The 'inception of value': price manipulation and financial fraud on the London Stock Exchange during the foreign debt mania (1860 - 1875)

In February 1875, after a 15 years boom in foreign securities had abruptly come to an end, in a context of acute instability on the London Stock Exchange more generally, MP Sir Henry James undertook to appoint a Select Committee “on Loans to Foreign States”. Its ambition was to inquire upon the suspicious methods used to issue sovereign securities on behalf of a few small Latin American countries, and upon the circumstances which led those countries to default. The conclusion of the report, published in July 1875, was scathing: “In order to induce the public to lend money upon a totally insufficient security, means have been resorted to which, in their nature and object, were flagrantly deceptive.” In particular, the report argued, prices had often been manipulated to induce the public to form false beliefs as to the solvency of the borrowers and the profitability of the investment projects financed. Drawing on a new dataset of stock prices from a wide variety of foreign bonds, collected from the British financial press, for the period 1860 – 1875, this article tests the empirical validity of the claims put forth by the Select Committee. It is shown that the manipulation identified were more widespread than what previously thought. This episode is mobilized to reflect on the role of prices as a mechanism of meaning creation.