The First Tech Bubble: 1720

The first global financial bubble in stock prices occurred 1720 …  Using newly collected stock prices for British and Dutch firms in 1720, we find evidence against indiscriminate irrational exuberance and evidence in favor of speculation about two factors:  the Atlantic trade and the incorporation of insurance companies. The fundamentals of both sectors may have led to high expectations of future growth.  Our findings are consistent with the hypothesis that financial bubbles require a plausible story to justify investor optimism. …

Although 1720 is not generally viewed as a period of technological novelty, we argue in this paper that there were at least three critical innovations that took place in a very short span of time; two of which were financial innovations, the other was a major potential shift in the configuration of global trade.  The first innovation was financial engineering at a national scale. The Mississippi Company and the South Sea Company issued equity shares in exchange for government debt; in effect converting the national debt into corporate stock. …

The second innovation was an incipient shift in global trade. Both of the companies were set up to exploit trade in the Americas. … The third innovation was also financial. The first publicly traded insurance corporations were chartered in Great Britain 1720, as a result of the Act. As such, they represented a new model of capital formation for maritime insurance firms – in a nation built on maritime trade.

More here.  These sure do seem like big innovations, which eventually did have large implications.  The general lesson: it is easy to over-estimate the profits to be gained by first-movers exploiting even very large innovations.

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  • josh

    1 minute of googling. couple of sources

    “When established by William Paterson, Bank of England was nothing more than a small organization consisting of 20 people. (josh: 1694)

    “Fifteen years after the bank was established, the British government had to borrow heavily from Bank of England to finance a series of wars. In return, the Bank of England received a monopoly in the banking industry.”
    Provincial banknote issues
    Attempts to restrict banknote issue by other banks began in 1708 and 1709, when Acts of Parliament were passed which prohibited companies of more than six people to set up banks and issue notes.

    “1717 Britain switches to Gold Standard.
    1720 Note issue by Bank of England exceeds total of all goldsmith bankers Bubble Act. ”

    Now, I’m no economist, but there may be more to this than irrational exuberance. At what point did Bank of England notes become themselves money rather than promises of money? Was this the first fractional reserve system or did it greatly increase the money supply in any way? Did people begin looking for other means of saving, e.g. stocks?

  • Curt Adams

    “Indiscriminate irrational exuberance” seems a strawman. Has there ever been an example of “indiscriminate” irrational exuberance? Every bubble I can think of has had fairly specific targets.

  • Sorry, but insitutional innovations, which are what are described here, are not the same thing as technological innovations. The main story here is simply bilge.

    However, there was a fascination with tech change at the time of these connected bubbles. A sign of this is the famous fraud that happened in UK near the peak of the South Sea bubble, when one entrepreneur offered a stock for “a project whose purpose will soon be revealed,” and made quite a bit of money. OTOH, maybe people thought he was up to another institutional innovation.

    • admin

      Institutions are technology.

  • admin,

    Makes a great line, but not necessarily, and certainly not in the established literature of most institutionaist economists, although the Clarence Ayres tradition tended to push your line. I would agree that sometimes technoligical change is deeply linked to instituitonal change (there are many examples), but they are not one and the same thing.

  • jonathan

    During the internet bubble, there was lots of junk talk about 1st mover advantage. To me, times change but the irrationality of the belief remains. Pioneers in America had no 1st mover advantage – had a disadvantage because if they made a mark, it’s a name on a map. The Gold Rush made a few late comers rich. JD Rockefeller consolidated oil (ruthlessly). Microsoft didn’t invent anything. If there’s an inherent advantage, it’s to the consolidators who come in with fresh money and fresh approaches to an area, an industry, an endeavor which has been gashed at up to the point where consolidation can reap rewards.

  • Jayson Virissimo

    “JD Rockefeller consolidated oil (ruthlessly)” -jonathan

    How is buying things by offering somebody more than they are being offered by other people ruthless?

  • Doug S.

    Technically, Rockefeller consolidated oil refining.

    Also, part of the 1920s stock bubble was driven by tech stocks, specifically companies involved in radio technology.

  • Re: “The general lesson: it is easy to over-estimate the profits to be gained by first-movers exploiting even very large innovations.””

    I think it would be bad to draw general lessons about first-mover advantages from data from the 1700s.

    The first-mover advantage depends in part on how rapidly it is possible to draw ahead of your competitors – which in turn depends on factors like the general rate of progress, and whether you have the technology to lock in customers.

    Those factors are increasing over time. First-mover advantages were less significant way back when.

  • What about all those Efficient Market Hypothesis adherents who tell us there are no such things as bubbles?

    In my naive way, I would have thought purchases of assets based on expectations of rising value in excess of actual increases in income from the assets would be a bubble. Surely, that is what happened with the housing bubbles, for example.

  • Let me go back to the original argument. The three “innovations” in finance were institutional, but they had nothing to do with technology. It is not comparable to say some change in the financial system arising due to the invention of the internet and the emergence of online banking, or the invention of computers and advanced software leading to automated trading systems.

    As for the reconfiguration of international trade, cross-Atlantic trade had already been going on for several centuries by 1720. The more historically astute Charles Kindleberger identified what lay behind the two bubbles as being the Treaty of Utrecht in 1713, which certainly had nothing to do with technology. It ended the War of the Spanish Succession, thereby ending seafaring wars that had been disrupting trade routes that already existed. This period coincided also with the peak of piracy, which would also begin to subside as the period of peace became increasingly established.