Tuesday, October 26, 2010

FT: the Darien scheme

The Darien scheme was dreamed up by the Scottish businessman William Paterson. He planned to found a Scottish colony at Darien on the narrow isthmus of Panama in Central America, to control trade between the two great oceans and so transform impoverished Scotland into a great trading nation. Thousands of ordinary people invested in the scheme; thousands elected to make the tough sea voyage and settle there as pioneers. But the plans ended in disaster.

“It’s generally thought it absorbed more than half of the national wealth of Scotland,” says Beaton. “They sent 14 ships in total and only one came back. Two thousand people died. Three huge factors were ignored. One was that the English could really put a spoke in it by putting an embargo on trade. Second, the climate was much, much worse than they had squared up to: conditions were terrible and 12 people were dying a day. Third, Paterson had wagered that the Spanish empire was waning and they had lost their chutzpah. And he was wrong.”

The downfall of the scheme crippled the Scottish economy and left the country demoralised, bankrupted and struggling to go forward as an independent nation. “The really significant thing about it in terms of British history is that it was a straight line from there to the Treaty of Union [leading to the joining in 1707 of Scotland to England in the single kingdom of Great Britain].”

...“It’s a story in its own right. But it’s also full of echoes for now. The idea that Scotland would overnight become a rich nation is a bit like what happened to Iceland ... [The economist] JK Galbraith wrote that one of the things that fuels every bubble is the belief that there’s a new device that makes everything safe. And the new device in the late 17th century was the joint stock company. It’s a very loose shorthand, but I think of it as the credit default swap of the era. People thought it had taken the risk away.”

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