The unfunded British national debt in 1715, at the end of the War of the Spanish Succession, was roughly £30 million. The individual securities that made up this unfunded debt were not standardized, hence not very liquid. Hence the arbitrage opportunity call the South Sea Company. The South Sea Company would buy up the debt from the government, collect the interest, and pay out the interest as dividends on its own standardized shares. Because the debt would be consolidated into one single security--South Sea Company equities--the debt would become liquid and easily traceable, hence more valuable. The government would still further sweeten the deal by offering the company the monopoly over trade to the South Sea, and the resulting profits would also go to those who had purchased shares. A small amount of the extra value created could be skimmed off to the benefit of the projectors, Including that powerful politician the Earl of Oxford. A win for projectors who got cash, a win for the government that found itself with extra debt capacity, a win for old debtholders who found themselves with more liquid and hence more valuable securities. What could possibly go wrong?
What went wrong, of course, was that overwhelmingly the shares of the company were treated on a when-issued basis and sold by those who expected to receive them. The structure of the deal was the same weather SLC Company issued 30 million shares at £1 each, or 300,000 shares at £100 each, or 30,000 shares at £1000 each. And as the price began rising, and as existing shareholders-to-be did the math and realized that their stakes would become more valuable if they could boost demand and so pump up the share price, the South Sea Bubble was off and running.
And once they had demonstrated that there was a market full of investors willing to pay good money for claims to wealth that had no fundamental support other than the fumes from perceptions of greater future liquidity, the door was open--for who couldn't promise liquidity, and so create value for the more gullible among us? It all ended in tears.
Can you say "BitCoin"? Sure you can!
Izabella Kaminska: Whither the BTC China premium?:
A couple of things worth noting, for those interested in the virtual pump-and-dump campaign that is Bitcoin. 1) The Chinese Bitcoin premium has seemingly abated.... Also worth noting, the biggest push into Bitcoin in China occurred on November 18... [which] was, of course, the day that the details of the Chinese plenum--including prospective plans for liberalisation--were first properly released and widely circulated.... 2) The Bitcoin euphoria is now taking other virtual currencies with it. The smarter pump-and-dumpers would have piled into Litecoin on November 18, since it’s now outperforming Bitcoin by an order of magnitude...
Izabella Kaminska: So this is how fiat currency dies, with thunderous CPUs?:
We noted that the shift from Bitcoin into other crypto alternatives, which give early adopters a better chance at pilfering wealth from suckers, had already begun. We referred, for example, to the rise in Litecoin. But this was foolish. We were thinking too small. There are so many other virtual choices on the market... Feathercoin... Namecoin... Peercoins... Novacoin.... Cryptocoincharts shows something in the region of 164 different virtual currency-based cross rates in the market.... All of which can be bought on eBay at ridiculous premiums due to the virtual currency industry’s “responsible” and meticulous authentication and verification processes, which are focused on drawing as much security information from those willing to hand over real world cash for virtual claims, and which make it near impossible to trade these things fluidly.
If ever there was an industry in demand of high frequency trading to bring some order to the self-manufactured pricing anomalies, inconsistencies, premiums, discounts and general captured markets, it is this one. For now, however, what we have is a wild west of artificial and abstracted value fragmentation. The natural consequence, perhaps, of a leisure economy... or, more simply, nothing more productive that has as great a potential for quick speculative profit.... Investing in a limitless Tesco club card redemption system, or a British Airways unit--redeemable in lounge time--seems like a much better economic option than a crypto currency any day...
This needs the vaccination of Chartalism: only a too-big-to-fail organization that wants its nominal debts to have value as a byproduct of accomplishing other purposes--like governing--can durably levitate the value of its fiat money above zero:
G.F. Knapp coined the term "chartalism" in his State Theory of Money, which was published in German in 1895 and translated into English in 1924. Knapp argued that "money is a creature of law" rather than a commodity.... Knapp contrasted his state theory of money with the view of "metallism", where the value of a unit of currency depended on the quantity of precious metal it contained.... He argued the state could create pure paper money and make it exchangeable by recognizing it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices".... Modern chartalist economists such as Wray and Forstater argue that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists. Adam Smith, for example, observed in The Wealth of Nations:
A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince...