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The First Crash: Lessons from the South Sea Bubble
For nearly three centuries the spectacular rise and fall of the South Sea Company has gripped the public imagination as the most graphic warning to investors of the dangers of unbridled speculation. Yet history repeats itself and the same elemental forces that drove up the price of South Sea shares to dizzying heights in 1720 have in recent years produced the global crash of 1987, the Japanese stock market bubble of the 1980s/90s, and the international dot.com boom of the 1990s.
The First Crash throws light on the current debate about investor rationality by re-examining the story of the South Sea Bubble from the standpoint of investors and commentators during and preceding the fateful Bubble year. In absorbing prose, Richard Dale describes the trading techniques of London's Exchange Alley (which included 'modern' transactions such as derivatives) and uses new data, as well as the hitherto neglected writings of a brilliant contemporary financial analyst, to show how investors lost their bearings during the Bubble period in much the same way as during the dot.com boom.
The events of 1720, as presented here, offer insights into the nature of financial markets that, being independent of place and time, deserve to be considered by today's investors everywhere. This book is therefore aimed at all those with an interest in the behavior of stock markets.
The First Crash throws light on the current debate about investor rationality by re-examining the story of the South Sea Bubble from the standpoint of investors and commentators during and preceding the fateful Bubble year. In absorbing prose, Richard Dale describes the trading techniques of London's Exchange Alley (which included 'modern' transactions such as derivatives) and uses new data, as well as the hitherto neglected writings of a brilliant contemporary financial analyst, to show how investors lost their bearings during the Bubble period in much the same way as during the dot.com boom.
The events of 1720, as presented here, offer insights into the nature of financial markets that, being independent of place and time, deserve to be considered by today's investors everywhere. This book is therefore aimed at all those with an interest in the behavior of stock markets.
- GenresHistoryNonfictionFinance
192 pages, Paperback
First published September 27, 2004
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Displaying 1 - 6 of 6 reviews
November 25, 2021
Only two stars because I didn't understand all the jargon, and I'm not convinced by its argument. Though I did learn a few new terms. This could be called a work of financial history. As the author points out, the bursting of the South Seas bubble, the first financial collapse with international economic implications, had no real lasting effect on the growth of capitalism (okay, he didn't put it that way, but that's what his words meant). At best, studying the consequences of the collapse of the South Seas bubble is academic.
That's not what the aim of this book is though. Rather, this is an elaborate argument in defence of the idea that the stock market, or rather the investors which make up the activity of the stock market, are, and were in 1720 when the South Seas bubble burst, fundamentally irrational.
I don't know if I agree with that argument. I think that the fact that South Seas stock was overvalued has less to do with any suppositions (no matter how argued) about the "rationality" or "irrationality" of investors. I think such a thing has more to do with the fact that profit is the goal of any investment. That people got on the South Seas companies bandwagon under circumstances in which they ignored the protestations of people like Archibald Hutcheson (a member of the English parliament in 1720, math guy, and financial analyst who pointed that the stock was wildly overvalued, and warned that a crash was inevitable), or other tools for the valuation of stocks available at the time, is sufficiently explained by the fact that no matter when the prospective investor jumped on board, their goal was profit. After all, that's how capitalism works.
Ultimately the author argues that the market is irrational. Their aim is to compare the irrationality of the South Seas frenzy with the frenzy of greed that fueled the dot.com and technology bubble of the late 1990's. By explaining that the stock market is inherently irrational the author asserts that we can guard against the behaviour of investors by implementing reforms (ie. implementing stronger regulatory mechanisms in order to ensure that the market doesn't succumb to the greed of its investors.) I think that we'd be more successful trying to teach a tiger to eat lettuce. Personally I don't see how greed can be reformed out of an economic system that depends upon it.
Like so many books it is more valuable to read between the lines on this one. Perhaps it is better read as a work of historical documentation than one of financial analysis. For example, I learned that the term "specie" is financial jargon meaning money as metallic coins. I also learned that the Mississippi bubble (the Mississippi company, floated by the nation of France, just prior to, and was inspiration for, the South Seas company in England) was inflated as part of a scheme to exchange all the coins in France for paper money. Needless to say, when the bubble burst, the scheme was abandoned and the people of France were turned off bank notes as a medium of exchange (ie. money) f0r generations.
So I don't recommend this book. It can be hard to understand for the uninitiated, plus the argument that the stock market (operating now with greater regulatory frameworks, but more institutional investing as opposed to individual investment activity characterizing the activity of various stock markets and reflecting the tendency of capital to become concentrated) is fundamentally irrational is unconvincing. Boom and bust are, and always have been the way capitalism works.
That's not what the aim of this book is though. Rather, this is an elaborate argument in defence of the idea that the stock market, or rather the investors which make up the activity of the stock market, are, and were in 1720 when the South Seas bubble burst, fundamentally irrational.
I don't know if I agree with that argument. I think that the fact that South Seas stock was overvalued has less to do with any suppositions (no matter how argued) about the "rationality" or "irrationality" of investors. I think such a thing has more to do with the fact that profit is the goal of any investment. That people got on the South Seas companies bandwagon under circumstances in which they ignored the protestations of people like Archibald Hutcheson (a member of the English parliament in 1720, math guy, and financial analyst who pointed that the stock was wildly overvalued, and warned that a crash was inevitable), or other tools for the valuation of stocks available at the time, is sufficiently explained by the fact that no matter when the prospective investor jumped on board, their goal was profit. After all, that's how capitalism works.
Ultimately the author argues that the market is irrational. Their aim is to compare the irrationality of the South Seas frenzy with the frenzy of greed that fueled the dot.com and technology bubble of the late 1990's. By explaining that the stock market is inherently irrational the author asserts that we can guard against the behaviour of investors by implementing reforms (ie. implementing stronger regulatory mechanisms in order to ensure that the market doesn't succumb to the greed of its investors.) I think that we'd be more successful trying to teach a tiger to eat lettuce. Personally I don't see how greed can be reformed out of an economic system that depends upon it.
Like so many books it is more valuable to read between the lines on this one. Perhaps it is better read as a work of historical documentation than one of financial analysis. For example, I learned that the term "specie" is financial jargon meaning money as metallic coins. I also learned that the Mississippi bubble (the Mississippi company, floated by the nation of France, just prior to, and was inspiration for, the South Seas company in England) was inflated as part of a scheme to exchange all the coins in France for paper money. Needless to say, when the bubble burst, the scheme was abandoned and the people of France were turned off bank notes as a medium of exchange (ie. money) f0r generations.
So I don't recommend this book. It can be hard to understand for the uninitiated, plus the argument that the stock market (operating now with greater regulatory frameworks, but more institutional investing as opposed to individual investment activity characterizing the activity of various stock markets and reflecting the tendency of capital to become concentrated) is fundamentally irrational is unconvincing. Boom and bust are, and always have been the way capitalism works.
October 17, 2015
This book, by a former financial analyst, is a vibrant, crisp, and clear explanation of what happened in the famous "South Sea Bubble" of 1720, when the stock of the South Sea Company, created in 1711 to buy up the British debt, suddenly surged to 10 times its original value and crashed back down to Earth again. This was arguably the first financial bubble and first market crash in world history.
The book explores a range of topics, some only tangentially related to the main tale. The book describes in detail the almost simultaneous growth and collapse of John Law's Mississippi Company in Paris, and the frantic trading on the Rue Quincampoix that accompanied it. It investigates the growth of London coffee shops in the late 1600s, Charles II's abortive attempt to ban them in 1675, and the battle over newspapers and financial activity in the shops. The author does demonstrate, however, that these coffee shops were the center of English finance and thus important to the eventual South Sea Bubble. While a coffee shop like Lloyd's could one day grow to became the most famous insurance company in the world, Jonathan's could eventually become the London Stock Exchange. It was also in the streets around these shops, on what became known as "Exchange Alley," that modern finance grew and took shape, with all the supposedly modern financial derivatives, such as puts, calls, repos, and forward contracts, in common use by stock brokers and "jobbers" and enforced by courts.
The book is weakest, however, when it narrows its focus and pushes its main argument, that the "Bubble" provides strong evidence against efficient markets and for an investor "mania." Using the detailed exposition of a contemporary MP, Archibald Hutcheson, the author shows that the South Sea Company assets, largely government debt paying 5% a year, were worth at best half of what the stock was worth at the boom's peak. Hutcheson does make the caveat that his valuation excludes possible profits from its monopoly on South Sea trading in slaves and goods, but he shows that such trading was never profitable and had largely ceased by 1718.
This calculation still excludes much. One issue is that just as John Law's Mississippi company was buoyed up by his simultaneous control of the Royal Bank and his ability to print endless streams of new "livres" to finance it, the loose monetary environment seemed to affect England and the South Sea Company as well. Law's paper money scheme drove gold out of the country and into England, and, as such money tends to do, it seemed to drive up prices everywhere. Just as Law unfortunately decided to deflate his way out of his troubles, and thus unwittingly ruin his company, the gold began to flow back out of England and prices crashed there as well. Viewed in this light, it was no coincidence that John Blunt's South Sea Company collapsed just two months' after Law's company, since they were both subject to the same inflationary and deflationary pressures. The author's intense investigations into the South Sea's books also begs the question of why the boom that took the South Sea stock up 500% in six months also took the Royal African Company up 483%, and the Million Bank up 250%. Clearly something systematic was going on here, and it could well be monetary changes. The South Sea's investors actions also look a lot more reasonable when one understands that this company at the heart of the first crash also received the first bailout, by the new incoming Robert Walpole administration. This bailout cancelled almost all the company's debt to the government, and allowed investors to recover almost half of what the stock was worth at its very peak. The investors' later complaints about the legislative authorization and supposed approval of the company by the government show that perhaps they always expected some sort of bailout.
Even if one does not buy the main argument of the book, there is lots of food for thought here. The legal reactions to the crash are remarkably familiar, with special legislative investigative committees into the crisis and the like. In 1721 the government banned "naked short sales," where the stock jobber did not own the actual stock to be sold, and in 1734 Barnard's Act voided all options contracts. There were new attempts to enforce a 1697 act that licensed all stock brokers and forbid them from trading "on their own account," an early attempt at "ring-fencing." One commentator argued that company accountants should swear to the accounts' truth under oath before board meetings, something not instituted until the 2002 Sarbanes-Oxley act in the U.S. On the whole, despite its argument and frequent segues, this book is an uncommonly clear and detailed explanation of the birth of modern finance.
The book explores a range of topics, some only tangentially related to the main tale. The book describes in detail the almost simultaneous growth and collapse of John Law's Mississippi Company in Paris, and the frantic trading on the Rue Quincampoix that accompanied it. It investigates the growth of London coffee shops in the late 1600s, Charles II's abortive attempt to ban them in 1675, and the battle over newspapers and financial activity in the shops. The author does demonstrate, however, that these coffee shops were the center of English finance and thus important to the eventual South Sea Bubble. While a coffee shop like Lloyd's could one day grow to became the most famous insurance company in the world, Jonathan's could eventually become the London Stock Exchange. It was also in the streets around these shops, on what became known as "Exchange Alley," that modern finance grew and took shape, with all the supposedly modern financial derivatives, such as puts, calls, repos, and forward contracts, in common use by stock brokers and "jobbers" and enforced by courts.
The book is weakest, however, when it narrows its focus and pushes its main argument, that the "Bubble" provides strong evidence against efficient markets and for an investor "mania." Using the detailed exposition of a contemporary MP, Archibald Hutcheson, the author shows that the South Sea Company assets, largely government debt paying 5% a year, were worth at best half of what the stock was worth at the boom's peak. Hutcheson does make the caveat that his valuation excludes possible profits from its monopoly on South Sea trading in slaves and goods, but he shows that such trading was never profitable and had largely ceased by 1718.
This calculation still excludes much. One issue is that just as John Law's Mississippi company was buoyed up by his simultaneous control of the Royal Bank and his ability to print endless streams of new "livres" to finance it, the loose monetary environment seemed to affect England and the South Sea Company as well. Law's paper money scheme drove gold out of the country and into England, and, as such money tends to do, it seemed to drive up prices everywhere. Just as Law unfortunately decided to deflate his way out of his troubles, and thus unwittingly ruin his company, the gold began to flow back out of England and prices crashed there as well. Viewed in this light, it was no coincidence that John Blunt's South Sea Company collapsed just two months' after Law's company, since they were both subject to the same inflationary and deflationary pressures. The author's intense investigations into the South Sea's books also begs the question of why the boom that took the South Sea stock up 500% in six months also took the Royal African Company up 483%, and the Million Bank up 250%. Clearly something systematic was going on here, and it could well be monetary changes. The South Sea's investors actions also look a lot more reasonable when one understands that this company at the heart of the first crash also received the first bailout, by the new incoming Robert Walpole administration. This bailout cancelled almost all the company's debt to the government, and allowed investors to recover almost half of what the stock was worth at its very peak. The investors' later complaints about the legislative authorization and supposed approval of the company by the government show that perhaps they always expected some sort of bailout.
Even if one does not buy the main argument of the book, there is lots of food for thought here. The legal reactions to the crash are remarkably familiar, with special legislative investigative committees into the crisis and the like. In 1721 the government banned "naked short sales," where the stock jobber did not own the actual stock to be sold, and in 1734 Barnard's Act voided all options contracts. There were new attempts to enforce a 1697 act that licensed all stock brokers and forbid them from trading "on their own account," an early attempt at "ring-fencing." One commentator argued that company accountants should swear to the accounts' truth under oath before board meetings, something not instituted until the 2002 Sarbanes-Oxley act in the U.S. On the whole, despite its argument and frequent segues, this book is an uncommonly clear and detailed explanation of the birth of modern finance.
August 19, 2025
This is an amazingly well researched and detailed account/analysis of the South Sea Bubble and its wider context, including the Mississippi Scheme and the credit crisis that engulfed the England, France, and even the Low Countries. Strangely enough, financial innovations such as credit default swaps, valuations, futures, options, derivatives(!), buying on margin, over-leveraged assets, insider trading, stock manipulation, and buying back shares operated substantially as they did until the advent of high speed and high volume financial transactions at the turn of the 21st century. All the devils are here.
May 22, 2015
Extremely dry read.
January 15, 2023
- History always rhymes: bubble started with an innovation that while having its merit, is merely an improvement than the old system. However, for the greater fools, they always believe such innovation will make them rich forever and they don't have to work after purchasing such instrument. The result is a ever increasing bid in the marginal price, followed by the equally harsh crash
- Everything is connected: the South Sea Bubble followed by the Mississippi Bubble, which also influenced the Dutch bubble at the time
- Information always spreads: back in the day information was spread through coffee houses that's scattered around the GB
- People got into the market seeing other people gotten rich by prior waves
- People thought the new financial innovation creates a new era of wealth and "this time is different"
- South Sea bubble also spread to other smaller companies. Smaller companies' bubble popped before the South Sea bubble popped, but the contingent effect is in full force
- Profit in the bubble also lead to massive demand for other industries (since fools believe they can just speculate and make a living forever)
- At one point, boats at the River Thames dried up/seek buyers because their owners are all speculating
- Credit crunch could happen even when interest rate drops: credit rationing happens when bank only seek the safest asset class to lend (cash, very short term securities): this happened during the latter stage of the South Sea bubble. Thus, looking at the interest rate alone is a poor metric for credit avaliabilities
- Everything is connected: the South Sea Bubble followed by the Mississippi Bubble, which also influenced the Dutch bubble at the time
- Information always spreads: back in the day information was spread through coffee houses that's scattered around the GB
- People got into the market seeing other people gotten rich by prior waves
- People thought the new financial innovation creates a new era of wealth and "this time is different"
- South Sea bubble also spread to other smaller companies. Smaller companies' bubble popped before the South Sea bubble popped, but the contingent effect is in full force
- Profit in the bubble also lead to massive demand for other industries (since fools believe they can just speculate and make a living forever)
- At one point, boats at the River Thames dried up/seek buyers because their owners are all speculating
- Credit crunch could happen even when interest rate drops: credit rationing happens when bank only seek the safest asset class to lend (cash, very short term securities): this happened during the latter stage of the South Sea bubble. Thus, looking at the interest rate alone is a poor metric for credit avaliabilities
May 11, 2018
This book is enlightening. You have to read it yourself to fully understand and appreciate some of the important laws and investor behaviors that evolved during 1720 South Sea Bubble burst and the years prior and after. These laws are still in force today in the financial world of stocks, shares, and trade. The book is more focused on investor behavior/rationality that led to the 1720 burst. Understanding the past will help you understand the present and the future.
Displaying 1 - 6 of 6 reviews