Money For Nothing: The First Great Stock Market Boom, Fraud, And Crash

It was called the South Sea Bubble, and it was one of the most precarious financial crises in history. It was also the birth of modern finance. MIT Professor Thomas Levenson unfurls this sweeping tale of one of the greatest financial frauds in history in his new book Money for Nothing: The Scientists, Fraudsters, and Corrupt Politicians Who Reinvented Money, Panicked a Nation, and Made the World Rich. The book explores the connection between the revolutionary advances in science, unveiled in quick succession in the early 18^thcentury, with the invention of financial capitalism.

In the early 1700s, England was running out of money after a protracted war with France. The British Parliament attempted to raise funds by selling debt to its citizens. The pitch: pay now and collect the money with interest after the war. The idea was to leverage the stock market—a relatively new invention—where Isaac Newton’s principles of motion were fast being applied to the world of money.

The irresistible lure of the South Sea Bubble
The movers and shakers at the center of London’s stock market had formed the South Sea Company. They hatched a highly successful scheme to turn pieces of the national debt into shares of company stock. Over the spring of 1720, stock prices doubled, doubled again, and then doubled once more. Londoners, from tradespeople to British royals, got caught up in the trend.

Unlike science, though, in which new ideas are tested and retested, this financial revolution was completely freewheeling, and after shooting skyward, the market inexplicably dropped. The “South Sea Bubble,” as it was later dubbed, had devastating consequences for individual investors, Britain’s economy, and the economies of nations around the world.

The end result of this wild ride? Improbably enough, the systems and structures of modern finance. British leaders chose to take a more enterprising lesson from the debacle—that issuing bonds that buyers could trade or use as collateral was a successful way to raise capital. Other countries, understandably, were wary of the practice, and did not adopt it for another century. In the interim, however, Britain raised immense quantities of money, giving it an edge in wars against far more populous and wealthy nations.