Early in 1720, a major investor, angered by Law's refusal to include him in a new round at the price he wanted, tried to sell a large number of shares, until the regent intervened to order him to desist. This caused a crisis of confidence. In the meantime, other investors with an unclouded view of the future had been converting their stock to gold and silver and taking it out of the country. Eventually so much coinage had left the country that there was not enough left to ensure the daily operations of business.
At this point, the value of Mississippi shares had fallen so far that an act of theater was thought necessary to restore confidence. Six thousand of the poorest people of Paris were drafted--"impressed"--against their will, outfitted with work clothes and shovels suitable for digging gold in Mississippi, and marched through the center of Paris day after day. They were then sent off to port cities for ostensible shipment to America, but most escaped, sold their tools and returned home. The Mississippi stock rallied slightly. In the meantime the regent continually printed more paper money, to try to cover for the absence of gold and silver coin. Eventually, there was 2600 million in paper money circulating, backed by less than half that in coin. Soon after, the remaining air went out of the Mississippi company, it was divested of its remaining rights and assets, and Law left the country newly impoverished.
Mackay boasts that England handled the South-Seas bubble much better than France did the Mississippi speculation. The facts are very similar, except that there was even less to the story. France at least had access to Mississippi and Louisiana. The South-Seas manipulation was based on rights to trade with Latin American countries which had not actually been granted to the company by the King of Spain, who permitted only one ship a year from the company to visit Mexico, Peru and Chile, and appropriated twenty percent of the profits for himself. A year after the South-Seas company was formed in 1717, Spain broke with England and revoked even this small privilege.
In February 1720, Parliament accepted a proposal from the South-Seas Company to retire the public debt, and the company's stock rose from 130 pounds a share to 300 in a single day. Before the slow-moving legislative process had been completed, the stock was at nearly four hundred. One of the few public figures willing to speak out against the South-Seas scheme was Mr. Walpole, who said that it would "hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labor for a prospect of imaginary wealth." He pointed out accurately that the scheme was not really about trading with Latin America: it was, instead, "to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose."
Imitators began springing up everywhere with their own bubbles, some based on solid business schemes had they been pursued in good faith. "But they were established merely with the view of raising the shares in the market," Mackay writes. "The projectors took the first opportunity of a rise to sell out, and next morning the scheme was at an end." Other schemes were obvious frauds which nonetheless fooled a profit-mad public. One company raised capital for a perpetual motion machine, while a particularly clever promoter--really a postmodernist--issued a prospectus for "A company for carrying on an undertaking of great advantage, but nobody to know what it is." He sold out an initial subscription, made a quick 2000 pounds, and left the country.
In the first week of June 1720, the stock of the South-Seas company rose to eight hundred and ninety,setting off a spate of profit-taking and driving the stock down by 20%. By September it had lost fifty percent of its value, and it was known that the chairman and some other principals had sold all their shares. An attempt by the Bank of England to shore up the company backfired, causing a run on the bank and the default of bankers and goldsmiths who had lent money upon, or made a market for, South-Seas stock, which now collapsed to one eighth of its maximum value.
Mackay comments that bubbles can only grow and burst in an atmosphere of general immorality. "Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later."
Mackay's most entertaining chapter is about the tulipomania. Starting in 1600, the wealthy of Holland, and eventually of all Europe, were caught up in a tulip craze, with traders investing thousands of florin in a single bulb. One merchant invested half his extensive fortune in a rare specimen, not for resale but for his personal admiration and that of his friends. Another hapless collector inexplicably left a recent purchase lying on his kitchen counter, where it was eaten by an ignorant visitor who mistook it for an onion.
Inevitably tulip exchanges were established, where jobbers manipulated the price. No-one any longer bought tulips to plant in the garden, but only for speculation. "It was seen that someone must lose fearfully in the end. As this conviction spread, prices fell, and never rose again." The market collapsed, and many traders could no longer sell tulips even at a fraction of what they paid for them.
The semiotics of bubbles
The first insight gained from a study of bubbles is that the business concept at the center is a sort of placeholder, rather than the actual DNA of a potential thriving company. In fact, the business idea is, in semiotics terms, really only a signifier, which only gains meaning when coupled with a significance, thereby transforming into a sign. Signifiers are relatively empty in themselves. In the case of bubble companies, the associated significance is not "Healthy, profitable company, returning profits to its investors in the long term", but a belief that the acquirer of shares, being a hell of a fellow, can ride an increase in the stock price, then get out in time. The core idea therefore is not required to have enough "legs" to last for any length of time, nor to return profits ever; it is simply required to meet certain minimum standards of persuasiveness, so that someone will buy your shares from you for more than you paid. In other words, as an investor in such companies, you are not gambling that the underlying business will succeed. You are instead gambling that the central idea will remain persuasive to other people longer than it is to you.
The brilliance of the promoter of the secret company thus becomes evident: he was the first, and perhaps the only promoter in history to create a successful company without even the slightest pretense of a business model: a sign without a signifier. The significance was all, but the signifier was absent. I would like to think that after making his two thousand pound score, he became a poet or a novelist.
I have seen first hand a couple of supporting proofs of the thesis that no-one knowledgeably situated to make money cares whether there is a real business at the core. When I was practicing law in the '80's, I represented a tax shelter promoter. One of his shelters was a software company. I had a speciality in computer contracts, and offered to evaluate the company's agreements, create a form of software license, etc. He looked at me as if I were crazy: a company which is a mere placeholder (the significance here was "save taxes", not "thriving software company") does not require strong contracts: paying me to work on them would have been a completely unnecessary expense.
(A pause for a completely irrelevant story about this client. I visited his house one time and his four year old son inquired if he had driven home in the Bentley or the Rolls. A short while later, as we ate dinner, the boy stood by the table with an eight by ten photograph of the client's Cessna, repeatedly crooning, "Look at the plane," then flipping it around and saying, "All gone!" A month later, the client, feverishly lobbying Congressmen all over the country against legislation curtailing tax shelters, ran out of gas and crashed that Cessna on the approach to Atlanta airport, killing himself and his chief operations officer.)
Later, when I was affiliated with a software services company, a public firm made an offer to purchase us in a stock swap. The banker who was brokering the deal, who had worked with us on other matters, stood in my office and said, with a penetrating stare, "The stock should stay good until the end of the year. Do you understand me? The stock should stay good until the end of the year." I concluded that he knew something and that the stock would not stay good longer than that. He apparently felt some ethical obligation to warn us, even in highly coded terms. A short time later, well before year's end, it turned out that another company recently acquired by our suitor had overstated revenues. This set off a crisis of confidence and the stock we were so close to accepting lost 90% of its value in a few days.
The banker did not, so far as I recall, spend any time telling me that the acquiring company was a good or bad environment, would be or remain profitable, would have the money or the interest to help our business grow within its empire. The suitor, which had seen its core business crumble, was buying a software services firm every month, creating a series of signs of its own future prospects, merely to keep its own price up. Its acquisition of us, from that perspective, would have been equivalent to the Mississippi company parading homeless men with picks and shovels through the streets of Paris.
As far as signifiers go, a tulip is a much better one than the South-Seas or Mississippi companies--there's far more reality to a tulip, which is a tangible object capable of producing a pretty flower.