MIT science writing professor shares tales and lessons learned from the South Sea Bubble’s financial crisis
A packed room full of attendees eagerly awaited the presentation by prolific author Thomas Levenson, science writing professor at Massachusetts Institute of Technology, discussing his newest book, which brilliantly details the archetypal stock market crash of the early 18th century known as the South Sea Bubble. Levenson’s June 25 lecture was the first in this year’s Malibu Library Speaker Series.
“Money for Nothing: The Scientists, Fraudsters and Corrupt Politicians Who Reinvented Money, Panicked a Nation, and Made the World Rich,” dives into the most famous financial scandal of modern financial capitalism and entertainingly details the birth of the modern idea of money.
“Money for Nothing: A Cautionary Tale,” the author’s projection screen’s title said. Of course, when one is delvingdeeply into historical, detailed finance developments and concepts, the subject matter can be quite serious, from the start.
Not so when you’re listening to Levenson. His first power point panel had to be — really had to be — an image of Dire Straits, whose epic song from the 1985 song titled “Money for Nothing,” gave him the idea for his book’s title.
Then we were off on a journey into earlier, but not, we learned, simpler times. Times when — surprise, surprise — those with power sometimes abused it and those with great assets insatiably craved for more and so, they threw caution and common sense to the wind and totally disregarded adhering to scruples, all to obtain more and yet more assets.
As the Financial Times incisively described Levenson’s broad thesis, his work posits that “by the turn of the 18th centurythe power of mathematics and habits of observation associated with the scientific revolution created new ways to think about the future.” Thus, great thinkers and theorists of those times, including Isaac Newton and astronomer Edmond Halley, developed a framework for conceptualizing money and money systems.
Readers enjoy being thrust into the nascent world of debt finance and share trading in 18th-century London’s Exchange Alleys on Cornhills, where famous establishments, including Jonathan’s and Garraway’s coffee houses, became progenitors of the modern London Stock Exchange, serving as early venues for the trading of shares and commodities.They also learn about how Newton managed the Royal Mint.
Levenson explains in detail with clarity, and by cleverly focusing on intriguing details concerning historical figures, Britain’s national debt, which escalated enormously to fund its incessantly waging wars in the late seventeenth and early eighteenth century.
“For 22 of the 30 years before the South Sea Bubble, British forces fought multiple opponents across two hemispheres,” Levenon noted, pausing to let that reality settle into attendees’ consciousnesses.
The solution to the Crown’s need to fund such incessant pugilance was — surprise, surprise — to borrow more and more. The South Sea Company, which was originally formed to supply slaves to Spanish America, lent money to the government for fees, trading notes, and offering shares to the public. The Bank of England was founded to facilitate lending to the British government, he stated.
“Credit was essentially a weapon of war,” Levenson said, quoting Daniel Defoe’s, “The Chimera,” published in 1720, which said “Foreigners have been heard to say … That there was no getting the better of England by battle … that while we had thus an inexhaustible Storehouse of Money, no superiority in the field could be a match for the superiority of the Treasure.”
However, ultimately, England found itself spending at least 31 percent of revenue to service debt, Levenson explained. The Crown’s solution, facilitated by the South Sea Company, was to fashion a debt-for-equity swap on an unprecedented scale. By doing so, Britain dominated Europe at the time, outwitting, out-warring and outspending its arch rival France, which did not adopt such a sophisticated financial market.
“The drivers of the cataclysmic rise were first, market manipulation — South Sea directors pumped liquidity into the market with options, loans and margin sales, and they delayed share transfers to constrain supply on Exchange Alley,” Levenson said. “Leveraging, they implemented what were then still novel and hence unfamiliar, trading tools, including margin sales, put-and-call options, and forward contracts.”
Those dynamics accounted for two of the three key ingredients needed to trigger a financial market disaster. One of the other essential factors was then — and, as we all learned in 2008 remains, Levenson noted — human folly.
Investors were driven by speculation and inflated the company’s shares. Ultimately, their frenzy culminated in the collapse of the South Sea Company in 1720. Investors who succumbed to the investment frenzy and lost greatly when the house of cards collapsed included the wealthiest man in Britain at the time and, none other than Sir Isaac Newton, a renowned intellectual of his time, who initially profited after cashing in his South Sea shares early on, thereby garnering great gains.
However, Newton could not resist investing again and, Levenson quipped, “ultimately, lost his shirt.” Newton, Levenson also noted, later told his niece that he could calculate the movements of celestial bodies but he could not discern the madness of people.
“The South Sea Bubble was not isolated to Britain,” Levenson noted, adding, “It was an international financial collapse.”
“Disaster, or Triumph?”
Levenson’s next presentation slide asked that question. His thesis is that it was the latter because, ultimately, a fully functional bond market emerged.
“Securitization was not invented in the 2000s,” Levenson noted, launching into a discussion of the relevance of the South Sea Bubble in our current financial markets.
As Levenson noted, French sociologist and political theorist Alexis de DeTocqueville observed long ago regarding America’s commercial life and the early republic’s history of financial disruption, “The return of these commercial panics is an endemic disease of the democratic nations of our age … it may be rendered less dangerous, but it cannot be cured.”
The Q&A was just as enthralling as Levenson’s presentation. Oddly, some attendees observed, the human being still hasnot learned not to use financial instruments to create risk too boldly — think 2008’s debacle. There was talk of how much risk is present in the shadow banking sector now, with lots of risk that is not discernible on the books. “Now, crypto is like that,” Levenson said, “on steroids.”
Malibu’s John Mazza, who attended is a Malibu planning commissioner, and was once was a professional in the world offinance publishing. Mazza perfectly summed up Levenson’s brilliant book and presentation: “In our present economy, there is nothing more important than understanding the money cycle. This book does a good job of doing that.”
The takeaway from Levenson’s work is, as the bard so aptly said in “The Tempest,” “What’s past is prologue.”