Blowing Bubbles: The Company You Keep (part II)

But how much power did even large shareholders have? Little. When the Company's directors petitioned the government to be released from their obligation to publish ten-year accounts in 1612 - the date when  investors were supposed to be able to withdraw their capital if they chose to - permission was granted and publication of the accounts and the repayment of investors' capital were both postponed. The only sop to shareholders was that in 1610 the Seventeen Lords agreed to make a dividend payment the following year, though at this stage the Company was so strapped for cash that the dividend had to be paid in spices. In 1612 it was announced that the VOC would not be liquidated, as originally planned. This meant that any shareholders who wanted their cash back had no alternative but to sell their shares to another investor.

Blowing Bubbles: The Company You Keep (part I)

Behind the ornate baroque façade of Venice's San Moise church, literally under the feet of the tens of thousands of tourists who visit the church each year, there is a remarkable but seldom noticed inscription:

HONORI ET MEMORIAL JOANNIS LAW EDINBURGENSES REGII
GALLIARUM AERARII PREFECTI CLARISSIMA

'To the honour and memory of John Law of Edinburgh. Most distinguished controller of the treasury of the kings of the French.' It is a rather unlikely resting place for the man who invented the stock market bubble.

An ambitious Scot, a convicted murderer, a compulsive gambler and a flawed financial genius, John Law was not only responsible for the first true boom and bust in asset prices. He also may be said to have caused, indirectly, the French Revolution by comprehensively blowing the best chance that the ancien régime monarchy had to reform its finances. His story is one of the most astonishing yet least well understood tales of adventure in all financial history. It is also very much a story for our times.

Blowing Bubbles (part II)

Stock market bubbles have three other recurrent features. The first is the role of what is sometimes referred to as asymmetric information. Insiders - those concerned with the management of bubble companies - know much more than the outsiders, whom the insiders want to part from their money. Such asymmetries always exist in business, of course, but in a bubble the insiders exploit them fraudulently. The second theme is the role of crossborder capital flows. Bubbles are more likely to occur when capital flows freely from country to country. The seasoned speculator, based in a major financial centre, may lack the inside knowledge of the true insider. But he is much more likely to get his timing right - buying early and selling before the bubble bursts - than the naive first-time investor. In a bubble, in other words, not everyone is irrational; or, at least, some of the exuberant are less irrational than others. Finally, and most importantly, without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission or
commission of central banks.

Nothing illustrates more clearly how hard human beings find it to learn from history than the repetitive history of stock market bubbles. Consider how readers of the magazine Business Week saw the world at two moments in time, separated by just twenty years. On 13 August 1979 , the front cover featured a crumpled share certificate in the shape of a crashed paper dart under the headline: The Death of Equities: How inflation is destroying the stock market'. Readers were left in no doubt about the magnitude of the crisis:

Blowing Bubbles (part I)

The Andes stretch for more than four thousand miles like a jagged, crooked spine down the western side of the South American continent. Formed roughly a hundred million years ago, as the Nazca tectonic plate began its slow but tumultuous slide beneath the South American plate, their highest peak, Mount Aconcagua in Argentina, rises more than 22,000 feet above sea level. Aconcagua's smaller Chilean brethren stand like gleaming white sentinels around Santiago. But it is only when you are up in the Bolivian highlands that you really grasp the sheer scale of the Andes. When the rain clouds lift on the road from La Paz to Lake Titicaca, the mountains dominate the skyline, tracing a dazzling, irregular saw-tooth right across the horizon.

Looking at the Andes, it is hard to imagine that any kind of human organization could overcome such a vast natural barrier. But for one American company, their jagged peaks were no more daunting than the dense Amazonian rainforests that lie to the east of them. That company set out to construct a gas pipeline from Bolivia across the continent to the Atlantic coast of Brazil, and another - the longest in the world - from the tip of Patagonia to the Argentine capital Buenos Aires. Such grand schemes, exemplifying the vaulting ambition of modern capitalism, were made possible by the invention of one of the most fundamental  institutions of the modern world: the company. It is the company that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized.