(a) Ownership and control goes with stock ownership in a corporation - in a partnership it's whatever they agree, and typically one member, one vote;
(b) Principal/Agency conflict in a corporation, between owner stock-holders and their agents, the directors/management - that need not, and probably will not, be the case in a partnership;
(c) in a Corporation members have only a collective responsibility, whereas in a partnership they have a collective and individual (joint and several) responsibility.
Limited Liability is a separate issue. For maybe 250 years until 1855 in the UK Companies and their members did not have limited liability, any more than partnerships did, and it was an extremely contentious change at the time.
Quite rightly, since as it has turned out, in return for this privilege, investors don't give much back to the society which grants them the privilege. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
For maybe 250 years until 1855 in the UK Companies and their members did not have limited liability, any more than partnerships did, and it was an extremely contentious change at the time.
An economic history hypothesis here: financial instability à la Minsky did not occur before 1855 and there was a speculative bubble starting in 1855 which ended in a severe recession.
I think most people would characterise both the South Sea Bubble and the Mississippi Bubble as financial instability, but I have yet to read Minsky's definition.
IMHO it's leverage - ie deficit-based financing, of which John Law's Banque Royale was arguably the first recognisable Central Bank nexus - that is the prime cause of instability.
Limited liability certainly wouldn't act against instability, that's for sure. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
South Sea Company - Wikipedia, the free encyclopedia
Furthermore, the scramble for liquidity appeared internationally as "bubbles" were also ending in Amsterdam and Paris. The collapse coincided with the fall of the Mississippi Scheme of John Law in France. As a result, the price of South Sea shares began to decline. By the end of September the stock had fallen to £150. The company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy). With investors outraged, Parliament was recalled in December and an investigation began. Reporting in 1721, it revealed widespread fraud amongst the company directors and corruption in the Cabinet. Among those implicated were John Aislabie (the Chancellor of the Exchequer), James Craggs the Elder (the Postmaster General), James Craggs the Younger (the Southern Secretary), and even Lord Stanhope and Lord Sunderland (the heads of the Ministry). Craggs the Elder and Craggs the Younger both died in disgrace; the remainder were impeached for their corruption. Aislabie was imprisoned. The newly appointed First Lord of the Treasury Robert Walpole was forced to introduce a series of measures to restore public confidence. Under the guidance of Walpole, Parliament attempted to deal with the financial crisis. The estates of the directors of the company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the murky Thames.[3] The crisis had significantly damaged the credibility of King George I and of the Whig Party.
Furthermore, the scramble for liquidity appeared internationally as "bubbles" were also ending in Amsterdam and Paris. The collapse coincided with the fall of the Mississippi Scheme of John Law in France. As a result, the price of South Sea shares began to decline.
By the end of September the stock had fallen to £150. The company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy). With investors outraged, Parliament was recalled in December and an investigation began. Reporting in 1721, it revealed widespread fraud amongst the company directors and corruption in the Cabinet. Among those implicated were John Aislabie (the Chancellor of the Exchequer), James Craggs the Elder (the Postmaster General), James Craggs the Younger (the Southern Secretary), and even Lord Stanhope and Lord Sunderland (the heads of the Ministry). Craggs the Elder and Craggs the Younger both died in disgrace; the remainder were impeached for their corruption. Aislabie was imprisoned.
The newly appointed First Lord of the Treasury Robert Walpole was forced to introduce a series of measures to restore public confidence. Under the guidance of Walpole, Parliament attempted to deal with the financial crisis. The estates of the directors of the company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the murky Thames.[3] The crisis had significantly damaged the credibility of King George I and of the Whig Party.
The number of outstanding shares of the company was probably around 500,000 in 1720. A stock price of 15,000 livres would have given the company a market capitalization of 7.5 billion livres. After the share price collapsed to 500 livres in September 1721, the company was valued at only 250 million livres. As a comparison, the French government expenses was 150 million livres in 1700, while their debt in 1719 was 1.6 billion livres. With the demand for company shares being high, the government and John Law set out to buy back the whole 1.6 billion livres government debt for shares in the company. The plan was successful and in 1720 the whole government debt was acquired by the company, before the company's market capitalization began to collapse during 1720 and 1721. Compare this with the debt acquisition by The South Sea Company of England that acquired 80% of the 50 million pound government debt during 1720. The South Sea Company reached a highest share price of 1,000 pounds in August 1720, a few months later than the Compagnie des Indes. As the creditors bought shares in the company with their bonds and debt papers (debt-for-equity transaction), the whole government debt became property of the company, the company became property of the former creditors, now the shareholders, and the effective control fell into the hands of the government that paid an annual 3% interest to the company, which amounted to 48 million livres. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.
The number of outstanding shares of the company was probably around 500,000 in 1720. A stock price of 15,000 livres would have given the company a market capitalization of 7.5 billion livres. After the share price collapsed to 500 livres in September 1721, the company was valued at only 250 million livres. As a comparison, the French government expenses was 150 million livres in 1700, while their debt in 1719 was 1.6 billion livres.
With the demand for company shares being high, the government and John Law set out to buy back the whole 1.6 billion livres government debt for shares in the company. The plan was successful and in 1720 the whole government debt was acquired by the company, before the company's market capitalization began to collapse during 1720 and 1721. Compare this with the debt acquisition by The South Sea Company of England that acquired 80% of the 50 million pound government debt during 1720. The South Sea Company reached a highest share price of 1,000 pounds in August 1720, a few months later than the Compagnie des Indes.
As the creditors bought shares in the company with their bonds and debt papers (debt-for-equity transaction), the whole government debt became property of the company, the company became property of the former creditors, now the shareholders, and the effective control fell into the hands of the government that paid an annual 3% interest to the company, which amounted to 48 million livres. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.
There's a great film to be made about John Law, and a couple of good documentaries. His understanding of the concept of Money was as good as any I have seen. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The long term close holding of the investment bank is what gives teeth to the practice of the investment bank holding a portion of the financial instruments that they underwrite - when the real risk of the holding devolves onto external shareholders while the short term reward to inflated financial asset pricing accrues to all executives with stock options, the fact that the investment bank holds a portion of the financial instruments that they underwrite loses a lot of its force. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
