Eighteenth Century London: The South Sea Bubble
The South Sea Bubble
The South Sea Bubble was the biggest financial disaster in the 18th century in Great Britain, caused by over speculation. It led the country into a big depression that influenced the economy and society for many years. A very similar stock crash happened in France simultaneously.
In 1571 at the Royal Exchange in London the first stock market had been founded. When at the end of the 17th century stock dealers were expelled from the Royal Exchange because of inappropriate behavior, the stock exchange was issued in Coffee Houses, especially the Jonathan Coffee House in Change Street, which made the trade with shares more public and accessible.1
For a better understanding of how the high the debts, capitals and trading sums were, it is important to know the value of a pound in the 18th century. A multimillionaire of today would probably have had a fortune around £100,000 a year at that time. Someone who earned a few hundred pounds a year lived a comfortable life, whereas a few pounds was all a servant earned in a whole year.2
At the beginning of the 18th century England was at war with France and Spain for over twenty years, trying to stop Louis XIV of France from dominating Europe.
The British hoped they could take over the valuable trade with gold and silver with Latin America from Spain to improve their trading. During the war the alliances changed often and the war kept on for over twenty years.
Due to this, at the start of the 18th century the government debt was soon at a very high rate. To get money in, lots of taxes were imposed between 1702 and 1714. Landowners were forced to hand in 1/5 of their income and also had to pay several local taxes. The Bank of England and the East India Company, the two big financial institutions of the country, had to pay high sums for their royal charters as well: first £2 millions in 1698 and than ten years later another £1 million.3
The Writer Jonathan Swift wrote in his journal about the early 18th century:
„...few of this generation can remember anything but war and taxes... 'tis certain we are the most undone people in Europe.“4
At this time the House of Lords was ruled by the financial and mercantile oriented Whigs, while the Tories opposed the war. In 1710 the Tories finally managed to wrest power from the Whigs and the new Chancellor of the Exchequer was Robert Harley, a Tory and favorite of Queen Anne's. Robert Harley wanted peace urgently, but he had to face the fact, that the government owed £8 million and had nothing but £5,000. To keep himself in power Harley needed money. There was no way to borrow money from the Bank of England or the East India Company, as they were in opposition to the new Tory regiment, due to their Whig directors. The Bank of England even offered the Queen £100,000, if she would displace Harley.5
In hope for a radical solution Harley sought advice from John Blunt, founder of the highly profitable Sword Blade Company. John Blunt accepted and organized a new lottery, something that already has been tried by the government in 1694. But in this kind of lottery there were no losers. A few participants won a high amount of money, which was also higher than in the first lottery and led to a rising stake. The others entailed a government annuity automatically, e.g. an annual payment just for buying a ticket. By this lottery, Blunt provided the basis for the grand speculation in 1720.
The first lottery was a success and consequently another one followed. Blunts company did the marketing and within 9 days all tickets were sold and they earned £3,5 million.
But the government also now had high sums it would have to pay in future, even though not now, but the debt only had been heightened.6
Following, Harley suggested founding a trading company to reduce the national debt. The new company was announced at the 2nd march 1711. It was supposed to trade in the South Seas and to take over the national debt of £9 million, not including the annual payments the government would have to pay from the lotteries. The company asked creditors to exchange their money for shares in the company and the Government supported it with a half million pound a year.7
On the first of August it was published, that the company would receive the monopoly rights to trade in the South Seas to the condition of peace with Spain. Lots of propaganda of the South American wealth and the slavery trade promised high profit and many people, including the directors, bought lots of shares.8
The formal foundation of the company followed on the 10th September 1711 with Robert Harley as its governor. No director of the company had experience with trading in the South Seas.9
Still problematic was, that there was the need for peace with Spain, but all of Harley’s efforts failed. At the end of September he informed his company, that there would be no peace and no exclusive trading rights. The directors of the company ignored these facts and bought ships and tons of merchandise. At this point Harley withdrew himself from the company, stayed away from meetings etc. In the end, 12,000 tons of merchandise rotted in the warehouses.10
In March 1713 peace was finally made between England and Spain and thus the South Sea Company received a trading contract, lasting 30 years. They were allowed to trade slaves and to send one single merchant ship a year to one of seven ports, which were nowhere near the South Seas.11
In the next year the company did trade slaves, but made no profit because of high Spanish taxes. Furthermore Queen Anne wanted ¼ of all profits and improvident ways of trading prevented further profits.
Soon it was clear that Harley had failed. He did not clear the national debt, but added nine million pounds through the lottery annuities. Due to Harley’s alcoholism Queen Anne was forced to sack him from his post on the 25th July in 1714. She died one week later.12
George the I. followed Queen Anne and he had no Tory sympathies. So John Blunt, now in control of the company, made the Prince of Wales the new Governor of the South Sea Company. All Tories were driven out and replaced by Whigs. Six of the directors came from Blunt’s Sword Blade Bank and were more interested in the manipulation of the market, rather than the trade business. When two directors died, the established balance changed and the Company was mainly ruled by Sword Blade men, rather than experienced financiers.13
The same year the company refused to accept a payment of more than one million pound from the government, which it owed to the company for taking over the loan.
In return they were allowed to bring more shares on the market. Now the South Sea Company had more shares than the Bank of England or the East India Company. The stock reached the value under which it had been launched by Harley the first time.14
In 1719 the company was allowed to convert further debts into shares. They offered to change annuities from the 1710 lottery into shares and 2/3 of the people did so. For this, the company lend another half a million pounds to the government and was again allowed to bring more shares on the market. The capital of the company was now about 12 million pounds, an absurd sum and the company still was not making any profit. Britain was at war with Spain again, so there was no shipping at all, but the company now decided to give up all trading-efforts and concentrated on being the holder of the national debt.15
When peace returned in 1719 the national debt was greater than ever. Thus the government needed help from the South Sea Company again. The government was not even able to calculate the sum of the debt. At a meeting with the directors the debt was calculated around 31 million pounds, 16 million redeemable debts and approximately 15 million irredeemable annuities, that can not be paid because they were bound to annual payments.16
Blunt offered that the South Sea Company would pay the government for the right to own the national debt and then would float it, by selling shares to make profit. Financially, this was absurd, but the people believed it would work. His advantage was, that no one in the government understood higher finance and he had bought lots of politicians to be sure of their support. Instead of giving the creditors one £100 share for every £100 worth of debt, Blunts tactic included that he persuaded them to exchange their annuities for shares at a higher market range, so he could keep the leftovers for the companies’ profits. For this, the company would receive £1 each year for every pound the government saved on interest payments on the debt. After 7 years the interest rate would be reduced from 5 to 4% and the government got £3 million from the company. With this tactic the national debts would be erased within a lifetime and thanks to Blunts courtesy nobody spend any attention to the fact that the company did not have no money at all.17
Of course the Bank of England did not approve the latest movements and tried to challenge Blunt, but they failed. The stock price only rose, because the South Sea Company now also managed to defeat the Bank of England, formerly one of the biggest institutions of England.18 The investment of £100,000 from the King rose the stock price even more, because many were impressed, that now the King himself believed so strong in the company.19
But Blunt had further strategies. First, the stock price had to rise higher, so he could erase the debt with the highest possible profit. On the 14th April in 1720, he published a first money subscription. He brought shares on the market, that were worth two million pounds with every share for only 20 pence, the rest of it could be paid every other month.20
It worked, the stock price rose and shares, one million pound worth, were sold in the first hour. Rumors of improving trading prospects helped furthermore.
Originally, Blunt was not allowed to create new stock, before he had not started to convert the national debt, but the politicians did not protest. In the next step the company lend money to everybody who bought shares, and the stock rose again. Everybody was investing into the South Sea Company now, even people from the countryside and from abroad. In 1720, 190 new companies had been launched, at the end of the year only four of them had survived.21
On the 30th of April, a second money subscription followed, where the shares could be bought on credit once more.22 In May, Blunt finally started to work on the debt problem. He offered the creditors shares in the company, and made £1,800 profit per deal. The stock was up to 500 now. One week in early June, the stock rose from 508 to 830 from Saturday to Thursday.23 The wise investors now decided to take their profit. The corrupt elite understood what was going on and sold as well, only the king would not do so.24
From the third money subscription, only 1/5 was open to the public. The stock was at about 1,100 now and the company had a capital of about £300,000,000.25
In August, Blunt made some legal moves against some joint-stock companies, which left investors with large debts. To pay them, they wanted to sell their South Sea Company shares, which led to an eruption of selling and the stock price fell. Thousands of investors wanted their money now. To stop the downward pressure, Blunt made a fourth money subscription and was able to find investors naive enough to buy at such a high market price. Still, everyone abroad sold his shares now and on the first of September the stock price was at 770, ten days later at 370 (Saturday) and on Thursday at 180. The stock price fell so rapidly, that the people now actually owed the company money. Banks were closing, among them the Sword Blade Bank, whereas the Bank of England had to deal with thousands of people wanting their money, but there was not enough gold and silver in the land.26 The trade, as well as the whole economy, broke down, many stockjobbers and gentlemen committed suicide.27
Cato's Letters wrote on the 12th November 1720:
[The stock market crash at Marseille] has destroyed, we are told, about Sixty Thousand Lives; ours has done worse, it has rendered a much greater Number of Lives miserable, who want but the Sickness to finish their Calamity; either by rendering it complete, or by putting an End to them and that together. [...] That we are fallen, is a sorrowful Truth, not only visible in every Face which you meet, but in the Destruction of our Trade, the Glory and Riches of our Nation, and the Livelihood of the Poor.
The Resurrection of Honesty and Industry can never be hoped for, while this Sort of Vermin is suffered to crawl about, tainting our Air, and putting every thing out of Course; subsisting by Lies, and practicing vile Tricks, low in their Nature, and mischievous in their Consequences.
That a Multitude of Families are ruined, and suddenly sunk from plentiful Circumstances to abject Poverty, is affecting and lamentable; though perhaps all owing to their own rash Confidence in the Management of known Knaves: That innocent Children, born, as they imagined, to fair Fortunes, and brought up accordingly, must now want Bread, or beg it, is a Catastrophe that must pierce every tender Heart, and produce Pity and Tears [...]28
The happenings were investigated by the Committee of Secrecy, which presented their results on the 16th February 1721. They expounded, that they found many books and stock missing. In lots of books pages had been torn out, but there was still enough evidence found against the corrupt politicians and directors. They were all put on trail and many lost their positions, or even went to prison, also the Chancellor of the Exchequer, who was followed by the Whig statesman Robert Walpole.
To punish the directors and politicians, they had to list everything they own, even towels, cutlery etc. and were allowed to keep only little of it. Blunts belongings were prized to £185,349 and he was to keep £5,000 of it. In total, the government reclaimed nearly £2 million from the directors. Robert Knight, the former treasurer of the company, went into exile to Paris to escape prison.29
To reduce the disaster Robert Walpole was asked to negotiate a contract between the Bank of England and the South Sea Company. The Bank of England should take over some of the capital, but it backed out.
Later, Walpole managed to negotiate with the directors of the East India Company and the Bank of England, so they would increase their capital and take over a quarter of each of the South Sea Company shares. Further installments were, that most of the different money subscriptions would be cancelled.30 This did not help much, the company's capital was still worth 37 million and 13 million belonged to the company from their further profits. 8 million of these 13 million were taken from the company and divided among the shareholders. The government ordered, that everyone who owed the company money would be free of debt, if he paid back 10% of the sum. From 11 million lend, the company received 1,1 million. It took years until the country was stabilized.31 Because of what happened, the government permitted the issuing of stock certificate until 1825.321 London Stock Exchange, ed. London Stock Exchange plc., 14th of July 2010.
2 Balen, Malcolm: A Very English Deceit (Fourth Estate, London 2002) xi.
3 Balen 14-16.
4 Quoted from: Balen 15.
5 Balen 18-20.
6 Balen 33-35.
7 Balen 36-37.
8 Balen 37.
9 Balen 38.
10 Balen 38-40.
11 Balen 40-41.
12 Balen 41-42.
13 Balen 50-51.
14 Balen 51.
15 Balen 51.
16 Balen 83.
17 Balen 83-87.
18 Balen 89-91.
19 Balen 93.
20 Balen 98.
21 Balen 98-107.
22 Balen 109.
23 Balen 113-119.
24 Tree caricature from South Sea Bubble cards. Author unknown.
25 Balen 126.
26 Balen 144-148.
27 Historic-UK.com, ed. Historic-UK.com, 20th of July 2010.
28 Cato’s Letters Vol.1 p. 6, 8-9. Eighteenth-Century Journals, April 27th 2010.
29 The South Sea Bubble, 10th of July 2010.
30 Balen 173-176.
31 The South Sea Bubble, 20th of July 2010.
32 Investopedia: A Forbes Digital Company, Investopia ULC, 20th of July 2010.
Balen, Malcolm: A Very English Deceit. Fourth Estate, London 2002.