The beginning can be traced to 1711 when the South Sea Company was given a monopoly of all trade to the south seas. The real prize here was the anticipated trade that would open up with the rich Spanish colonies in South America upon the conclusion of the War of the Spanish Succession--a war that began in 1703 and would end in 1713 with a treaty that did favour England but not nearly to the extent that was hoped. In return for this monopoly, the South Sea Company would assume a portion of the national debt that England had incurred during the war. The scheme was originally promoted by Robert Harley who wanted to set up a financial establishment that could compete with the Whig Bank of England, which had been created in 1694. Hence, the South Sea Company was really a financial institution that used its monopoly primarily as a means of attracting investors. Some slave-trade voyages were made but these produced little profits. When Britain and Spain officially went to war again in 1718, the immediate prospects for any benefits from trade to South America were nil. What mattered to speculators, however, were future prospects, and here it could always be argued that incredible prosperity lay ahead and would be realized when open hostilities came to an end.
The early 1700s was also a time of international finance. By 1719 the South Sea directors wished, in a sense, to imitate the manipulation of public credit that the Scot John Law had achieved in France with the Mississippi Company, which was given a monopoly of French trade to North America; Law had connived to drive the price of its stock up, and the South Sea directors hoped to do the same. Many believed that some action was necessary to halt the diversion of English capital to France. In 1719 the South Sea directors made a proposal to assume the entire public debt of the British government. On April 12, 1720 this offer, sweetened somewhat, is accepted. A number of large bribes to influencial Whig politicians like Stanhope and Sutherland and other influential people, including the royal mistresses Madam von Platen and the Duchess of Kendal (this might seem scandalous but the Duchess of Kendal took all kinds of bribes), had something to do with the result of the vote. The bribes were paid in fictitious holdings of stock. The Company immediately starts to drive the price of the stock up through artificial means; these largely take the form of new subscriptions combined with the circulation of pro-trade-with-Spain stories designed to give the impression that the stock could only go higher. (There perhaps is an analogy here between the stock of microcomputer companies in the early 1980s and the overseas-trading monopolies in the second decade of the eighteenth century. The potential for growth seemed limitless.) Not only did capital stay in England, but many Dutch investors bought South Sea stock, thus increasing the inflationary pressure.
The middle of the Bubble story takes us from the offices of politicians and company directors to the crowded Exchange Alley and its famous coffee-houses (Jonathan's and Garraway's) or what we now would call the financial district of London between Cornhill and Lombard streets. The contemporary atmosphere of Jonathan's--i.e., the frenzy of trading and manipulation of news--is wonderfully brought to life in a scene from Susanna Centlivre's 1718 play A Bold Stroke for a Wife, written a little over a year before the Bubble. Exchange Alley (or Change Alley for short) runs between Cornhill (Picture) and Lombard (Picture) directly opposite of the Royal Exchange complex (present building was erected in the nineteenth century). Today you can find a plaque on the Alley wall indicating the exact location of Jonathan's (no reference, however, to the events of 1720). Moving west, we can catch a glimpse of the Chapter House in St.. Paul's Churchyard, next to which stood the Bowles Print Shop where most of the South Sea prints were produced.
South Sea stock rises steadily from January through to the spring. And as every apparent success will soon attract its imitators, all kinds of joint-stock companies suddenly appear, hoping to cash in on the speculation mania. Some of these companies are legitimate but the bulk were bogus schemes designed to take advantage of the credulity of the people. Several of the bubbles, both large and small, had some overseas trade or "New World" aspect. In addition to the South Sea and Mississippi ventures, there was a project for improving the Greenland fishery, another for importing walnut trees from Virginia. Raising capital sums by selling stock in these enterprises was apparently easy work, and brokers, or "jobbers" as they were then called, had a field day. The projects mentioned so far all have a tangible specificity at least on paper if not in practice; others were rather vague on details but big on promise. The most remarkable was "A company for carrying on an undertaking of great advantage, but nobody to know what it is" (Mackay 55):
[the prospectus stated] that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his [or her] desposit, was entitled to 100 pounds per annum per share. How this immense profit was to be obtained, [the proposer] did not condescend to inform [the buyers] at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'cock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2000 pounds. He was philosophical enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again. (Mackay 55-56)Such scams were bad for the speculation business and so largely through the pressure of the South Sea directors, the so-called "Bubble Act" was passed on June 11, 1720 requiring all joint-stock companies to have a royal charter. For a moment the confidence of the people was given an extra boost, and they responded accordingly. South Sea stock had been at 175 pounds at the end of February, 380 at the end of March, and around 520 by May 29. It peaks at the end of June at over 1000 pounds (obviously a psychological barrier in that four-digit number).
With credulity now stretched to the limit and rumors of more and more people (including the directors themselves) selling off, the bubble then bursts. To be accurate, it suffers a puncture and begins a slow, very slow at first, but steady deflation. By mid August the bankruptcy listings in the London Gazette reach an all-time high, an indication of how people bought on credit or margin. Thousands of fortunes are lost, both large and small. The directors attempt to pump-up more speculation. They fail. The full collapse comes by the end of September when the stock stands at 135 pounds.
The last part of the story may be told quickly. Investors scream foul against the South Sea directors. Parliament is recalled and George I hastens back to London. Mobs crowd into Westminster. A committee is form to investigate the South Sea Company; by early 1721 it uncovers widespread corruption and fraud among the directors, company officials and their friends at Westminister. Unfortunately, some of the key players have already fled the country with the incriminating records in their possession. Those who remain are examined and some estates are confiscated. Robert Walpole then rises to power with some reasonable proposals to restore public confidence. They take effect but the "Bubble" affected the fortunes of several families and remained in the consciouness of the Western world for the rest of the eighteenth century, not unlike our cultural memory of the 1929 Wall Street Crash.
Last Updated: October 11, 1996
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