Sunday, July 03, 2016

The "South Sea Bubble" and the "Mississippi Scheme" - Plumbing History for a Solution to U.S. National Debt

The U.S. National Debt is now around $19 trillion, which works out to more than $160,000 from each taxpayer. That’s a lot. Some day, we’ll need to find a way to address the problem. One proposal, which echoes what has happened in the past would be to grant “exclusives” to companies.

For example, could a company propose to take over the U.S.’s national debt in exchange for an “exclusive” – monopolistic control of the Internet?

If it’s any consolation, we’re not alone with our large, choking obligations. Many countries have faced enormous debt and a sluggish economy, so they have not been able to simply tax or confiscate their citizen’s earnings or assets.

So, what have they done? Let’s take a page from our economic history book and look at two very interesting cases of innovative solutions to national debt. Neither one worked out very well; in fact, you could say they were disastrous. But, could they work today? If we just tweak the approach, would it work?  The first was the “South Sea Bubble” and the other was the “Mississippi Scheme”.  Both had to do with the government giving “exclusives” and monopolies to individual companies.

The “South Sea Bubble”:  In 1710, England was facing serious debts from wars and other skirmishes, as well as anxieties about how to make its colonies start producing revenues. The Industrial Revolution had not occurred yet, and the big sources of income were from mercantile operations – trading with the colonies. Unfortunately, North America had not been the big bonanza they had hoped for. Spain and Brazil had all the luck – South America seemed to be dripping gold and silver everywhere they looked. (It’s too bad the English did not start in California, but that’s another story).

So, knowing what a good thing trade with South America could be, Robert Harley formed the South Sea Company, and then proposed to the government that he would take over the national debt (pay it off) if he could get an exclusive on trade with Spain.

The government of England was all for it. They eagerly supported him and even raised taxes so they could pay him a little extra.

But, there was one snag. Spain did agree to the trade deal. They agreed to one port, one time a year, and you couldn’t trade in gold or good – only slaves. And, they wanted 50% of the profits and a 5% flat tax. So, it was an immoral, low-profit proposition for the company. It would not work for the government.

What could be done?  The 18th century equivalent of an IPO was launched, with lots and lots of hype. No one bothered to describe the real deal. It was all blue sky and gold. And, the people bought it. Everyone did.

What resulted was a colossal bubble – and it was so clearly a bubble that the people embraced the concept. The idea was to buy while the bubble was still expanding, and sell at a profit. Unfortunately, no one really wanted to discuss the eventual outcome of all bubbles – the big POP. This was before the day of the SEC and Sarbannes-Oxley, and so it was not long before enterprising and creative entrepreneurs launched their own bubbles.

It worked for a while. But, eventually, when it collapsed, it wiped out the savings of people at all walks of life. There was despair, and there were suicides and murders.

But it did not stop the impetus of the “bubble” and the contagion of bubble enthusiasm. Everyone thinks they can game the system and time it. But, playing a bubble is filled with treacherous risk.

Across the English Channel, a Scottish visionary and economist, John Law, was proposing a similar deal to bail out the French government. He suggested giving a company a monopoly to do trade with the French holdings in North America, which included the Mississippi River and the broad swath of land.

His scheme was similar to the South Sea Company’s idea, but with a few key differences. John Law did it through opening a bank, the Banque Generale, and by getting permission to print bank notes. Paper money was new to France, and the idea was the more money you printed, the more you’d stimulate economic activity. Then, he was able to get an exclusive on the French North American trade for his “Compagnie d’Occident.”

There were many, many trading opportunities, and it seemed to be a great value. But, the problem was that John Law’s bank issued too many bank notes. What resulted was inflation and economic collapse for France, which lasted more than eighty years, and, which fueled the economic inequality which would fuel the French Revolution and fire up the guillotine.

 Are there any modern-day analogues?  Has the government given an “exclusive” or a monopoly on what could be a very lucrative commercial opportunity? What if you’re the only provider of the Internet (or everyone thinks you are)?

Let’s return to the first question posed. Could a company propose to take over the U.S.’s national debt in exchange for an “exclusive” – monopolistic control of the Internet? And, what if that company were secretly funded by another country?

The implications are quite interesting. I have a feeling it has been tried in other countries – for that reason, cell phones and internet access are controlled by a single company. But, we’re talking about a huge magnitude of difference, with dramatic and radical implications.

For further reading:

Harvard Business School. “South Sea Bubble: Short History”

Mackay, Charles. (1841) Extraordinary Popular Delusions and the Madness of Crowds. London: Richard Bentley Press.

Mississippi History Now. John Law and the Mississippi Bubble: 1718-1720.

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