There is nothing new about financial schemes that trap the unwary and unwise into investing money that they are destined to lose. One such notorious affair that led to the ruin of many and had huge political consequences occurred in early 18th century Britain and has been known ever since as the “South Sea Bubble”.
A legitimate start
The South Sea Company began as a perfectly legitimate business concern in 1711, its aim being to secure trade monopolies with Spanish colonies in South America, in anticipation of a successful outcome to the War of the Spanish Succession which had been going on since 1701. It would therefore act in a similar way to the highly successful East India Company which dominated trade with
India and . China
In practice, trading with
colonies proved difficult, especially as relations between Britain and were never easy, even after
peace was declared in 1714. However, the “asiento” (or “trading agreement”)
signed in 1713 by the two countries did give Britain a monopoly of the trade in
slaves, and this was to prove the most profitable of the South Sea Company’s
enterprises. Despite this boost, however, the Company looked destined to
prosper only very slowly. Spain
However, the directors of the South Sea Company wanted it to be more than just a trading company. They also sought to provide an alternative investment opportunity to that provided by the Bank of England, which had been established in 1694. This was a time when political parties were starting to emerge, and the South Sea Company was seen as the Tory alternative to the Whig Bank of England, which had done well from the War and provided its investors with very good returns.
Things go awry
The real problems only arose a few years later, around 1719-20, when the Company directors sought to take over part of the National Debt and invited investment by the buying of company shares. In order to make this move, and in the hope of making quick profits, the Company needed to take steps that were both illegal and financially unsound. Bribes were offered to some of the highest people in the country, including the two mistresses of King George I. The bribes were paid for in South Sea Company shares.
In order to attract large investments, claims were made about the Company’s profitability that were simply untrue, and high dividends were promised that could never be justified.
The promises were believed, and
became the hottest thing in town. As the share price rose, from around March
1720, and some investors were seen to be making substantial short-term profits,
everybody wanted a piece of the action. People with money bought large numbers
of shares, and people without money borrowed what they could in order not to be
left behind. The frenzy affected the whole of society from top to bottom. South
New share issues were made, promising even higher rewards, and supplying even more generous pay-offs to the politicians who smoothed the way for the Company’s directors. The share price doubled, then tripled, and shares eventually traded at 1000% of their original price.
Other schemes sprang up in the wake of the investment frenzy, many of them being entirely bogus. One company was even set up with the prospectus of “carrying on an undertaking of great advantage but nobody to know what it is”. Needless to say, many fools were permanently parted from their money.
Pop goes the Bubble
Bubbles have a tendency to burst, and of course this one did. Some wiser heads realised that the speculation was unsustainable and cashed in their shares, encouraging others to do the same. The price began to fall, leading those who had bought at the peak to suffer disastrous losses. Hundreds of thousands of people lost money, and many were ruined as they were unable to pay back the money they had borrowed to buy their shares. Bankruptcies soared and cases of suicide were reported. By September 1720 the Bubble had well and truly burst.
Towards the end of August, a Member of Parliament from
(and Paymaster General), Robert
Walpole, wondered whether he should renew his portfolio of South Sea Company
shares. He had already made a decent profit when the price reached 300% and he
had sold his shares at that point, but now he decided to re-invest, in a big
way, as the price was at 1000% and showed every sign of going higher. However,
his application got lost in the post and so was never actioned. Norfolk
But for that accident,
would probably have been ruined. As it was, he now found himself being called
upon to sort out the mess that everyone else had got themselves into. He passed
legislation in Parliament that restricted the activities of joint-stock
companies, pursued the wrongdoers, and turned a diplomatic blind eye to those
in high places (such as the King himself) who had been party to shady dealings
but whose support was worth cultivating. Walpole
Consequences of the scandal
The affair of the South Sea Bubble therefore discredited the Tories and boosted the reputation for prudence of
although the consequences of his personal greed were only avoided by the merest
chance of a lost letter. Walpole
The Whigs, under
stayed in office for many years to come, with the Tories only reviving when
George III became King in 1760. Walpole Walpole was now ’s first
“Prime Minister”, although this title was unofficial, and his “reign” of 21
years was longer than that of any of his successors. Britain
The lesson of the South Sea Bubble should have been clear to everyone, namely that if a thing looks too good to be true, it almost certainly is. However, the prospect of a “dead cert” quick profit is always tempting, and many people have been caught out in similar ventures ever since.
© John Welford