A little over 300 years ago one of the most famous financial crashes in history occurred in the UK. You may well remember the ‘dot com bubble’ bursting in the late 1990s. But nearly three centuries earlier in 1720, the South Sea Bubble burst and rocked the financial markets like never before.
But what was the South Sea Bubble and what was the impact of it bursting? You may not have heard much about it, but the ripple effect of this event has had a lasting effect on global stock markets. Sit back and enjoy the story of a single British company that whipped up a financial frenzy on the British stock market in 18th century London that resulted in a spectacular collapse.
The first financial markets were set up in the 1690s, at a time when the costly Nine Years War was raging. Launched in 1694, the first Bank of England established a credit system and with that came the country’s first national debt. The Bills of Exchange that they issued were paper notes with a ‘promise to pay’ inscribed on them (the same words can be found on our banknotes today – not on your contactless device though).
There was a surge in money-making schemes like lotteries, annuities and joint-stock companies. Overseas investment increased. London grew richer. During that time the Bank of England grew into a confident and bright teenager with increasing amounts of power. It was the sole lender to the government. In the early 18th century, the Whigs were controlling the Bank of England. But when new Tory Chancellor of the Exchequer, Robert Harley, took office in 1710, he began to find new ways to raise much needed funds. A government debt of around £9 million had been racked up.
Robert Harley appointed John Blunt as the Bank of England’s lottery promoter. The aptly named Blunt was director of the Hollow Sword Blades Company, an unofficial bank cum sword manufacturer. Sounds a bit shifty doesn’t it? Financier, John Blunt was a pro at selling lottery tickets, but that simply whet his appetite for bigger fish to fry. So he and Robert Harley set up the South Sea Company.
The South Sea Company was the brainchild of Scottish trader, William Paterson with John Blunt and Robert Harley as the founders. Established in 1711, the company intended to exploit new overseas markets.
At that time, international trade was opening up. There was also a feeling was that the War of the Spanish Succession was ending. The South Sea Company founders spied an opportunity – trade with Spanish America (largely in slaves). And in 1713 that came to fruition when the Treaty of Utrecht gave Britain the rights to supply slaves to Spanish America. They worked with the Royal African Company to ship thousands of slaves across the Atlantic.
The South Sea Company arranged to buy the ‘asiento’ (monopoly contract) for trade in the Spanish South Sea from the British government. In effect, they took on Britain’s national debt of over £9,000,000.
When the company took on the national debt in 1820, it created a flurry of interest. There was a good amount of spin doctoring about this venture. Huge riches were promised and the company was positioned as immensely patriotic.
This 18th century ‘get rich quick scheme’ held great appeal. King George I himself was one of the investors and became the company’s governor. Their positive propaganda was so convincing that investors ranged from nobility and their domestic staff to politicians and renowned celebrities. Institutions like The Royal Society were swept up in it. The likes of scientist Sir Isaac Newton and author Jonathan Swift also wanted their piece of the South Sea Company.
Ever heard the adage, ‘what goes up must come down’? Well that’s exactly what happened.
In 1720, there was a frenzy of investment in South Sea stock. In the January, company shares were worth 128 1/2, around 600 in April, and by August they’d shot up dramatically to over 1000. It was such exceptional financial activity that, in June 1720, John Blunt was recognised for ‘his extraordinary services in raising public credit to a height not known before’ and made a Baronet.
Other companies tried to get in on the act. People were scammed into making unwise investments. To try to stop this, Parliament passed The Bubble Act of June 1720, forbidding the creation of joint-stock companies without a Royal Charter. It didn’t have the desired effect.
The propaganda around the amazing trade and riches to come didn’t fully materialise. The Company began to act like a bank, lending money to potential investors. This helped to keep up demand for South Sea stock and inflated the stock price artificially. And that’s why it was ‘the South Sea Bubble.’
By September, the market had collapsed. By December, the South Sea share price had sunk to 124. These weren’t the only shares to take a nosedive. It dragged down other stocks, including government ones, with it.
Firstly, the treaty with Spain wasn’t as fruitful as they’d hoped. Spain only allowed Great Britain a limited amount of trade and, on top of that, they took a percentage of the profits and taxed the slave trade. The limits were so stringent that Britain ended up only being able to send a single ship per year for general trade.
The company didn’t make anywhere near the profits it had promised. It was just trading itself against the national debt that it had bought – a self-perpetuating cycle.
Investors in the company shares lost huge sums of money. Families lost everything. Some felt suicide was the only solution. Waves of anger and discontent were evident in the streets of London.
Step forward Robert Walpole to sort out the mess. He became First Lord of the Treasury, Chancellor of the Exchequer, and Leader of the House of Commons in 1721. He’s considered by many as the first British prime minister.
The public wanted answers, so The House of Commons ordered an inquiry. That showed several MPs had accepted bribes and speculated in the company. Walpole made an example of the South Sea Company’s directors who were disgraced and punished as a result. Their estates were confiscated to repay investors. The remaining South Sea shares were allocated to the East India Company and the Bank of England. This also deflected attention from other investors – like Walpole himself, his mates and the king!
In the same year, “bubbles” also ended in Amsterdam and Paris. What’s known as The Mississippi Bubble burst in France (the fall of John Law’s Mississippi Company), as well as a financial crisis in the Dutch Republic (Tulipmania). The combined international financial crises gave rise to the first global stock market crash.
It sparked an outcry fuelled by satirists, writers and artists (William Hogarth being a key one) which prompted calls for increased scrutiny of unregulated financial markets. In effect, not much changed though. And amazingly, The South Sea Company kept trading until 1853.
The South Sea scheme was one of the first known economic bubbles. Inevitably, it wasn’t the last. In fact, some have drawn parallels between the South Sea Bubble and today’s cryptocurrency mania. Only time will tell.
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