Broken

I've had a bit of a financial meltdown weekend (and no - I haven't been closely examining my bank statements). First of all I watched HBO's gripping drama about the fall of Lehman Brothers, and the financial crisis of 2008 Too big to fail. Nominated for 11 Emmies, it had a stand-out ensemble cast, and some great individual performances. Coincidentally, at the same time I happened to be reading Malcolm Balen's account of the first great financial disaster - the South Sea bubble - A Very English Deceit.

What struck me about both the film and the book were how depressingly similar they were, although the roots of the disasters were leagues apart. In both cases the perpetrators of the disasters were never brought properly to book, while ordinary investors were bankrupted overnight. In both cases too inevitably greed played a substantial part in the ensuing fall of the market, and the bankrupting of many ordinary people. In many ways the recent financial disaster had more in common with the parallel disaster to that of the South Sea Bubble - the crash in the French economy. Balen looks at this too in his book, and contrasts it with the South Sea crash. The French model had originally a lot going for it - a talented Scottish economist John Law persuaded the French government to move from coinage to paper money enabling a freer flow of money throughout the economy. The French economy took off, taxation was abolished, and as ordinary people rushed to exchange their coins for paper at a preferential rate, the infant stock market shot up, and the man in the street became a millionaire overnight (it was at this period that the first millionaires were created). Determined to keep up with the French, and reeling from a massive national debt, the British government decided something must be done.

Meanwhile the directors of the Sword Blade Bank, eager to overtake the Bank of England as the bank to trade with, decided to branch out into a trading company. The South Sea company was formed to trade with South America and the Pacific. Only one problem - Britain had little experience of trade in those areas, and the market was already dominated by the Spanish, who were able to tax imports at will. The South Sea company however agreed to buy up the National Debt exchanging it for shares in the South Sea company - which had a couple of ships which were falling apart, and was doing no trade whatsoever. It was an enormous scam built on a company that in reality never existed, fuelled by a mass bribing of politicians (the recent scandal over MPs' expenses is nothing new) and hysteria. The market rose and rose and rose, and of course (according to the financiers) it was never going to collapse....but it did.

Back in France the market had become vulnerable as people started to doubt the validity of paper money, a run on the bank started, and Law's decision to invigorate the market by printing more money led to a loss of confidence. The French market plummeted, paper money was abandoned - and wasn't resurrected until the French revolution. Investors turning from France to the South Sea company thought that they were safe, until shares started to fall there too, and it soon became obvious that they had been the victims of an almighty financial scam. Most of those responsible for the scam got away with it, a few corrupt MPs and board directors were named and shamed, but because the English government was up to its neck in the scam, most of the dealings of the South Sea company were swept under the carpet. Indeed it was only in the twentieth century when a letter was found in the Vienna State Archives, that the full extent of the governmental cover-up was revealed.

Many investors lost everything, but there were some winners - it made Robert Walpole politically, and more importantly it touched the lives of countless ordinary people when it made a London bookseller, Thomas Guy, a fortune. Guy had never been convinced that the South Sea company was as good as it appeared to be. He bought stock early on, sold sensibly while the market was still rising, and never re-invested. Upon his death much of his fortune was used to fund the London hospital which bears his name. Now one of the foremost hospitals in the world, Guy's Hospital is an odd memorial to one of the greatest financial disasters of all time.

Told in everyday language, comprehensible to even the most financially illiterate of us (me for instance) Balen's book is an astounding read. Throughout he contrasts the markets of the day with the dot.com bubble of the early 21st century, but it works equally well as a parable for a much more recent financial crisis. There are some truly jaw-dropping moments in this book, it's well worth reading.