Nothing Learned in 300 Years - Bernie Madoff, John Law, the South Sea Bubble

The scandal around Bernie Madoff's alleged Ponzi scheme recalls many historical examples of human greed and stupidity, notably the Mississippi Scheme of John Law in France and Britain's South Sea Bubble, both of which contributed to European economic collapse in the early eighteenth century.

By mid-1720, when the South Sea Company was spreading extravagant rumors about the value of its trade in the New World, the share price of the Company had risen to nearly £1000 from £128 at the beginning of the year, on the back of low actual earnings (associated partly with trade in slaves). Based on its high share price, the Company bought 80% of the British government's £50 million debt, ensuring government cooperation in the affair (for a while). When instalment payments actually came due in August on new issues of South Sea shares, the Company found that it could not collect on loans made to investors in the shares. This triggered enormous falls in the share price and thousands of bankruptcies. By end-September the share price had fallen to £150. Even one of history's greatest mathematical geniuses, Sir Isaac Newton, reportedly lost £20,000, a considerable fortune at the time.

The enterprising Scot known as John Law (Jean Lass to the French), who had been appointed France's Controller General of Finances by the regent, Philippe d'Orleans, acquired control of the derelict Compagnie du Mississippi, which benefited from a national monopoly in New World trade, as the South Sea Company had done. Based on similar wild exaggeration and effective marketing, shares in the company rose from 500 to 18,000 livres, before falling back to 500 in 1721. By then Law had fled France (he died in Venice in 1729, aged 57). His company had bought the whole of France's 1.6 billion livre government debt with subscription proceeds. The resulting chaos led to economic collapse across Europe.

The South Sea Company and Mississippi schemes, while technically bubbles, bear a resemblance to a Ponzi scheme, like Mr. Madoff's arrangement seems to have been, due to the same offer of high returns, and payouts to investors from the money provided by new investors drawn into the scheme. Both schemes, like Mr. Madoff's, had managed to clothe themselves in an aura of legitimacy, given the high profiles of many investors, as well as government backing.

Mr. Madoff's investments consistently reported gains of around 1% a month for 20 years. It seems that hardly any information about the nature of investments or strategy was shared, and he was known to reject investors who asked too many questions. Even useful information provided in similar cases, such as the failure of Amaranth (a hedge fund which went bust in 2006) to file required SEC forms (after which investors piled even more money in), is apparently ignored. Lack of information might be an excuse for eighteenth-century investors, but tends to fall short of twenty-first-century "sophisiticated" standards. Like many other examples, Madoff's scheme is likely to go down in the history of human gullibility, along with the South Sea Bubble and the Mississippi Company.

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Nothing Learned in 300 Years - Bernie Madoff, John Law, the South Sea Bubble