Trading Companies and Distribution of Speculative Bubbles within European Commodity and Stock Markets, 17-18 century

Sapuntsov Andrey Leonidovich ORCID: 0000-0001-5689-5737 Doctor of Economics Leading Scientific Associate, Institute for African Studies of the Russian Academy of Sciences 123001, Russia, Moscow, Spiridonovka str., 30/1 andrew@sapuntsov.ru Other publications by this author

IntroductionThe first stages of the formation of society are inextricably linked with economic crises, which were based on the assessment of changeable weather conditions and the determination of the appropriate opportunity to obtain the necessary amount of food, tools and other useful things from hunting and gathering.

Farming and cattle breeding made people even more vulnerable to weather events, when successive harvest and lean years determined the accumulation of food reserves and, consequently, periodic fluctuations in the volume of consumption and the level of prosperity. Money, as the greatest discovery of mankind, capable of simplifying commodity exchange and opening doors on the way to wealth, began to be used by governments in the context of financial relations, in which incomes did not always correspond to expenses. After the wars, by 88 BC, the state treasury of the Roman Empire faced a shortage of funds – this caused impoverishment of the population and unrest ^{[27, p. 74]}. A more clearly "framed" financial crisis occurred in 33, during which the Roman Empire confiscated the assets of the population, interest rates increased, the price of land decreased, overdue debts were formed and the authorities borrowed to restore monetary circulation ^{[8, p. 588]}.

The advent of the era of Great Geographical Discoveries allowed Europeans to make sea crossings to distant worlds and bring from there outlandish goods that quickly became the object of envy, rivalry in possession between the rich and the object of trade. The expeditions conducted under the leadership of Christopher Columbus and Vasco da Gama, as a result of which new continents and more rational trade routes were discovered, allowed navigators to use pepper and its derivatives for canning and preserving the properties of meat provisions during a long voyage. Moreover, the supply of nutmeg, cloves, cinnamon and other food-flavoring spices to European markets was organized; fabrics and dyes for them from Bengal, shells, pearls and other jewelry began to arrive. Europeans, after all, had previously been familiar with the gifts of the East, which were imported by land routes in limited quantities and were mainly intended for the royal court, while the colonial development of North and South America made it possible to organize the supply of fundamentally new items, such as tobacco and furs.

Establishment in the early years of the XVII century . East India Companies (OIC) in the UK and the Netherlands, as well as later – in France, Portugal, Denmark, Sweden and other countries, as well as West India Companies (VIC) and other similar trading partnerships for the development of America, opened a milestone in overseas trade and allowed to establish large-scale imports earlier "elite" goods to Europe, making them mass-consumed and partly accessible to the general population ^{[14, p. 51-52]}. Moreover, the activities of quasi-monarchical trading companies were largely deployed due to the start of trading in their shares on the London and Amsterdam stock exchanges, respectively, and as a result, the companies were able to raise the necessary capital, which became owned by a relatively large number of individuals. The circulation of securities of trading companies on the stock exchange and active trade in overseas goods, which was also carried out on organized "platforms" with the possibility of setting prices during trading and concluding contracts for the supply of natural goods in the future, led to a gap between physical assets and their representation in the financial dimension, which opened up new opportunities for speculative transactions, sharp fluctuations in prices that do not reflect the value of assets and the costs of their production.

Previously unprecedented large–scale speculative financial crises began to unfold on the stock exchange, and later – on the borrowing market, in trade, and so on – this led to significant enrichment and the unprecedented ruin of participants in trading assets, unsecured real things or their justified long-term usefulness, and later - other related participants in economic relations. It seems productive to investigate the place and role of trading companies in speculative crises in the context of the identification of a "generic concept and an independent entity outlining the system of political relations within the whole of humanity. In other words: as repeatedly repeated in the universal history of the realities of the political, economic and social existence of mankind" ^{[2, p. 6]}.

Tulip mania in the NetherlandsThe basis of the crisis of tulip mania (nider.

tulpenmanie), which took place in the Netherlands in 1634-1637, lies the exchange trade in tulip bulbs, which became rapidly active under the influence of the expansion of demand for the product in question from the mass buyer, led to a rise in the corresponding prices to unprecedented values and the intensification of exchange operations. At the end of the crisis, the collapse of the market followed, expressed in a multiple decrease in the values of its main indicators, as well as in the ruin of many merchants and wealthy people. The Dutch OIC was not a direct importer of tulip bulbs to Europe, despite its participation in overseas trade and importation of new items from Asia, and it is wrong to qualify it as a direct initiator of the crisis. As well as indirectly, this company could only stimulate the exchange trading of its securities on the stock exchange, which led to the expansion of trading in the first commodity futures – they reflected only the rights to tulip bulbs that were planned to appear in the future. The collapse of the Amsterdam Stock Exchange did happen in 1672 and was associated with the emergence of fluctuations in the prices of shares of companies, in particular the Dutch OIC ^{[15, p. 506]}. Overstocking of European markets indirectly caused a decline in the value of assets of importing organizations.

For a better understanding of the nature of Tulip mania, it is necessary to determine the motivations of the inhabitants of Europe to present such a high demand for this plant, when the price of just one bulb reached the wages of a skilled worker for several years. The birthplace of the tulip is considered to be the Pamir Mountains, later it could be found in the Tien Shan. Elongated leaves, erect stem, red–colored flower and annual death of the root system are morphological features of wild tulips, which were later transferred by man to Asia Minor (Anatolia) ^{[3, p. 173-175]}. Sources of the Seljuk Empire from the 12th century indicate the use of the tulip as a decoration there, in the next century the tulip was mentioned in the poetic works of Jalaladdin Rumi and later used in the Ottoman Empire.

In the XVI century . Anatolia was visited by German envoys who highly appreciated the aesthetic properties of the tulip and took it with them to Europe. In 1593, botanist Carl Clusis conducted a systematic study of the tulip in the Netherlands, studying and describing the features of its growth, reproduction and flowering, and the latter was observed for the first time on the European continent in 1559 in Austria ^{[17, p. 123-124]}. The demand for tulips increased in the XVII century in France, Italy, Germany and the Netherlands among the representatives of the aristocracy, and in the latter of these countries the soil, humidity and climate proved suitable for the cultivation of these plants. In 1580, the property of variegation of tulips caused by a corresponding virus was observed, as a result, the flowers began to combine intricate patterns of white, yellow, purple and dark red colors, and the petals became pointed ^{[7, p. 162]}. The above discovery allowed botanists to engage in breeding experiments with infected tulips, as a result of which a sufficiently large number of new varieties were obtained by the 1630s, and technologies for the preservation and reproduction of bulbs suitable for circulation were developed.

The onset of the Golden Age in the Netherlands was accompanied by an increase in national income, an increase in trade turnover, an increase in the welfare of the population, and more and more people began to have free money that required their investment in profitable projects ^{[24, p. 1226]}. Moreover, such quick-to-implement highly profitable projects were stimulated by the completion of the bubonic plague epidemic in the 1620s, which claimed the lives of about a third of the population of the Netherlands. It has become more profitable to trade tulip bulbs than to grow flowers from them for direct sale. This commercial innovation of 1635 determined the further speculative nature of the crisis, and in order to make a profit, tulip bulbs were resold rather than used as seed material.

The most important feature of the speculative trade under consideration was the replacement of the purchase and sale of cash tulip bulbs with futures transactions, in which they began to trade obligations to dig up and deliver bulbs in the future, since at the time of the transaction, agrotechnical restrictions did not allow to disturb the entrenched bulb. The receipts issued by merchants were repeatedly resold along the chain of transactions between speculators, and some of them did not have sufficient funds to execute their transaction, which made it possible to consider such a situation as "air trading" (nider. windhandel). Participants in the trade were broad segments of the population of the Netherlands, in particular, weavers mortgaged their property and invested the money received in the market of tulip bulbs. This allowed the weavers to make more profit than from the main business, so their example was soon followed by representatives of less capital-intensive professions, such as printers, lawyers and even priests ^{[20, p. 20]}.

The influx of new assets into the tulip bulb market caused its fragmentation and increased the price spread between very cheap monophonic tulips and very expensive ones of rare color. For example, a tulip bulb of the "August Forever" variety (Semper Augustus), which was very famous at that time, cost in 1633 a substantial 5.5 thousand guilders, which at current prices is 76 thousand dollars ^{[13, p. 230]}. Tulip bulbs doubled in price in 1635-1636, and in November 1636 the first crisis phenomena appeared due to a 4-fold decrease in prices. However, the intensification of speculation in the market and the almost complete disregard by traders of aspects of the future use of bulbs for growing tulips, allowed prices to rise 20 times by February 1637.

The collapse of the market of futures transactions with tulip bulbs on February 5, 1637 led to a 20-fold decrease in prices for them to the level of 1634 ^{[28, p. 103]}. The involvement of many economic entities of the Netherlands in the tulip trade caused a deep economic crisis in their economy, associated not only with the bankruptcies of the participants of the "tulip" market themselves, but also with a series of non-payments and disruption of banks, as well as insurance companies. It was only by the 1640s that the crisis phenomena were largely settled ^{[7, p. 11]}, and later the tulips practically lost their value. For example, the bulb of the above–mentioned "August Forever" cost in 1739 only 0.1 guilder - this was 1/200 of 1% of its peak price, which became one of the factors of the loss of both this variety of tulips and their sharp-leaved form as a whole ^{[9, p. 37-38]}.

In order to prevent such crises in the future, the Dutch government began to apply more widely the decree issued back in 1606 banning speculative trading in shares of the Dutch OIC related to their issue for non-existent overseas expeditions and the increment of stock prices due to the separation of financial capital from the actual value of assets. Moreover, the requirements for registration of participants in exchange trading and for the conditions for issuing securities were tightened, so the Netherlands was able to avoid the speculative component in the above-mentioned crisis of 1672. However, groups of entrepreneurs appeared in other countries who wanted to organize an analogue of Tulip mania and make significant money on it.

The South Seas Bubble in the UKThe South Seas Company was established in 1711 on the basis of a law of the British Parliament in the form of a public-private partnership with the aim of expanding trade with America, due to which it was planned to manage the English public debt more effectively, if possible, reduce it.

In 1713, the company was granted monopoly rights of trade in the region, including the asiento – the right to the specified trade in Negro slaves with the Spanish and Portuguese colonies in America ^{[22, p. 768]}. Moreover, the investment attractiveness of the KYUM was determined by information about large reserves of gold and silver in South America, which could be accessed and, consequently, traded in these metals with great profit.

The first shares of KUM were issued with a dividend of 6% per annum, which was provided by the repurchase of 10 million pounds of short-term UK government debt. This attracted new shareholders and testified to the future success of the business, but after the deterioration of relations with Spain and the levying of an increased tax on the slave trade by its authorities, business realities turned out to be not so rosy. The first KYUM expedition took place only in 1717 and did not bring significant profit, then the company acquired an additional 2 million pounds of British government debt, but there was not enough money to service it at such a high interest rate, therefore, an increase in assets was required to maintain the volume of dividend payments at the same level.

Despite the ambiguity of the connection of debt transactions with the real trading activities of the KUM, King George I of Great Britain became its manager in 1718, which forced investors to pay attention to this business with renewed vigor. The public debt of Great Britain reached 50 million pounds in 1719, of which private companies owned 3.4 million pounds to the Bank of England, 3.2 million pounds to the British OIC and 11.7 million pounds to the KUM. It was planned that KYUM would become the holder of half of the UK government debt after carrying out an operation to refinance highly liquid debt obligations with a high rate of return to low–liquid ones with a low rate of return. These plans would reduce the burden on servicing the debt obligations of the government, which encouraged the activities of the KUM and created favorable conditions for it.

In February 1720, the beginning came in the "inflating" of the bubble by the KUM stock: from the a priori price of 128 f. art., it already increased to 330 f. art. in March, in May – to 550 f. art. ^{[11, p. 1949]}. At the same time, there was no progress in trading activities in such a short period, but rumors were cultivated among the population about the untold wealth obtained in South America and expressed in gold and silver ^{[21, p. 890]}. Instead, the King and the Parliament of Great Britain issued a huge loan of 70 million pounds to KYUM to expand overseas trade. Many people began to buy shares of KUM, spending their savings on it and selling property in the hope of an easy and quick profit. Statesmen and even members of the royal court became investors of the KYUM, which inspired optimism in its stability and inviolability, however, these persons did not spend their own funds, but purchased receipts that allowed them to profit from an increase in stock prices after a set period of time.

In June 1720, the British Parliament passed an Act on countering bubbles on the stock Exchange (Eng. Bubble Act), designed to manage the unlimited issuance of equity securities of joint-stock companies over the limits of their physical capital and thereby avoid the growth of quotations of such shares due to their resale, speculation and unreasonable heating of demand. Speculative trading in shares of other companies was hampered by new exchange market regulation measures, after which buyers concentrated their activities on KUM securities. Ironically, the effect of this law turned out to be the opposite, and by August, the price of the KUM stock reached its peak value of over one thousand pounds. In September 1720, the bubble "burst" when the price of the stock dropped to 170 pounds. in October and by December, the a posteriori price returned to the values at the beginning of the year ^{[11, 1949]}.

The first to declare bankruptcy were speculators who purchased shares of KYUM with borrowed funds, after which a series of bankruptcies was observed among bankers and gold traders who did not receive the borrowed funds on time. The crisis turned out to be so large-scale, as many ordinary people and representatives of the aristocracy became its victims. For example, Isaac Newton missed his 20-30 thousand pounds invested in shares of KUM, after which he stated: "I can calculate the movement of the stars, but not the degree of insanity of a person" ^{[19, p. 35]}. The parliamentary investigation revealed the corrupt ties of cabinet members within the framework of relations with the KUM on the placement of its shares, which caused an unprecedented scandal.

The crisis affected many other issuers of shares, including the Royal African Company (AS), established several decades earlier. It was formed by King Charles II of Great Britain in 1672 with the signing of a corresponding charter on HOW, which made it a monopoly in trade on the Atlantic coast of Africa from the Gulf of Guinea to the lands North of modern Namibia. The document in question differed little from the charters issued in relation to the previously formed OIC, and determined priorities in obtaining valuable colonial goods, including gold on the territory of the Ashanti Kingdom, as well as operations that subsequently became no less in demand for the capture (purchase) of Negro slaves for the purpose of transporting them to work in Central and North America. In order to ensure its economic presence in Africa, the Company began building a series of trading posts, warehouses and shopping complexes, as well as forts and other fortified military structures there ^{[23, p. 1151]}.

By the 1690s, the aggravation of conflicts between Great Britain and the Netherlands and the loss of forts in West Africa had a negative impact on the exchange rate of its shares, which by the beginning of the XVIII century were sold at 20-24 f. art. at a nominal value of 100 f. art. The above-discussed heating of the stock market, based on the arrival of a mass investor, led to a similar increase in quotations stocks AS: from 24 f. art. – in January 1720, to 50-60 f. art. – in the spring, 140 f. art. – in June and 195 f. art. – at the peak of the market. The September "rupture" of the South Seas bubble led to a decrease in the stock price to both 60 f. art. and 45 f. art. – by the end of the year ^{[5, p. 227]}. The quotations of securities listed on the stock exchange changed under the influence of the general mood of investors, but the shares were not the subject of speculation, but the company's reputation was significantly damaged. Under the yoke of financial and managerial difficulties, it was liquidated in 1752, and activity in the main direction – the transatlantic slave trade was stopped as early as 1731 ^{[18, p. 447]}.

The Mississippi Bubble in FranceThe speculative crises described earlier were nevertheless based on the desire of entrepreneurs to meet the demand of the population and organize production and sales activities for this, in the implementation of which miscalculations were made.

The theoretical basis of the bubble under consideration was the invention of fiat or "paper" money not backed by precious metal in the state treasury, which John Law (1671-1729), a Scottish financier, gambler and adventurer, founded in 1705 and later put into practice in France ^{[4, p. 274]}. The issue of such money made it possible to lower the burden of public debt for the French treasury, which was on the verge of declaring default in 1715. By analogy with money circulation, according to the plan of this scam, private companies will succeed by issuing their shares under the spreading information about allegedly super-profitable activities in the colonies, which will attract investors and increase the price of shares ^{[16, p. 26]}.

In 1716, D. Law established a Universal Bank in France (fr. Banque G?n?rale), which gained access to its public finances and through the issuance of unsecured money and began to solve the problem of public debt. The following year, D. Law secured the granting of monopoly rights to the Mississippi Company, which was founded in 1684, and renamed it the Western Company (French Compagnie d'Occident), in 1719. it became an Indian Company (French Compagnie des Indes). The colonies of France located in North America along the course of the Mississippi River were developed – they included vast lands north of modern Louisiana to Canada. Information about the natural resources of these territories began to be purposefully disseminated, with an emphasis on the harvesting of beaver skins and the extraction of precious metals, which initially did not correspond to reality.

The D. Lo company received the right to mint coins in early 1719, in August – the right to collect indirect taxes of the French crown in the Mississippi colonies and in October – direct taxes. At the next stage, a decision is made to refinance the French public debt by converting it into company shares. The result of the circulation of positive information about market conditions was an increase in the quotations of shares of the Indian Company from 500 livres in January 1719 to 10 thousand livres in December; the price of shares in early 1720 increased 10 times compared to the same period last year ^{[6, p. 630]}. The mass of paper money issued by the Universal Bank increased, which led to inflationary phenomena in the real estate market in France and in the market of expensive goods. At the same time, such money was issued for the future extraction of gold and silver from the Mississippi River Valley, which was not there.

In January 1720, the stock prices of the Indian Company began to decline, which caused a wave of panic among those who wanted to sell its shares and fix investors' profits. Restrictions were imposed on the repurchase of shares, but already in May a scandal broke out about the absence of gold mines in the Mississippi River area – the paper money of the Universal Bank depreciated by 50%, which was facilitated by its participation in trading shares of the Indian Company ^{[26, p. 163]}. As a result, by September 1720, the company's stock prices had dropped to two thousand livres, by December – to one thousand livres and by 1721 – to 500 livres ^{[10, p. 103]}. Soon both the company and the bank were declared bankrupt. The possibility of transferring monetary policy into the private hands of people capable of spreading false information about market conditions through rumors and deception became both the basis of the Mississippi bubble and its difference from the South Sea bubble. D. Law was forced to flee Paris in 1721 and as a consequence of the scam under consideration, the French stock market and its central bank until the end centuries lagged behind London and Amsterdam in terms of the functioning of similar institutions there ^{[25, p. 305]}.

ConclusionConsidering the crises described above as the setting for many subsequent similar phenomena of the future, it is important to take into account that "contrary to the one-line schemes of social evolution, suggesting that increasing complexity (at least up to the level of a pre–industrial state) is inevitably accompanied by socio-political homoarchization - increasing inequality and social stratification, reducing the role of broad segments of the population in political life" ^{[1, p. 152]}.

By analogy with Tulip Mania, the bubbles of the South Seas and Mississippi, as well as the events of 1929, speculative crises gained new strength and retained elements of the progenitors in the face of trading companies and their finances. At the same time, researchers pay detailed attention to speculative crises of the past and present, develop mathematical models for them ^{[12, p. 1808]}.

Even many supervisory (and regulatory) bodies and the digital technologies at their disposal could not prevent the crisis of 2007/2008 ^{[29, p. 4]}. The measures taken by both governments and self-regulating organizations to prevent speculative crises still fail to prohibit the freedom to conclude a contract and the right of economic entities to dispose of their assets, which allows crises to appear again and again with renewed vigor, damaging the economy and allowing enterprising businessmen to withdraw funds from uninformed persons who are easily conducted on promises to get a high profit in a short period of time.