The South Sea Bubble

Few would think, glancing at the few brief sentences devoted to the South Sea Bubble by English history books, that drama, plot, counter-plot, bribery and corruption all helped to make the affairs of one of England's most wealthy companies a source of ruin to thousands. But the South Sea affair had repercussions in every part of the globe under the British flag. It came near to destroying the confidence of the whole business world, and it plunged Great Britain into a state of chaos and despair, shaking the very foundations of commerce and public credit. It represented a calamitous swindle, or serious of swindles, the like of which was never known before, and will probably never be known again.

The drama is centred round the South-Sea Trading Company, wealthiest concern in Great Britain, if not the entire world. The time is the reign of King George I. The setting is a quiet, if war-weary England; an England with few roads other than those which the Romans left behind them seven hundred years before, a country of small communities, highwaymen, coaches, and long journeys. To-day, when we shudder at the thought of aggression, and ask each other automatically, "Will there be another war?" we find it hard to go back two hundred years, to imagine ourselves discussing, with idle interest, the possible advantages of further war with Spain. With our National Debt standing at the almost incredible figure of £7,385,296,938, it is difficult to picture ourselves worried about the national encumbrance of those times - a mere £53,000,000.

So it was, however. And the gentlemen of the day spent many a half-hour in alehouse and club, pondering over this scheme and that, which had been submitted in all humbleness to the Lords Spiritual and Temporal in Parliament Assembled, as possible solutions to the difficulty. With England's house in order, it was argued, not only would public credit improve, and increased prosperity result, but new wars could be undertaken with a reasonable assurance of worth-while results. And scarce a stone's throw from these city meeting-houses, hard by the idly busy Exchange Alley, stood the magnificent edifice, South-Sea House, home of the powerful South-Sea Trading Company; and even as these folk discussed the nation's great problem, schemes were afoot within its walls to tackle that same problem on entirely new and adventurous lines.

Founded in 1711, the "tenth of Queen Anne," the South-Sea Company held the monopoly of British trade with South America and the Pacific Islands. With a capital almost double that of the Bank of England, at £10,000,000, the South-Sea Company had grown, in its five prosperous years, to an amazingly successful organisation. At the time cf the beginning of the dramatic turn of events it was paying dividends of six per cent, on its ten millions of stock, and amassing no mean fortunes for its directors and proprietors. It was, quite naturally, held in the highest esteem throughout the land, and looked upon with great favour by Royalty. Many of its eminent directors, amongst them knights and baronets, were Members of Parliament, and it was undoubtedly the strongest and soundest of concerns in being.

In 1716, by Act of Parliament, its dividends were reduced to five per cent., and by virtue of a loan to the Government, and through subscription in a State lottery, its capital was increased to £11,250,000, making its position even more redoubtable than before. It may well have been that first real link with Government affairs - that lottery subscription-was the initial seed of all that was to follow. Lotteries, illegal to-day, were then run by the Government for filling the coffers of the exchequer. People with money to invest were tempted by prizes, ranging from several thousands of pounds to fifty or so, to buy tickets. It was an ingenious scheme if expensive, for the Government got what was needed - ready cash - and whether a prize was drawn or not, all money was returnable to the public after so many years, at interest, or paid back as annuities. It was expensive, because the Government was paying, with the "bait" of prizes, as much as thirty per cent, and more for its money; but it was ingenious, because the lure of prize money persuaded many people to invest in Government loans who would otherwise not have done so.

Imagine, then, the reactions of the British public to the news that the mighty South-Sea Company was proposing to take over the entire National Debt from the Government. An atmosphere of excitement prevailed, on account of the news of easy money which so many fortunate lottery winners had added to their estates, and no less a personage than his Majesty King George I. had accepted the Governorship of the South-Sea Company. It was obvious, therefore, that if Parliament did accept the Company's proposals, thousands of people would be able to share in the profits of South-Sea trading. What more could any investor ask? It was an incredibly bold scheme, and it was undoubtedly attractive, as attractive as anything could be, and not only to the Government, but to every one who wished to turn pence into shillings. Even while the proposition was being discussed, and long before anything tangible occurred, the stock of the South-Sea Company began to increase in value.

By taking over the National Debt, the Government would hand over to the South-Sea Company a thousand-and-one minor troubles, putting all its worries under one concrete heading; the South-Sea Company would be empowered to increase its already amazing capital to an enormous figure, taking over all the annuities; the people who held those annuities would turn them in to the Company in exchange for the coveted stock. Taken all round, it seemed flawless. The Company was more than sound. It was more than wealthy. It was the protegee of the King, its Governor; it had the backing of Parliament - had even lent the country money; and it had the monopoly of the highly lucrative South Sea trade. But was it flawless? Can any scheme be flawless which seems so perfect from every aspect? Read what one Member of his Majesty's Parliament wrote of it in 1720:

"The South-Sea Company must design some advantage to themselves by their proposal to the Parliament, otherwise they would not be at such an expensive zeal in soliciting its acceptance. And if they aim at profit to themselves by it, whence must that profit arise? Must it not proceed from such art and dexterity in the turning of stocks and money, as may deceive the present National Creditors, the annuitants, and deprive them in some measure of the advantages of their bargain...."

Wise words, those, but the public were in no mood to attend to them, even if they read them. The South-Sea Company were proposing to offer no less than three-and-a-half million pounds for the privilege of taking over the burden of the National Debt. Obviously they must have some gain in view. But the annuity holders did not wish to see that. They were receiving a certain fixed annual sum from the Government - a repayment of their loans by lottery, plus interest, but they longed to increase that annual sum. They knew, or told themselves, that they would receive a better return by way of dividends from South-Sea Stock.

It was Mr. John Aislabie, Chancellor of the Exchequer, who informed the House officially of the South-Sea Company's daring proposal, and this he did in February, 1719. He said that "he had a proposal for taking into the South-Sea Company most of the Publick Debts; that they would give a good sum of money for it; and that he thought it worth while to take it into consideration." The House agreed to this, and a day was fixed for its consideration. When the day arrived, however, and the proposal was read, several of the Bank of England's directors, themselves Members of Parliament, were present, and they laughed it to ridicule; called it, amongst other names, a vision, and a phantom. As a result a further consideration of it was postponed for another day.

Prime mover in the proposed scheme was Sir John Blunt, a director of the Company, and he was no little annoyed by its reception in the House. But Sir Robert Walpole, the Prime Minister, had a better opinion of it than many others, and he considered it from all angles in his own mind, and finally approached the directors of the Bank of England with it, disgruntled, probably, because Sir John Blunt had not troubled to discuss it with him. At any rate, the upshot of it all was that he inspired the Bank's directors to compete against the South-Sea Company's directors, and to bid for the scheme themselves. So, instead of the South-Sea Company being able to walk away with the scheme for the three-and-a-half million which the directors had in mind, a day was fixed for offers to be made in the House, the highest bidder to win.

As soon as the South-Sea Company learned of this, they called a meeting of their Court of Directors, twenty-nine of them, and empowered their Sub-Governor, Sir John Fellows, to bid what he thought fit. But, it was added, he must take care, whatever it cost, that nobody else should walk away with the scheme. Meanwhile, on the other side of the fence, Sir Robert Walpole met several of the Bank's directors, and it was suggested that they bid £7,000,000. Thus was the first stage of the drama given shape, and on the day appointed the actors appeared at the House of Commons.

As Sir John Fellows and some of his directors reached the Lobby of the House, the Postmaster General, James Craggs, came out; and in conversation it was mentioned that the Bank directors were going to offer seven millions. This was confirmed by the postmaster's son, James Craggs Junior, Secretary for State, and Sir John Fellows was advised to make his bid seven and a half millions - more than double the figure originally decided upon, and certainly two million pounds more than anything which had been discussed at South-Sea House. However, having his instructions from his directors, and acting upon what he had heard, Sir John boldly bid seven and a half millions to an astounded House; and none were more surprised than such members of the South-Sea Company who were present. No higher bid was made, and subject to the proposal being accepted, the scheme went to the South-Sea Company.

Meanwhile, in spite of this huge price, public excitement grew rapidly as the matter hung fire, and the South-Sea stock began to rise in price - which was, of course, exactly what the directors wanted to happen. The higher the price of their shares, the less stock they would have to exchange for the people's annuities. To pay for the seven and a half millions, the old shareholders in the Company would have had to have paid an extra -£16 per share, and any new shareholders would have had to pay £126 per £100 share, but such figures meant nothing. Royal assent was given to the Bill on April 7, 1720, and the stock leaped up to far beyond that figure at once. The Bill empowered the Company to take over the National Debt, and at the same time to increase its capital accordingly. The Company's capital was eleven and three-quarter million pounds at the passing of the Bill; it was to be increased to nearly forty million pounds almost at once.

The first subscription for the New South-Sea Stock was opened, and £2,250,000 of it was issued at 300 per cent. - people paying £300 for every £100 share! But that was nothing. Public appetite was insatiable. The excitement had been simmering for too long. A second subscription disposed of one and a half million pounds in a few hours, at £400 for a hundred pound share. Still the stock rose. The next issue was for five million pounds at no less than £1,000 for one £100 share! And another issue at the same fantastic premium followed soon after. In all, those four issues, and the forthcoming midsummer dividend, made the Company's total capital nearly thirty-three million pounds. It was incredible. The people went crazy. They were money mad.

But this scheme, if it were crazy itself, was nothing compared with the hundred-and-one hair-brained schemes which sprung up in sympathy with it. At least the South-Sea Company had an apparently solid background. But the people were money-mad. These were heydays. Nothing could be wrong. And such a harvest was reaped, by the sharks who stepped in, as will never be reaped again, even by honesty. Exchange Alley was packed with a mass of eager, adventurous humanity. Even women were there in their dozens, and bonds and certificates of every description and denomination were exchanged with frenzied enthusiasm. So complete was the chaos, and so careless the spirit, that the same bonds were being bought and sold at different ends of the street at a price difference of as much as a pound on quite cheap stock. And how cheap! And how expensve the very cheapest of it! For the sharks had stepped in. In the wildness of the hour mere sheets of worthless paper were sold and exchanged. Sections of ordinary playing cards, stamped with imposing seals, were sold for several pounds! What were they? Nothing!

No one will ever know the full extent of that swindle. Men arrived in the city overnight, lured by the news of easy money. Offices were hired - a day was enough. An announcement in a paper to the effect that a subscription was to be opened at such-and-such a place was sufficient. It mattered not a whit what the subscriptions were for. "Producing oil from sunflower seeds" was the ambitious title of one "company." "A Scheme to Supply London with Sea Coal" was another, and its capital was to be three millions. There were thousands of people waiting to be caught. A million meant nothing. One audacious swindler did not even bother to name the purpose of his company. He merely stated that in order to benefit by his scheme a deposit of two guineas was necessary. Each two guineas would entitle the depositor to make a subscription of £100 at some future date - and he stated quite blandly that each hundred pounds subsequently invested would yield that sum annually - indefinitely! On that, and nothing more, he received over two thousand pounds in one morning - and departed whence he had come. And, needless to say, no one ever knew where. But that was only one glaring case. There were hundreds of them. The total capital advertised to be raised for only three schemes added up to the fantastic figure of £300,000,000 - far in excess of the value of all the land in England! But still the people bought. They bought and they sold. Stock, worthless paper, bought one day in London was already sold a dozen times before nightfall, increasing in price as it went. It was sold and resold in town and country. Men and women alike realised everything they had of value in order to be able to buy. Men met their brokers in taverns, shops, and coffee-houses; women made similar appointments at their hairdressers and dressmakers. A few sold at a profit and were contented. But only a few.