The South Sea Bubble Bursts
The 28th of September 1720 AD
The South Sea Bubble is a tale of greed, corruption, political chicanery, and (temporary) ruination of the nation. In contrast to more recent scandals of a similar stripe, however, the guilty parties were largely brought to book – though not of course King George I , Governor of the South Sea Company.
Founded in 1711 by Tory leader Robert Harley, Earl of Oxford, the SSC was initially an attempt to rival the Whig stronghold that was the Bank of England at that period. Harley ensured that the company’s board comprised men of his party, with no regard to their total ignorance of financial and commercial matters. The business model, if the anachronistic term is not too flattering, was that the company would take on government debt, paying the holders of that debt in its shares, with the government paying interest on the debt to the company. The shares would be more liquid than the original loans made to the government. Additionally the company was to be granted a monopoly on British trade with Spanish South America (including the Asiento, the trade in slaves to Spain’s New World colonies), giving it a further source of income. That trade income would be taxed by the government to fund payment of the interest on its debts: all very nice and circular, though the very limited trade was never likely to generate tax revenues of significance.
Corruption linked to the company came in several forms. It paid bribes to secure government debt against Bank of England bids. It talked up its stock value – helped by many apparently credible and worthy figures investing in the company, many of them MPs in fact given shares. And with George I’s mistresses associated with it and the King himself as governor it looked like an organ of state, which it never was. Wild rumours were started about the vast profits that the South Sea Company would make. Throughout the land investors poured money into the stock, so its price rose in leaps and bounds. Foreign money supported this rise. People borrowed to invest in such a sure thing, including borrowing from the company itself.
From a price of £128 in January 1720 it eventually peaked at £1050 on June 24. Profit taking by the wise, a realisation that the company was fundamentally unsound, and the more than minor inconvenience to its trade of the war with Spain which had begun in 1719, led to a catastrophic fall in the price. This accelerated near the end of September when the company’s assets were written down by half. Most investors were severely hit; many who had borrowed to invest were bankrupted.
Robert Walpole cleared the mess up. Among the measures taken were the seizure of the estates of the directors, the imprisonment of John Aislabie, the Chancellor of the Exchequer, and the impeachment of many more politicians – it is thought the Postmaster-General James Craggs took poison because of his disgrace. Several MPs were forced out of the Commons.
As George Santayana said, those who do not learn from history are doomed to repeat it. Those who thought the dot.com boom would last forever certainly burped away serious money.
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