The Great Welsh Leek Bubble of 1876

Ray Rees, who writes a regular Letter from Germany in our July issue, reports here on a little known crisis in the Welsh leek market more than a century ago.

The leek is not only a splendid vegetable, but, as I’m sure readers will know, it is the national emblem of Wales. The English have the rose, the Scots the thistle, and the Irish the shamrock, all worn on their respective national days. But the great advantage of the leek over these other rather fragile emblems is that it not only has much more of an impact when it is worn, both on the eye and on the nose, but it can also be eaten afterward. Nothing is wasted.

But readers probably have not heard of the Great Welsh Leek Bubble of 1876, though it deserves to stand up there with the Dutch Tulip Mania, the English South Sea Bubble, the French Mississippi Bubble, and more recent events in the US, from S&L’s to Dotcom to Subprime, as a great case study in human folly and greed.

It began in the little town of Llareggub, made famous by our great poet Dylan Thomas in his radio play ‘Under Milk Wood’. A local gardener named John P Morgan (Morgan, like Thomas, is a very common Welsh name) proudly announced one day that he had cultivated a wonderful new variety of leek, with a stem of a purer white, the leaves a deeper green, and a flavour more subtle but powerful, than any other leek in existence. Moreover it could be worn for three days without losing its flavour.

Demand for the new leek, which John Morgan christened the ‘Prince of Wales’, or simply ‘The Prince’, soon outstripped supply, the price rocketed to unheard of heights for such an ordinary vegetable, and soon John P Morgan, who was now a rich man, had sold all of his stock, both of leeks and of seed. This caused something of a panic, because St David’s Day, the national day of Wales, was only a couple of months away. Everyone had to have a leek to wear on that day (even though today the effete practice of wearing a daffodil on St David’s day has become widespread) and of course people did not want to be seen wearing anything but a Prince of Wales leek.

Then a local insurance agent named Arthur I Gee hit upon the clever idea of selling Prince of Wales leeks forward. For an immediate payment, he would issue a contract guaranteeing the delivery of a bundle of 10 Prince of Wales leeks on the day before St David’s day. He of course knew very little about growing leeks, but assumed that all the seed that John Morgan had sold would be producing a bumper harvest by the time St David’s day came around. At the same time he contracted with all the growers who had bought John Morgan’s seed, giving him an exclusive right to buy their crops at the currently prevailing price, thus cornering the market.

The Forward Leek Contracts, or FLC’s as they became known, issued by Arthur Gee, started to be traded on the Llareggub Prince of Wales Forward Leek Exchange and indeed sold like hot cakes, soon fetching huge prices. It became clear that a classic bubble was under way. People from as far away as London were buying FLC’s not because they wanted to wear leeks on St David’s day, but because they expected the price to go on rising, so they could resell their FLC’s at a profit. So desperate were the people of Llareggub to profit from the price spiral that they sold their cows, pigs and sheep (to Arthur Gee) in order to put the money into FLC’s. For a fee of 5%, he would also accept, as collateral for loans to buy more FLC’s, already existing holdings of FLC’s, which he immediately resold on the market. The price of an FLC soon reached the same level as the price of a small cottage or large pigshed.

Towards the end of February 1876, in order to stabilise the market, which was beginning to feel a little nervous, Arthur Gee offered insurance against the loss of value of FLC holdings, at a premium equal to 10% of their insured value. Many people bought this and felt reassured. When a reporter from the local newspaper asked Arthur whether he had the reserves to meet potential insurance claims, he carefully explained the sophisticated system of Credit Default Swaps (CDS’s) that he had arranged with some big bankers in London. Since he explained all this to the reporter as he was cutting the impressive hedge of beech trees in front of his house, the reporter decided to call them ‘Hedge Funds’. He also explained that the very reputable rating agency of Standard, Indigent and Temperamental’s had given him a triple A+ rating, which more than justified the large fee he had paid them to prepare it, as well as the even larger consultancy fee they had charged for the advice on how to structure the CDS’s in such a way as to earn this rating.

Then an ugly rumour started to circulate. The same reporter had calculated that the total number of Prince of Wales leeks required to cover all the FLC’s in circulation was about ten times as large as the number that could possibly be grown, in the time available, from the seed that John Morgan had sold. The only way that it would be possible to meet the contracts to supply all the bundles of leeks would be to mix inferior leeks in with the Prince of Wales leeks in a ratio of 9:1, thus creating what was known in the trade as a Toxic Leek Asset (TLA). This precipitated what was subsequently called the Sub-Prince Crisis.

The price of FLC’s immediately plummeted, and did not stop until it reached the level of the cost of 9 ordinary leeks and 1 Prince of Wales leek, at the price at which John Morgan had originally introduced them.

Of course, all the holders of FLC’s went bankrupt. Arthur Gee disappeared. John P Morgan, a much saddened man, gave up growing leeks, emigrated to America and opened a merchant bank. But his leek lives on and is still worn, and eaten, to this very day.

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