The Shanghai rubber bubble of 1910 holds a lesson for today
Friday, 12 April, 2013, 12:00am
Speculative excess has a long pedigree, given how easily human desire for quick gains can overcome concerns about long-term profitability
When you are reputed to be London’s most highly paid hedge fund manager, you can afford to indulge in a few whims.
David Harding’s whims are a tad unusual, however. Among other things, the founder of US$26 billion hedge fund company Winton Capital has endowed a Cambridge University professorship in the public understanding of risk, and is patron of the Harding Centre for Risk Literacy at the Max Planck Institute for Human Development in Berlin.
A former theoretical physicist, Harding sponsors the Royal Society’s Winton Prize for science books, and in 2009 he donated £20 million (HK$238 million) to Cambridge’s Cavendish physics laboratory.
His latest project is equally eclectic. It’s a massive and lavishly illustrated 300-page coffee table history of foolish financial speculations, co-authored with the head of Winton Capital’s historical research department, James Holmes.
Harding and Holmes cover all the obvious episodes, from the Dutch tulipomania of the 17th century, through England’s South Sea Bubble of 1720, right up to the 2007 subprime boom.
But it is in writing about less well known incidents of speculative excess that Harding and Holmes really excel.
They describe the Florentine credit bubble of 1339, punctured when Edward III of England defaulted on his sovereign debt.
They write about the land reclamation and property development frenzy that gripped Bombay in 1863, and the Constantinople crisis of 1895, when the monopoly Ottoman Bank collapsed after investing unwisely in South African mining shares.
Closer to home, they also describe the Shanghai rubber bubble of 1910.
Demand for rubber was already running high in the early years of the 20th century. But when Henry Ford began mass-producing his Model T cars in 1908, it ballooned.
Then, in 1909, when the world’s biggest producer, the Brazilian state of Pará, restricted supplies in an attempt to bump up its income, rubber prices surged.
Rubber plantations in Malaya made huge profits, and paid shareholders handsome dividends.
In an attempt to cash in, Shanghai-based financiers immediately began setting up Malayan rubber companies and selling their shares to eager investors.
Many of these issued prospectuses were “highly mendacious”, write Harding and Holmes, grossly overstating their acreage under rubber.
Even the genuine companies were high-risk investments, however, considering it takes four to five years of growth before rubber trees can be tapped – and before plantation companies can begin paying dividends.
The prospect of quick gains easily trumped such long-term concerns, however, and a lively derivatives market soon developed on rubber shares.
According to one witness, “brokers had the clothes almost torn off their backs by excited plungers who desired to buy shares ‘forward’ at three or four hundred per cent premium”.
And in an account that will resonate loudly today, the British consul at the time described how money flowed into the market from all over China.
“Chinese officials in charge of government and railway funds recklessly cast them into the melting pot in the sure and certain hope of making their fortune.”
The mania couldn’t last, and when American demand for rubber slackened, the market “let out a whoosh of hot air and sank to the ground”.
“Shanghai’s stock exchange, shortly beforehand a hive of activity, sank into a deep torpor that lasted for several years,” write Harding and Holmes.
In the aftermath, several of Shanghai’s leading brokers were convicted of gambling and sentenced to 80 strokes of a bamboo cane before being exiled to at least 3,000 li from the city.
It’s a deterrent that may well appeal to the authorities today.
But if there’s one piece of wisdom to learn from Harding’s latest vanity project, it’s that human folly is timeless.
The threat of punishment won’t make financial markets efficient, and episodes of speculative excess will recur again and again, regardless of any lessons the past may try to teach us.
“Time is your most precious gift because you only have a set amount of it. You can make more money, but you can’t make more time. When you give someone your time, you are giving them a portion of your life that you’ll never get back. Your time is your life. That is why the greatest gift you can give someone is your time.
It is not enough to just say relationships are important; we must prove it by investing time in them. Words alone are worthless. “My children, our love should not be just words and talk; it must be true love, which shows itself in action.” Relationships take time and effort, and the best way to spell love is “T-I-M-E.”
~ Rick Warren, The Purpose Driven Life: What on Earth am I Here for?
“The less you associate with some people, the more your life will improve. Any time you tolerate mediocrity in others, it increases your mediocrity. An important attribute in successful people is their impatience with negative thinking and negative acting people. As you grow, your associates will change. Some of your friends will not want you to go on. They will want you to stay where they are. Friends that don’t help you climb will want you to crawl. Your friends will stretch your vision or choke your dream. Those that don’t increase you will eventually decrease you.
Consider this: Never receive counsel from unproductive people. Never discuss your problems with someone incapable of contributing to the solution, because those who never succeed themselves are always first to tell you how. Not everyone has a right to speak into your life. You are certain to get the worst of the bargain when you exchange ideas with the wrong person. Don’t follow anyone who’s not going anywhere.
With some people you spend an evening: with others you invest it. Be careful where you stop to inquire for directions along the road of life. Wise is the person who fortifies his life with the right friendships. If you run with wolves, you will learn how to howl. But, if you associate with eagles, you will learn how to soar to great heights. “A mirror reflects a man’s face, but what he is really like is shown by the kind of friends he chooses.”
The simple but true fact of life is that you become like those with whom you closely associate – for the good and the bad.
Note: Be not mistaken. This is applicable to family as well as friends. Yes…do love, appreciate and be thankful for your family, for they will always be your family no matter what. Just know that they are human first and though they are family to you, they may be a friend to someone else and will fit somewhere in the criteria above.
“In Prosperity Our Friends Know Us. In Adversity We Know Our friends.”
~ Colin Powell