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The South Sea Bubble page 2


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And then the tide began to turn. Giant among huge speculations was the South-Sea Company, and the South-Sea Stock began to fall. Having gone from 800 to 900, soaring steadily upwards to 1,000, it reached its mad peak. Every one held stock. Not only business men had thronged the narrow confines of Exchange Alley, but shopkeepers, clergymen, lawyers, doctors; all of them, for the time being, gamblers. Raising all they could raise on what they had already bought, they bought more. And then, as the peak was passed, they rushed to sell. Banks, goldsmiths of repute, all had advanced cash against stock at its highest. Then, when those who had cash on deposit came to withdraw it, it was not there for them. In vain the bankers and goldsmiths sought to call in their loans. The cash which they had lent against "stock" was already spent upon more stock, and most of it gone for good. They were forced to close down. Many fled in panic. But if they who had lent the money were in panic, how much greater was the anguish of those whose money it was they had lent. Thus the first repercussions of the affair were already hitting the innocent as well as those who had ventured to try their luck; and like some vicious snowball scheme the effects of the panic spread from home to home.

Men and women alike, in the mad scramble to make money, had not only invested all they possessed - had not only borrowed on what they had bought, in order to buy more - but they had also used up every source of credit open to them. The motive of those crazy days was: "Why let a pound stand idle when it can be turned into two pounds?" And so, everything invested, they had turned to the usurers. Money was borrowed wildly, right and left, and the devil take the interest. What did interest matter when there were profits far in excess of that interest to be made? Twenty per cent, interest per day was paid gladly at the height of the boom - seven thousand, three hundred per cent, per annum! But what was a pound a day, when every pound borrowed would grow into ten - or perhaps twenty? And in many cases it did. The "Lustring Company," one of the "bubbles" of that brief, hectic period, issued ten thousand shares at 5 2s. 6d. per share. They were not worth a farthing the lot, but they soared away up to 120 each, for all that - making profits for person after person, right up to the peak - right up till the time that the last buyer was left stranded with a handful of completely unsaleable and utterly worthless paper.

When South-Sea stock began to fall, a sympathetic rumble was felt in every other wild-cat speculation. The alarm had rung, and people were beginning to open their eyes to what they had done. An atmosphere of dreadful uncertainty welled up in place of that aura of complete confidence. The whisper was to sell, and the whisper became a cry, followed by a rush. But to sell there must be a buyer, and there were no buyers in that uncertain atmosphere. Those who had bought South-Sea stock at 1,000 for a 100 share began to wonder what they were holding. Even the fact that the King was Governor to the Company was no longer of any assurance; that the Company was linked with Parliament by many ties made no difference; that its capital was over six times that of the Bank of England meant nothing. All that mattered was the fact that people had paid up to 1,000 for a sheet of paper - and they had begun to wonder exactly how much that sheet of paper was worth.

As far as the South-Sea Company was concerned, there was an admirable way of replacing confidence in their stock. They lent money on it. In order to create confidence, and so maintain its price, they advanced money against their own shares, on six-month terms, at 400, 500, and even 700 per share. But even that scheme was not successful for long; from its peak price of 1,000, the stock fell away rapidly to 850, and by the end of August, 1720, it had shrunk to 780. Something more than the bluff of lending money on shares was necessary to stop the catastrophic landslide; for not only did it fail to check the slump, but it attracted flocks of borrowers who must not be denied.

A bold statement by the South-Sea Company on August 30 had more effect. It was announced that the next Xmas dividend would be thirty per cent., and that thereafter an annual dividend of fifty per cent, would be paid for at least twelve years. The directors had, in effect, said, "Within twelve years you will have made 630 interest on every 100 share." For two days this stemmed the panic, and the shares even improved from 780 to 810. But for two days only did the crazy promise work. Glad of a chance to see even a 30 saving on their losses, a wave of new sellers appeared, and within the week the price had fallen to 680. By the 29th September they were down to 175.

From 1,000 to 175 in one month. A dead loss of 825 on every share. Complete and utter ruin for thousands. No mere words can portray the appalling state of misery that prevailed. The very bottom had fallen out of the world, and the people were numbed with horror and amazement at the incredible thing which had happened to them. Their savings, their homes, everything that they possessed, had been swept away from them. Worse than that in many cases, for many had taken up still more stock for future delivery or payment; they had committed themselves to contracts when prices were at their zenith; and now, not only faced with complete ruin, they had no hope of ever starting again, for ahead of them stretched endless years of misery and burden, wherein every penny must go towards the hundreds of pounds which they owed for mere scraps of worthless paper. There was no one to turn to for help, because it seemed that every one was in the same plight, and, moreover, the vital background of trust was gone - swept away in the gigantic wave of ruin. Men with money would not lend, because, for all they knew, the borrower was already committed far beyond his means. Private credit was gone; to trust was further madness, and so the credit of the whole country was undermined. And the evil spread, and public credit was also ruined.

Those who had enriched themselves during the boom found themselves suddenly poorer than when they set out to gamble. Those who never intended to gamble at all, but merely to make a safe and sound investment to keep them in comfort for the remainder of their years, were made destitute almost overnight. Poor people, whose sole source of income had been Government Annuities, purchased with savings, saw nothing but the spectre of utter poverty ahead of them. Right and left, with no discrimination for class or sex, the bitter blows fell, on clergymen, widows, and wealthy alike. Individual tales of woe were legion, but for the most part they went unheard in the general chaos of the moment. There were sufferers in every walk of life, and those who deserved to lose were no more harshly treated than those who were ignorant of the risks they were taking.

Typical amongst the thousands who were hit was one Thomas Hudson, a native of Leeds; and none could have lived a more sober and well-ordered life. As a Government clerk in London, he spent his youth and middle age industriously and without hope or desire for riches. Then unexpectedly, through the death of an aunt, he inherited a comfortable fortune. He retired to the country to live out the remainder of his days in peace and moderation. He had everything he wanted, and nothing was further from his mind than gambling when he invested his whole capital in the mighty and respectable South-Sea Company. Then, in a month, he was destitute. Frantic with the tragedy which had so unaccountably befallen him, he became insane. For years he haunted the streets and alleys of London, a well-known figure, wrapped in an old rug and leaning on a crutch; and so he begged his way through the cold and empty months, till finally death released him from his misery.

There is also the case of Gay, the poet, one who had never anticipated riches, but who suddenly found himself wealthy. "Gay had a present of some South-Sea stock from young Craggs (the Secretary for State), and once supposed himself to be worth 20,000. His friends advised him to dispose of his shares, but he dreamed of dignity and splendour, and could not bear to obstruct his own fortune. He was then importuned to sell as much as would purchase him a hundred a year for life, ' which,' as one said to him, ' will make you sure of a clean shirt and a shoulder of mutton every day.' This counsel was neglected. The profit and the principal were lost; and Gay sank under the calamity so low that his life became in danger."

The wave of mistrust, once started, gathered such momentum that it seemed nothing could stop it. Every possible plan was considered by the directors of the South-Sea Company to counteract the sudden panic which was sweeping the country, but they, too, were at their wits' end. With their shares now standing at little more than 150, and people still clamouring to sell, it appeared as though there was nothing they could do. They had lent out huge sums against shares in a futile attempt to restore confidence in the value of the stock: so much so that, it was hinted later, a bare 1,000 in cash was left in their safes. Then, when all hope seemed at an end, it was decided at a meeting of the court of directors to approach the Bank of England for a loan of 2,000,000. When compared with the immense capital which had so lately backed their proud and mighty organisation, the whole of the Bank's 5,500,000 might well have appeared useless; but the Bank was then, as now, regarded as a veritable bulwark of safety, and could they but enlist the aid of its directors, the public might well view their own concern with more confidence. And indeed such was the case, for even while the possibility of Bank assistance was only a rumour, the price of South-Sea stock began to rally. From 175 on September 29, it rose to 320 in a day. And so another page of the drama was being planned behind the scenes.

Sir Robert Walpole, hearing of the Company's proposal, hastened to the Bank and talked with the directors, urging them to take over a large block of South-Sea shares at a premium. He was convinced that an interest of this nature would do far more towards restoring public credit than a mere loan, and accordingly, when the South-Sea directors arrived to keep their appointment they were informed that Sir Robert had already spoken on their behalf, and that although no figure had been definitely fixed, they might reasonably expect a price of 400 for their shares. This news, so encouraging after the recent depression, brought in a large number of new buyers, and books were opened at the Bank for subscriptions. But it was no use. Although the stock rose, those who had raised it realised on their shares, benefiting by the welcome chance of recouping past losses; money was paid out over the counter almost faster than it came in, and there was danger of a run on the bank. Once more the price fell back, and the Bank, fearing quite naturally that it might be dragged down into the morass as well, renounced the agreement, which had never materialised into anything solid and binding. Thus was all hope abandoned of saving the lost millions of the investors. Like puppets at the mercy of those who pulled the strings, they had waited from day to day in an agony of suspense, cheered by the slightest rumour, thrown back into the depths of despair at the slightest reaction of the stock which they held, and which meant everything in life to them. Until this latest decision there had been a ray of hope, no matter how feeble. Now there was nothing. They were finished, and everything which they had was gone for good. Many of them, unable to live in such circumstances where they were known, left the country and were never heard of again.

No one shall ever know the feelings of the directors of the once famous and wealthy South-Sea Company, from the time the ground began to crumble until the last traces of the landslide settled. No one can ever say truthfully how far each and every one of them was involved in its cause. But such a cry rose up, when it was realised finally that all was lost, that all of them must have known they could not escape retribution. Parliament had opposed the Bill in the first place: the Bank's directors had laughed at the very idea of the scheme: peers in the House of Lords had pointed out at least five objections, first of them being that it would tend to enrich a few at the cost of many. It would also, so they said, countenance the "fraudulent and pernicious practice of stock-jobbing." In these two surmises they were only too correct, and had the scheme been any more successful it is more than probable that their other objections would have proved right as well - namely, it would give foreigners a chance to put even more fingers in the pie of public funds than they had already, and that the Company, with its terrific capital of over thirty millions, might well be able to influence the election of Members, consequently swaying the very Government itself through the House of Commons. These objections had been skilfully answered by the Earl of Sunderland, however, and, as has been seen, the directors of the Bank of England were so far converted from their original opinion of amusement that they bid for the scheme themselves.

Now that the scheme was brought to disaster, there were all those who had opposed it in a position to speak more plainly of what they had feared. The directors of the Company must give some fuller explanation of what they had intended to do. There were unavoidable questions to be answered as to how and why the crash had come. Such a wail of misery arose from the entire populace that only the fullest inquiry could satisfy it, even though that inquiry was fruitless to the extent of rinding some measure for relieving the sufferers. Few people, even those in highest authority in the Company itself, had the slightest conception of what would be the outcome of that inquiry. But it was inevitable, and in January, 1721, a Secret Committee was chosen by ballot and appointed to investigate all the proceedings of the South-Sea Company since the end of 1719. It was to follow through all transactions from the Company's books and, more significant still, it was to study the histories and private papers of the Company's directors. Only a few days were needed to confirm the worst.

In its first report to the House the committee was able to bring news of what was likely to prove the most complex tale of fraud and trickery that the world had ever known. False entries had been found in the books, pages were missing from cash books and ledgers, there were unexplainable alterations and erasions, and many vital papers could not be found at all. In the first instance, from 4th February, 1719, to the 12th April, 1720 - the all-important period during which the scheme was under preparation and consideration - there were entries in the cash book showing the sale of vast quantities of stock, but no names to show to whom it had been sold. And no one was able or prepared to explain this fact. Later, as the investigation proceeded, it was found that the Company had been lending money to shareholders and others out of all proportion to the amounts laid down by their laws. It was found, further, that officials of the Company had been helping themselves to large blocks of stock, juggling with it, and enriching themselves at the expense of both Company and public alike; and not only this, but they had been able to juggle so successfully that personal loss was almost impossible, whatever happened, and gain was almost certain. In other words, by fictitious dates and entries, they had apportioned huge numbers of shares in the books at various prices. If the stock went up, as they bargained, names were filled in afterwards and the differences of price taken. If it had gone down, as they realised quite plainly it might have done, other and more unfortunate names would have been filled in the gaps, and others would have had to have paid the difference. But those were only the first and most glaring of the discoveries.

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