The South Sea Bubble, the History of Corporations and the Cryptocraze
People who have read my blog for some time know that besides value investing, I am a big fan of historic (and current) asset bubbles.
The South Sea bubble – recap
One of the most interesting historical stock bubbles was clearly the famous “South Sea Bubble” which peaked and collapsed around 1720. Besides the fact that Sir Isaac Newton lost a ton of money in this bubble, there is another interesting aspect of this bubble which is often overlooked:
The underlying construct which enabled this bubble was the invention of the “Business Corporation” which were initially created to gather enough capital for exploiting the colonies in the Netherlands and England.
Up until 1711 or so, only a few “Business Corporation”s were existing, most of which were very solid dividend paying enterprises such as the East India company.
With the initial success of the South Sea company, the year 1720 became known as the bubble year with a lot of new companies being created as this article lists:
As South Sea Company shares bubbled up to incredible new heights, numerous other joint-stock companies IPOd to take advantage of the booming investor demand for speculative investments. Many of these new companies made outrageous and often fraudulent claims about their business ventures for the purpose of raising capital and boosting their stock prices. Here are some examples of these companies’ business proposals (History House, 1997):
- For supplying the town of Deal with fresh water.
- For trading in hair.
- For assuring of seamen’s wages.
- For importing pitch and tar, and other naval stores, from North Britain and America.
- For insuring of horses.
- For improving the art of making soap.
- For improving of gardens.
- For insuring and increasing children’s fortunes.
- For a wheel for perpetual motion.
- For importing walnut-trees from Virginia.
- For making of rape-oil.
- For paying pensions to widows and others, at a small discount.
- For making iron with pit coal.
- For the transmutation of quicksilver into a malleable fine metal.
And the most outlandish (and cunningly clever!) of all:
- For carrying on an undertaking of great advantage; but nobody to know what it is.
In the same year 1720, the British Parliament decided enough is enough and basically prohibited Business Corporations with the “Bubble Act”.
All undertakings … presuming to act as a corporate body … raising … transferrable stock … transferring … shares in such stock …, either by Act of Parliament or any charter from the Crown, … and acting under any charter … for raising a capital stock … not intended … by such charter … and all acting … under any obsolete charter … for ever be deemed illegal and void.
Of course this didn’t help the stock price of the South Sea company which collapsed shortly thereafter. For the next 100 years or so, those dangerous corporations could only established by obtaining a “royal charter” which was granted very selectively.
However what is important to understand is that the concept of a “Business Corporation” thereafter was fully established.
It is hard for today’s investors to understand how life would look like if there were no Business or Stock corporations. In the old days, people would only act als private persons or some kind of partnerships. This had, among other issues the disadvantage that an entrepreneur was always personally liable if things didn’t work out.This was not a small problem as in those times debtors actually had to go to prison until their debt was worked off. Naturally this didn’t really improve the entrepreneurial spirit when business failure might mean a life long prison sentence.
It is fair to asume that only the Corporation allowed to issue stocks or bonds and fund the industrial revolution, Back then in 1720 Government though it was a much too dangerous innovation. But as we know now, this concept could not be stopped forever and resulted in today’s economy with unstoppable corporate juggernauts like Amazon, Google or Apple being worth hundreds of billions of dollars.
How does this relate to Bitcoin & Crypto currencies ?
Many investors I know compare the Cryptocraze with the Tulip mania, This was a 1637 event where in the Netherlands tulip bulbs were traded for astronomical sums for a few months. After the dust settled, all that was left were too many tulip bulbs but not much more.
The South Sea bubble however, as I mentioned above had much more profound impacts.
In my opinion, the current Cryptocraze is much more like the South Sea bubble than the Tulip mania.
Underlying the current Crypto currency mania in my opinion is a fundamental new way how to raise capital for and create a new type of decentralized organization.
This is very similar to the fledgling Business Corporation concept which fueled the South Sea bubble.
Similar to the South Sea bubble we see the ascend of the dominating concept (Bitcoin) and hundreds or thousands of copycats who try to make a quick buck or two. (ICOs) with even more stupid concepts than those listed above.
What is so far missing is the Government stepping in big time and abolishing most of those schemes. Nevertheless I think that will come at some point in time when enough people have lost a lot of money. However this is much harder to enforce as Crypto currencies are global and virtual and single countries can not do too much against it.
I guess it is also fair to assume that the initial “scheme” like in 1720 will not be the ultimate winner.
But the big question in my opinion is the following: Will have decentralized token based systems have the same impact on business and the economy than the concept of the Corporation 300 years ago ?
I am not sure but I would be carefull especially in assuming that today’s dominating digital “network” or “platform” companies will be unstoppable for decades to come. Especially such networks and platforms can be organized very nicely with decentralized token systems and we will see how this plays out.
In any case, I really like to follow everything with crypto currencies at the moment because I think that this is “history in the making”, only on “fast forward”. Other than with the south Sea bubble, I don’t think that we need to wait 100 years for the impacts.
For that reasons you might read more about this on th blog in the coming montgs (which in itself might be one sign for the top of the bubble).