The Shanghai rubber bubble of 1910 holds a lesson for today

Speculative excess has a long pedigree, given how easily human desire for quick gains can overcome concerns about long-term profitability

PUBLISHED : Friday, 12 April, 2013, 12:00am
UPDATED : Friday, 12 April, 2013, 5:43am

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.