If there is something that we can learn from history, it’s that people do not learn from history. The sentiment is so oft repeated that it borders on cliché — but, like figure skaters, we cross and criss-cross the same lines, over and over, until the grooves are well imprinted.

In today’s article, we will be discussing the development of new markets, the greed and euphoria that comes with it, and then the inevitable collapse and overreaction by the powers that be. This isn’t the story of crypto markets today, though it certainly shares similarities, such as speculative mania, stablecoin collapses, and unkept promises.

This is the story of the development of stock markets in the early 18th century, and the growing pains that came with developing a new asset class.

Besides that, it is the fourth in a series of articles talking about the history and evolution of financial markets. It’s not necessary to read all other articles to make sense of this one, as they’re all designed to be self-contained. However, if you’re looking to read everything sequentially, we invite you to start from the beginning.

In the last article, we talked about how the stock market evolved from practices already existing in 17th-century Dutch Republic commodity markets. We begin our tale shortly thereafter — the Tulip Bubble has popped, and the Dutch Republic is starting to master the tools that will lead it to spectacular economic growth.

Yet, over the seas, the country that would soon become the United Kingdom was about to undergo a truly extraordinary revolution, which would change the character of the society and the stock market, only to then run the potential of collapsing the national economy.

The era of projecting

Finance is not just how we trade with each other, but how we express our beliefs and culture. Even with access to the exact same starting conditions, two nations would eventually diverge, as the underlying way of doing things of the countries would be different. In much the same way, countries might undergo such profound cultural shifts that their financial future changes from one day to the next — such was the case of the soon-to-be UK at the end of the 17th century.

Any good story needs a villain to defeat, and in the case of the ‘Glorious Revolution of 1688’ King James II was the antagonist. It’s not that he was evil or anything of the sort, but he was Catholic, and in the Protestant country of the territories that would soon be the United Kingdom, this was certainly an issue. So much so that his government and aristocrats would openly ignore his authority.

This had long been the state of affairs, his grandfather, King Charles I, had been in a similar rut, causing what came to be the English Civil War, and his father King James I, was also disliked.

Following in the family tradition, James II once again ostracized the people he ruled over and riots started. Things got so bad that a coalition of important men invited William III, the de facto ruler of the Dutch Republic and the son-in-law of King James II, to come to the British Isles and militarily protect the protestant faith [1].

William III saw this as an opportunity to secure power for the Dutch, and so accepted the invitation, bringing with him a mercenary armada four times bigger than the legendarily invincible Spanish armada. King James II’s army laid down their weapons and decided not to fight, rather than getting captured, the king fled, making William III the ruler of the Dutch Republic and the soon-to-be UK.

Yet, it wasn’t just soldiers that William III brought when he landed in the UK, but financial technology — after all, the whole expedition had been funded by a consortium of Dutch merchants. And soon the merchants of Holland started to infiltrate the United Kingdom’s way of doing business [2].

Perhaps it was the revolutionary zeal at the time, but everything seemed possible. So, when the Dutch introduced their developed notion of the stock market and associated derivatives, it started a new era of speculation.

The widespread use of tradable stocks allowed money to be crowdsourced for new ventures. At first, this was mainly used for ship voyages and similar grand ventures, where a single ship might cost the modern equivalent of millions of dollars. Instead of finding one rich person to fund a voyage, you could find a thousand small-time investors who would chip in and match the economic power of a whale.

The realization that happened in the years following the Glorious Revolution was that this same principle could be applied to ventures on land, which carry similar levels of risk and reward as voyages on sea. Funding a crazy inventor or business model might have less risk of death for the person receiving funds, as ship voyages were notoriously dangerous, but from an investor’s point of view, it still carried a similar risk of ending empty-handed, as the business might just not work out.

Similar to how we saw in the Initial Coin Offering (ICO) mania of 2017, every half-baked idea would get funding. However, not all concepts are deserving of investment — sometimes the entrepreneur might have a great idea, but no business acumen or the project might just be an outright scam. There were companies for all manner of half-baked ideas, like flying machines, pearl diving companies, imitation Russian leather manufacturers, brain zapping companies, and any zany idea you can think of! Hence, in modern parlance, rugs were inevitable.

This was the environment that English writer, merchant, and journalist Daniel Defoe saw when he called this “The Age of Projecting”, the age where any project (no matter how good or bad) had a chance of making it. If we can look past the archaic forms of speech, a lot of what he mentions seems terribly familiar [3]:

“Necessity, which is allowed to be the mother of invention, has so violently agitated the wits of men at this time that it seems not at all improper, by way of distinction, to call it the Projecting Age. […]

People have been betrayed to part with their money for shares in a new nothing; and when the inventors have carried on the jest till they have sold all their own interest, they leave the cloud to vanish of itself, and the poor purchasers to quarrel with one another, and go to law about settlements, transferrings, and some bone or other thrown among them by the subtlety of the author to lay the blame of the miscarriage upon themselves.”

One look at crypto Twitter on any given day, with a laundry list of new projects, inventions, and inevitable scams, and it’s quite easy to sympathize, across the span of the centuries, with Daniel Defoe’s violently agitated wits.

In the case of the Age of Projecting, as today, there just weren’t cultural guardrails — whether legal or from a social taboo standpoint. It’s akin to introducing a new predator to a previously peaceful area — as happened on an island in New Zealand, where a cat called Tibbles managed to singlehandedly wipe out the native bird species, as they weren’t used to being hunted down.

It would take several years for the regulatory and judicial systems to begin considering such pertinent matters as what kind of rights and obligations shareholders have, what roles managers should have; and to what extent should governments exercise their power in regulating the industry.

The historian William Robinson Scott estimated that in 1695 joint-stock companies only represented 1.3% of the national wealth held in the UK, yet by 1720, they represented 13% [4]. When there is a new development whose time has come, it seems almost inevitable that it will take over the world.

Crypto seems to be at a similar juncture, where it’s still rather small when compared to the rest of the financial markets. Yet, because of its flexibility, it can quickly start absorbing and expanding the production and distribution of all kinds of goods and services.

At the time of writing, crypto as a whole is about 1.05 trillion dollars in terms of market capitalization, while in June 2022, the total market capitalizations of domestic companies listed on stock exchanges worldwide was 105.07 trillion dollars [5].

Meaning that out of pure coincidence, the crypto market has a similar hold on the global economy as stocks had in the UK prior to the Glorious Revolution, which changed the character of the economy. If we similarly extrapolate, it’s not unreasonable to suggest that crypto’s new way of doing things could take hold of large chunks of the market capitalization of traded companies. The reason will seem obvious in hindsight as, when harnessed correctly, crypto is a qualitatively different and more efficient way of performing certain transactions.

Earlier we mentioned that historian William Robinson Scott had tracked the development of the stock market from 1695 to 1720. There’s a reason why his analysis stops there, as contemporaries of the Age of Projecting soon would come to learn that 1720 would prove to be a disastrous year.

Sailing the South Seas

When you have a hammer, every problem looks like a nail. In the Era of Projecting, the proverbial hammer was joint stock companies. Not only that, but owing to the newly-found Dutch influence in the British Isles, it became tempting to copy models that had worked quite well in the Netherlands.

The newly formed UK was under a mountain of debt. This was such a colossal debt, that even after WWI, that same British government debt was refinanced in such a way as to only be paid down until 2015 [6]!

Back in the eighteenth century, the proposal to solve it was simple: exchange outstanding government debt for stock in “The South Sea Company” a newly formed company that would have a trading monopoly in the “South Seas” and South America. It would be similar in operation and style to the Dutch East India Company, which had so enriched the Dutch over the last century.

There was however a slight snag, Spain and Portugal controlled the vast majority of South America, and Britain was at War with the Spaniards. Nevertheless, as today, investors weren’t particularly phased by the fact that this business model was infeasible. Fortune favors the bold (and foolhardy) though, and a short while later the UK managed to defeat the Spaniards. Among the victory concessions, they gained the trading rights of the South Seas in 1714…or at least they gained the right to send ONE ship to each Spanish port once a year, which ultimately made the venture unscalable.

Besides that, high operating costs stopped this from being profitable at all, they had yet to learn the lesson that the French had learned in their operations of that particular route — the real profit was in smuggling textiles with the accidental Spanish king’s blessing, not in the official goods on which you had to pay all manner of costs and taxes [7].

Four years of unprofitable slog later, and with no end in sight, there was another war in 1718 with the Spanish, which once again stopped commerce. Yet, this did not stop the British public from speculating, quite the contrary.

It’s far easier to speculate on the potential of something when you’re not given contradictory information. After all, once the war with Spain was settled, there’d finally be mass adoption and a real-world use for those monopoly concessions, right?

The general population was lulled into buying the stocks as the British elite also bought in. The king himself owned shares in the company, even becoming its director at one point, and many politicians and notable figures like Isaac Newton owned stocks [8].

At least on first glance, the South Sea Company was too big to fail.

For the sake of the audience, we will abridge the back office wheeling and dealing. But just know it contains real estate scandals, arrests, naming people Lords purely to manipulate the government’s policies, bribing newspapers to print fake news, and that’s just to start with.

The important bit of all this was that the South Sea Company had the obligation to take on government debt. As such, if the government owed £1000 the South Sea Company had to exchange it for £1000 worth of stock. The fun thing was that if the price of the company stock rose, the company and its owners got to pocket the difference, as the number of stocks had been decided beforehand [9].

Given that we are talking about Empire-level debt, even a single £ difference between the original face value of the stock and the market value could make the original holders rich beyond their wildest dreams.

As soon as people realized this, everyone started purchasing South Sea Company stocks like mad. Then, as the price began to sag, the stock earnings were used to provide loans to poorer people, so they could own stock on credit.

Eventually, the South Sea Company stock had risen so much that it started to represent over half of the stock market by itself, so every other company in any other industry was essentially taking away potential market cap from this venture. In modern tech terms, it was still a “pre-profit company”, and there was no possibility of earning any profit, certainly not enough to warrant being worth half the stock market!

System insiders started to protect themselves from all the other joint-stock companies, whether legitimate or not, and in 1720 Parliament passed “The Bubble Act” — which stopped the formation of joint stock companies, unless otherwise explicitly allowed by the government, and this law also limited the scope of existing companies [10].

The logic being that if there were no other companies to invest in, the capital would naturally flow back into the South Sea Company. In an ironic twist of fate, this sudden market shock caused overleveraged traders to start selling their South Sea Company stock to make up for their losses in the supposed riskier ventures. This caused some volatility in the price, but in the end, the company still managed to chug along to its all-time high.

The South Sea Company shares were first issued at £100 and were ultimately sold for £1000, but this proved untenable. Many of the early investors, bribe recipients, etc. cashed out around this threshold and the price crashed. The further the price fell, the more people who had bought on credit were unable to meet their obligations, which dug an even deeper pit for the stock’s price. By the end of the madness, the price had fallen to £150, and then kept sliding down to well below first issue price [11].

Overnight, many people were destitute, suicides were rampant and the public demanded change. Isaac Newton was also caught in the blast, lost a major portion of his wealth, and is then said to have uttered:

“I can calculate the motion of heavenly bodies, but not the madness of people.”

Aftermath, lessons for crypto & conclusion

Indirectly, the South Sea Company laid the foundation for much of the financial world we know today. Markets went from being free and vicious, where any crazy venture could be imagined and funded, to a more regulated affair. Over the following centuries, it became increasingly difficult to get listed on the stock market, to the point where companies nowadays do “reverse mergers”, where a non-listed company buys a listed one for the sole purpose of inheriting its stock market listing.

For new entrants to the market, it’s easier to spend potentially hundreds of millions of dollars to acquire a company they have no interest in than to undergo the bureaucracy involved in getting into the stock market.

Historians have argued that part of the reason why the Industrial Revolution didn’t happen 100 years before, in the Age of Projecting, was the overbearing regulation that came on the back of scandals like the South Sea Company. Instead, the Industrial Revolution was often funded by private wealth, and bankers, as opposed to the public’s will [12].

Would an industrial revolution funded by the public, as opposed to the already existing oligarchs, have been that much different from what we ended up having? It’s certainly worth considering.

This is one of the many reasons why crypto has proven to be so exciting for small and nimble startups — it has reintroduced the Wild West nature of the financial markets, and great ideas are getting organically funded.

Unfortunately, the lack of guardrails does introduce major scam potential, bad actors, and negligence. This has brought the attention of regulators, who seem to be poised to repeat things like the Bubble Act of 1720.

Besides that, increasingly, politicians are beginning to understand that whether or not they approve of crypto, it’s here to stay. Not unlike the South Sea Company, there are already experiments of crypto-esque innovations by government entities, like Central Bank Digital Currencies (CBDCs), which are already being researched, developed, and even trialed in most countries.

The downfall of the Age of Projecting is a salient reminder that if we are not careful, everything can come crashing down. We must find a balance between protecting the public and taming the markets while allowing them to develop into unique shapes we have yet to see before.

Crypto has the seeds of something like the Industrial Revolution, and despite its decentralization and promise, it is ultimately fragile. Whether we care to admit it or not, on/off ramps, the lack of privacy, etc. are potential fault lines in our industry. The protocols might be strong, but not necessarily the users in them.

Let’s be careful that the promise of our Era of Projecting is not lost within the pages of arcane bureaucracy.

Bibliography

1 Goetzmann, William N. “Money changes everything.” Money Changes Everything. Princeton University Press, 2017. Chapter 19 — “Age of Projecting” p.320–330

2 ibid

3 Defoe, Daniel. An essay upon projects. Vol. 2. №104. Cassell, Limited, 1888.

4 Goetzmann, William N. “Money changes everything.” Money Changes Everything. Princeton University Press, 2017. Chapter 19 — “Age of Projecting” p.328

5 Statista Research Department, and Jul 22. “Domestic Equity Market Capitalization Globally 2022.” Statista, 22 July 2022, https://www.statista.com/statistics/274490/global-value-of-share-holdings-since-2000.

6 Rohrer, Finlo. “What’s a Little Debt between Friends?” BBC News, BBC, 10 May 2006, http://news.bbc.co.uk/2/hi/uk_news/magazine/4757181.stm.

7 Carswell, John. The South Sea Bubble. Sutton, 1993. p.40

8 ibid p.73–75

9 ibid p.89–90

10 Harris, Ron (1994). “The Bubble Act: Its Passage and Its Effects on Business Organization”. The Journal of Economic History. 54 (3): 610–627. doi:10.1017/s0022050700015059 JSTOR 2123870

11 Paul, Helen J. (2013). The South Sea Bubble: an economic history of its origins and consequences London. ISBN 978–0–415–70839–5. OCLC 925312648

12 Goetzmann, William N. “Money changes everything.” Money Changes Everything. Princeton University Press, 2017. Chapter 19 — “Age of Projecting” p.330