windowthroughtime

A wry view of life for the world-weary

Double Your Money – Part Eleven

350px-William_Hogarth_-_The_South_Sea_Scheme

The South Sea Bubble of 1720

The lure of easy money has always been one hard to resist – even governments are on the look-out for an easy way out of their financial difficulties. The War of Spanish Succession (1701 – 1714) had left the British government on its uppers and they promised the South Sea Company, formed in 1711, a monopoly of all trade to the Spanish colonies in South America in return for taking over and consolidating the national debt. The Treaty of Utrecht of 1713 which confirmed Spanish sovereignty over its South American colonies scuppered the company’s chances of exploiting its franchise.

Nonetheless, the company pursued a strategy to become the guarantor of choice for the British government, persuading it in 1719 to convert additional portion of national debt into South Sea Company shares, offering interest of 5% paid by the government. The share price of the company stood at £128 in January 1720 but as more national debt was underwritten by it the price rose to £175 in February and to £330 by the end of the following month when it saw off competition from the Bank of England to underwrite even more debt.

As we have seen elsewhere a nascent stock exchange was forming in London and in 1720 those who were unable to get their hands on South Sea company stock found that there were a remarkable number of start-ups vying for their fortunes.  Some companies were lunatic – one was set up to manufacture a gun to fire square cannon balls – or fraudulent – one’s mission statement was “for carrying on an undertaking of great advantage but no-one to know what it is” and attracted £2,000 of investors’ money – and others wildly optimistic – one company was established to buy the Irish bogs. Most people with money or savings plunged in with gay abandon.

In June 1720 Parliament passed the Bubble Act requiring all joint stock companies to receive a royal charter, an attempt by the South Sea Company to control competition in a frenzied market. When the Company got its charter its share price rocketed to £1,050. To meet the demand for shares the company issued more, even lending would-be investors the money to pay the initial deposit – a fatal flaw that would have tragic consequences.

When in August the first instalments of the money subscriptions on South Sea stock were due and many investors had subscribed without the financial resources to meet their obligations. Their only recourse was to sell. This in turn triggered a fall in the share price – by September it was down to £175 – ruining many who were unable to recoup their investments. Many, including members of the clergy and gentry lost their life savings and those who had staked everything became destitute overnight. Suicide rates increased dramatically.

Retribution for the disaster soon followed. The Directors of the Company were arrested and their estates forfeited and as a result of a Parliamentary enquiry – 462 MPs and 112 Peers were involved in the company – John Aslabie, the Chancellor of the Exchequer, and several MPs were expelled from parliament in 1721.

To rectify the situation Robert Walpole was appointed Chancellor of the Exchequer and he split the National Debt that had been placed with the company between the bank of England, the Treasury and a sinking fund, a portion of the nation’s income that was put aside each year. Eventually financial stability was restored and a salutary lesson about the vagaries of investing in shares was learnt by all.

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