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South Sea Bubble redirects here. For the Noel Coward play, seeSouth Sea Bubble (play).
1754 engraving of Old South Sea House, the headquarters of the South Sea Company, burned down in 1826,
on the corner ofBishopsgate StreetandThreadneedle Streetin theCity of London
TheDividendHall of South Sea House, 1810
Azure, a globe whereon are represented theStraits of MagellanandCape Hornallproperand insinisterchief point two herrings haurient in saltire argent crowned or, in acantontheunited arms of Great Britain
Heraldic grouping above main entrance to the surviving South Sea House, Threadneedle Street, rebuilt after the fire of 1826
An early trade label of the South Sea Company, for export of finest Englishsergecloth. The letters circumscribing the seal below should read SS&FC, for South Sea and Fishery Company
1733 share certificate of the South Sea Company showing the Companys coat of arms and the Latin motto
(FromCadizto Dawn,JuvenalSatires, 10)
Hogarthianimage of the 1720 South Sea Bubble from the mid-19th century, byEdward Matthew WardTate Gallery
TheSouth Sea Company(officiallyThe Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of fishing)was a Britishjoint-stock companyfounded in 1711, created as apublic-private partnershipto consolidate and reduce the cost of national debt. The company was also granted a monopoly to trade with South America and nearby islands, hence its name. (The modern use of the term South Seas to refer to the entire South Pacific was unknown in England at the time.) When the company was created, Britain was involved in theWar of the Spanish Successionand Spain controlled South America. There was no realistic prospect that trade would take place and the company never realised any significant profit from its monopoly. Company stock rose greatly in value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing to little above its originalflotationprice; theeconomic bubblebecame known as theSouth Sea Bubble.
TheBubble Act1720 (6 Geo I, c 18), which forbade the creation of joint-stock companies withoutroyal charter, was promoted by the South Sea company itself before its collapse.
In Great Britain, a considerable number of people were ruined by the share collapse, and the national economy greatly reduced as a result. The founders of the scheme engaged ininsider trading, using their advance knowledge of when national debt was to be consolidated to make large profits from purchasing debt in advance. Huge bribes were given to politicians to support theActs of Parliamentnecessary for the scheme.Company money was used to deal in its own shares, and selected individuals purchasing shares were given loans backed by those same shares to spend on purchasing more shares. The expectation of profits from trade with South America was used to encourage the public to purchase shares, but the bubble prices reached far beyond the profits of the slave trade.
A parliamentary enquiry was held after the crash to discover its causes. A number of politicians were disgraced, and people found to have profited unlawfully from the company had assets confiscated proportionate to their gains (most had already been rich men and remained comfortably rich). The company was restructured and continued to operate for more than a century after the Bubble. The headquarters were inThreadneedle Streetat the centre of the financial district in London. At the time of these events theBank of Englandalso was a private company dealing in national debt, and the crash of its rival consolidated its position as banker to the British government.
In August 1710Robert Harleywas appointedChancellor of the Exchequerin a government of commission. The government at this time had become reliant on theBank of England. This was a privately owned company, chartered 16 years previously, which had obtained a monopoly as the lender to Westminster, in return for arranging and managing loans to the government. The government had become dissatisfied with the service it was receiving and Harley was actively seeking new ways to improve the national finances.
A new Parliament met in November 1710 with a resolve to attend to national finances, which were suffering significantly fromtwo simultaneous wars: thewar with France, which ended in 1713, and theGreat Northern War, which was not to end until 1721. Harley came prepared, with detailed accounts of the situation of the national debt, which was customarily a piecemeal affair, with different government departments arranging their own loans as the need arose. He released the information steadily, continually adding new reports of debts incurred and scandalous expenditure, until in January 1711 the House of Commons agreed to appoint a committee to investigate the entire debt. The committee included Harley himself; the twoAuditors of the Imprests, whose task was to investigate government spending; Harleys brotherEdward; and Paul Foley, his brother-in-law. Also included were theSecretary of the TreasuryWilliam Lowndes, who had had significant responsibility for reminting the entire debased British coinage in 1696; andJohn Aislabiewho represented theOctober Club, a group of around 200 MPs who had agreed to vote together.
Harleys first concern was to find 300,000 for the next quarters pay for the British army operating in Europe underMarlborough. This was provided by a private consortium ofEdward Gibbon,George CaswallandHoares Bank. The Bank of England had been operating a state lottery on behalf of the government, but this had not been particularly successful in 1710, and another had already begun in 1711. This too was performing poorly, so Harley granted authority to sell tickets toJohn Blunt, a director of theHollow Sword Blade Company, which despite its name was an unofficial bank. With sales commencing on 3 March 1711, tickets had completely sold out by the 7th. This was the first truly successful English state lottery.
The success was shortly followed by another, larger, lottery, The Two Million Adventure or The Classis, with tickets costing 100, a top prize of 20,000 and every ticket winning a prize of at least 10. Although prizes were advertised by their total amount, they were paid in the form of a fixed annuity over a period of years, so that the government effectively held the prize money as a loan until it was paid out to the winners. Marketing was handled by members of the Sword Blade syndicate, Gibbon selling 200,000 of tickets and earning 4,500 commission, and Blunt selling 993,000. Charles Blunt (a relative) was made Paymaster of the lottery with expenses of 5,000.
The national debt investigation had concluded that a total of 9,000,000 was owed, without any allocated income to pay it off. Edward Harley and John Blunt together had devised a scheme to consolidate this debt in much the same way that the Bank of England had consolidated previous debts, although the Bank still held the monopoly on operating as a bank. All holders of the debt would be required to surrender it to a new company, the South Sea Company, which in return would issue shares to the same amount. The government would pay the company 568,279 10s 0d (6% interest plus expenses) annually, which would be distributed as a dividend to shareholders. The company was also given a monopoly to trade with South America, a potentially lucrative enterprise, but one controlled by Spain, with whom Britain was at war.
At that time, when continental America was being explored and colonized, Europeans applied the term South Seas only to South America and surrounding waters. The concession both held out the potential for future profits and encouraged a desire for an end to the war, necessary if any profits were to be made. The original suggestion for the South Sea scheme came fromWilliam Paterson, one of the founders of the Bank of England and the financially disastrousDarien Scheme.
Harley was rewarded for the scheme by being created Earl of Oxford on 23 May 1711, and was promoted toLord High Treasurer. With a more secure position, he began secret peace negotiations with France. Commercially, since the lotteries were discredited, some of the debt intended to be consolidated under the scheme was available in the open market before the scheme was announced, at a discounted rate of 55 per 100 nominal value. This allowed anyone with advance knowledge to buy debt cheap and sell at an immediate profit, and made it possible for Harley to bring further financial supporters into the scheme, such as James Bateman andTheodore Janssen.
Unless the Spaniards are to be divested of common sense, infatuate, and given up, abandoning their own commerce, throwing away the only valuable stake they have left in the world, and in short, bent on their own ruin, we cannot suggest that they will ever, on any consideration, or for any equivalent, part with so valuable, indeed so inestimable a jewel, as the exclusive trade to their own plantations.
The originators of the scheme knew that there was no money to invest in a trading venture, and no realistic expectation there would ever be a trade to exploit, but the potential for great wealth was widely publicised at every opportunity, so as to encourage interest in the scheme. The objective for the founders was to create a company which they could use to become wealthy, and which offered future scope for further government deals.
The Charter for the company was drawn up by Blunt, based on that of the Bank of England. Blunt was paid 3,846 for his services in setting up the company. Directors would be elected every three years while shareholders would meet twice a year. The company employed a Cashier, Secretary and Accountant. The Governor was intended to be an honorary position, and the position was later customarily held by the ruling monarch. The charter allowed the full court of directors to nominate a smaller committee to act on any matter on its behalf. Directors of the Bank of England and of theEast India Companywere disbarred from being a director of the South Sea Company. Any ship of more than 500 tons owned by the company was to have a Church of England clergyman on board.
The exchange of government debt for stock was to occur in five separate lots. The first two of these, totaling 2.75 million from about 200 large investors, had already been arranged before the companys charter was issued on 10 September 1711. The government itself exchanged 0.75 million of its own debt held by different departments (at this time, individual office holders were responsible for money in their charge, and were at liberty to invest it to their own advantage before it was required). Harley exchanged 8,000 of debt and was appointed Governor of the new company. Blunt, Caswall and Sawbridge together provided 65,000, Janssen 25,000 of his own plus 250,000 from a foreign consortium, Decker 49,000, Sir Ambrose Crawley 36,791. The company had a Sub-Governor, Bateman; a Deputy Governor, Ongley; and 30 ordinary directors. In total, nine of the directors were politicians, five were members of the Sword Blade consortium, and seven more were financial magnates who had been attracted to the scheme.
The company created a coat of arms with the mottoA Gadibus usque ad Auroram(from Cadiz to the dawn) and rented a large house in the City as its headquarters. Seven sub-committees were created to handle its everyday business, the most important being the Committee for the affairs of the company. The Sword Blade company was retained as their banker and on the strength of its new government connections issued notes in its own right, notwithstanding the Bank of England monopoly. The task of the Company Secretary was to oversee trading activities; the Accountant, Grigsby, was responsible for registering and issuing stock; and the Cashier, Robert Knight, acted as Blunts personal assistant at a salary of 200 per year.
TheTreaty of Utrechtof 1713 granted Britain anAsientolasting 30 years to supply the Spanish colonies with 4,800 slaves per year. Britain was permitted to open offices inBuenos AiresCaracasCartagenaHavanaPanamaPortobelloandVera Cruzto arrange theAtlantic slave trade. One ship of no more than 500 tons could be sent to one of these places each year (theNavo de Permiso) with general trade goods. One quarter of the profits were to be reserved for the King of Spain. There was provision for two extra sailings at the start of the contract. The Asiento was granted in the name ofQueen Anneand then contracted to the company.
By July the company had arranged contracts with theRoyal African Companyto supply the necessary African slaves to Jamaica. Ten pounds was paid for a slave aged over 16, 8 for one under 16 but over 10. Two-thirds were to be male, and 90% adult. The company trans-shipped 1,230 slaves from Jamaica to America in the first year, plus any that might have been added (against standing instructions) by the ships captains on their own behalf. On arrival of the first cargoes, the local authorities refused to accept the Asiento, which had still not been officially confirmed there by the Spanish authorities. The slaves were eventually sold at a loss in the West Indies.
In 1714 the government announced that a quarter of profits would be reserved for the Queen and a further 7.5% for a financial advisor, Manasseh Gilligan. Some Company board members refused to accept the contract on these terms, and the government was obliged to reverse its decision.
Despite these setbacks, the company continued, having raised 200,000 to finance the operations. In 1714 2,680 slaves were carried, and for 171617, 13,000 more, but the trade continued to be unprofitable. An import duty of 33pieces of eightwas charged on each slave (although for this purpose some slaves might be counted only as a fraction of a slave, depending on quality). One of the extra trade ships was sent to Cartagena in 1714 carrying woollen goods, despite warnings that there was no market for them there, and they remained unsold for two years.
The company was heavily dependent on the goodwill of government; when the government changed, so too did the company board. In 1714 one of the directors who had been sponsored by Harley, Arthur Moore, had attempted to send 60 tons of private goods on board the company ship. He was dismissed as a director, but the result was the beginning of Harleys fall from favour with the company. On 27 July 1714, Harley was replaced as Lord High Treasurer as a result of a disagreement that had broken out within the Tory faction in parliament. Queen Anne died on 1 August 1714; and at the election of directors in 1715 the Prince of Wales (the future KingGeorge II) was elected as Governor of the Company. The new KingGeorge Iand the Prince of Wales both had significant holdings in the company, as did some prominent Whig politicians, includingJames Craggs the Elder, the Earl of Halifax and Sir Joseph Jekyll. James Craggs, as Postmaster General, was responsible for intercepting mail on behalf of the government to obtain political and financial information. All Tory politicians were removed from the board and replaced with businessmen. The Whigs Horatio Townshend, brother in law ofRobert Walpole, and theDuke of Argyllwere elected directors.
The new government led to a revival of the companys share value, which had fallen below its issue price. The previous government had failed to make the interest payments to the company for the last two years, owing more than 1 million. The new administration insisted the debt be written off, but allowed the company to issue new shares to stockholders to the value of the missed payments. At around 10 million, this now represented half the share capital issued in the entire country. In 1714 the company had 2,000 to 3,000 shareholders, more than either of its rivals.
By the time of the next directors elections in 1718 politics had changed again, with a schism within the Whigs between Walpoles faction supporting the Prince of Wales andJames Stanhopes supporting the King. Argyll and Townshend were dismissed as directors, as were surviving Tories Sir Richard Hoare and George Pitt, and King George I became governor. Four MPs remained directors, as did six people holding government financial offices. The Sword Blade Company remained bankers to the South Sea, and indeed had flourished despite the companys dubious legal position. Blunt and Sawbridge remained South Sea directors, and they had been joined by Gibbon and Child. Caswall had retired as a South Sea director to concentrate on the Sword Blade business. In November 1718 Sub-Governor Bateman and Deputy Governor Shepheard both died. Leaving aside the honorary position of Governor, this left the company suddenly without its two most senior and experienced directors. They were replaced by Sir John Fellowes as Sub-Governor and Charles Joye as Deputy.
In 1718 war broke out with Spain once again, in theWar of the Quadruple Alliance. The companys assets in South America were seized, which the company claimed cost it 300,000. Any prospect of profit from trade, for which the company had purchased ships and had been planning its next ventures, disappeared.
Events in France now came to influence the future of the company. A Scottish economist and financier,John Law, exiled after killing a man in a duel, had travelled around Europe before settling in France. There he founded a bank, which in December 1718 became the Banque Royale, national bank of France, while Law himself was granted sweeping powers to control the economy of France, which operated largely by royal decree. Laws remarkable success was known in financial circles throughout Europe, and now came to inspire Blunt and his associates to make greater efforts to grow their own concerns.
In February 1719 Craggs explained to the House of Commons a new scheme for improving the national debt by converting the annuities issued after the 1710 lottery into South Sea stock. By Act of Parliament, the company was granted the right to issue 1,150 of new stock for every 100 per annum of annuity which was surrendered. The government would pay 5% per annum on the stock created, which would halve their annual bill. The conversion was voluntary, amounting to 2.5 million new stock if all converted. The company was to make an additional new loan to the government pro-rata up to 750,000, again at 5%.
The South Sea company presented the offer to the public in July 1719. In March there was an abortive attempt to restore the Old Pretender,James Edward Stuart, to the throne of Britain, with a small landing of troops in Scotland. They were defeated at theBattle of Glen Shielon 10 June. The Sword Blade company spread a rumour that the Pretender had been captured, and the general euphoria encouraged the South Sea share price to rise from 100, where it had been in the spring, to 114. Annuitants were still paid out at the same money value of shares, the company keeping the profit from the rise in value before issuing. About two-thirds of the in-force annuities were exchanged.
Emblematical Print on the South Sea Scheme
(1721). In the bottom left corner are Protestant, Catholic, and Jewish figures gambling, while in the middle there is a huge machine, like a merry-go-round, which people are boarding. At the top is a goat, written below which is Whol Ride. The people are scattered around the picture with a sense of disorder, while the progress of the well-dressed people towards the ride in the middle represents the foolishness of the crowd in buying stock in the South Sea Company, which spent more time issuing stock than anything else.
The 1719 scheme was a distinct success from the governments perspective, and they sought to repeat it. Negotiations took place between Aislabie and Craggs for the government and Blunt, Cashier Knight and his assistant and Caswell. Janssen, the Sub Governor and Deputy Governor were also consulted but negotiations remained secret from most of the company. News from France was of fortunes being made investing in Laws bank, whose shares had risen sharply. Money was moving around Europe, and other flotations threatened to soak up available capital (two insurance schemes in December 1719 each sought to raise 3 million).
Plans were made for a new scheme to take over most of the unconsolidated national debt of Britain (30,981,712) in exchange for company shares. Annuities were valued as a lump sum necessary to produce the annual income over the original term at an assumed interest of 5%, which favoured those with shorter terms still to run. The government agreed to pay the same amount to the company for all the fixed term repayable debt as it had been paying before, but after seven years the 5% interest rate would fall to 4% on both the new annuity debt and also that taken over previously. After the first year, the company was to give the government 3 million in four quarterly installments. New stock would be created at a face value equal to the debt, but the share price was still rising and sales of the remaining stock, i.e. the excess of the total market value of the stock over the amount of the debt, would be used to raise the government fee plus a profit for the company. The more the price rose in advance of conversion, the more the company would make. Before the scheme, payments were costing the government 1.5 million per year.
In summary, the total government debt in 1719 was 50 million:
18.3m was held by three large corporations:
3.2m by theBritish East India Company
Privately held redeemable debt amounted to 16.5m
15m consisted of irredeemable annuities, long-fixed-term annuities of 7287 years, and short annuities of 22 years remaining to expiry.
The purpose of this conversion was similar to the old one: debt holders and annuitants might receive less return in total, but an illiquid investment was transformed into shares which could be readily traded. Shares backed by national debt were considered a safe investment and a convenient way to hold and move money: far easier and safer than metal coins. The only alternative safe asset, land, was much harder to sell and it was legally much more complex to transfer ownership.
The government received a cash payment and lower overall interest on the debt. Importantly, it also gained control over when the debt had to be repaid, which was not before seven years but then at its discretion. This avoided the risk that debt might become repayable at some future point just when the government needed to borrow more, and could be forced into paying higher interest rates. The payment to the government was to be used to buy in any debt not subscribed to the scheme, which although it helped the government also helped the company by removing possibly competing securities from the market, including large holdings by the Bank of England.
Company stock was now trading at 123, so the issue amounted to an injection of 5 million of new money into a booming economy just as interest rates were falling.Gross Domestic Product(GDP) for Britain at this point was estimated as 64.4 million.
On 21 January the plan was presented to the board of the South Sea Company, and on 22 Januarypresented it to Parliament. The House was stunned into silence, but on recovering proposed that the Bank of England should be invited to make a better offer. In response, the South Sea increased its cash payment to 3.5 million, while the Bank proposed to undertake the conversion with a payment of 5.5 million and a fixed conversion price of 170 per 100 face value Bank stock. On 1 February, the company negotiators led by Blunt raised their offer to 4 million plus a proportion of 3.5 million depending on how much of the debt was converted. They also agreed that the interest rate would reduce after four years instead of seven, and agreed to sell on behalf of the government 1 million of Exchequer bills (formerly handled by the Bank). The House accepted the South Sea offer. Bank stock fell sharply.
Perhaps the first sign of difficulty came when the South Sea Company announced that its Christmas 1719 dividend would be deferred for 12 months. The company now embarked on a show of gratitude to its friends. Select individuals were sold a parcel of company stock at the current price. The transactions were recorded by Knight in the names of intermediaries, but no payments were received and no stock issued indeed the company had none to issue until the conversion of debt began. The individual received an option to sell his stock back to the company at any future date at whatever market price might then apply. Shares went to the Craggs:the Elderandthe YoungerLord GowerLord Lansdowne; and four other MPs.Lord Sunderlandwould gain 500 for every pound that stock rose; George Is mistress, their children and Countess Platen 120 per pound rise, Aislabie 200 per pound,Lord Stanhope600 per pound. Others invested money, including theTreasurer to the Navy, Hampden, who invested 25,000 of government money on his own behalf.
The proposal was accepted in a slightly altered form in April 1720. Crucial in this conversion was the proportion of holders of irredeemable annuities who could be tempted to convert their securities at a high price for the new shares. (Holders of redeemable debt had effectively no other choice but to subscribe.) The South Sea Company could set the conversion price but could not diverge much from the market price of its shares. The company ultimately acquired 85% of the redeemables and 80% of the irredeemables.
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The company then set to talking up its stock with the most extravagant rumours of the value of its potential trade in the New World; this was followed by a wave of speculating frenzy. The share price had risen from the time the scheme was proposed: from 128 in January 1720, to 175 in February, 330 in March and, following the schemes acceptance, 550 at the end of May.
What may have supported the companys high multiples (itsP/E ratio) was a fund of credit (known to the market) of 70 million available for commercial expansion which had been made available through substantial support, apparently, by Parliament and the King.
Shares in the company were sold to politicians at the current market price; however, rather than paying for the shares, these recipients simply held on to what shares they had been offered, with the option of selling them back to the company when and as they chose, receiving as profit the increase in market price. This method, while winning over the heads of government, the Kings mistress, et al., also had the advantage of binding their interests to the interests of the Company: in order to secure their own profits, they had to help drive up the stock. Meanwhile, by publicising the names of their elite stockholders, the Company managed to clothe itself in an aura of legitimacy, which attracted and kept other buyers.
The South Sea Company was by no means the only company seeking to raise money from investors in 1720. A large number of other joint-stock companies had been created making extravagant (sometimes fraudulent) claims about foreign or other ventures or bizarre schemes. Others represented potentially sound, although novel, schemes, such as for founding insurance companies. These were nicknamed Bubbles. Some of the companies had no legal basis, while others, such as the Hollow Sword Blade company acting as the South Seas banker, used existing chartered companies for purposes entirely different from their creation. The York Buildings Company was set up to provide water to London, but was purchased by Case Billingsley who used it to purchase confiscated Jacobite estates in Scotland, which then formed the assets of an insurance company.
On 22 February 1720 John Hungerford raised the question of bubble companies in the House of Commons, and persuaded the House to set up a committee, which he chaired, to investigate. He identified a number of companies which between them sought to raise 40 million in capital. The committee investigated the companies, establishing a principle that companies should not be operating outside the objects specified in their charters. A potential embarrassment for the South Sea was avoided when the question of the Hollow Sword Blade Company arose. Difficulty was avoided by flooding the committee with MPs who were supporters of the South Sea, and voting down the proposal to investigate the Hollow Sword by 75 to 25. (At this time, committees of the House were either Open or secret. A secret committee was one with a fixed set of members who could vote on its proceedings. By contrast, any MP could join in with an open committee and vote on its proceedings.) Stanhope, who was a member of the committee, received 50,000 of the resaleable South Sea stock from Sawbridge, a director of the Hollow Sword, at about this time. Hungerford had previously been expelled from the Commons for accepting a bribe.
Amongst the bubble companies investigated were two supported by Lords Onslow and Chetwynd respectively, for insuring shipping. These were criticised heavily, and the questionable dealings of the Attorney-General and Solicitor-General in trying to obtai