The leak of the Panama Papers has brought to light elite tax avoidance and evasion on an unprecedented scale and has had important political ramifications. But this is not the first time that Panama has been at the heart of financial shenanigans on a global scale.

At the end of the 17th century, Panama became the focal point of Scottish imperial ambitions in a venture often described as the “Darien Scheme”. The failure of Darien was so catastrophic that it remains one of the greatest calamities in Scottish history. Its consequences have long been debated by historians, although none can doubt that it cost Scotland dearly. Some even see it as a decisive factor in compelling the Scottish parliament, along with the scheme’s bankrupted investors, to enter into union with England in 1707.

A 17th-century vision

A cynical reading of this venture could certainly see this as the first great Panamanian scam. As Douglas Watt relates in his book The Price of Scotland, William Paterson, on whom the Darien vision depended, was the 17th-century equivalent to a modern-day investment banker and stockbroker. He convinced men and women from the Scottish elite and professional classes to invest £400,000 in a scheme that had no guarantee of success. While this may seem like a relatively meagre figure in today’s money, it was a remarkable achievement for a small nation, especially when compared with similar stock schemes of the period. The total raised equated to about [25% of Scottish national wealth](http://scholar.harvard.edu/armitage/files/paterson.pdf, and nearly two-and-a-half times the estimated value of Scotland’s annual exports.

Paterson was well-qualified for encouraging people to part with their money. In the 1690s, he worked as a [director of the Bank of England](http://scholar.harvard.edu/armitage/files/paterson.pdf and had been responsible for selling shares to fund William III’s war effort on the continent. As an experienced trader in both Europe and the Americas, he had also tried for a number of years to sell his vision of “Darien” as a great opportunity for overseas investment.

His ideals for Darien were founded on mercantilist tenets. It was theorised that a kingdom, no matter how small, could build a successful global empire by taking key strategic territories to advance trade. The Isthmus of Panama became central to Paterson’s scheme. It had been controlled by the Spanish Empire from the 1510s, but it was now the weak link in what was a declining international superpower. He aimed to establish a permanent settlement in Panama that would link the trade of Europe and the Americas with the markets in China, India and Japan. He called it “the door of the seas, and key of the universe”.

It was certainly a convincing argument. But many had warned of settling in a territory at the heart of the Spanish Empire. It was also likely to antagonise England, which was fighting a war against the French King Louis XIV in Europe – this depended on both Scottish taxes and a peaceful alliance with the Spanish.

But this was not enough to deter either the Company of Scotland, who led the colonisation effort, nor its 1,500 investors drawn from across Scottish society. In contrast to the controversy of today, however, having a financial stake in a Panamanian scheme was not then cloaked in secrecy. The Scottish investors were proud to put their names to the scheme because they were convinced by Paterson’s rhetoric.

A taxing issue

Just as today, tax was a motivating factor for those investing in Panama. The Scottish nation had been deeply affected by the high taxes raised by William to pay for his wars on the continent, which most Scots opposed. They were also affected by protectionist trade barriers brought in across Europe and the North American colonies, which made it harder to vend Scottish goods abroad. Darien therefore became an opportunity for Scotland to assert its independence from England, to restore its national pride and to raise its prestige on the global stage. It had the potential to unite a politically and religiously divided kingdom around a single ambition. It would also give a famine-ridden, declining nation the opportunity to assert itself as a global trading power.

And so, in July 1698, a fleet of merchant ships, transporting around 1,200 men, women and children sailed across the Atlantic to build a new life at Darien. But Paterson’s vision and the financial backing of a wide section of the Scottish nation was not enough to ensure success.

The venture was cut short after only seven months, when the second group of colonists arrived to find the grisly effects of a fever epidemic, food shortages and attacks by native peoples and foreign powers. Hundreds of people are believed to have died within the space of a year, among the casualties was Paterson’s wife and son. T.M Devine, in his book Scotland’s Empire, states that only three of the 13 company ships that landed at Darien returned to Scotland.

The catastrophic failure of the scheme placed the Scottish economy in a precarious situation and bankrupted many of those who had so willingly placed their trust in Paterson’s vision. The Scottish seizure of Spanish territory at Darien also flouted international agreements and soured English attitudes toward Scotland, as it directly contravened English imperial ambitions in Europe. As Tony Claydon and A.M Claydon report in their book William III, the king declared shortly after hearing about the scheme that he had been “ill-served” in Scotland.

The fallout

Much like the Panama controversy brought about by the papers, the significance of Darien was not for the most part financial or economic, but rather political. Above all else, the scheme seriously affected Scottish national pride. For some Scottish MPs, its failure suggested that Scotland could not survive on its own and that the nation would be in a stronger economic and political position if they united with their English neighbour.

While the 1707 Act of Union was by no means a foregone conclusion after the collapse of Darien, the prospect of compensation under the terms of the union to cover the money lost at Darien must have been an appealing prospect.

Traditionally, historians and commentators took their cues from William III when he described Paterson and his company as “raging madmen”, deeming it a subject not worthy of serious historical attention. But the response to Darien on a national and international scale proves that it was taken very seriously at the time. As the revelations of the Panama controversy unfold and its political consequences remain to be determined, Darien may continue to prove a lesson from which we can all learn.