incentivised to listen to the protests of market participants.

Wind or Bubbles? How the Concept of Wind Trade Came to Embody Speculation in the Dutch Republic

Inger Leemans

This paper researches how the concept of wind came to embody speculative trade in the Dutch Republic. During the financial crisis of 1720, the term windhandel (‘wind trade’) suddenly gained momentum as the preferred term in reference to high risk trading in shares and derivatives. The use of this concept appears to be limited to the Netherlands: in France and England the term ‘wind trade’ is rarely used. In this paper, the sudden and nationally confined rise of ‘wind’ as a financial term is explained by combining arguments from the history of finance, science and industry. We argue that 1) the introduction of derivatives within a well-established stock market called for a new kind of conceptualization of (speculative) trade, indicating both the high gain potential and the inherent risks. 2) As wind and air were re-conceptualised in scientific research (from spirit to substance), they gained suitability as metaphors for a...

This paper researches how the concept of wind came to embody speculative trade in the Dutch Republic. During the financial crisis of 1720, the term windhandel (‘wind trade’) suddenly gained momentum as the preferred term in reference to high risk trading in shares and derivatives. The use of this concept appears to be limited to the Netherlands: in France and England the term ‘wind trade’ is rarely used. In this paper, the sudden and nationally confined rise of ‘wind’ as a financial term is explained by combining arguments from the history of finance, science and industry. We argue that 1) the introduction of derivatives within a well-established stock market called for a new kind of conceptualization of (speculative) trade, indicating both the high gain potential and the inherent risks. 2) As wind and air were re-conceptualised in scientific research (from spirit to substance), they gained suitability as metaphors for a trade that is both solid but also highly evaporative. 3) The Dutch Republic provided a well-established and visible tradition in the economization of wind, through an advanced industrial windmill park, where merchants could invest in wind through shareholder companies. The quite sudden introduction of wind in the realm of finance in 1720 triggered an explosion of cartoons and texts full of wind symbolism, which affected the traditional iconography of wind and helped to take temperature of the economy.