I’ve been reading up on Scottish history in advance of the independence debate heating up. The must-have book on the events in advance of the Act of Union that brought Scotland and England together in 1707 is Douglas Watt’s The Price of Scotland.
It’s a fantastic run-through of the “catastrophic failure” of the Darien scheme – the creation of the Company of Scotland to establish a Central American colony. This failure (a result of horrible financial mismanagement and shockingly bad strategy) and the huge financial losses that came with it, made Darien what Watt calls a “central ingredient” in the eventual marriage of convenience between the two countries. “The Price of Scotland” refers to the huge sum of money transferred from England to Scotland on union, the majority of which went to pay back the losses of the original investors in the Company of Scotland. I suspect we’ll be returning to this one here another day.
Not only is it a good lead-in to everything from joint stock mania to the periodically discovered evils of financial innovation, but there has been a good row going on in Scotland for 300 years about whether it was all the fault of the English or not.
However it was in looking around for more information on this (a quest that ended at Douglas’s door) that I came across a much less well-known Scottish financial debacle – the story of Sir Gregor MacGregor. MacGregor turned up in London in 1821. He announced that he was the Cazique, or chief, of a land in the heart of Central America, a position he had been given in gratitude for his all-round heroism in joining the struggle of the South Americans to free themselves from the Spanish.
It wasn’t, he told his eager listeners, just any old land. No, Poyais was civilised, cultured, rich in natural resources and covered in lush, underutilised farmland. All it needed to make it perfect was a little cash in the form of a development loan and a few ships of good people ready to fill senior positions in the bureaucracy and to take ownership of the farms. A little over a year later MacGregor had sold £200,000 worth of loan stock and convinced 200 people to hand over their savings in return for passage on a ship leaving Leith for Poyais.
You will have guessed by now that Poyais was a figment of MacGregor’s particularly evil imagination and, should you feel up to it, you can read all the horrible details of their misery and untimely deaths in David Sinclair’s The Land That Never Was: The True Story of the Most Audacious Fraud in History.
But here’s the really interesting bit: so much did the people of Europe want to believe that there was a promised land, that MacGregor’s fraud didn’t end with the discovery that Poyais didn’t exist and the deaths of 70% of the first shipload of would-be colonialists (the survivors eventually made it to Belize). Instead, MacGregor got away with blaming “agents” of various sorts. By 1825, he was issuing a prospectus for a new £300,000 loan paying 2.5% a year and secured against future revenues from various gold mines as well as “indigo, sugar, tobacco etc”. A year later it was £800,000 at 3%.
I had this in mind this week as I read the first line of the latest note from Dylan Grice of Société Générale. “What kind of return,” he asks, “would have to be on the table for you to want to lend on an unsecured basis to a borrower with unaudited accounts and a history of playing dirty when the chips are down?” In London in 1825 the answer was 2.5%. Today it is just under 2% (the yield on ten-year government bonds).
It wouldn’t be reasonable to suggest that there is too much of the Poyais about the finances of the likes of the UK and the US (where the ten-year yield is 1.7%). After all, we are as sure as we can be that they exist.
However the thing is, as Dylan points out, that “governments are as prone to fibbing about their financial position as anyone else” and we shouldn’t forget just how dependent the US and the UK are on the “white lie of money printing”. Back in 1826, MacGregor printed new loan notes to pay the interest on his old loan notes. Since 2008, the US and the UK have between them printed enough money to buy over 60% of the new issuance of their government securities.
That might not be the wrong thing to do (if we couldn’t print our own money our bond yields wouldn’t be that different to those in the likes of Portugal and Italy). But it should at least tell you, should you be in any doubt, that the US and the UK aren’t in any less trouble than any other Western countries: they just have more financial gimmicks available to make it look as if they are. So they can print money and default on their bondholders slowly via inflation rather than having to do it suddenly via sharp austerity or real default.
However, if this makes you think that today’s low yields – which guarantee you an annual return below inflation – mean that buying US or UK bonds is a good long-term wealth creation plan, do drop me a line. I’ve got a boat leaving Leith next week.
• This article was first published in the Financial Times