Sailing into financial disaster
BILL JAMIESON The
Scotsman 22-01-07
Lack of confidence is often cited as Scotland's greatest ill. However, it is a view that should be tempered by consideration of the havoc over-confidence has wrought. Between 1696 and 1700, Scotland succumbed to one of the great speculative delusions in financial history. The brightest and wealthiest of Scotland - lairds and lawyers to the fore - came to believe in one of the most under researched, poorly planned and utterly improbable commercial ventures ever undertaken in the cause of wealth creation: it came to be known as the Darien adventure, an attempt to set up a Scottish colony on the isthmus of Panama.
Historians have cited Darien and its financial fall-out as a contributory factor in the convulsions that led to the Treaty of Union. But in a book out this month (*), Douglas Watt makes Darien the pivotal hinge on which Scotland's history swung.
It is an account that opens up deep and searching questions. How was it our history was profoundly changed by this adventure? Could Scotland have retained its independence had Darien not happened?
When the ships set sail from Scotland, failure was unthinkable. The country was gripped by a collective conviction of wealth on an epic scale. But the colony collapsed within months, with the loss of 1,500 lives and a financial black hole that threatened to ruin not just the aristocracy but also an entire economy blighted by harvest failures and a slump in trade.
And as astonishing as the story of the debacle was the subsequent bail-out. Not only were Darien's investors amply compensated for their folly, but also the directors responsible received the biggest pay-outs. William Paterson, the man behind the hare-brained scheme, was later awarded compensation equivalent in contemporary terms to £2.25 million.
When lists opened on 26 February, 1696 to subscribe for shares in the Company of Scotland, "they came in shoals from all corners of the Kingdom to Edinburgh", wrote Walter Herries, "Rich, Poor, Blind and Lame". This was unfair to the wealthy, perfectly sighted and healthy who flocked to subscribe.
Such was the enthusiasm, that by early April the original target of £300,000 was raised to £400,000, this being reached (with an £8,000 "top up" from the directors) by August. The minimum investment was £100 and the maximum £3,000 (equivalent to £10,000 and £300,000 today). Midlothian provided the most subscribers, with 425 pledging £111,650. But other shires, such as Angus, Ayrshire and Roxburghshire were also well represented. Edinburgh accounted for 22.1 per cent and Glasgow 10.6 per cent. Merchants subscribed £96,195 and the Scottish nobility about 14 per cent, with the family and friends of the Marquis of Tweedale subscribing £50,000.
Six out of 14 senators of the college of justice (judges) were subscribers, as were 21 advocates, 16 Writers to the Signet and 48 writers. All told, 58 per cent of the Faculty of Advocates subscribed and the Faculty itself invested £1,000. The legal profession pledged a total £25,100.
Almost all the principal corporate bodies in Scotland were caught up in the mass outbreak of irrational exuberance, from the burghs of Edinburgh and Glasgow to the Merchant's House of Glasgow and the Convention of Royal Burghs.
The debacle at Darien threatened widespread ruin. The market in the shares collapsed in 1700 and the company ran out of money in the summer of 1701. Investors faced wipe-out. Watt's account is particularly good on the aftermath of the debacle, the determination of the directors to blame everyone but themselves - and the intense pressure to secure compensation from England.
This was secured through Article 15 of the Treaty, which dealt with the "Equivalent". This enshrined one of the most bizarre developments in corporate history: a shareholder bail-out with cash provided by a foreign government.
"Not only," writes Watt, "were the investors to receive all the cash they had paid to the company but also, amazingly, interest payments of 5 per cent per annum."
The bail-out of 142p in the pound was, he adds, "a truly incredible result for the directors, who had squandered the capital of the company and now, as major shareholders, were to be generously rewarded for their mismanagement".
Would Scotland's independence been saved had Darien not happened? That depends on one's view of history. Union may have taken longer to come about. But had the Company of Scotland prospered through alternative investment in the East Indies as had been urged by some, such success would probably have fed a clamour for more - best achieved through "corporate political merger".
The process may have been a lot less humiliating, but the outcome broadly the same. Mr Watt is to be congratulated on a compelling and insightful contribution to our understanding of Darien.
• (*)The Price of
Scotland: Darien, Union and the Wealth of Nations, by
Douglas Watt, Luath press, Edinburgh, £25
COLONY BESET BY DISEASE AND VIOLENCE
The settlement was set up by Scots colonists in the late 1690s to combat England's trade and influence, but ended in disaster and inflicted devastating loss on Scotland's economy.
An estimated 2,000 settlers and a quarter of Scotland's wealth for the period were lost through supporting the scheme. The Company of Scotland consortium set up an operation on coastal swampland in Panama's Darien region, then part of Spanish territory. Efforts to create trade by bringing Bibles, wool and wigs to the colony were of little avail as settlers suffered from disease, hunger and attacks by natives and Spaniards.
See also:
Darien adventure repeated
Ship of fools sunk Darien scheme
Scottish influence on North America