The exhibition traces back schemes from the 1600s, such as the Darien Disaster, right through the Railway Mania and Overend and Gurney Bank failure of 1866 through to Northern Rock and the credit crisis today.
Here are the key disasters you can check out if you visit the Museum before the end of May.
The Darien Scheme. 1700
The Darien Scheme, which became known as the Darien Disaster, was a colonisation project that attempted by the Kingdom of Scotland, which was a separate Kingdom at the time, to become a world trading nation.
The idea was to establish a colony called "Caledonia" on the Isthmus of Panama in the late 1690s, and the Darien Company was formed with £170,000 of investment (about £300 million in purchasing power today), mainly from Scottish nobles and landowners.
From the outset, the undertaking had problems due to poor planning and provision, weak leadership, a lack of demand for the goods traded, devastating epidemics of disease and shortage of food.
It was also heavily opposed by the King of England, William III, and other English rival trading companies, as well as those of France and Spain. As a result, the Scheme was abandoned in April 1700, after a siege by Spanish forces.
As the Darien Company was backed by nearly a quarter of all of the money circulating in Scotland at that time, the nobles and landowners were near completely ruined and was an important factor in weakening the resistance to the Act of Union.
Not long after, the Scots lost the Battle of Culloden in 1746 and became part of the United Kingdom, or England if you want to be really argumentative.
The South Sea Bubble, 1720
In 1711, after a war which left Britain millions of pounds in debt, the government proposed a deal with the South Sea Company to allow Britain’s debt to be financed in return for a higher level of interest. In order to sweeten the deal, the government added another benefit: sole trading rights in the South Seas.
Because of their monopolistic position and strength with government backing, shares in the South Sea Company were incredibly popular and their value rose to ten times their initial public offering price.
Seeing the success of the first issue of shares, the South Sea Company quickly issued more. Again, the stock was rapidly consumed by the voracious appetite of the investors. Investors saw that the stock was going to the stratosphere and they wanted in.
Equally, many investors were impressed by the lavish corporate offices the Company had set up even though, at the time, they had not even started trading in the South Seas.
The extent of the South Sea bubble can be seen by the fact that 462 members of the House of Commons and 112 Peers had some sort of stake in the South Sea Company. Everyone bought into the stock.
Then the 'bubble' burst because people discovered that the South Sea Company, after several years of trading, had yet to actually deliver any goods or produce from the South Seas. The shares had been valuable on paper, but worthless in reality. Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out of the markets.
People all over the country lost all of their money. Porters and ladies maids who had bought their own carriages became destitute almost overnight. The Clergy, Bishops and the Gentry lost their life savings. The whole country suffered a catastrophic loss of money and property. There was even a call in Parliament to resurrect the Roman punishment of Lex Pompeii, where bankers and those involved in this disaster would be tied in sacks with snakes and thrown into the Thames.
The South Sea Company Directors were arrested and their estates forfeited and frantic bankers thronged the lobbies at Parliament.
The Bubblers Medley, or a Sketch of the Times: Being Europe’s Memorial for the Year 1720
The satirical print shown here is a remarkably rich record of the popular culture surrounding the South Sea Bubble in England and the Mississippi Bubble in France, both occurring in 1720.
The France War Crisis, 1797
After the storming of the Bastille in 1789, France was overseen by various coalition governments of revolutionary forces and, for over ten years, created wars with other European nations in an attempt to gain supremacy.
On 21st January 1793, the revolutionary government executed Louis XVI after a show trial. Spain and Portugal entered the anti-French coalition in January 1793, and, on 1st February, France declared war on Great Britain and the Dutch Republic.
The war with France was extremely expensive, straining Great Britain's finances.
Unlike the latter stages of the Napoleonic Wars, the war effort was mainly operated by sea power and by supplying funds to other coalition members facing France. This meant that, in 1797, Prime Minister William Pitt the Younger was forced to protect Britain’s gold reserves by preventing individuals from exchanging banknotes for gold.
This led to one of the most famous cartoons in Britain’s history of finance: the ravishment of the Old Lady of Threadneedle Street by Thomas Gillray in May 1797.
The cartoon is a reference to the financial crisis of the time and the issuing of paper money not backed by gold, and shows William Pitt pretending to woo the Bank which is shown as an old lady wearing a dress of £1 notes seated on a chest of gold. Britain would continue to use paper money for over two decades.
Hence, the cartoon led to the Bank of England gaining nickname the “The Old Lady of Threadneedle Street”*.
The Poyais Scam, 1825
Gregor MacGregor was a Scottish soldier, adventurer, land speculator, and coloniser who fought in the South American struggle for independence. Upon his return to England in 1820, he claimed to have been made the Cacique (a Prince) of the Principality of Poyais, an independent nation on the Bay of Honduras.
This nation was given to him by the native chieftain King George Frederic Augustus I of the Mosquito Shore and Nation, and was the equivalent of 12,500 miles² (32,400 km²) of fertile land.
At the time, British merchants were all too eager to enter the South American market and MacGregor was welcomed by London high society. He also claimed that one of his ancestors was a survivor of the Darien Scheme and, in order to compensate for this, he had decided to draw most of the settlers from Scotland.
MacGregor established offices in Edinburgh and Glasgow, selling land rights for 3 shillings and 3 pence per acre in 1822 (about £10 an acre today).
Soon after, a “Sketch of the Mosquito Shore” including the Territory of Poyais written by Captain Thomas Strangeways was released, describing Poyais in glowing terms and boasting of the profit one could gain from the country's ample resources.
Poyais was described as a very anglophile region with infrastructure, untapped gold and silver mines, and large amounts of fertile soil ready to be settled.
On 10 September 1822, the Honduras Packet departed from the Port of London with seventy would-be-settlers, including doctors, lawyers and bankers who had been promised positions in the Poyais civil service. On 22 January 1823 another ship, the Kennersley Castle, left Scotland for Poyais with 200 would-be-settlers and enough provisions for a year.
The settlers found nothing and were left ruined and homeless in a jungle full of diseases. They were found a year later by accident, and the Chief Magistrate told them that there was no such place as Poyais, but agreed to take them to British Honduras. By the time they arrived in British Honduras, 180 of the 240 would-be settlers had died or were lost.
The survivors departed for London on August 1, 1823, but more died on the journey back such that fewer than 50 made it back to Britain alive. When they returned, city papers published the whole story.
Astonishingly, some survivors refused to label MacGregor as a culprit, but blamed his advisers and publicists for spreading false information. MacGregor, however, had left for Paris in October 1823 where he continued to peddle his schemes of riches in the Americas.
Over his lifetime , his bond-market frauds ran to £1.3 million (as a share of Britain’s economy, around £3.6 billion today).
Take note however, that the Poyais Scam was just one of many schemes that failed at this time, with frenzied investment culminating in many bankruptcies. For example, over sixty banks failed during the 1825 panic, leading to a chronic shortage of cash in circulation in the economy and the Bank of England having to recycle old bank notes to keep the economy running (sound familiar)?
Bank of England £1 Bank Note, Issued in 1821 and Reissued in 1826
Railway Mania, 1846
Another historical section focuses upon the Railway boom and bust of the 1800s.
The Railway Mania was a speculative frenzy in Britain in the 1840s, and follows the usual pattern of a boom bust cycle.
It began with the expansionism of the rail network across Britain and, as the price of railway shares increased, more and more money was poured in by speculators until the inevitable collapse.
It reached its peak in 1846 when 272 Acts of Parliament were passed setting up new railway companies, and the proposed routes totalled 9,500 miles (15,300 km) of new railway.
Around a third of the railways authorised were never built with the companies concerned either collapsing due to poor financial planning or being acquired by a larger competitor before it could build its line or turning out to be a fraud.
The Sheffield and Retford Bank Certificate 1843
The Sheffield and Retford Bank arranged large loans to railway companies to finance line construction, selling shares such as this to raise capital. In 1846, a number of railway companies defaulted on their loan repayments, causing the bank to fail.
Preface to the 1857 edition of Little Dorrit by Charles Dickens
I have been occupied with this story, during many working hours of two years … I would hint that it originated after the Railroad-share epoch, in the times of a certain Irish bank, and of one or two other equally laudable enterprises.
The Overend Gurney Crisis, 1866
Overend, Gurney & Company was a London wholesale discount bank, known as "the bankers' bank", which collapsed in 1866 owing about 11 million pounds, equivalent to around £1 billion today.
The business was founded in 1800 with Gurney's Bank (acquired by Barclays Bank in 1896) supplying the capital. The bank devoted itself entirely to the buying and selling of bills of exchange at a discount which, at the time, was a market only loosely served by other banks. The idea was novel and proved an instant success and, for over forty years, it was the greatest discounting-house in the world. During the financial crisis of 1825, the firm was able to make short loans to many other bankers. The house indeed became known as "the bankers' banker", and secured many of the clients of the Bank of England (the Bank was not nationalised at this time).
The bank expanded its investment portfolio and took on substantial investments in railways and other long term investments, rather than holding short term cash reserves.
The result was that it found itself with liabilities of around £4 million, and liquid assets of only £1 million. In an effort to recover its liquidity, the business was incorporated as a limited company in July 1865 and sold its £15 shares at a £9 premium, taking advantage of the buoyant market during the years of 1864-66. However, this period was followed by a rapid collapse in stock and bond prices, accompanied by a tightening of commercial credit. Railway stocks were particularly badly affected.
Overend Gurney's monetary difficulties increased, and it suspended payments on 10 May 1866. A run on the bank ensued as panic spread across London, Liverpool, Manchester, Norwich, Derby and Bristol, with large crowds around Overend Gurney's head offices at 65 Lombard Street.
The bank went into liquidation in June 1866, and created a financial crisis that saw over 200 companies and banks failing as a result.
The directors of the company were tried at the Old Bailey for fraud, but were only found guilty of “grave error” rather than criminal behaviour, and the jury acquitted them.
The exhibition then jumps forward to more recent crisis, such as the crash of Barings Bank, Northern Rock and the most recent financial crisis.
These are all well covered here on the blog, so I won’t rake over those coals, but the interesting thing is that there are common themes to all of these booms and busts, as regularly discussed here on the blog.
The core is that whenever you see a continual and major rise in asset prices – shares, markets, industries, commodities, property, etc – it is guaranteed to go bust at some point.
Continual rises in asset prices at a higher than average level of expectation is unsustainable and will go bust.
Then, when it does go bust, there will always be a blame game afterward.
Blame of individuals:
“Barings has been the victim of losses caused by massive, unauthorised dealings by one of its traders in South-East Asia.”
Barings press statement, 26th February 1995
Blame of customers:
“Northern Rock was pushed to the brink of extinction by savers withdrawing their money amid fears that the panic could spread to other banks.”
Daily Mail, 17 September 2007
Blame of corporations:
“Bankers have made an astonishing mess of the financial system.”
House of Commons Treasury Committee Report, 2008-2009
Blame of regulators:
“We allowed a [banking] system to build up which contained the seeds of its own destruction.”
Mervyn King, Governor of the Bank of England, 5th March 2011
* There was a real Old Lady of Threadneedle Street: Sarah Whitehead.
Sarah had a brother called Philip, a disgruntled former employee of the bank, who was found guilty of forgery in 1811, and executed for his crime.
Sarah was so shocked she became 'unhinged' and every day for the next 25 years she went to the Bank and asked to see her brother.
When she died she was buried in the old churchyard that later became the Bank's garden, and her ghost has been seen on many occasions in the past.