A guest review by LH Member Laurence Scales.

Money for Nothing, the South Sea Bubble and the Invention of Modern Capitalism by Tom Levenson

The spectre of slavery and empire has been a focus of the news this year. This book concerns a great financial crash, the collapse of the South Sea Company in 1720: the South Sea Bubble. The business of the South Sea Company was, notionally, the slave trade to South America. Its only mitigating circumstance was that, at least until the crash, the company was extremely bad at it and did very little trade at all.

But this book is not a study of slavery in the tropics. It is about how the South Sea Company was built up using an emerging technology – financial engineering – in the City of London. The company men were sharks, and their customers green, but not by a long way was all the financial engineering dishonest. Much of it remains legal and above board practice today.

Though this is non-fiction the author, Tom Levenson, wins attention by introducing in the first pages a character with whom you can sympathise, especially when otherwise you suspect you will be surrounded by characters who are hopeless dupes or artful tricksters. Our companion in this case is Daniel Defoe – a narrator who surfaces now and again to give vent to what you may be feeling, and what you may still feel after the financial collapse of 2008. He was a novelist of course (Robinson Crusoe, 1719) but also a trader who knew a thing or two about financial ruin. If only we had Defoe now to point a finger at, for example, ‘a true triumvirate of modern thieving’. (You may insert names of your choice from the present day.) But wait, it seems that Defoe too was compromised!

When this book arrived I found that I had already enjoyed Newton and the Counterfeiter by the same author, in which Isaac Newton stars in his lesser known capacity of senior officer of the Royal Mint, pursuing the devious forger William Chaloner to the gallows. Levenson is an American science writer, but not a moonlighting science academic, so you will not be baffled by the science, though I found some of the trail of worthless paper, the shares and ‘liquid instruments’, the options and embryonic derivatives impossible to follow around every turn, though it hardly matters with the story told at the pace of a racing commentator.

The first several chapters introduce Isaac Newton again, Edmond Halley of comet fame, and William Petty. Petty is a name that crops up in the early Royal Society but also became infamous for his taking on the small task of a land survey for Cromwell in Ireland. (Whatever came of that?) These actors do not lead us off into celestial mechanics but prepare us for the mindset that laid foundations for the financial markets of today, and the strength of the City of London. Then we are introduced to the architects of the bubble, the gang whose modern counterparts today gamble with our money and retire to a life of ease whether their customers’ bank balances rise to the skies, or the sky falls in on them.

The South Sea Company, headquartered in the City of London at the south part of Bishopsgate, was not just any old company. There were not many companies in those days. It was used not just to make a few people rich but also as a ruse to help pay off the national debt, no less. At times the demand for shares was so great, and the exchange of one kind of paper asset for another so fevered, that the Bank of England had to set up counters in the street. (A fine picture of backed-up buses it conjures today.) One of the winners, who kept a cool head and sold at the right time, was Thomas Guy who endowed Guy’s Hospital.

A drier commentator than Defoe was Archibald Hutcheson MP. His contributions appeared in the form of calculations in a series of pamphlets. What he announced to those who cared to look at his figures in the run up to the crash, was that this emperor had no clothes.

I felt that perhaps Levenson was so intent the financial wizardry that he was too distracted to count the damage and misery that resulted from the crash. He is also more interested too in the emergence of our first Prime Minister, Sir Robert Walpole, than in the now destitute ladies’ maids who had been caught up in the craze for buying shares. History is not written by ladies’ maids so our quantum of solace resides in a few falls from a great height: one man seized after the crash with apoplexy, an estate or two confiscated, and an impoverished peer seeking sanctuary in the obscurity of a colonial governorship.

I did not know that France had its own bubble, the Mississippi Company, also in 1720. We hear about that. It blew up for slightly different reasons. Paris had its own financial engineer. He was a Briton, John Law.

The book has helped me better understand a number of different institutions of which I knew some history – the Royal Mint, the Bank of England, the Stock Exchange, the City indeed. Also, I did not know when before 2008 the clever/dodgy financial engineering started, the ways in which you could make a mountain of debt look like a solid asset, and make an empty safe look like a safe bet. The answer is, a long way back. If you want an embarkation point from which to understand the history of the City of London as a financial rather than simply mercantile or population centre then this book is a useful one, and one to whet your appetite.

The South Sea Company survived the crash and unfortunately began to trade more vigorously in slaves. But the legacy of the scheming and improvidence of the early South Sea Company has not been wholly bad. Levenson draws his account to a close with lessons both from the 1720 Bubble and the crash of ’08. We may be sure that the most pressing lessons go unlearnt and that our assets will go on to dive another day.

Money for Nothing, the South Sea Bubble and the Invention of Modern Capitalism (480pp, hardback, illustrated) by Tom Levenson is published in the UK by Head of Zeus with a cover price of £20.

Review by Laurence Scales @LWalksLondon