As we saw in the previous posting on this subject, how the British government chose to finance the Napoleonic Wars embodied what amounts to legal counterfeiting as a primary source of financing government operations — something Ebenezer Scrooge, pre- and post-reformation would have had a hard time swallowing. Had the Ghost of Christmas Yet To Come shown Scrooge where John Maynard Keynes would take the bizarre belief that government can actually create wealth out of nothing, maybe he would have been inspired to do something about preventing the spread of such an insane idea.
The sweeping changes wrought by the French Revolution and then by the Man of Destiny affected every aspect of life. They spawned widespread acceptance of what the Catholic Church initially called rerum novarum, “New Things,” that were later called socialism and modernism . . . which doesn’t mean anything modern, but an attempt to bring organized religion up to date and conform it to changed conditions in the world by dredging up some very old ideas.
More immediately, the social, political, and economic orders were completely disrupted. As one example, in an epic too vast to do more than mention here, the Spanish Empire lost most of its possessions in Central and South America to revolutionary governments that in some cases sprang up to defend the Spanish monarchy against Napoléon, but then transformed or began as efforts to secure independence from Spain. In this they were largely successful, although not the way intended by, e.g., José de San Martin and Simón Bolivar.
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| San Martin and Bolivar |
Where the new republics of Central and South America were outstandingly unsuccessful was in preserving sound economies and maintaining an adequate tax base. They still had to finance the new governments, however, and — taking their cue from the British government — issued massive amounts of debt. These bills of credit or anticipation notes were backed by nothing other than the new governments’ promises to pay . . . which in most cases were not worth the paper they were printed on.
And that’s when the government actually existed! In one rather spectacular instance that has been called “the most audacious fraud in history,” the entire country existed only in the imaginations of the man who carried out the scheme and the people he persuaded to go along with his grandiose project. This was the Republic of Poyais, “the Land that Never Was,” an entire counterfeit country!
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| South Sea Company |
What is even more remarkable about the fake Central American country — and, indeed, the flood of new government debt of the new (genuine, if fiscally unstable) republics — is that the scheme was carried out in the same area where the “South Sea Bubble” originated. That fiasco began in 1711 when the “Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of the Fishery” (no, really, that was the full name) was formed as a joint-stock company. It was a “public-private partnership to consolidate the national debt and reduce the costs of carrying it.
And to raise money? The “South Sea Company” (for short) obtained a monopoly in 1713 from the Spanish Crown to supply African slaves to South America and the Caribbean Basin. In other words, money from slave trading was to be used to service Great Britain’s national debt.
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| British soldiers in the War of Spanish Succession. |
That was pretty despicable, but it was also stupid, even for slave traders. You see, at the time, Great Britain was involved in the War of Spanish Succession, and Spain and Portugal controlled virtually all Central and South America and the Caribbean Basin. There was no reasonable chance that the South Sea Company could actually engage in the business of kidnapping people and carrying them off into slavery — and (as the British virtuously point out) it realized very little profit from its monopoly. Apparently, selling only a few people into slavery is okay as long as you don’t make too much money doing it.
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| When government debt fuels the economy |
That, however, is not what caused the Bubble. The share value started going up when the Company expanded operations from its marginal activities in slave trading, to dealing in — you guessed it! — government debt! The stock price went up like a rocket, and inspired the formation of dozens, possibly hundreds of new ventures, some of them very strange indeed, as related in Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, which came out in 1841.
The share value of the South Sea Company Peaked in 1720, then suddenly collapsed to a trifle over its original issue price. Thousands of investors and other people were ruined in the crash. In an ironic twist, in an effort to get rid of some of the competition that was springing up, the South Sea Company lobbied parliament to forbid the creation of joint-stock companies without a royal charter. The so-called “Bubble Act” of 1720 (6 Geo I, c 18) might not have been passed had not the South Sea Company been caught up in the frenzy it itself created.
With all that, of course, why would anyone have gotten caught up in a scheme that relied on ‘investing” in government debt issued by countries on a very shaky financial footing, and in the one case, didn’t exist at all?
That is what we will look at in the next posting on this subject.
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