Ethics and Corruption in Business and Government: Lessons from the South Sea Bubble and the Bank of the United States

Abstract

This lecture addresses a phenomenon that arises repeatedly in history: concurrent and interrelated corruption in the political system and in business that puts political and business establishments on the defensive. When corruption from business spills over into government, the story is likely to end with politicians seeking to cover for their own actions or to elevate themselves on an ethical pedestal above their peers. Resulting legislative action - hostile to business and driven by self serving political considerations in the wake of scandal - is often not well thought out, and may hinder economic growth and stability. The lecture discusses two examples of this phenomenon in England and the United States respectively. First, the South Sea Bubble of 1720 - during which many Members of Parliament took bribes in South Sea Company stock and traded in the stock on inside information - was followed by Parliament's draconian restriction in the Bubble Act on transferability of shares for over 100 years thereafter. Second, there were two attempts at the end of the Eighteenth and the first half of the Nineteenth Century to establish a permanent Bank of the United States modeled on the Bank of England. This undertaking was championed by Federalist and Whig politicians who, while they may have sought economic stability, also encouraged speculation in government securities on inside information, and bribery by the Bank of Members of Congress. The debate over the Bank was in part a debate over corruption that came with it. The First Bank of the United States was opposed and eventually allowed to expire by Jeffersonian Democrats and the Second Bank was attacked, and then pushed out of business, by President Jackson. Congress failed to establish a national bank until the Wilson Administration in 1913, two and a quarter centuries after establishment of the Bank of England. The lecture concludes that corruption of government by business is not only bad for government, but in the long run bad for business. Business sometimes overreaches in influencing government officials, but at the risk of a backlash in which politicians - in self righteous indignation or in order to cover up for their own actions - embrace harsh anti-business policies, regardless of whether those policies are in the national economic interest.