2. New Evidence on the First Financial Bubble William Goetzmann Edwin J. Beinecke Professor of Finance and Management Studies Yale School of Management November 13, 2009

3. Background East Indies Company VOC, 1602 West Indies Company WIC, 1621 British East India Company EIC, 1600 –funding 1708 Royal Africa Company, 1660 Bank of England, 1694 funding of debt, paper money Royal Exchange Company and the London Assurance, 1719 John Law, Banque, Company Des Indes, 1719 1720’s New Issues in London South Sea Company, 1711 Asiento, funding Rotterdam Insurance Company, 1720 Crash in Fall 1720

4. Interpretations Bubble Drive by Government Debt Conversion Irrationality Mackay “Extraordinary Delusions…” 1863 Kindleberger (1978) (Dale, Johnson, & Tang (2005) Velde (2009) Plausibility Scott (1912) Garber (1990) Neal (1990)

5. Our Approach Look at cross-section Did bubble hit some industries/companies not others? Look at timing Daily data and coincidence with events may help identify source of expectations. Look at international evidence Holland’s Bubble – never before explored Data never found

6. Our Findings It was an Insurance Company Bubble It Was about America It was about Corporate Regulation

7. Data Neal (1990) Freke’s Price of Stocks Castaing’s The Course of the Exchange The Bubblers Mirror Leydse Courant ( Hague) Het Groot Tafereel

9. “Monument consacré à la posterité en memoire de la folie incroyable de la XX année du XVIII siècle” Bernard Picart, 1720

17. The Bubbler’s Mirror A British Satirical Print Listed par value of shares and maximum level of price in the bubble. Sufficient to consider comparative bubbles.

18. Bubbler’s Mirror: Maximum Percentage Price Increase of British Firms over par by Industry, 1720 IndustryTotal Total (less large firms) Number Insurance2013%1717%8 Real Estate1625% 2 Commodity1208% 12 Manufacture1166% 6 Atlantic895%948%4 Marine875% 6 Service/Utility567% 3 Pacific349% 1 Bank/Finance335%500%3 Total1172%995%45

19. A New World Bubble Mississippi Company – Companie des Indes (combined E&W) UK Difference EIC/SS Dutch Similarity? VOC/WIC New data on VOC and WIC from Leydse Courant Check for a Bubble

20. Why Americas? War of Spanish Succession? War of Quadruple Alliance Slave Trade/Triangle Trade Louisiana Dafoe

24. International Linkage South Sea Company Timing Insurance Companies Dutch WIC

26. What sparked the crash? Obligation to pay 50,000 pounds on September 11 th Investigation whether insurance companies acted beyond their charter on August 29 th In Jamaica 12 ships sank for insured value of 72,000 announced on August 30 th Burglary at the home of one of the directors, September 2nd

27. Spread to Netherlands Attempt to Create an Amsterdam Insurance Company Success at creating a Rotterdam insurance Company Edmond Hoyle Rapid imitation across Dutch cities Spread to Hamburg. Rotterdam Company.

29. Do we learn from the Dutch Companies? 1.Projects typically associated with particular city (East Indies company consolidation of smaller companies) 2. If the consolidation was anticipated, every city wanted to participate 3. Scale of Dutch bubble smaller (see also Gelderblom and Jonker (2009)) 4. Mostly insurance related. 5. Specifically note variety of lines of business.

30. Irrationality?

31. Madness of Crowds

32. Herd Behavior

33. Archetypes of Crash

34. Investor Brain Disorder

35. Removal of Stone

36. Speculation as Evil

37. Or Shift in Risk?

38. Pastor and Veronesi New/Old Economies Bubble stronger in new than in old economy Stock prices in both economies bottom at the end of the revolution New economy's market beta should increase sharply before end of the revolution New economy's volatility should should rise sharply and exceed old economy's volatility Old economy's volatility should rise but less than new economy's one New economy's beta and both volatilities should peak at the end of the revolution

39. Formal test on innovation Pastor and Veronesi (2009) develop framework for fast- adopted innovations with high uncertainty: Rational to invest small fraction in new technology Risk first predominantly idiosyncratic Learn on productivity gain of innovation Shift from “old” to “new” economy by investing more in new technology Risk of new technology becomes systematic

42. What were the consequences of the bubble? 1. Surviving firms were very successful (Stad Rotterdam, Middelburg), which proves the viability of the companies 2. Vast majority never acquired critical mass of capital to survive the crisis 3. Impact on the real economy minimal (see Slechte (1982)) 4. Non-surviving companies returned capital to investors

43. Conclusions 1. Evidence against indiscriminate irrational enthusiasm 2. Expectations about Atlantic trade important factor 3. Innovation in insurance market played a large role 4. Expansion of “rights” of corporations