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Book Review of ‘Panic, Prosperity and Progress’
Five centuries of bubbles and panics
book review, Panic, Prosperity and Progress, Timothy Knight, Wiley, Isaac NewtonIn 1711, Britain was deep in debt following its debilitating war with Spain. It owed £9 million and had no means of paying it off. The prospects of government bonds being paid back were so low that they were trading at 50% discount. It made the financial elite of Britain to form a private organisation to take over and manage the government debt. In return, they demanded a monopoly to trade with the Spanish colonies of South America which, at that time, was referred to as the South Seas.
A new company, called The South Sea Company, was born to take over the debt. The holders of debt would get shares in the new company but the government would continue to make interest payments to the company. In essence, their cash flows were secured by interest payments and their profits by the monopoly trading rights, even though Britain was still at war with Spain till 1713.
The reality was different. There was hardly anything to trade with South America. For seven years after the formation of South Sea Company, not a single ship left Britain to trade. When it did, it was to trade not in products or materials, but in slaves. The agreement with Spain was too restrictive: supply the Spanish colonies with 4,800 slaves per year for 30 years and just one ship of up to 500 tonnes of other cargo. If that trade were profitable, the Spanish king would take away 25% of the profit.
Meanwhile, there were no interest payments by the government. Unpaid interest had accumulated to over a £1 million. Shareholders were expecting dividends from that interest. To make up, fresh shares were issued. The shares of South Sea Company got listed and started to move up gradually until late 1719 because of the expected profits from trading with distant mysterious lands. But soon war broke out again between Britain and Spain and the South Sea Company got reduced to just a building in London holding a bunch of bonds of dubious value. This did not deter massive speculative frenzy in South Sea shares. 
There was heady excitement about bold new frontiers in finance being conquered, with private enterprise running public finance. South Sea stock took off and, with it, stocks of newly listed companies committed to outrageously harebrained schemes such as trading in hair, horse insurance, creating a wheel of perpetual motion and “carrying on an undertaking of great advantage but nobody to know what it is.” South Sea Company promoters were unhappy with this bubble. They even got a Bubble Act passed by bribing the lawmakers requiring all traded companies to receive a royal charter. Most of them did not get the charter and were suspended. The South Sea, of course, got one and its shares shot up tenfold in six months! 
This caught the attention of Britain’s most distinguished scientist at that time—Sir Isaac Newton. In early 1720, he bought some shares at £150 and sold them at £350 for a princely profit of £7,000. The stock continued to climb. Newton jumped back in and put in much more money to make up for lost time (and profits), even borrowing money for it. The stock almost hit £1,000 and then crashed like a waterfall inflicting a loss of £20,000 (which, in 1720, amounted to almost all his life savings). This prompted him to say: “I can calculate the movement of heavenly bodies, but not the madness of men.” 
The South Sea Company is one of the great bubble and crash stories. Many books have referred to it. One of the finest is Devil Take the Hindmost by Edward Chancellor. Panic, Prosperity and Progress, by Timothy Knight, is of the same genre. It documents five centuries of such episodes starting with the Tulip Mania in Netherlands and moving on to California Gold Rush, hyperinflation of Germany, the Internet bubble and the financial meltdown of 2008. An interesting read but should be available in paperback. 


Safe and smart money advice for college students
Moneylife Foundation conducted a financial literacy seminar for 250 students of Vaze College in Mulund, Mumbai
There is little in college education that can prepare you for the intricacies and the realities of managing your money. Before college students go out to get a job and earn their first salary, it is important for them to have a good understanding of what it takes to protect their money and invest smartly in a manner that would deliver prosperity in the long term.

Moneylife Foundation conducted a special programme for students –“Be Safe and Smart with Your Money” at Vaze College, Mumbai. The first session was conducted by Sucheta Dalal, managing editor of Moneylife and founder trustee of Moneylife Foundation. She pointed out to the students as to how one can avoid financial mistakes. The second session was addressed by Debashis Basu, editor and founder trustee of Moneylife Foundation. He articulated the simple steps for investing smartly.
Ms Dalal started her session with a brief introduction about scams in India. A person’s knowledge or smartness does not guarantee that he/she cannot fall prey to the confidence tricksters. She narrated to the packed audience incidents, where “relationship managers” have taken genuine and educated customers for a ride. She also explained how usurious are the rates charged on credit card outstanding. Ms  Dalal talked at length about the new phenomena like Phishing and Vishing on the internet that traps the gullible public and robs them of their hard-earned money.
There are different types of scams – lottery scam, job scam, conference scam and interest waiver scam out to get us. The numbers of scams reported are infinite. In her session, she also discussed that one should keep one’s financial life simple and one should invest in just a few products—products that are safe and well regulated. Ms Dalal spoke about the dubious schemes like QNET, Pearls, City Limouzine, Japan Life, which could be clubbed to category called Pyramid scheme or chain money schemes. These schemes claim to provide extremely high returns luring the unsuspecting savers and then vanish into thin air.
In the second session Mr Basu explained the importance of saving regularly to secure one’s future financially. Everybody can make financial decisions, he said if they stick to some simple principles. He explained the principles of compounding under different scenarios. The effect of compounding is slow in the initial periods, but as time passes on, the power of compounding takes over and the wealth created is huge. The key rule is to save as much as possible as early as possible in good financial products.
He illustrated several situations to explain this concept. When investing over a 20-year horizon, even if one starts five years or 10 years later and invests a higher amount, they will end up with a lower amount at the end of the 20-year period, than a person starting at the beginning of 20 years.
Many students look to earn a good income when they start work. Mr Basu highlighted that savings has nothing to do with income. It is more important to spend smartly.  
Where does on invest? Mr Basu explained to keep it simple. While not going in to detail on the various investment products available, he gave the suggestion of just one. As college student have time on their side, he advised them to invest in equity mutual funds and stocks with an investment horizon of 15 years or more.
The event was concluded with an interactive question and answer session.



Agyat Vyakti

8 months ago

Off the topic. This is just for awareness.. Qnet and MLM are using friends and relatives to dupe you... You may like to read Qnet modus operandi with screen shots and facts and how to avoid them here ... Please share for public interest.. Qnet Scam in delhi by Ashwin Baluja and Prithvi Raj Grover

Deepak B

1 year ago

Great iniative....must have such programmes organised by Principals of all colleges, as this category is the most vulnerable to greedy and experienced fraudsters who know how to manipulate young aspiring minds.
Kudos Moneylife!!! Keep up the good work.

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