The turn to private finance carries some risks. To understand them, we look to a key episode in Western economic development – the 1830s development of the Mississippi Valley and American south-west, which led to a financial Panic in 1837 with important similarities to the 2008 Global Financial Crisis and important insights for current efforts to create tradeable assets backed by development projects.  Public actors worked to create a market for private investment in the development of the American southwest, leading to a boom in cotton – and in slavery. The unintended results were catastrophic – not only for the Native Americans displaced and the hundreds of thousands of African Americans enslaved, but for America. In the short term, the boom led to a financial bubble, the Panic of 1837 and an economic depression not matched until the 1930s. In the longer term, the bursting of the cotton bubble led to a shift in financial and political power from South to North, and the destabilization of the American political settlement leading later to the American Civil War.

The financing strategy used to develop the Mississippi Valley has similarities to current multilateral approaches to Financing for Development – including the creation of tradeable asset classes pooling risk from multiple underlying development projects. In the 1830s, public actors facilitated the creation of bonds, underpinned by mortgages of plantations and even of slaves themselves. These bonds were sold into European capital markets. We highlight two lessons: 1) the dangers of encouraging private risk-taking without mandating centralized monitoring of resulting systemic risk; 2) the dangers of delegating risk assessment and management to private actors whose incentives do not align with the public interest.

Yet, the episode also points to the possibility of creative solutions, such as the construction – by American abolitionists including a young Abraham Lincoln – of a market for reliable risk information. We show how this may point to an important role for development actors in regulating today’s sustainable finance to help reduce modern slavery risks. This points to a final lesson: development is shaped not just by single interventions and national development strategies, but by global market regulation. If the development sector is serious about reducing vulnerability to modern slavery, it must think not only about how to safeguard against modern slavery at the individual project level, but also at the systemic level.