“Demand for land since July 1 appears to be as high as ever; All payments are made in Mississippi Stock, which is sold at a 25 percent discount. . . The demand for properties is so great that I don’t have time to take care of my returns or books during office hours.” — Nicholas Gray, land clerk, 1816
On April 10, 1815, Mount Tambora, a volcano on the Indonesian island of Sumbawa, exploded in the biggest volcanic eruption in history. The volcano spewed an estimated 31 cubic miles of rock and ash and claimed at the least 70,000 lives.
However, the eruption’s impact on the climate was much more deadly and devastating.
The volcano sent an enormous cloud of sulfur dioxide into the upper atmosphere, blocking sunlight and temporarily cooling the planet by an estimated 1 degree Fahrenheit, or about 0.5 degrees Celsius. The impact of the disaster peaked in the summertime months of 1816, the so-called Year Without a Summer. Crop yields collapsed worldwide, resulting in a shortage of agricultural raw materials and a pointy rise in prices – especially for wheat and cotton.
European farmers were hit particularly hard, and countries increased their imports to feed their populations. The US experience was less catastrophic but still painful. New England suffered most from the harsher effects of cold weather in northern latitudes. Thousands of American farmers sold their land and moved west. The appeal was twofold. First, they might acquire larger areas of farmland. Second, crop prices rose. For example, wheat prices rose nearly 25% by the tip of 1816 and greater than 50% by the tip of 1817. The combination of more acreage and better prices gave the impression to be the last word win-win situation. The chart below shows the sharp increase in land purchases in only one county in what’s now the state of Mississippi.
Total Land Sales in Acres, Washington County, Mississippi
Source: Malcolm J. Rohrbough,
The first great depression
“The banking bubbles burst. . . The merchants decline, the manufacturers perish. . . There seems to be no cure except time and patience and the changes in events that time affects.” – President John Quincy Adams
The global cooling attributable to the Mount Tambora eruption was intense but short-lived. Unlike carbon dioxide, sulfur dioxide naturally evaporates from the atmosphere inside just a few years. By 1818, sulfur dioxide levels returned to pre-eruption levels and global temperatures returned to normal.
Farmland owners within the Midwest suddenly found themselves facing bankruptcy. Many had taken out huge loans to purchase land at prices that might only be justified if crops continued to sell at higher prices for a few years to come back. Instead, strong harvests and the large expansion of agriculture led to a world supply glut and costs plummeted. By 1820, wheat prices had fallen by about 60% in comparison with 1817.
The drop in agricultural commodity prices triggered a collapse in U.S. land values as farmers and speculators adjusted their income forecasts. At the identical time, the Second Bank of the United States, which began operations in 1817, modified a lot of its lending policies to stop further erosion of its dwindling reserves. This reduced the cash supply and increased the economic downturn. Falling raw material prices, falling land values, strict monetary policy and heavily indebted landowners were an excessive amount of for the economy. No single event marked the start of the Panic of 1819, however the financial misery that followed rivaled anything the nation had experienced before and is typically known as the Panic of 1819 first great depression.
Lessons from the Mount Tambora eruption
The Mount Tambora eruption occurred greater than 200 years ago, but there are numerous lessons to be learned from it which can be still relevant today. I describe a few of them intimately Summer 2023 edition of the magazine and just a few more below.
1. The danger of herd behavior
“That is the dilemma we face. In the next 15 years we will no longer have these beautiful fields and orchards [alternative assets] For ourselves there will be a lot more money and a lot more competition. It can be assumed that it will become significantly more difficult for foundation institutes to maintain their performance advantage.” – Laurance (Laurie) R. Hoagland, Jr., former CIO of the Hewlett Foundation
Humans have a powerful instinct to follow the group. This bias has been hardwired into our brains for a whole bunch of 1000’s of years since it was crucial to our survival. When early humans discovered a pretty resource and harvested it, or recognized a hidden danger and fled it, their neighbors often did the identical. For most of human history and in many alternative contexts, this approach has worked and continues to work, and later comers profit from it just as much as the primary adopters.
But the herd instinct doesn’t work on the earth of investing. In fact, it backfires. As the herd flocks to recent investments, the worth rises and quickly exceeds the intrinsic value of the asset. As soon as the provision of latest investors dries up, the asset collapses. A small variety of early adopters may profit from undiscovered investment opportunities, but followers will almost actually miss out.
The farmers and speculators of the 1810s differ little from modern victims of herd behavior. They suffered the identical consequences as retail investors who invested in dot-com stocks, residential real estate, cryptocurrencies, non-fungible tokens (NFTs), and now artificial intelligence (AI) stocks. This behavior can also be common amongst institutional investors who’ve significantly increased their allocation to alternative assets, only to be dissatisfied by the returns, as Laurie Hoagland all but predicted 15 years ago.
2. The danger of fighting against the tide of time
This is how James Buchan, the creator of , describes the behavior of participants in perhaps the biggest asset bubble of all time, the Mississippi Bubble in France from 1717 to 1720. Like most financial catastrophes, it arose in an attempt by investors to get ahead of the powerful current of the times deceive . A characteristic feature of the most effective investors in history – the Hetty Greens, Warren Buffetts and Charlie Mungers – is their ability to adapt their investment behavior to the inflexible flow of time. In a word, they’re patient. They understand that successful investing is more about watching the grass grow than winning the lottery. But those caught up in investment trends, be it Midwest real estate within the 1810s or AI investing within the 2020s, often suffer from a compulsion to shorten the time it takes to make rather a lot out of a little bit money . For this reason, regardless of what the present investment trend could also be, there’ll almost all the time be many more losers than winners.
3. Saving time with sulfur dioxide emissions
“Solar Radiation Modification (SRM) is a potential complement to other available tools to combat climate change: mitigating greenhouse gas emissions, removing carbon dioxide (CO2) from the atmosphere, and adapting to existing and expected climate changes.” SRM offers the chance to guard the planet inside to chill down significantly in only just a few years.” – “Congressionally mandated research plan and an initial research governance framework related to solar radiation change,” June 2023
The final lesson comes with a caveat, because it is a reasonably extreme and undesirable suggestion.
That the planet is warming quickly and that CO2 It is usually accepted as a undeniable fact that values are a very powerful driver. However, to date we will not be moving fast enough to cut back CO22 Emissions. Over the following few a long time, the race between natural forces and human ingenuity will determine how much the world warms and when and where temperatures plateau.
The long-term solution to climate change will involve dramatic reductions in fossil fuel emissions and maybe innovations that remove greenhouse gases from the atmosphere. However, given the slow progress, we might have to think about alternative tactics to purchase time. In June 2023, the White House released a congressionally mandated report that examined the usage of solar radiation modification (SRM) to slow climate change. One possible tactic is to copy the results of a big volcanic eruption by releasing large amounts of sulfur dioxide into the upper atmosphere.
This could appear far-fetched, however the Mount Tambora eruption shows that science is working, and fast. Of course, the logistics and financial feasibility of such a project still must be resolved, and its unintended effects—sulfur dioxide produces acid rain and might deplete the ozone layer—may very well be severe, even unbearable.
Uncertainties aside, the undeniable fact that the experience of the Mount Tambora eruption not only holds lessons for investors greater than two centuries later, but could also help solve one among humanity’s most pressing modern problems shows the importance of studying financial history study and look into the past to acquire information in regards to the present and shape the longer term.
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Image courtesy of Jialiang Gao. This file is licensed under the License Creative Commons Attribution-ShareAlike 3.0 Not ported License. Circumcised.
